Tuesday, December 13, 2005

macroblog: Is This Good News?

This year will be the first year without a bank failure in the Federal Deposit Insurance Corporations history. Macroblog asks the question, Is this good news? I ask the same question but with a different premise behind my question.

A little research should show that 1975 and 1992 were good times to buy bank stocks as long term holds; right at the end of real estate recessions. Further research should show that 1982 and 2001 were good times to buy after the end of manufacturing recessions. Bank failures were large during the recessions and particularly large during the real estate recessions.

Recently, TV talking heads have suggested that banks will do well when the FOMC stops raising rates. They may--at least for awhile.

Playing short term moves close to the end of a cyclical move can be profitable but, stay too long and you might get your head handed over. My friends and family are generally avoiding bank stocks. A rising interest rate environment generally lowers the value of existing fixed rate bank loans. The end of the FOMC increases is not the end of the uptrend in interest rates. A strong economy should keep the pressure on rates.

Business spending will be strong. Banks will lend money but they will not enjoy the benefit of lending at a fixed rate and then watching the cost of the funds lent decline. When the real estate recession does finally hit, the banks will be hit with substantial losses. One does not want to hold bank stocks a year or more in advance of a real estate recession.

I believe the next real estate recession will hit around 2010 or 2011. Play the banks for the next year or two if you must but plan to sell at least by 2008.