Bank Dividends add Insult to Injury

Posted on March 16, 2012 by John S. Hopkins, Jr.

Bank Dividends add Insult to Injury Banks have been on a tear lately, helping to lead the overall market higher. Part of the reason they’ve taken off is many of them have recently announced increases in dividends, making their respective shares more valuable.

Therein lies the problem.

Let’s step back in very recent history to the fall of 2008. That’s when the nation was on the brink of a complete and total financial meltdown. It’s when TARP was born and it preceded a fall in the S&P to 666 in March, 2009. It’s when the banks were bailed out, given many billions of dollars lest the world economy come to a screeching halt.

Let’s also take a moment to remember why the banks were brought to their knees. They collectively engaged in lending practices and the creation of toxic financial instruments that ultimately resulted in the collapse of the US housing market, where millions of homeowners ended up in foreclosure.

Now we can fast forward to today.

Earlier this week the Federal Reserve conducted stress tests on major banks. A few of the banks, like Citigroup and SunTrust, came up short of looking like they could withstand another meltdown. The other big banks passed, and some immediately (or in the case of JP Morgan, prematurely) announced an increase in dividends.

One could argue that since the banks survived, paid back all TARP funds and some recently agreed to a multi-billion dollar settlement to deal with foreclosures, they should be free to do what they want with their excess earnings. But, the $25 billion or so that is to be used to deal with the foreclosure situation is a pittance compared to the damage it has caused to the American economy and psyche.

Consider this. At the height of the financial meltdown in 2008.2009, American Express was on its knees. The stock had fallen from $50 in April, 2008, to $9 by March, 2009; that’s an 82% haircut. Like many other big financial entities at the time, it was on the verge of going under. Instead, American Express was granted a bank holding charter, specifically so it could qualify for TARP funds.

Adding insult to injury, the board’s chairman and CEO at the time, Kenneth Chenault, who was at the helm when the stock’s price collapsed, was granted millions of dollars in stock grants in January, 2009, when the stock had fallen sharply, and under his watch. This almost assured Mr. Chenault would put millions of dollars in his pocket if the stock recovered along with the rest of the economy, not because of any extraordinary efforts on his behalf.

So, instead of Mr. Chenault being penalized for the stock plummeting under his watch, he was rewarded by getting low price stock options that were practically guaranteed to rise once the economic calamity ended, with the stock now trading at $57 per share.

During the same period of time, millions of individuals lost their homes to foreclosures, while no one in any executive level capacity was held accountable for the shoddy lending practices. A few may have been shamed, but no one ended up in jail for what is arguably one of the most diabolical chapters in the financial history of our country.

Let’s also not forget that when TARP was established it was backed up by the US taxpayer – yes, you and me. Yet the banks, and the banks alone, were the beneficiaries of billions of dollars in bail out money.

This brings me to ask the question; why would the banks even think about raising dividends at this time, instead of using those precious dollars to help out those who have fallen on hard times? I imagine Jamie Diamond, CEO of JP Morgan, would scoff and laugh at such a suggestion. Remember, he’s the one who pre-empted the Fed’s announcement about stress test results by saying the bank would raise its dividends, almost mocking the process, what I would term an “in your face” moment.

I’ll tell you this. In spite of a number of big banks passing the most recent stress test, if the economy went in the tank again, they would be the most vulnerable. And, as much as I would like to think we learned our lesson from the most recent meltdown, you can bet that we would hear again that the banks would need to be protected, to keep our economy from collapsing. It will be then that you will hear the cries that the banks should have held on to those precious dividend dollars since we will be called on once again as taxpayers to save the day.

Goldman on the Hot Seat Once Again

Posted on March 14, 2012 by John S. Hopkins, Jr.

By now you may have seen the article in the New York Times where a London based executive director of Goldman Sachs resigned with a vengeance. Greg Smith laid it all on the line in the article basically confirming what many of us have thought and expressed for a long time now; that the culture at Goldman is all about making money, and the hell with the client.

