Merrill Lynch says that they (ML) are through the worst of the credit crisis.
RBC Capital Markets believes that whether that is the case or not, Bank stocks remain attractive. Here are RBC’s 5 reasons why bank stocks have not reached the bottom:
5 Reasons Why Bank Stocks Have Not Bottomed
1) Bank Stock Valuations Are Still Excessive:
• Current stock valuations of the Top 50 banks relative to historical valuations, remain expensive — even with the recent poor performance.
• The Top 50 banks’ forward 12-month P/E ratio stands at 13.2x, which is roughly one standard deviation above the mean (25-year avg of 10.9x).
• During the trough of the last two bank stock bear markets, 1990-91 and 2000-01, P/E ratios for the top 50 banks declined to 5.7x and 10.1x, respectively.
2) Recessionary Forces Will Lead To Bigger Credit Quality Problems:
• In prior recessionary periods, credit problems typically followed as a result of the weakening economy. We believe the U.S. economy is currently facing recessionary pressures that will only worsen extending into 2009.
3) Exposure to Riskiest Loan Areas Remains Extreme:
• Construction, Commercial Real Estate (CRE) and leveraged loans have provided steady growth over the past few years. Commercial loans outstanding for the US banking industry grew 64% from 2004 to 2007 due to demand from the syndicated loan market, in our opinion. As the economy weakens further in 2008, the underlying fundamental strength in commercial real estate and industrial America will soften leading to higher defaults in poorly underwritten CRE and leveraged loans.
4) Loan Loss Reserves Are Too Low:
• Bank management teams will often claim loan loss reserve adequacy only to boost reserves in subsequent quarters. We have adopted the Eyles Test (ET) for loan loss reserve strength. Banks should build and maintain reserves that will ensure survival during the down leg of the credit cycle.
5) Credit Problems Are Not Likely To Peak Until 2009:
• Given our belief that CRE, construction and leveraged loan portfolios have significant room to weaken in 2008, we believe credit problems will not reach their peak until sometime 2009.
Nice work . . .
Commercial Banks – Has The Hurricane Passed Or Are We In The Eye Of The Storm?
Gerard Cassidy, Jake Civiello
RBC Capital Markets, APRIL 3, 2008
R.E.M. is the original alternative rock band. Their first album, 1983′s Murmur, transformed the post-punk, underground college-rock era into brand new genre: What you take for granted as alternative rock was essentially created out of whole cloth by R.E.M.
They came up in conversation with an old friend recently, who noted that the band just released its 14th album, “Accelerate.”
Most of you young’uns probably are familiar with the band’s later bigger commercial hits — “Losing My Religion, Shiny Happy People, Everybody Hurts, Stand, etc.” That stuff is all good for what it is — better than most of the pop on the radio at the same time, anyway.
But if you really want to delve into this seminal and influential band’s best work, you need to go back to 4 of their first 5 albums.
Genius lay that way.
A little context: In 1983, the US Stock market had just awoken from a 16 year slumber. Reagan was President, polyester had not yet gone away. The movie Saturday Night Fever was still relatively fresh in people’s minds, and there was plenty of Disco on the air, along with Journey, Boston, and Foreigner. It was an ugly, if simpler, time.
Along comes R.E.M., from of all places Athens, GA. Murmur broke boundaries, and literally created a new genre. The music lay somewhere between the jangling guitar work of the 1960s bands (Beatles, Byrds), with a drive that was not unlike later bands (Clash, Patti Smith).
I was surprised to see that the CDs of both Murmur and Reckoning are $7.97 at Amazon. It is long overdue for the music industry to use dynamic pricing on the back catalogues of artists. I suspect, however, they are a decade too late, and have already lost a generation of CD buyers.
R.E.M. was overtly political. Their songs were barbed attacks on
the status quo, hidden beneath hauntingly beautiful melodies, arcane lyrical language, driving drumbeats, jangly guitars, and
mumbled vocals. It was a completely idiosyncratic approach, but it worked well.
What stood out most of all were their collections of
songs, alternatively beautiful and compelling. Dramatic structures, majestic melodies, lush vocal harmonies and somewhat archaic language combined for a unique sound.
The band became a critical darling, and sold increasingly well. Each subsequent album sharpened the band’s focus, and saw their writing become increasingly layered and complex, culminating in the tight, driving rock of Document. This was the album that catapulted R.E.M. from college radio favorites to mainstream stardom — and with good cause, too. It also marked their critical (but not their commercial) peak.
A recent WSJ piece noted the commercial decline:
“It has been a long, slow fade for a band that came to be known both as one of the founders of alternative rock and one of the genre’s most bankable names. Its 1996 contract turned out to be the high-water mark of a five-year frenzy of wildly expensive superstar contracts across the music industry, whipped up by interlabel bidding wars and CD sales’ seemingly boundless potential for growth. Most of these deals, such as Sony Music’s $60 million contract with Michael Jackson in 1991, and Virgin’s $70 million 1996 pact with his sister Janet, proved overly optimistic about the commercial prospects of artists who were past their prime.”
That sound about right. None of these artists have since achieved any level of their former commercial — or critical — success.
I hope REM breaks the streak. I have yet to hear the entire new album, Accelerate, but the first single, “Supernatural Superserious” is encouraging. Reviews have generally been positive, calling the album R.E.M.’s “most relevant in years.”
Must Own Albums:
• Murmur (1983)
• Reckoning (1984)
• Lifes Rich Pageant (1986)
• Document (1987)
• Accelerate (2008)