As regular members of this blog community know I am a “Civilian Marine” (the term used by the USMC Commandant to describe Marines no longer in uniform) and a manager of a private financial services fund. With these two inputs one can see how I tend to view last week’s news on financial services earnings.
Disappointing earnings for Financials
During the week, a number of large financial services companies reported their fourth quarter and calendar 2010 earnings. With the exception of Raymond James Financial, which we own, most observers were disappointed with the results. I was not disappointed as I did not have very high expectations for net interest income and retail volume. My modest views were due to the recognition that past battles have left deep scars that are now only slowly healing. But as an aftermath of prior battles, one can start to see the difference between the recovering walking wounded and the staggering lurches of what look like “zombies.”
The walking wounded
The recovering walking wounded members of the financial community are showing environmental scars of both low investor appetite for some of their products and services, as well as new wounds from less-than-helpful regulations. These firms will continue to recover as the global economy continues its progress. Their cultures are largely intact as are their senior managements who have worked successfully together for many years. Their survival is largely ensured.
The “zombies” have not only suffered the same elements of damage that the walking wounded have suffered, but have also endured much more serious and perhaps life-threatening rescue acquisitions. The zombies have added failed cultures to their already weak cultures. In many cases they have had to import outside executives to fix their problems quickly. These are high risk maneuvers which did not play well on last week’s earnings pages.
Why should diversified portfolio investors pay attention to the financial services stocks? First, in a period of paucity of growth opportunities, much of the available merchandise is selling well below its prior peak prices. If one believes that we will eventually equal or surpass past market prices, then large segments of the market are reasonable candidates for current purchase. The S&P 500 Financial Index is selling under half of its former peak levels. Last week’s decline of 1.66%, gives an interesting window. Second, a bull market not including financials is difficult to imagine. This is particularly true in most of the developed markets, where the financials are the largest single market cap components.
As the fog of past battles (read mistakes) lifts the separation of the walking wounded vs. the zombies, the prudent long term investor may receive an unusual opportunity.
What do you think?
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