Tuesday, January 13, 2009
I remain optimistic that housing is nearing a bottom. Collapsing prices have created very good buying opportunities and a pick up in home shopper traffic. Add to the fall in prices, the recent sharp reduction in 15 and 30 year mortgage interest rates (now under 5%) and housing is becoming very, very cheap by any standard, including replacement cost. My optimism on housing encourages me to be optimistic on banks, even in the face of all of the bad news about loan losses. In my judgement, most banks in the US have been trying to get out ahead of their actual losses by setting aside reserves greater than they believe will be necessary to cover their losses. They have been doing this, not to deceive investors, but to take the loan loss reserve issue off the table. If they can do this, then bank stock prices will turn higher for good because it will be clear that the worst of the housing debacle is behind us. It is with this in mind that the upcoming earnings reports from the banks are of keen interest to me. There will be gains and losses on a reporting basis, but my eye will be zeroed in on what the banks do with the loan loss reserves. If they increase them appreciably, the turn in the banks is months away. If reserves stay near their current levels or rise only modestly, the turn in bank stocks may be near. Tomorrow JP Morgan reports. They are as important a bank as there is in this country. They will set the tone for those that are to come. Over the next two weeks the following banks will report earnings. Marshall and Isley, First Horizon, Bank of America, Northern Trust, US Bancorp, Bank of New York, BBT, Fifth Third, Key Banks, and Sun Trust Banks. My guess is that there will be a mix of adjustments to reserves among these banks, but the stocks will all be treated alike. If JP Morgan and Bank of American report tame loan loss reserves, all the banks will rally. If the big banks have worse than expected numbers, all the banks will get hit. Having said this, even if the loan loss reserves numbers are not good, I still believe the high quality banks are near a bottom. I believe this because I believe that real estate has gotten cheap enough that drive-by shoppers will increasingly stop in for a look, and when they do, the combination of price and mortgage cost will turn shoppers into buyers.