rebounded today, aided by a rally in financials. Why was the group strong?
Because a team of analysts at a well-known Wall Street firm upgraded the
large banks sector. And why did they do that? Bloomberg gives us the lowdown in "Wells Fargo, Biggest U.S. Banks Raised by Goldman":
Fargo & Co., JPMorgan Chase & Co. and the biggest U.S. banks were
raised to “attractive” from “neutral” by Goldman
Sachs Group Inc., which said share prices don’t reflect prospects for
believe this difference in earnings power hasn’t been fully reflected
in share prices,” New York-based analysts led by Richard Ramsden wrote
in a note to clients today. “We estimate that normalized earnings for
large banks are 39 percent higher than in 2007 despite the 36 percent decline
in share prices.”
Fargo, based in San Francisco, was upgraded by Goldman to “buy”
from “neutral” after its tangible assets per share increased 70
percent in the second quarter. “The reason is simple: Wells bought
Wachovia at a depressed price,” Ramsden said. Banks have increased
earnings with acquisitions that will add to earnings over the “long
term,” he said.
powerful stuff, eh? Then again, maybe not. You see, if you go back and look
at what Goldman said in late-January, when most bank stocks were trading at
far lower levels than they are now, the firm wasn't exactly upbeat on the
group. Again, Bloomberg
had the details in "U.S. Banks May Be the ‘New Utilities,’ Goldman
U.S. banks risk becoming the “new utilities” as governments introduce
greater regulation and force lenders to increase capital ratios, Goldman
Sachs Group Inc. analysts said.
on equity at the biggest U.S. banks will be limited by higher capital
requirements and greater regulatory controls, analysts led by Richard Ramsden
in New York said in a report to clients today. The measure of how effectively
banks invest earnings may shrink to between 10 percent and 12 percent, from
the 15 percent banks generated between 1990 and 2006, they said.
Bancorp was cut to “sell” because the Minneapolis- based company,
while “a good bank,” is already highly valued, the analysts
wrote. Goldman also re-instated its sell rating on Citigroup Inc., saying
“investors should avoid the stock given no core earnings power
of America Corp. was cut to “neutral,” the same rating given
Morgan Stanley, Wells Fargo & Co. and PNC Financial Services Group Inc.
The analysts recommend buying JPMorgan Chase & Co., which they said may
show earnings improvement as the economic cycle turns.
banks, particularly Citigroup, U.S. Bancorp and Bank of America, have
“thin” capital cushions compared with Goldman’s estimates
for losses in the industry, the note said.
long after, the shares began a sharp recovery, and those crackerjack Goldman
analysts probably felt pressure to reconsider. In May, after the sector had
rallied more than a third from when the firm had issued its negative call,
the banks team bit the bullet -- sort of -- as Bloomberg reported in "Goldman Sachs Upgrades Large U.S. Banks to 'Neutral'":
Sachs Group Inc. upgraded large U.S. banks to “neutral” [Note: to
Bloomberg editor: might be helpful if readers knew the prior rating],
saying strong mortgage and capital markets earnings will likely continue into
the second quarter and new capital raised reduces leverage.
trust banks were upgraded to “attractive,” as the Goldman Sachs
analysts led by Richard Ramsden determined revenue will recover from the
first quarter. The analysts also raised their recommendation for U.S. credit
card companies to “neutral” and reiterated their
“cautious” stance on U.S. regional banks, which are “not
out of the woods yet.”
of America Corp., the biggest U.S. bank by assets, has more than tripled in
New York Stock Exchange trading since hitting a low on March 6, while
JPMorgan Chase & Co., the second largest, has more than doubled in the
period. Regulatory stress tests of the 19 biggest U.S. lenders led firms to
raise more than $100 billion in capital, the Goldman analysts said.
Goldman's relative lack of enthusiasm for large bank shares -- after all,
they were neutral -- meant that those who took their advice to heart likely
missed the subsequent double-digit percentage rally in the sector.
sum, while markets cheered today's news that Goldman Sachs -- who many
consider to be the "smart money" -- was upgrading the large banks,
based on their track record so far this year, shouldn't investors have been
selling those shares -- and the overall market -- instead?
by Michael J. Panzner
Michael J. Panzner is a
25-year veteran of the global stock, bond, and currency markets and the
author of Financial Armageddon: Protecting Your Future from Four Impending
Catastrophes, published by Kaplan Publishing.