Mr. Smith isn’t some lowly guy who just decided to dump on his former employer. This is a seasoned veteran who started out with an idealized view of a storied Wall Street firm and found out that it wasn’t at all what he expected it would be. In fact, he had this to say:

“The place has veered so far from the place I joined right out of college that I can no longer in good conscience say that I identify what it stands for…I am sad to say I look around today and see virtually no trace of the culture that made me love working for the firm for many years.”

Ouch.

Then there’s this zinger, aimed right at the top of the heap:

“When the history books are written about Goldman Sachs, they may reflect that the current chief executive officer, Lloyd C. Blankfein, and the president, Larry Cohn, lost hold of the firms culture on their watch. I truly believe that this decline in the firm’s moral fiber represents the single most serious threat to its long-run survival.”

Take that, Lloyd!

Smith hints that Goldman sells products to clients strictly for the money, even if they are wrong for them. This pretty much mirrors what others have said about how Goldman conducts itself.

So, does the market – and Goldman’s clients – really care what this guy has to say – or might it be seen as sour grapes? In looking at the stock, it’s had a nice run lately, up 33% since the beginning of the year. But, where the S&P and Dow are at multi year highs, Goldman is still down 26% off its annual high; that tells you something right there.

Shortly after the article hit the papers, Goldman came out with a memo to its employees that leaked to the press. As expected, Blankfein pointed out that Smith was for the most part an anomaly; that everything was peachy at Goldman, as expressed in feedback surveys by its employees. Please. If you worked for a company where the bulk of your compensation depended on the success of the business, would you go out of your way to bad mouth the company and paint a bleak picture? Hardly. That’s where Smith comes in. He’s no longer beholden to the big, bad beast on Wall Street.

Another year begins

Posted on January 4, 2012 by John S. Hopkins, Jr.

Here’s what we know about the market in 2011. The S&P ended at 1257 as of December 31, 2010, and ended at 1257 as of December 31, 2011. So, over a period of 365 days, the S&P was totally flat for the year.

It’s hard to fathom that after 365 calendar days and hundreds of trading days that the S&P would not gain or lose one point, but that’s exactly what happened. It’s hard to imagine that with everything going on during 2011, including a stalemate on balancing the budget, the near implosion of Europe, millions of people losing their homes and unemployment remaining high that the S&P didn’t move. If you had decided to bury your head in the sand for a full year, put your money into the S&P Spiders with hope that your portfolio might jump, you discovered a year later that you hadn’t made a dime; nada. In fact, inflation adjusted, you would have been in the hole.

Of course, the market did move throughout the year, with the S&P getting as high as 1370 on May 2 when it peaked and then falling as low as 1074 on October 4. Thus, the S&P was up as much as 9% at its peak for the year and then fell over 20% from that May 2 high to the October 4 low.

Still, 2011 required a unique set of trading skills and discipline to keep the average trader from losing his/her shirt. Yes, that sounds a bit odd; if the S&P broke even, at least one should be able to preserve 100% of capital. Sorry, doesn’t work that way.

Instead, those individuals who like to call themselves “trend traders” were pretty much forced to approach the market more like “day traders”, or risk losing heavily, when, for example, news from Europe overnight left them vulnerable to heavy losses. You would think this would be a big boon to companies like Charles Schwab who rely on heavy trading to make their money, but this was not the case. In fact, despite the churning throughout the year, Schwab lost 33% of its value over the course of the year, so even the brokers suffered.

Bank’s were hit particularly hard during 2011, with Bank of America itself losing nearly 60% of its value over the course of the year; Goldman Sachs lost 45% of its value; Morgan Stanley lost over 40%. This is compared to a flat S&P, so it gives us some perspective on how poorly the banking sector did perform for the year.

