What the Stock Market Is Telling
Us About the Bank Stocks

What the stock market is telling us about the bank stocks.Moody’s Investor Services has cut the credit ratings of Bank of America Corporation (NYSE/BAC), Wells Fargo & Company (NYSE/WFC), and Citigroup, Inc. (NYSE/C). In the case of Bank of America and Wells Fargo, their long-term credit ratings were downgraded. In the case of Citigroup, its short-term credit rating was cut.

Moody’s questions whether the government’s past “too big to fail” position on the banks would change if a bank crisis situation similar to 2008 were to repeat itself. In a way, Moody’s is saying that, given how the public frowned upon the government bank bailouts of 2008, maybe the government won’t be a lender of last resort to the banks again should another crisis develop.

I’ve written before on these pages about my distaste for Bank of America. The stock has nosedived from $15.31 at the beginning of 2011 to a close of $6.16 last night—and I still don’t like the stock. Looks like Warren Buffett is the only one making money on this stock (his Berkshire Hathaway bought preferred shares last month in Bank of America, which pay a fixed return).

The banks are paying the price for their reckless lending during the boom real estate years that ended in 2005. American banks failed to show the restraint Canadian banks demonstrated during their real estate market boom. The American banks went for profits despite the big risks associated with aggressive lending.

My concern is that the stock market is telling us that more trouble lies ahead for the big American banks. Remember, the stock market is a leading indicator. The Dow Jones U.S. Bank Index is down 73% since the beginning of 2007—while most industries have recovered from the recession, the banking industry woes continue.

Bank stocks have been particularly hit this year; the Dow Jones U.S. Bank Index is down 38% from the beginning of this year! The stock market is telling us that U.S. banks are still in trouble. I don’t see any bargain buying among the U.S. bank stocks yet.

Michael’s Personal Notes:

New home sales in the U.S. fell to a six-month low in August.

It’s the same old story. Foreclosures are putting more homes on the market, home prices are falling, and, despite interest rates at record lows on the 30-year fixed U.S. mortgage, consumers are in no rush to buy houses.

The median price of a new home in the U.S. has fallen from $226,600 in August of 2010 to $209,100 in August of 2011, according to the U.S. Commerce Department.

As I’ve said before, the Fed can lower interest rates as much as it wants, but that will not spur home buying, because the banks have tightened their lending policies. Cash deals are accounting for about 30% of all transactions in the home resale market. How can we have a meaningful rebound in housing if the banks are being very difficult with regards to lending money?

On these pages, at the beginning of 2011, when I gave my forecast for housing this year, I predicted that U.S. housing prices would fall 7.5% in 2011. I’m sticking with that prediction.

Where the Market Stands; Where it’s Headed:

There’s no denying the facts.

We are only one day away from the end of this month—marking the 31-month anniversary of the bear market rally that started in March of 2009. Yes, that Phase II of the bear market, which brings investors back into stocks, has lasted 31 months. The 1934-1937 bear market rally lasted 35 months.

Depending on what happens with stocks today and tomorrow, stock prices will end September at about the same level they entered the month. It’s my opinion that we are in bear market rally that will take stock prices higher, but that the rally is getting old and tired.

What He Said:

“I see a deal when it’s a deal. And right now there’s a good “for sale” sign flashing on gold bullion and gold producer shares. In fact, after peaking at the $690.00-an-ounce level earlier this year, gold could be a bargain at its current price of around $650.00 per ounce. As a reader, you are undoubtedly aware of my negative stance on the general stock market and the U.S. economy. As the economic problems continue to brew in the U.S., as these problems develop into others, and as they are finally exposed, what other investment but gold will worldwide investors turn to?” Michael Lombardi in PROFIT CONFIDENTIAL, March 14, 2007. Gold bullion was trading under $300.00 an ounce when Michael first started recommending gold-related investments.