The Bears are Breaking the Banks

Forbes.com has a great article on the bears ruling banking stocks. Tom Van Riper makes some very sound arguments for that reasoning:

"Investors in major U.S. brokerage stocks haven't seen the last of the sell-off. Not with bank funding for merger deals slowing as credit gets more expensive. Wider spreads in the junk bond market, where so many deals are done, mean the costs of issuing securities are higher, as are the risks for doing so."

I cannot disagree with logic. And for just these same reasons, I'm waiting to see what happens before taking my profits. When Goldman Sachs fell below $200, I was tempted to cash out. Of course, I did not. And when Goldman Sachs broke through the $200 dollar mark last week, I was regretful. I waited and saw GS lose even more value. For that reason, I'm holding off on covering my short. I think we've got a ways to go before banking stocks begin a recovery. Mortgage rate resets have yet to reach a peak, while overall business credit is trending tighter and tighter. The Chrysler deal is a great example. With every new story coming out of the financial main stream media, psychological factors will push banking stocks lower. And if Hank Paulson has his way, the federal deficit will crowd private investment even more, but that's for a different post.

Of course there are some people who will disagree with me. Here, James Altucher of The Street wonders why Goldman Sachs is so cheap. He even goes so far as to say that the company might be subject to a private buyout. Here, Mr. Altucher continues his faulty reasoning by indicating that investors should buy Goldman Sachs, as well as JP Morgan, and Citigroup, all of which I've indicated at sell or short sell status. At least James didn't try and convince investors to buy Bear Stearns. Ha!

I may be wrong about this next point, and if that's the case, then call me out. I think the credit cycle is at least as easy to predict as the housing market. Why is this? Because the credit (ie: banking) industry moves at a pace that is similar to the housing market. Complete cycles in both sectors take years to complete. As soon as one realizes that the credit cycle downturn is beginning, a savvy investor would take bank stock shares from Mr. Altucher's account and sell them short. When the credit cycle peaks as high as it has this last go around, the drop should act in symmetry. What does this mean? Big money for "danger-seeking" investors who know how to play the game.