By John Reizner |
This article might be titled, How You Can Make a Fortune by Investing in Strong Banks During a Credit Crunch. In my article Monday March 5, 2007: Are Stocks Still Worthwhile Investments? I stated in reference to at that time lesser possibility of contagion in the subprime mortgage problem, "The only thing that I believe could affect the economy and equities would be for the authorities to starve the system of providing mortgage money to potential borrowers - in other words, a credit crunch."
This indeed seems to be unfolding, as only the most creditworthy persons are now receiving mortgages. As reported in The Wall Street Journal, one Bear Stearns rep stated that credit conditions are the tightest he has seen in 25 years. And the squeeze seems to be felt throughout the entire credit market, not just in subprime lending. I heard in a CNBC interview with Donald Trump that the Donald believes "cash is king." It remains to be seen whether the Federal Reserve will come to the rescue to the credit markets by lowering key rates and stating that the Federal Reserve will stand by its historic position as lender of last resort. This would be a huge sigh of relief.
Ken Heebner, a respected mutual fund manager, stated on CNBC that the price of housing on the two coasts could retrace to their levels at the turn of the century. Most people would weather this adjustment as only the most recent borrowers would be affected. I mention this somewhat severe prediction as Ken Heebner has a well deserved reputation for thinking outside the box, and I believe his opinion must be given credence. This of course, would place further downward pressure on banks and mortgage issues.
We are now seeing share prices of mortgage issues decimated, and even shares of strong banks such as Wachovia and Citibank are coming under heavy pressure. It is my opinion that weak banks with high subprime loan exposure could lose more than half to two-thirds of their value from their recent highs. But what may be less expected, the shares of strong banks with little such exposure may also see their shares cut substantially from their recent highs. If one takes the position of investing only in strong banks with less subprime exposure at much lower share levels, I believe you can profit over the coming years. However, it is probably going to take some time before all the bad loans are washed out of the bad banks before one should invest in the good ones. On a positive note, on Monday August 6th, 2007, many banks exhibited a key reversal, indicating a continuation of the positive share price behavior of that day in the short term.
I base the opinions in the previous paragraph on the share price behaviors of a wide range of banks during the last great banking crisis: the savings and loan/real estate crisis of the late 1980's-early 1990's. I also stated in March 2007 in my above referenced article, "Many people are pointing to a "debacle" in sub prime mortgage loans as a possible threat to the banking system and to our stock market. You may recall the savings and loan crisis which reverberated through our banking system and stock market in the late 1980's and early 1990's. This crisis was portrayed by bank failures, plummeting bank share prices, and a real estate collapse. This was enough to cause a general bear market, punctuated by Saddam Hussein's invasion of Kuwait."
During the early 1990's real estate crisis, bank shares, both good and bad banks saw their shares under severe pressure. Many banks went belly-up, and even Citibank was thought to be a candidate for failure. However, the height of that crisis would have been the ideal time to buy shares of strong banks - as from the early 1990's until recently they have been outstanding performers. This strategy permitted me to multiply my original investments in Wachovia and Wells Fargo from the 1990's forward. Lessons can be extrapolated from that time to the present day.
No one can foretell precisely how long this credit crunch will endure, but if we keep our powder dry and keep our eye on strong banks, then the past may indeed be prologue to the future.