Avoid financials - analysts
Written on March 19, 2008
Investors should avoid owning shares of most financial institutions until the industry begins raising up to $1.2 trillion in fresh capital, a Friedman Billings Ramsey analyst said Monday.
Government-sponsored enterprises, which include mortgage lenders Fannie Mae and Freddie Mac, need to raise about $20 billion apiece and the banking system needs $200 billion to $250 billion, analyst Paul J. Miller Jr. wrote in a note to clients.
The financial system is as much as $1 trillion to $1.2 trillion undercapitalized, depending on the amount of exposure reduction that has already taken place, Miller said.
"Fresh capital will help to stabilize pricing and eventually stop the destruction of capital from continued securities write-downs," Miller wrote. "We are speaking in general terms in this note and realize that not all banking institutions will have to raise capital, but, given the recent developments in fixed-income markets, financial equities will continue to experience downward pressure until fresh capital comes into the system."
JPMorgan (JPM, Fortune 500) said Sunday it would buy Bear Stearns Cos http://pay-day-home.com. (BSC, Fortune 500) for $236.2 million, or $2 per share in a deal that was fast-tracked by the federal government to avoid a bankruptcy after bad bets in the troubled mortgage market crippled the investment bank. Bear Stearns shares closed at $30 per share on Friday and in the last year traded as high as $159.36.
"The government, through either the Fed or Capitol Hill, will find a solution to fix the many problems facing financials today, but it will take time and it will be painful, and we would expect normalcy in the markets not to return until sometime in late 2009 or early 2010," Miller wrote.
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