- Martin Sosnoff
More Banks Than Bankers
Morris Shapiro, who ran his bank stock trading house over 60 years ago with great elan, used to say: “There are more banks than bankers in the world.” Those days, even the biggest banks, sold OTC. Nobody paid them much attention. Their paper sold at 10 times earnings and near book value. Branch staff sat at tiny desks, cleaned of papers.
Past week, the market dished out some poison. Not just for banks in trouble, but for industrials, energy paper and airlines. Actually, any property facing cyclical risk or higher interest rates. You could lose your underwear in 2-Year Treasuries as well.
Not only bank stocks are deconstructing, but 10% daily flops take place in basic industrials embracing Alcoa, U S Steel, Halliburton and Schlumberger. Contrastingly, there was money for prime growth stocks like Microsoft and Apple which rose contrapuntally in this weak setting. Exxon Mobil and Occidental Petroleum remained relatively buoyant. Both sell below 10 times earnings with latent dividend paying capacity.
Nobody wants to own basic industrials like GM and GE. The level of violence in bank stocks showed in daily swings of 5% or more for comparatively sound properties like JP Morgan, Goldman Sachs and Morgan Stanley. Sound industrials like Boeing wobbled along with oil-related Halliburton and Schlumberger.
So far, financials like Schwab and First Republic National have taken the big hits in asset value. Keep in mind the financial meltdown of 2008-09 when the market sold down to book value from nearly 2 times book. Banks then destroyed themselves writing mortgages made on flimsy asset backing. Casualties included not only Bear Stearns and Lehman Brothers. Even Merrill Lynch was merged out at $4 a share to Bank America.
For years, savers remained disenfranchised in terms of asset yield. They averaged just 1.9% on 10- Year Treasuries and little more than 3% for AAA corporates of 5 year duration. Money market rates ran at zero to 25 basis points. Today, the shoe’s on the other foot. Two- Year Treasuries yield over 4% along with money market rates. BB corporates of 5-Year duration yield close to 7%. No wonder that disintermediation on bank deposits is today’s pressing issue.
To the extent that a bank lends money at a fixed rate against a low cost but variable deposit pool, its earnings base is insecure. Ironies abound. Comparing the ratio of a bank’s deposit base JP Morgan is at a 2 to 1 ratio but First Republic Bank is over 4 to 1 and thus more vulnerable to savings outflow This forces the bank to sell assets at a discount that can be punitive to net worth.
Asset wealth does change markedly. Even in the 1980’s if your fortune counted up to $250 million, you made the Forbes 500 list. The Buffett ”hold” approach, in the art market made a handful of dealers into billionaires. I’m thinking of Pierre Matisse, Ileana Sonnabend and Anthony d’Offay. They had doled out monthly stipends to keep their artist stable from starving.
First Republic Bank is a horse of a different color because only a portion of total deposits is insured. So it stands vulnerable to outflows. The scary issue is how this banking crisis gets dealt with by the market. First, I consider the S & P 500 Index, selling near 20 times earnings, as grossly overvalued in a rising rate structure setting for fixed income securities.
The S&P 500 should sell nearer to 15 times current earnings power not its present 20 times multiplier. In my book, the market is overpriced by at least 20%. Punditry, today, is mum on its inherent bullishness. Where’s the beef?
Premature to project rising earnings for the S & P 500 or that interest rates have peaked in the money market or for long maturity Treasuries and corporate bonds.I’m assuming reserve city banks like JP Morgan, Citigroup and Bank properties like JP Morgan, Goldman Sachs and Morgan Stanley. Sound industrials like Boeing wobbled along with oil-related Halliburton and Schlumberger.
What’s more, banks’ wealth management construct of a 60/40 equity-debt ratio failed broadly last year. Their wealthy clientele could turn restive on pie chart constructs for their assets. Wealth management is the third or fourth largest earnings segment for major banks like JPM and Citi. It has peaked.
What’s to do for an individual investor on his own in asset management? Well, I run my family office, which includes my own capital, in a most conservative construct, long approximately35% in equities. My sector concentration is anything but conventional. No financials or industrials. But, overweighted in energy paper like Exxon Mobil, Occidental Petroleum and Enterprise Products Partners. My technology play is just 2 stocks, Apple and Microsoft. Both act better than the market. Their balance sheets are impeccable.
Our fixed income portfolio is mainly in 2-Year Treasuries which I bought near their high and so I look like a moron or worse. My corporate bond sector is in BB debentures with 5-Years’ duration. No runs, hits or errors here, but the yield to maturity is 7%.
I keep mumbling to myself: What are the chances for the market breaking wide open? I’d say close to even money. I dug a hole and mumbled same, but wouldn’t dream of saying such out loud.
Times change. Over 50 years ago, a very youngish, roundish Saul Steinberg made his play for New York’s Chemical Bank. The Establishment reared up, roiled, denying Saul necessary financing. Saul then settled for Reliance Insurance, then properly sleepy. Saul jetted around in his converted 727, but he was an effective hands on operator until his health failed and his brother took the reins.