There were also some big names, what I like to refer to as “cult” stocks, ones that traders love to get involved in. Research in Motion (RIMM) was one that got hammered for the year, down over 70%; Netflix (NFLX) was down roughly 60%, and over 75% from its peak to year end.

The combination of a dismal financial sector and such uncertainty abroad made it nearly impossible for the market to advance. 2011 was the year that Europe took center stage, with investors in US stocks being held hostage day in and day out, never knowing what the morning might bring. This was a dramatic shift from the norm, where most investors around the globe had become accustomed to letting the patterns in US stocks dictate the move in world markets.

Yields in US treasuries fell off the cliff, with the yield on the 10 year Treasury Note falling over 40% from the end of 2010 to the end of 2011. In that respect, one could argue that US equities did well to break even, as investors around the world fled to safety.

What will it take for US equities to shine during 2012? For starters, banks need to perk up. When you have banks like Bank of America, Goldman Sachs and Morgan Stanley faltering, it’s a sign of uncertainty – i.e., what might be lurking on the collective balance sheets of the banks? Next, the consumer needs to perk up, and that’s going to be tough as long as unemployment remains high. It has been encouraging lately to see weekly jobless claims fall, down under 400,000 for more than just one week at a time, and the unemployment rate is back below 9%. But, rest assured that corporations will do everything they can to increase their respective bottom lines without adding bodies, leading to the continuation of skeptical consumers.

One other thing. When the US implemented its TARP program back in 2008, it took almost 6 months for the market to bottom, when the S&P reached 666 in March, 2009. So though it may appear that Europe has made progress with its banks, we may yet see a delayed affect that will affect markets around the world.

Bottom line for 2012? Honestly, it’s just too hard to tell. It’s a presidential election year, so that could affect the market, depending on the outcome. Banks could continue to struggle as more loans go sour and as the realities of dealing with so much bank owned real estate. And, without the banks participating, it is hard to imagine the market able to make much headway. Expect corporations to squeeze as much as possible out of the work force; no one is going to hire unless absolutely necessary. It’s also quite possible that the effects of recent actions in Europe will continue to be felt in the US, keeping a significant number of investors on the sidelines.

On the other side of the spectrum, if the banks can make headway on their bad loans while minimizing real estate related losses while open up lending in an even bigger way to small businesses, that would be a net positive. It’s also possible that the affect of all of the Fed‘s efforts the past many months will kick in big time, stimulating the economy and the market as well.

A potential huge impediment? Rising oil prices, particularly if it translates to higher prices at the pump. That could be a deal killer. It certainly had a near devastating impact when oil neared $150 a barrel back in 2008; we all saw what happened to the market and the economy in general. The US economy is not yet strong enough to withstand a repeat of 2008.

Which gets me to my 2012 forecast…see me in about 12 months and I’ll give you my number then!

Banks Score Again

Posted on December 21, 2011 by John S. Hopkins, Jr.

Banks Gorge on ECB Loans

So went the headlines this morning as European banks took advantage of a program meant to increase liquidity in Europe’s fragile banking system.

According to Reuters, banks borrowed almost 500 billion euros in 3 year loans carrying an interest rate in the range of 1%.

The market’s initial reaction was positive but then it started dawning on traders that the need for such a huge amount of cash could signal more trouble. And, there’s some question as to how the funds will actually be used; i.e., will the funds be used to loan to third parties or will the banks just sit on the cash, or invest in treasuries while enjoying the spread, much like US banks did when they received TARP assistance back in 2008.

In many ways, what’s going on in Europe is eerily similar to what happened in the US during that tumultuous period back in 2008. Regulators saw trouble brewing, and instead of letting more banks go under decided to throw lots of cash at them, which some think ultimately worked. Now European regulators are hoping for the same outcome, though it is too early to tell if what they are doing will work.

