The Election and the Market

What will the election mean for the market?  We are only four days away from the termination of the onslaught of political ads. Thank goodness! We are also only 96 hours from selcting a new president and some House and Senate seats. How will this play out in the market? Here are my thoughts……….. I believe an Obama win has been factored into the market. Unless his victory is accompanied by a landslide effect in other areas I don’t expect a severe market reaction. Should McCain pull off the upset I think we would see a surge upward on Wednesday morning and perhaps set the tone for a longer term rally.

I also believe that the mere fact that the election will be in our rear view mirror and a selection will been made will be a positive for the market—- It will be one more unknown out of the mix.

President Bush Agrees with Me!

In a news conference held Monday 10/20 President Bush made a point of stating that the Communty Banks of the country are generally in good fundamental shape. He pointed out that the problems of Wall Street banks are not the same as Main Street banks. This is a familiar theme you have been reading on this site for over a year.

This is not to say that community banks are not facing current challenges or that their share prices  have not declined- there are issues to resolve and when the tide went out on the banking sector stock prices all the boats in the harbor were lowered. Investors still need to take a cautious approach to committing funds and certainly have a longer term time horizon.

With that being said it is important to realize that the much publicized problems of the big banks are not those of your main street bank. We are in a recession and the economy is beginning to reflect that fact. All small businesses are and will continue to be affected by the cycle but like other similar periods we will recover. The community bank business model fills a basic economic need and will emerge in tact from the current cycle.

Record Market Gains, Now What?

Lucky October the 13th. The Dow Jones Industrial average posted a gain of just over 936 points! The broader market averages also participated to the tune of over 11%  for the day. The one day point gain was a record but the percentage numbers were eclipsed in the 1930s with a 15% effort. The DJI is now at 9,387 after a 6 business day roller coaster ride from 10,000 to just below 8,000 and returning to today’s close. Whew! Pass the air sickness bags.

What do these giant swings mean for the market as a whole and per the focus of this blog- what does it mean for Community Bank Sector investors.? As for the overall market I believe the swings we have seen are setting a broad channel that the market will trade in for the coming quarters. We may, I say again may, have found a bottom area in the high 7000s on the DJIA and I think it likely we are within 10% of the top end of the perceived range. As the markets churn through this channel we will have an evolving healing process for the economy reveal itself and we will also welcome in a new President. We will also be guaranteed to be presented with many more news worthy unpredictable events that will effect the market’s psyche. I think the economy will take at least 3 to 5 years to gain a new solid foundation and regain meaningful growth dynamics. We have a lot of excesses to work out of the system.

Community Banks have also felt the wrath of the sub-prime engendered credit chaos– not as direct participants in the sub-prime investment fiasco but rather as victims of the trickle down effect to the overall economy. Some banks’ share prices have been decimated in the sell off even though the fundamental profile of those banks remains healthy. There are profitable banks with little to no loan losses on their books selling at or below book value! Those situations spell opportunity for patient bank investors who can tune out the short term euphoric to manic market mood swings .

The primary message to be delivered is that for knowledgeable investors who perform a solid due diligence process this is a point in time that offers some exceptional value opportunities.

The Economic Rescue Plan and the Community Banking Sector

The ill defined Economic Rescue plan has finally been passed by the House and Senate. What are the implications for the Community banking arena?  The situation is a mixed bag of good news and bad news.

The bad news is that it is improbable any meaningful portion of the rescue funds will ever reach community banks– which leads to the good news– It is apparent that only a small minority of community banks may have participated in the mortgage backed securities fiasco. This is further confirmation to past observations published on this site that investors must delineate between Wall Street and Main Street. The community banking business model calls for focus of lending and investment activities in the local communities they serve. It appears that a major source of credit problems for Community Banks reside in the construction loan area and It also appears that the rescue plan will not reach to assist these loans.

As we continue to watch the ongoing credit crises unfold let’s be aware that as community bank investors that we must stay our course and not be swayed by irrelevant commentary.

A glimpse of Panic

September 29, 2008 was a day where the trading in the securities markets exhibited elements of good old fashioned Panic. Was this the spike panic bottom that will signal a turn-around? I don’t think the odds favor that pattern. However, what it does show is that there is an extra amount of volatility in the markets brought on by panic behavior. These are elements that manifest closer to bottoms than tops of cycle moves.

It could well be that the days to come will bring equally volatile sessions in both directions to the markets of the world, actually I believe this is a probability. So as Community Bank investors what shall we do?…. same old, same old… take a deep breath, stay cool and hold on to those fundamentally sound banks in you protfolio— also be on the look out for values– there have been quite a few babies that have been thrown out with the bath water.

