Brokers Fade Right on Cue

Raymond James is a great firm. Sure, their annual conference is a good time, particularly for grappa lovers, but the enormous Florida oranges they send to the BuySide every Holiday season is the firms hidden jewel. Big and juicy, and best of all, gratis, which of course is the BuySide's favorite word.

Speaking of gratis, they even enable portions of their research to be read for free, and Investment Strategy from Jeff Saut is a steal. He is no perma-bear, which is the worst kind of critter, and lets prices help shape his posture, Buy low, sell high.

I have been trying to get constructive on the financials for some time, but there always seems to be a fly in the ointment. True, the stocks have stymied the bears, at least if you look at the price action in the XLF ETF since mid-January. But it is hard to make a case for the stocks, outside of a dead cat bounce, due to (valuation) multiple compression, ongoing de-leveraging, dilution from capital injections and perhaps most important, increased regulation.

But much of that news is priced in, although many were slow to recognize issues like FAS 157. And now the herd is catching on the latest reason to short the brokers, at least for a trade:

May 5th
Short-term rallies may come and go, but Saut says the coming "re-regulation" of the financial industry is likely to crimp industry profits and P/E ratios for the foreseeable future.

Saut's thesis sure reared its ugly head today:

The SEC is pushing for more disclosure, urging investment banks to raise capital and asking firms to extend the terms of their borrowing agreements. The regulator plans to ``phase in additional disclosure related to concentration of exposures,’’ Christopher Cox told reporters. Bloomberg

The Street is trying to batten down the hatches, given their balance sheets are stuffed to the gills with Level 3 assets. But regulators have their own agenda taking shape.

Wall Street hates to show its hand, but greater transparency is coming to the brokers, and helping to shape the policy is probably preferable to fighting the eye in the sky.

Although the bears are sure to gnash their teeth over today’s comments by the SEC Commissioner, the bulk of the pain is likely behind the brokerage stocks, unless you consider moving sideways a form of torture.

Re-testing the lower trading range on the XLF is probably as bad as it gets, but if you are looking for these stocks to lead the broader market higher you might want to take a long nap.

May 5th

Once again, Saut really nailed it.
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No Bottom for Financials: ‘Re-regulation’ Means Slower Profits Ahead
Tech Ticker

SEC to Make Banks Reveal Capital, Liquidity Levels
Bloomberg

FAS 157: This is No Rumor
1440 Wall Street
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The content contained in this blog represents the opinions of 1440 Wall Street. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author. No Positions

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