Let’s remember what happened not long after US banks got their TARP funds. It took a few months, but eventually, the market tanked, with the S&P hitting a low of 666 the week of March 2, 2009. In fact, the S&P was close to 1100 at the beginning of October, 2008, when TARP was initiated, so it fell almost 40% in a five month period.

There’s no telling if Europe is on the same path, but those who went through the volatile times at the end of 2008 and the beginning of 2009 know that the initial reaction to TARP was relief. Then reality set in resulting in that big move down in the equity markets. So, we shouldn’t be surprised to see a similar outcome once the initial relief period wanes.

Whatever the ultimate outcome one thing is clear. Banks have once again managed to hold the universe hostage due to their poor decisions. And, once again, the party line will be that banks are the lifeblood of the economic system, that we can’t live without them, that they must all remain strong. Really? Might we not be better off if the we let things run their course, letting the weakest of the weak go under, while weeding out those banks who have made the worst decisions? No one seems to have the answer, but perhaps its worth a try.

Bank of America weakens

Posted on November 29, 2011 by John S. Hopkins, Jr.

Once again, Bank of America is teetering on falling below the “magic” price point of $5 per share. BAC has not been this low since the market bottomed in March, 2009. The stock is down a shocking 75% from its April high of 19.86, compared to the S&P being down 10% during the same period of time.

It’s known that large institutions steer clear of stocks under $5 per share, so in addition to being a psychological level, there are other implications as well. Thus, traders are keeping a very close eye on the stock, knowing that a move below $5 could spell more trouble.

The reality is that Bank of America swallowed way too much when it absorbed Countrywide and Merrill Lynch. At the time they probably thought they were getting a bargain, when in fact, the acquisition of those companies practically put them under.

To me, it seems as though BAC is going to need another life line, and it won’t be the American taxpayer; not this time. Instead, I could see a scenario where the company is absorbed by another/other financial institution(s) who pick it apart in what might ultimately be a fire sale.

If the US ends up in another recession (I stated long ago that I felt we were already in one) and the market tanks, I don’t see how BAC survives. In fact, it may be a necessary process to cleaning up the mess that started several years ago when banks loss all sensibility in mortgage lending.

BAC isn’t necessarily the only bank that could go away. Morgan Stanley doesn’t look much better, and Citigroup isn’t exactly setting the world on fire. But to me BAC looks the most vulnerable, given the baggage it’s carried for too long now.

Of course, I could be completely wrong here; maybe BAC comes out of this mess better than expected. But, in many ways it symbolizes everything that went wrong in the banking sector leading up to our near meltdown, so sacrificing itself for the good of the whole might not be so bad after all.

Bove baffles again

Posted on November 17, 2011 by John S. Hopkins, Jr.

In what has become an almost laughable reoccurance, CNBC once again paraded Rochdale Securities Richard Bove to try to explain why US banks shouldn’t be pounded every time something in Europe erupts. His logic this time is that US banks will benefit from Europe’s woes and Fitch Ratings’ downgrade of the sector as depositors from across the world turn to US banks for safety. That idea strikes me as quite absurd since no one seems to really knows what exposure US banks have to Europe or other types of loans on their books.

Bove’s argument is that US banks have stabilized and as European banks continue to stumble that banks in the US will be able to pick up the pieces. He sees no connection between what is going on over there and what is going on in the US.

Unfortunately for Bove, investors haven’t agreed with him for a very long time; why should they? He continues to make the same arguments over and over, yet the banking sector lags the overall market on a consistent basis.

Of course Bove has to go to bat for the banks; it’s how he makes his living. And, by regularly pounding the gavel, he hopes that at some point his prognostications will turn out to be correct. But I have to say I haven’t seen many analysts be wrong so many times for so long as Bove; it’s almost uncanny.

What Bove should really do is focus on what the market is telling him; they completely disagree. All he has to do is look at a chart of the bank index, the BKX. It’s struggled all year long and now is once again in danger of losing technical support, a sure sign of weakness.

