Stay Away From Banks and Detroit

by Dual Income No Kids on April 30, 2009 · 0 comments


Hi All,

Maybe this is obvious by now, but I wanted to urge our readers to stay away from two economic sectors: domestic automotives and banking. This may be somewhat controversial, but here is my thesis:

Banking:

1) Banking will continue to suffer. Why? Several reasons. First, a toughened, but contradictory regulatory environment is beginning to take shape. The Federal stress test has reaffirmed the need for tougher oversight on the part of the treasury. At the same time there are a number of government programs in place to modify the terms of existing mortgages to make them more amenable to borrowers. These two policy trends work at cross purposes. On the one hand, banks are encouraged to lose money by making their products more acceptable to borrowers, on the other, they are forced to improve their capital base by Federal regulators. Its a no win situation.

2) There is still a TON of junk on the balance sheets of banks. While a lot of the subprime loan are being written off, there is still a titanic amount of questionable loans on big finances books. Specifically, a number of Alt-A and option ARMs will be coming due in the next two years (1,2). These loans are thought to be similar to subprime in that are issued to less than perfect borrowers. Nobody really knows how much these loans are going to cost.

There are a number of other reasons to stay away from the banking sector, but a hostile regulatory environment and unforeseeable losses should be enough.

Detroit:

The major reason not to invest in American domestic automobile manufacturers is: they’re all bankrupt. As of this posting, rumors are circulating around the internet (we’ve reported them) that Chrysler will file for bankruptcy. Similarly, Ford is bleeding money. Their most recent quarterly loss was something like 1.4 billion. Ford said that was great because they weren’t losing money as fast as previously. Thats ridiculous. A $1.4 billion loss is awful. it means Fords business model isn’t working. Finally, GM’s problems are well publicized. They bear little repeating here, but its enough to mention to that GMs bondholders are negotiating for control of the firm (1). This means their management has lost control and can’t make a profit.

So, just to sum up, both of these industries are troubled. In addition, the nation is a very bad recession, so they’ll have the added drag of trying to do business in a poor economy.

Folks, its dangerous to give investing advice, but please if you are thinking about these industries for a long term position, please reconsider. You can build your wealth faster and at a much lower risk elsewhere.

Best,

James

Disclosure:

We jointly own 270 shares in Umpqua National Bank (UMPQ) and Miel owes 100 shares of Citigroup (C). We are currently NOT adding to our positions.

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