No Guts, No Glory: Time to Go All In on Banks?

No one ever said making money in the market was easy. Sometimes the most profitable trades are the ones where you have to hold your nose when you buy. Recent action in the market has been eerily similar to the financial meltdown in 2008 and 2009, with the big banks being at the epicenter of the turmoil once again. Wild, 600-point swings, talk of insolvency and the need for additional capital, Meredith Whitney on CNBC talking about “zombie banks”, etc. – it is all just too familiar. The result of that scrutiny and volatility has left bank stocks with huge percentage losses over the past two weeks. Over the past 14 sessions, Bank of America BAC has lost 28%, Citigroup C has lost 24.4%, Morgan Stanley has lost 24%, Goldman Sachs has lost 13.5%, and JP Morgan JPM has lost 12.7%. Those losses, however, may provide an excellent opportunity to capitalize on a potentially overblown downside reaction. The fact of the matter is that banks in 2011 are vastly different than they were in 2008. That is not to say that they do not have issues or are adverse to economic uncertainty, but they do not carry nearly the same risk as they did back then, and, thus, do not carry the same potential for losses. Banks today are sitting on large cash reserves to offset any potential future losses and are estimated to be three times less leveraged then they were in 2008. Not only are they less leveraged, they are taking on less risk. In the current environment, with the crisis still a fresh memory in Washington D.C. and “main street's” heads, big banks are doing everything in their power to at the very least appear to be prudent. They have reigned in trading desks, and are being very careful about what kind of investments they take in, and the kind of loans they make. In 2008, one of the issues that exacerbated the stock market plunge was the fact that most of the bank execs were suspiciously silent throughout much of the turmoil. They did not make any statements or appearances until the height of the crisis, and by that time, the damage had already been done. To be honest, there was not much any of them could have said anyway, considering that everything being reported was basically true. Confidence, however, is an intangible, yet critical component of the stock market, and reassurances from bank CEO's at the time may have been able to quell at least some of the selling pressure. That lesson has been learned it seems, as yesterday many large bank executives took to the media to assure the public that the rumors decimating the markets were unfounded. In an interview with CNBC, JP Morgan CEO Jamie Dimon noted, “The fundamentals are so much better than four years ago. If I thought it was a calamity I would go back to New York, but I think this is just a lot of volatility in the marketplace.” Bank of America CEO Brian Moynihan said in a conference call with analysts and investors, “We expect it's going to be a slow and steady, but grinding recovery.” Citigroup CEO Vicrim Pandit also reached out to his bank employees urging them to assure customers that the bank is in “good shape,” adding, “Not only is it a fundamentally different time, but we are a fundamentally different company.” Societe Generale's CEO Frederic Ouedea, whose company has been at the center of recent events, dismissed recent worries stating, “Really, it's all very surprising to see rumors like this. All that is absolutely rubbish. It's ridiculous.” Not only was yesterday's media blitz a welcomed event for investors, but for the market as a whole. The result has seen markets surge in today's session - led by financial stocks. The S&P 500 (SPX) is currently up 55 points (4.9%) to 1,176. The Dow Jones Industrial Average has gained 485 points (4.5%) to 11204, while the NASDAQ has put in a 119 point (5%) gain to 2,500. The Financial Sector, which has been one of the worst performing areas of the market over the past 30 days, is the strongest segment of the market in today's session, currently up 6.4%. All of the big bank stocks are surging on huge volume. JP Morgan is currently trading up 7.9% to $37.09, Goldman Sachs is currently trading up 8.2% to $119.39, Citigroup is currently trading up 8.5% to 30.94, and Bank of America is currently trading up 9.4% to $7.41 – all near the highs of the day. It is hard to say whether the rumors floating around the market are valid or not, as the saying “where there's smoke, there's fire” usually rings true. It is hard to imagine, however, that the big banks would repeat the same idiocy that got them in such hot water just three short years ago, although as the market has shown time and time again, anything is indeed possible. The recent freefall, combined with today's significant buying volume, may be a perfect opportunity to capitalize on an overblown market reaction by getting long some of these names – most notably Bank of America. As always, downside protection is always a prudent idea. Picking up some out of the money puts to insulate from any unseen calamity is the best way to go should you choose to go long. “Be fearful when others are greedy and greedy when others are fearful.” – Warren Buffet.