Today’s Financial Sector

A Menagerie of Bulls, Bears and Turkeys

It seems as though every day brings us a new soap opera drama in the Financial world. There are many intriguing and disturbing scenarios unfolding at this writing. Huge firms such as Citigroup and Merrill lynch are taking in bundles of cash injections from foreign and domestic investor groups. One hears about additional write downs of assets and increases in loan loss provisions as common fare in today’s business news. Valuations in the sector have plummeted on average in excess of 20% in just the past 90 days.

This situation makes investing a very difficult proposition. What are the values Bulls may buy? What issues are still overvalued and should be judicially liquidated from portfolios by the Bears? Finally, what is the next total collapse candidates that should be dumped by everyone immediately (i.e. The Turkeys)? Unfortunately, for this answer there is no accurate guidebook like the Audubon Bird Guide differentiating a sparrow from a robin. The best one can do is sketch and blueprint a plan of action.

The first step is to separate the large capitalization institutions like Bank of America and Wells Fargo, from the small an micro capitalization community banks such as Pacific Coast National Bank and American Business Bank. The business model of the large banks and the Community banks are vastly different. Many of the problems read about today such as sub-prime loans, securitized loans and derivatives are not found in the Community Bank sector. Typically a community bank has a more straight forward model with loans to businesses, real estate situations and individuals in the community they serve. However, when the Financial Sector began its slide downward, all of the boats were lowered by the tide. As investors with our menagerie profile we must discern the issues that pertain to our specific interests.

Large capitalization institutions’ share prices have been in virtual freefall. The classic question is how low is low and are they values or value traps? Conservative investors may want to step aside if they still have large cap financial shares in their portfolio and certainly do want not to try to “catch the falling knife” of a dropping stock endeavoring to buy at a low. History tells us that the probabilities favor a long basing period of 4 to 6 quarters as opposed to seeing a “V” shaped bottom when the sector does in fact recover. There will be time to accumulate positions. The current problem seems to be that the unknown is unknown.

Community bank investors are in a different environment. Generally speaking, it is likely a major contributing factor to their banks’ shares decline has been in large part in sympathy with the overall sector move and therefore may yield themselves more favorably to individual analysis in a search for value. If investors feel the shares of their community bank project a value it may be more appropriate to retain the position based on the premise that the fundamentals of the situation will prevail more readily--- finding a way to disconnect from the sector’s morass.

The bottom line is to know your animals. You can be a Bull or Bear but for goodness sake avoid the Turkeys. In today’s financial world, this is a challenging proposition, but by identifying the short-comings of an otherwise stable industry, one can still invest wisely and reap the rewards of a smart long-term investment strategy.