Obviously, everyone is entitled to their opinion, but why does CNBC continue to showcase someone who has been wrong so often? I can’t tell if Rochdale is one of their sponsors or if there’s some type of special friendship between Bove and someone at CNBC that gets him exposure on such a regular basis, but it really reduces their credibility. Can’t they at least throw up on the screen when he’s on air a summary of his predictions and which ones turned out right or wrong? At least this would give viewers the opportunity to decide if what he has to say carries any weight.

A lesson for the US?

Posted on October 28, 2011 by John S. Hopkins, Jr.

There’s a lesson to be learned from Europe’s handling of their economic problems; actually take steps that have teeth to them.

Step back to 2008 when then Treasury Secretary Henry Paulson summoned all of the top executives of US banks together to discuss what would become the TARP. Originally, when Paulson had spoken to Congress, the funds were going to be used to clear out bad mortgage loans. Instead, the funds were loaned to the banks as a means of providing liquidity and keeping them all from going under.

Europe’s approach is different. In effect, bondholders who were owed money by Greece were told to take a 50% haircut; no questions asked. The reasoning was simple; if you don’t agree then everyone’s going under, and this won’t be allowed to happen; end of discussion.

Banks in the US were simply given too much leeway, and there was no way they were going to, or intend to, take the types of haircuts they need to in order to help get the economy back on track. Instead, a full three years after TARP, our economy remains stuck in the mud, millions of people have lost their houses and many more face the same fate.

Clearly, Europe’s actions aren’t the answer to everything; but, they did what needed to be done to keep Greece from going under. Now they will need to look at Italy, Spain and others that face similar economic problems, and that will be a daunting task. But, a blueprint has now been laid out where each situation can be dealt with one step at a time.

Much like Europe was able to benefit from seeing how the US handled its own internal problems a few years back, we now have an opportunity to do the work necessary to get our economy back on track. I only hope that the banks can somehow see that if they get proactive by dealing more appropriately with the millions of under water loans on their books that it will not only help them in the long run but the entire country as well.

Banks revenues in the tank

Posted on September 21, 2011 by John S. Hopkins, Jr.

I just read an article from CNBC titled, “US Banks Face Worst Revenue Decade Since Great Depression“.

In this article, CSLA’s Mike Mayo explains, “This is going to be the worst revenue growth year since 1938. And in fact, this decade for U.S. banks will be the worst revenue decade since the decade of the Great Depression.”

Of course, none of this should come as a big surprise to anyone, but still, when you see someone like Mike Mayo laying it on the line, it goes a long way to substantiating what many of us have believed for some time now.

And, what do I say to this? I say Karma is a bitch; yes, when you engage in practices like many of the big banks have for quite a while now, when you engage in wholesale foreclosure practices in spite of shoddy lending programs, when you choke off small businesses while hoarding cash that you’ve managed to accumulate thanks to the good graces of taxpayers, this is your reward. Too bad.

Honestly, bankers today are more despised than just about any other profession, perhaps right up there with politicians. And, why not? To this day, they have spent millions of dollars in legal fees trying to put a lid on what it should cost them because of the carnage they created because of their mortgage lending practices, instead of just coming out and admitting what they did was both illegal and immoral. And, the fact is, the only way this ends in any positive way is if the banks just finally cave in and become better citizens.

Banks provide an important function in our economic system, but when they try to avoid the inevitable by digging in their heels, they end up on the wrong side of the popularity meter.

Bank of America vs Costco – two worlds apart

Posted on September 12, 2011 by John S. Hopkins, Jr.

Bank of America is in trouble and they know it, and this is why they have laid out a plan to downsize and cut $5 billion in annual expenses beginning in 2013. This downsizing will mean laying off thousands of employees while closing hundreds of branches.

