Are the Bank Stocks Becoming a Buy?

by Michael Lombardi, CFP, MBA

In the biggest bank failure since Washington Mutual went under last year, Colonial BancGroup Inc. of Alabama was closed by regulators and taken over by North-Carolina-based BB&T Corp.

The total tally is 77 failed banks in the U.S. this year.

According to Bloomberg, regulators are closing banks at the fastest pace in 17 years. But, while it may sound like a big number, 77 failed banks in 2009, is a far cry from the thousands of banks that failed during the Great Depression.

While I will not pretend to be a banking expert, my question is this: what will happen to the banks once interest rates start moving higher? Will they get caught in a classic squeeze, as they will be unable to raise their loan rates as fast as their cost of money is rising? Or is there some other risk out there for the banks (like commercial loans)?

Looking at the chart of the Dow Jones U.S. Bank Index, the chart shows the index collapsing from a high of about 575 in early 2007 to 220 today — a fall of 62%. According to, these banks are selling at 75 times earnings today, hardly a bargain.

My interpretation of the Dow Jones U.S. Bank Index chart is that the index (which is comprised of 45 major American banks) is still in a downtrend. Unless the banks start delivering some surprising profits — which are not in the cards according to banking analyst expectations — the sector will remain weak.

Would I buy banking stocks? Personally, I would not, as I believe that the sector needs some more consolidation and more time for the liquidation of bad loans that still linger on the books of many banks, and I have a great deal of concern over commercial loans and their future. My prediction of higher interest rates ahead doesn’t bode well for the banks either.

Michael’s Personal Notes:

Is Europe leading the U.S. out of the global recession? The numbers certainly give that indication. Both Germany and France saw their GDP grow by a surprising three percent in the second quarter. The media was quick to point to strong government spending and increasing demand for European products by Asia as the underlying reasons GDP suddenly went up.

Germany is Europe’s largest economy; hence the feeling is that since Germany is coming out of the recession, the remainder of Europe is not far behind. Based on the positive GDP growth news, many analysts announced the recession as being over. My view is different — because of the pressure for interest rates to move higher and because of looming inflation, I believe what we have just seen in GDP growth in Germany and France is more of a one-time thing as opposed to a new trend.

Where the Market Stands:

Global stock markets are weak this morning. Giant home improvement company Lowe’s Companies, Inc. (NYSE/LOW) just reported that its second-quarter profit was down 19% from the same period last year, and that sales are soft. Lowe’s missed analyst expectations. The Dow Jones Industrial Average is up 6.2% for the year. I continue to believe that the current “bear” rally has some leg left and that a run by the Dow Jones to the 10,000 level is a strong possibility before the bear sinks its teeth back into the market.

What He Said:

“I’m getting very worried about the state of the U.S. housing market and its ramifications on the economy. The U.S. could be headed for its first outright annual decline in home prices on record, adjusted for inflation. And I really believe this could be a catastrophe for the U.S. economy.” Michael Lombardi in PROFIT CONFIDENTIAL, August 2, 2006. Michael started talking about and predicting the financial catastrophe we started experiencing in 2008 long before anyone else