Why I was wrong, by Dick Bove

Why I was wrong, by Dick Bove

Posted by Kate Mackenzie on Nov 28 12:56.

Rochedale’s Dick Bove has pondered why he’s been wrong on the banks — spurred on, he writes, by a Bloomberg survey (which we couldn’t find) showing analysts’ predictions on financial stocks have been dismal over most of the past two years.
The conclusion:

Why Was I Wrong in 2011 and Will This Continue Through 2012?
The answer to the question as to why I was wrong in 2011, and some other analysts may have been as shown in the Bloomberg survey, is clear. I failed to understand that the fears in the market concerning banking were so great that the fundamental improvements in the economy, the industry, and companies like Bank of America and Citigroup would simply be ignored.
The next question that arises concerns whether the fears in the marketplace are reasonable and whether it is true that the banking industry can suffer very negative consequences that do not impact the overall economy. The key issues are these:
Economy: While the economists and others are projecting upward movement in the United States economy, the market is not. It is reflecting fear that the European and Chinese economies will falter and bring the U.S. down with it. While one cannot argue that this will not happen it is important to note that while gross exports are 13.4% of real GDP net exports are 3.0%. Domestically, final sales continue to grow and there is some indication that inventories are too low to support this growth.
Housing: The housing crisis began in 2005, six years ago. Since that time the population has grown by an estimated 15 million people; housing affordability has soared; and housing construction has fallen below what in normal times would be replacement requirements. The crisis in this industry is certainly not over but it is close to ending.
Financial System: the biggest threat to the financial system is not coming from the economy. There are excess funds in the overall economy and in banks. The biggest threat is coming from the Federal Reserve which may be applying draconian standards to the banks crippling their ability to perform. Hopefully, the people in the Federal Reserve will come to their senses driven by a need to assist the economy.
Europe: There is a belief that the European debt crisis will result in a massive financial problem for United States banks. To date there is no evidence of this. In fact, it is clear that the American banks are benefitting meaningfully from this crisis as funds, loans, and customers leave Europe for the U.S. It also seems likely that the European Central Bank will ultimately resolve the debt crisis by accepting the cost of bailing out the profligate nations.
U.S. Financial Stress: There seems to be no likelihood that the U.S. government will resolve its debt problems. The main reason for this is that there seems to be no reason to do so. Money continues to flow into the dollar and the U.S. Treasury from lenders.
Rumors: Investors have fled the market as shown by the decline in mutual fund holdings. Therefore, by default the markets are driven solely by rumors and computer-driven, day-trading programs. In this environment, banks do not fare well since all of the rumors associated with these companies are negative and are likely to remain so.

Despite the stubborn inability of the market to follow Boveian fundamentals, he is maintaining a belief in the upside:

Presumably, at some point, fear will either be realized or dissipate. My assumption is it will dissipate. At this point, the industry’s fundamentals will drive bank stocks much higher. This was my view at the beginning of 2011 and it is my view at present.