Look Out Below ....

Short post today. These regional bank earnings continue to be nothing but awful. Whether you look at Fifth Third, Key, Synovus or Huntingdon it’s the same crap. Common themes include CEO’s commenting how commercial real estate (CRE) is rapidly deteriorating, non-performing loans continue to rise and large increases to loan loss provisions persist. I have yet to talk to a sell-side financial services analyst who wanted to discuss how in the past 10 years the regional banks have been effectively shut out (by the national banks) of the consumer credit card and auto loan business. In order to grow, regional banks have taken a much larger weight in commercial loans than at any time in the past. Oh oh. Maybe someone should have stress tested those risk models

So it shouldn’t be too hard to put 2 and 2 together and realize that since commercial loans lag in losses to consumer loans that there is more pain to come. These stocks have been destroyed in the past year. But my feeling is that whether it is full nationalization or “quasi-nationalization” the equity holder is about to be wiped out. The belief that we need a strong financial system in order to get through a crisis is absolutely true. But what investors forget is that there isn’t a linear relationship between a strong financial system and rising stock prices. Inherently it is easy to assume this but it is wrong. Our strong financial footing will come with a cost – mass dilution. Remember the cock roach theory – where there is one there is always more. Be careful out there. I have zero exposure to financials right now. I’ll talk more in coming posts about earnings expectations and forecasting and what to expect.