The Stopped Clock Over At The WSJ

No matter the facts, Peter Eavis seems determined to always be negative on the banks.


It’s a little unfair for me to point this out the same week JPMorgan reported a blowout quarter, but my old pal Peter Eavis, Wall Street’s eternal skeptic on the banks and a guy with a preternatural talent for ticking me off every time he sits down to a keyboard, was at it again on Monday. Eavis now contributes to the Wall Street Journal’s “Heard on the Street” column; his considered view of the banks lately is that they—are you ready?—are an accident waiting to happen. This time, the problem seems to be commercial real estate:

A slow motion train wreck is still a train wreck.


Against all expectations, shares in banks heavily exposed to commercial-real-estate debt have been on a tear recently. Losses from commercial mortgages could well be large. Even so, investors are betting they'll be bearable, assuming banks will book the losses over time and offset them with earnings from healthier loans. But that convenient scenario may not play out for all banks, leaving investors potentially exposed to shock hits from commercial real-estate exposure. It will pay to sift through banks' first-quarter earnings, which start to come out this week, for signs commercial real estate could yet cause unexpected pain. [Emph. added]

Frequent readers of this site know that Eavis has regularly turned out these sorts of anti-bank bloviations for the better part of a decade. By now, his antipathy to the sector might be the longest-running gripefest on Wall Street, short of my string of anti-Hugh McColl squawks that began in the mid-1980s.


He can’t seem to help himself. No matter where we are in the cycle, or what valuations look like, or who’s running the companies, Eavis can be counted to come up with a reason to tell investors the stocks are doomed. It’s as if he had some scarring experience with a teller at one of Citi’s more hellish branches downtown years ago, and never quite got over it. To Eavis, no one in the industry can do anything right. Ever. Look, for example, at what he had to say about the banks in April in 2000. Back then, the problem wasn’t CRE loans, it was loan growth generally. And he didn’t think the group was a slow-motion train wreck. It was a high-speed car wreck.

Just as some drivers accelerate to get out of troublesome situations, some banks may be speeding up loan growth in a bid to avoid lower profits in their lending businesses.


Putting the pedal to the metal is always a questionable move on the pike. And itcould end up hurting banks, if, in their eagerness to boost loans, they become less picky about their borrowers and lend too much to firms and people more likely to default.

So sometimes too slow, and other times too fast. Whatever. Anway, Eavis fingered BB&T and SunTrust as two particularly egregious malefactors in the gun-the-loan-growth scam. You know what happened next. Over the next three years, both stocks ran rings around the S&P 500 and the S&P Financials. BB&T’s returns in particular were twice the S&P 500’s.


No matter. Just a month later, Eavis was back on the banks’ case. This time, the problem was . . . rising interest rates! They would torpedo the value of banks’ securities portfolios, he warned. More finger-wagging:

It's well known that higher interest rates have eaten deep paper losses in securities portfolios at several large financial institutions, including Washington Mutual (WM),Bank of America (BAC) and Golden State Bancorp (GSB).


But, contrary to common wisdom, these losses aren't being offset by reported gains elsewhere on the institutions' balance sheets. . . .


The failure to achieve offsetting gains raises a number of questions for investors. It suggests that the banks are struggling to manage interest-rate risk in their balance sheets, which will become more of an issue if the Fed continues to raise interest rates. In addition, banks' equity is reduced by these paper, or unrealized, securities losses. . .

Questions raised for investors! Thanks, Peter. Golden State was later acquired, and WaMu went kaput years later following the subprime crackup, so we don’t know what happened to their stock prices after this particular Eavisian warning of peril. But we do know what happened to BofA. It rose by 50% over the next three years.


Fast forward to the end of 2002. This time, predicted Eavis, the end was really nigh. Really.Now he was back to worrying about credit quality:

Credit where credit is not due.


Expect that to be the market's rueful motto in 2003, when the latest tidal wave of lending inevitably starts going bad. Since the economy began slowing back in 2001, banks and other lenders have continued making loans at a breakneck pace,spurred on, of course, by the historically low interest rates set by the Federal Reserve under Alan Greenspan. That poor discipline will come back to hauntfinancial institutions this year, you can bet.

In fact, the KBW Bank index rose by 24% in 2003 and 53% over the next three years.


Oh, come off it, Brown, you’re thinking, stop sniping. Eavis was one of the few who was right on the really big issue: he saw the subprime crack-up coming and you didn’t, and all this is a bunch of sour-grapes revisionism.


No. Oh, it’s true enough I didn’t see the depth and breadth of the housing meltdown ahead of time and got walloped by it along with just about everybody else. But over the long term, I’ve mainly been right about the direction of the banking business, and, since the housing tsunami, have made some adjustments. Over the very long term (and the effects of the subprime crackup notwithstanding) I’ve generated ample absolute and relative returns for myself and my investors. Over that same period, I fail to see how Peter Eavis’s one-note rants about the banks have done any investor even a smidgeon of practical good. He was down on them, and they went up. Then he was down on them, and they went down. He was down on them ten years ago and he’s down on them now. He’s always down on them.


And, notably, what did Eavis have to say about the stocks at the most crucial moment of all, as they approached the greatest low of anyone’s lifetime early last year? You guessed it: he was negative. This is from January of 2009, just weeks before the group’s final bottom:

Get ready for an old-fashioned banking crunch.


So far, the banks that have been hardest hit committed new-age sins during the credit bubble. They owned excessive toxic securities, relied too heavily on flighty funding sources or wrote too many at-risk mortgages. Now, as the economy worsens,even the banks with more traditional balance sheets are feeling serious pain as job losses and other factors cause defaults to soar.

Oh, please! I don’t need to tell you that, as a cautionary note to bank investors, this was spectacularly ill-timed. It simply won’t do. Peter Eavis is a know-nothing, 24/7 yawp machine. I fail to see how that adds much value at all; the Wall Street Journal can do better.


What do you think? Let me know!


Thomas Brown

http://www.bankstocks.com/