Will All the Banks Fail?

The list of market problems just seems to keep getting longer. We're down two Macs (Indy and Freddie), a Fannie, a Bear, and the Brothers Lehman. With a partridge and a pear tree we would have a little diddy. 

Are we doomed to repeat the 1930's? Is the mattress safer than the depository? Will we all be destitute by Christmas waiting in a communal soup line?

While some individuals may be hit so hard personally that the end appears near, the broader picture is nowhere near as bleak. It does make for good drama, though. And the market will continue to roller coaster on each verbal slip from Ben, deal from Hank, and the various jetsam from Congress. Don't expect to see calm seas anytime soon. 

That said, I must reiterate my buy signal for those willing to sift through the rubble. Even in the days of sky high commodities and the mergers and acquisitions that follow such a run, we will soon find financial M & A activity to be more voluminous than any other sector. The global financial market is exhibiting Darwinian theory at its best. While it seems a shame to see a bank falter, why should a competitor prop it up when the pieces will be half price after the fall? We've already seen several acquisitions of opportunity including Merrill Lynch and Countrywide both purchased by B of A. Several Sovereign Wealth Funds have invested in various institutions at fire sale prices. Chase and Wells Fargo are both positioned well to profit handsomely from a pending train wreck. The system isn't as broken as it appears if the strong are swallowing the weak. 

While consumers spent too much on credit, banks lent too much without cash assets. Both parties will now suffer the consequences while those who didn't participate look on with only temporary hits to their savings. 

I'm not saying that one can avoid the calamity, but keep avoiding the news and focus on the fundamentals. Buffett just announced a 5B investment in Goldman. While Mr. Buffett may offer his personal fortunes to philanthropic ventures, his Berkshire Hathaway company is ALL about profit. And Goldman isn't getting a handout. What we are witnessing is the savvy investor preparing a solid investment that will outperform the market in only a couple year's time. 

For those of you with the inclination, it is time to follow the Sage to the Market. The Blue Light Specials are plentiful and one's mattress will not offer a similar return. For example, Wells Fargo is one of those pesky financial firms that seem to be the root of all evil right now. But alas, they've not fallen foul as others have. Their fundamentals indicated strength while the financial sector dragged the stock down. With a balance sheet of 46B, the company was trading at less than 2 times their asset value in July. Since then, the stock is up 75%. What a handsome return. Now let's look at a potential acquisition target, WAMU. While they are likely to throw in the towel to a suitor, they are not in the exact same situation as one of the investment firms such as Bear or Lehman. This company has over 20B in net assets and is trading at a market cap of less than 6B. While it is certainly possible that WAMU files bankruptcy, it is highly unlikely because this bank as billions of cash in deposits and a tremendous credit card business. If they are acquired at a 50% discount, the stock will almost double. Hmmm...

But let's not look at fish bait, how about some solid positions for our 401K? Are there any financial firms still making money? While certainly off their highs, there is a company that still pulled over 6B in gross profit last quarter with an operating profit of 600M (one quarter folks). Maybe we shouldn't leave home without some American Express stock. If something smaller is your flavor, how about Apollo Investments (AINV). Their portfolio was beat up a bit from the turmoil, but they don't hold any mortgage securities and if you'll give them your money, they'll give you 12% in dividends. Oh yeah, and their stock is trading at barely 1 times their balance sheet. 

I suppose the folks in the 30's didn't see a light at the end of the tunnel but if history teaches us anything, it is that business will always survive and prosper... ultimately. A little research will find some very nice diamonds in this rough and the diligent will inherit this earth's cash while the meek will find their stash full of dust mites.