My response is don't believe the hype of the banks! I know in my last post I told you to take advantage of the banks and buy FAS which is a fund that gives you 3x the normal returns of owning a basket full of bank stocks. This has worked out perfectly as FAS was recommended on April 2nd and if we use the price at the close of the stock market, you would have purchased them around 6.42. My recommendation is to sell FAS today and pocket a big gains in only a matter of seven days. I hope you enjoyed the ride up, the stock closed @ 8.74!!!
Play Defense!!! Here are my reasons why you should stay cautious of the banking sector.
First, the entire sectored rallied on just Wells Fargo (WFC) and let me remind you that every bank isn't built the exact same way WFC is!!!!
- One of biggest reasons why WFC is doing well and the other banks may not is WFC does not have an extensive consumer credit loan portfolio!!! Yep WFC doesn't have to worry about the risks associated with battered consumers who can't pay off their plastic.
- Second, just listen to the CFO, Howard Atkins who openly mention the huge profits can directly be attributed to large writedowns on Wachovia's bad loans. Wells Fargo is probably an exception that every other bank may not be able to replicate. A huge write-down do to their acquisition of Wachovia and a first quarter provision isn't in the cards (no pun intended) for most of the other banks.
So how to play the Fake Bank Rally:
- Start with the bad apples like Capital One (COF) They just got the big smack down by Moody's and Fitch Ratings who downgraded the stock due to the expectation of rising credit costs.
- How about American Express (AXP) and the fact that their default rate was leading the industry. WOW, now I would be slower here to pull the trigger because two firms just upgraded their shares...from basically Don't Touch to Think about it...Maybe
- Finally I am not a believer in Citigroup as their are being propped up by the government
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