The name assigned to this revamping of Bank of America is “Project New BAC”, incorporating into the jingle the companies stock symbol, and the idea is to try to clean out the ghosts from the past that have plagued the company for some time now. Of course, BAC’s true nightmare acquisition was Countrywide Financial Corporation, a company at the forefront of the sub-prime mortgage meltdown.

BAC’s stock has plunged from a high of 15.31 on January 14 to as low as 6.01 on August 23, so a 60% reduction in share price during calendar year 2011; by any standard, quite a haircut.

Some will argue that BAC’s plight was brought on by its former CEO Ken Lewis who embarked on an aggressive acquisition campaign, and it is true that Lewis carried out some ambitious plans. So, in that respect, it looks like BAC’s current CEO, Brian Moynihan, is trying to undo some of what was done under Lewis’s watch to get the bank back on track.

In some ways, what’s going on at BAC reminds me of what took place in the auto industry, especially General Motors, which was bailed out by the government and has moved to a lean and mean strategy. So, Moynihan appears to be willing to concede the bank’s top level ranking in financial assets while working towards greater profitability, and at any cost.

Now I want to contrast what Moynihan is proposing to do to an article I read in the Seattle Times.

The story is about Costco’s co-founder Jim Sinegal who will be stepping down by the end of this year. He’s described as colorful and unbending when it comes to employee retention, sometimes getting flak from the investment community for not doing enough to improve the bottom line. In fact, in reading the story, it is pointed out that during the recent recession, as other retailers closed and/or slashed jobs, “Costco laid off no one, aside from its usual seasonal workers and extra people hired for its new store openings. It also refused to cut back on on health benefits, despite rising costs and pressure from Wall Street.”

In another telling commitment to its customers, Costco has left the cost for a large hot dog and drink (which I have to say is the best bargain on the planet) at $1.50 for 26 years and has no intention of raising the price. As far as customer loyalty? It’s pointed out in the article that almost 90% of its customers renew their memberships every year.

And, what does Sinegal think about being replaced when he steps down? He says, “It’ll be an upgrade”, so obviously possessing a self deprecating sense of humor, something so often missing at top levels these days.

So, there you have it; a tale of two paths, one that shows sole focus on the bottom line with little regard for the well being of its employees and another where employees are identified as the top priority and customers flock back each year. Oh, and how have investors treated the stocks of these two very different companies? Just look below, where a picture tells a thousand words.

If things weren’t so serious Bove would be a joke

Posted on September 6, 2011 by John S. Hopkins, Jr.

Here’s the latest take on things by banking analyst and “guru” Dick Bove of Rochdale Securities. To paraphrase, if the government continues on a path of holding banks accountable for their deplorable actions, the US will go into recession. In other words, give the banks a break.

Hold on now. Let’s take a little stroll down memory lane here.

First, banks have always had favored institution status, given that the money they take in from depositors (you and me) are backed up by the government (you and me).

Next, no one put a gun to the heads of bank executives when they happily raked in fees from bogus mortgages and collateralized mortgages sold to unsuspecting investors.

Next, the banks didn’t turn down the $700 billion in TARP funds that kept the bulk of them from going under while the average person on the street was left to fend for him/herself.

So, Bove saying that the government will be responsible for putting the US back into recession because they are forcing them to pay up for their mistakes, well, that sounds more like an analyst that made a bad bet on banks.

In fact, as I’ve stated before, Bove has been all over the map. In many ways, he represents the market, trying to find some footing, reaching for solutions that simply aren’t there, and hoping that one of his calls actually comes true.

Yes, if a few more banks go under, it’s going to likely cause a ripple effect, but at least we’ll end up weeding up the ones who shouldn’t be around anymore. Hell, the banks didn’t seem to have any problem at all foreclosing on millions of homeowners – many who should never have received loans in the first place – and upending their lives. So, perhaps it is fitting that these same banks suffer similar consequences. I promise, it won’t take long for most of us to forget about them.

Invested Central

Stock Market Analysis, Guidance and Education

Tag Archives: Banks