Fin - Breakout - US

The Big Banks: Is It Time to Buy or Bail?

Jeff Macke
Breakout

Banks, banks, banks -- that's the earnings story this week. With Goldman beating nicely in its earnings report this morning, can we get long now and bank on returns? Or is now the time to bail?

We asked John Roque, managing director of WJB Capital Group, what he thinks about the financials. And what he thinks is that they are sales. The technical analysis specialist and strategist sees little chance of financials recovering fully from the beatings the sector took in 2007 and '08. Roque draws a parallel between the financial stocks today and semiconductors after the Internet bubble popped, leaving former leaders such as Intel, Microsoft and Cisco dead money to a whole generation of stock pickers. The banks and brokers are as dead as the one-time market-leading techs and semiconductors have been since 2004.

What about the financials' increase in dividends? Is that not an argument to be patient with them?

No, says Roque. "I think it's hard to be patient with something that continues to underperform ... you may make 2 percent on the dividend yield but you're losing 10 to 15 percent a year. I don't see how that makes you patient." Plus, he says, "We've done enough historically market work to know that, when a bubble is burst, the group that was broken takes a long time to heal."

Roque notes that the financial sector traditionally makes up some 20% of the S&P 500 in terms of market cap weight. This made them a sell, and Roque said so in 2007, when the financial weight peaked at over 22% of the S&P. After the bubble burst, the weight of financials tumbled as low as 8% before recently rallying back to 16% . The double since then, to Roque, is akin to a marathoner or other type of athlete finishing a race or suffering a debilitating injury. Once the run is over, it's wrong to expect a return to dominance anytime soon. Said another way, once an athlete gets old, they never really come back.

Does that make the financials something like Derek Jeter? It seems too soon to ask a dyed-in-the-wool Yankees fan like Roque. Less emotionally attached to the financial stocks, Roque concludes, "Any rally you get post-earnings, post-dividend [news] rally ... is a time to sell."

For Yankees fans depressed over the Captain's Mendoza-line-esque start to the baseball season, perhaps taking a little aggression out on the rickety husk of the money center banks during earnings season could be just what the doctor, and investor, ordered.

Let us know what you think. Write to us at Breakoutcrew@yahoo.com.

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