A day after getting slammed, financial stocks rallied sharply Tuesday as fears about Europe receded, at least for a day. Jeffries led the way, surging 24% after reporting better-than-expected fourth-quarter results and holding a conference call designed to assure investors they are not another MF Global.
Other winners included JP Morgan, Wells Fargo, Citigroup and Bank of America, which climbed back above the $5 level after breaching it for the first time since 2009 on Monday.
In addition to good tidings about Europe, bank stocks were reportedly buoyed by better-than-expected U.S. housing starts data as well as the Fed's decision to roll out new capital requirements in two phases, with firms having a year to get into compliance.
Speculation about the new Fed rules, which are mandated by both Dodd-Frank and the Consumer Protection Act and designed to get U.S. regulations in line with Basel III accords, were cited as a catalyst for Tuesday's rout in the sector.
But what's been ailing the financials is not about yesterday's news or last quarter, says Barry Ritholtz, CEO of Fusion IQ and author of The Big Picture blog. Noting financial stocks have lagged the S&P this year -- and really since the fall of 2009 -- Ritholtz cites three fundamental reasons to avoid the sector, Tuesday's rally notwithstanding:
Balance Sheet Mystery: Because of FASB 157, an accounting rule adopted in early 2009, banks are essentially able to determine the 'fair value' of toxic assets on their books. "Remember, these are the same idiots who bought the piece of junk that's now worth much less than it was," Ritholtz says. "Why would I want to rely on them to value it?"
Housing Hangover: Despite hoopla over today's housing starts data, "there doesn't appear to be a housing bottom anywhere in sight," Ritholtz says. With about 25% of all U.S. mortgage-holders under water, he fears even a slight increase in the unemployment rate and a 'run-of-the-mill' recession could end up slamming banks in 2012. (See: Home Prices Fall to 2003 Levels; When Will Housing Hit Bottom?)
It's a Confidence Game: "The thing people forget is banks and Wall Street shops are highly dependent on the goodwill of counterparties, clients and investors," Ritholtz says. Because of the "ephemeral" nature of the business, banks and brokers get into "deep-deep trouble" if those stakeholders start to lose confidence -- for whatever reason, real or imagined. As it was with Bear Stearns and Lehman in 2008, so it was with MF Global in 2012 while Jeffries appears to have brought itself back from the brink.
Add it all up and Ritholtz says "there's no reason to own a bank" -- with the possible exception of small community banks that don't have the same kind of opaque balance sheets and exposure to housing as the "too big too fail" behemoths.
For the moment, at least, the big fear is about European banks but "if housing takes another leg down and mortgages become an even bigger problem, don't be surprised if we see a Citigroup or Bank of America kimono-opening event in the next couple of years," Ritholtz quips.