A Quick Look At Buffett’s Goldman Sachs Deal

On September 23rd it was announced that Warren Buffet would invest $5 Billion in Goldman Sachs. This announcement gave at least a short term boost to the confidence factor in the financial markets. As usual Buffett appears to have made a very strong deal for his end of the table. The investment allows Goldman to buy back the securities at any time for a 10% premium over Buffett’s cost. Additionally Buffett received Warrants with the Preferred Stock purchase that have a strike price of $110 per share. That price gives the warrants immediate value with Goldman shares trading at $125– an unusually good deal. Translation— Goldman needed the infusion.

I believe that down the line Goldman will be acquired by a large international bank, perhaps Citigroup. I think Goldman’s adoption of a bank holding company structure changes the culture of the firm to the extent that exit strategy alternatives enter the matrix. We will all have to stay tuned.

Goldman and Morgan To Be Bank Holding Companies

Imagine trading in your Corvette for the “Family Truckster” ( thank you Chevy Chase) That is the equivalency of what has happened to Goldman Sachs and Morgan Stanley. Once free wheeling investment banks performing all sorts of exotic operations under cover of secrecy they are now going to be under the scrutiny of the Federal Banking regulators. Bottom line is that this is a change that was needed to inspire confidence in our financial system and  to insure the survival of those firms and many others downstream on the industry daisy chain.

The results of this move will be many fold but a few prominent items jump to the forefront;

* More regulators for the firms to deal with which will change the overall culture permanently.

* There will be added visibility to the outside world as to what these firms are actually doing.

* Profitability will drop significantly due to the change in business mix and the regulatory pressures.

* Key personnel will leave to work for more less regulated entities such as Hedge Funds

The talent that these firms attracted are not keen on working for a Bank– they need More $$ and most importantly more freedom.

* Many of the assets of these firms will have to be sold over time as they will not fit into the “box” with which the regulators are comfortable.

These are interesting times and we all need to stay tuned for further developments.

Indy Mac and Beyond

The failure of Indy Mac Bank has sent shock waves of fear and even panic throughout the investor and banking communities. Investors are clicking their mouse fervently on the Sell buttons. There are  worried  account holders at various institutions ( including some major industry participants)  lining up to withdraw funds out of concern over the safety of their savings.

Will there be more failures to come? I THINK SO. There are reportedly 90 institutions on the Regulators’ “Critical Watch List”– Some of these may in fact fail or be conscripted participants in a shotgun marriage with a larger institution.

As always my focus is for the Community Bank Investor. What to do here? At this point in the cycle investors should not sell holdings based upon the negativity of the broad brush portrayal of the industry. As Small Cap Value investors we must analyze our holdings on an individual basis and make decisions based on fundamental data. We are in a pricing cycle where over 40% of Community Bank shares are now trading below book value. The key word is Cycle. Market pricing opinions are a cyclical phenomenon and are dynamic in nature. In time these pricing “opinions” will change and movement as regression  to the mean will occur.

In plain talk keep an eye on the financial fundamentals of your holdings and wait for cycle adjustments to carry prices back toward their historic norms.

Not Yet

Oil is above $129 per barrel, dollar index is looking iffy, CPI and other inflation related indicators are on the rise and the evidence indicates that we are far from the end of the housing problems. These do not seem to be the elements that would foster a sustained bull market. Neither does it appear to me to be the darkness and panic environment that typify market bottoms. I believe the odds favor a continuation of a widely ranging market marked with highly volatile events.

So what does this mean for Community Bank investors? I say again stick with value investing and ride through these tough times. Also investors need to be highly selective and do thorough due diligence on any prospective purchases. The fundamentals of a bank ultimately prevail.

With that being said I also believe that it is not yet the time to expect a wash of market euphoria to lift portfolio values. This is a time for earning it the old fashioned way —– add patience to value holdings.

True or False

Bear Stearns had the dumbest management team on Wall Street and made the poorest investments of all the firms. I’m going to say a big fat False! There is more to come people. The list of valuation surprises continues to grow— Countrywide, Bank of America, Bear Stearns………….. and I believe etc.

For the community bank investors for whom this blog is created I reiterate my reiteration to  stay the course as a small cap value investor. Keep it simple and stick with the solid well valued community banks.   Additionally, put a few more gallons in your “Patience” tank. It is going to take a few more quarters before market valuation levels return to pre-established norms.