The big banks have all reported fourth-quarter earnings and a jury of their market peers have deliberated in the case of Too Big to Fail vs. Market Expectations. Looks like negative market expectations are winning out against the big U.S. banks–with the exception of PIMCO’s Bill Gross, who continues to be a believer in big bank bonds.
To many market participants, though, Gross stands alone in betting on bank bonds. Indeed, players including Los Angeles-based DoubleLine Capital LP’s Jeffrey Gundlach, research firm Keefe, Bryuette and Woods and at least one top-ranked boutique fund manager have all come out against the big U.S. banks.
Gross bet on debt of the big banks last year–his worst against peers, noted Charles Stein in a Jan. 25 Bloomberg story. Gundlach, on the other hand, cut bank bonds in May, dodging their second-half slide and beating 99% of his rivals, according to Stein.
“The competing bond managers haven’t changed their minds,” he wrote. “Gross, whose $244 billion PIMCO Total Return is the world’s largest mutual fund, recommended financial debt in this month’s investment outlook for Newport Beach, Calif.-based Pacific Investment Management Co., saying senior, higher-rated securities ‘should be considered’ as clients await the result of central-bank efforts to reinvigorate the global economy.”
But Stein went on to say that Gundlach told clients in a Jan. 5 conference call that he isn’t putting his money on the big banks. “You want to be underweight banks,” Gundlach said. “Certainly, we are.”
Keefe, Bryuette and Woods also views big banks unfavorably.
“How bad was 2011? The KBW Bank Index fell 25% last year, while the KBW Regional Banking Index lost just 7%,” AdvisorOne reported Jan. 2. “The major banks had a dismal stock-market performance in 2011. Some are positioned for a better showing this year, analysts say, though they could be outpaced again by their regional counterparts.”
Bank of America (BAC) was the worst performing stock of the Dow Jones Industrial Average’s 30 components last year, with a drop of more than 58%. Citigroup (C) moved down 43%, while JPMorgan (JPM) had a roughly 20% decline. Morgan Stanley (MS) now trades at about $18 versus $28 a year ago.
“Issues related to European sovereign risk, mortgage legal issues, and subdued capital markets activity are taking a painfully long time to resolve,” said David Konrad and other analysts in KBW’s Universal Banks-2012 Outlook: These Things Take Time report.
Meanwhile, Josh Strauss, co-portfolio manager of Chicago-based Appleseed Fund (APPLX), told AdvisorOne this week that he is very decidedly avoiding any investment in Bank of America, Citi, Goldman Sachs, JPMorgan and Morgan Stanley. APPLX currently has the largest percentage of its portfolio, 16.9%, sunk into gold trusts.
According to Strauss’ brother, Adam, another Appleseed investment manager, any company that goes into APPLX’s sustainable portfolio has to meet two criteria–one pertaining to stock price value and the other to both negative and positive sustainability screens–and big banks don’t meet those criteria.
“Negative screens are industries that we just try to screen out, such as the tobacco industry, alcoholic beverages, gambling, weapon systems and pornography,” said Adam Strauss in an interview last April with The Wall Street Transcript. “And more recently we added a new screen on the too-big-to-fail banks.”