Feed the ducks when they’re quacking.
That’s the refrain I heard endlessly on the trading floor at my alma mater, Morgan Stanley. If the clients want something, give it to them in spades, whether it makes any sense or not. So the sky must be darkened with uncountable flocks of our avian friends when I see three of the biggest equity issues in history hit the market at once, $25 billion for Bank of America (BAC), $25 billion for Wells Fargo (WFC), and $20 billion for Citigroup (C).
This new abundance of wallpaper is further proof that we still don’t have a functioning SEC. Besides diluting the daylights out of the existing shareholders, the great problem I have with these issues is the terrible fundamentals that still bedevil the industry. You know these guys are engaging in blatant window dressing to get these deals out the door, extending and pretending, until their noses grow to Uzbekistan. Sure, by borrowing at zero and lending at 5%, 6% and 7%, even bankers can make money. So on paper anyway, the cash flow looks great.
But as toxic waste dumps, their balance sheets put the Love Canal to shame. Their willing co-conspirator is the Federal Reserve’s Ben Bernanke, who used the nuclear option of zero interest rates to engineer one of the greatest stock rallies in history to get bank shares out of the toilet. Revenue quality is terrible, earnings visibility is nonexistent, home foreclosures are still accelerating, and commercial defaults may not crest for another three years. You know whatever capital they are raising now is already spoken for by imminent loan write offs, and more capital raisings will have to follow. Napoleon’s 1812 retreat from Moscow immediately comes to mind.
For me it’s deja vous all over again, because every time the Nikkei tried to rally in the nineties, it was slapped back down by a tsunami of new bank equity issues that sucked the life out of the market and left gullible investors choking to death.
If someone is pointing a gun at your head forcing you to buy bank shares on pain of death, only look at the small ones that couldn’t gain access to Ben’s exclusive country club, like Hudson City Savings (HCBK), Westamerica (WABC), and Bank of Hawaii (BOH). Given the dreadful fundamentals, you’d think traders would be flooding into the leveraged short financials ETF (SKF) by now, which is down a humbling 92% from its high.
I guess bank stocks can keep inching up until Ben runs out of Kool-Aid. With the stock market within spitting distance from the top of a multiyear range, I’m afraid that the investors in these big issues will end up as dead ducks.
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