The market is making some sense today. We are seeing the tape for its true colors, that Europe is doing nothing, nothing at all to really ameliorate the situation. So our banks, which should have been going down but had been hanging in there, are at last swooning as they should have been all along.
Yes, we have had a dramatic decline in exposure to European banks when it comes to the cash-reserve funds for the mutual. We have seen a large pullback in exposure from the international banks.
But we have no idea what insurance these companies have written on the weakened German and French banks and whether the counterparty layoffs in risk are money-good.
In other words, our banks have been so busy trying to take hedge-fund market share that they have issued policies that pay off on the destruction of the European banks, and those policies could soon have to be paid out. The banks don't have to tell us what real exposure they have, so, somehow, they think that's good news.
That's idiotic. It is why I am pushing U.S. Bancorp (USB). It has no exposure to Europe, and it's carving up share from those that do.
We are also seeing calls for capital raises from the international regulators, and we have seen relentless political pressure on all of the major banks as the government starts the Dodd-Frank enforcement machine. Meanwhile, that terrific source of fees from credit cards has vanished, thanks to Senator Durbin.
Of course, there are big tax losses here, both on the common and on the bond side. The bonds, for example, of Citigroup (C) and Bank of America (BAC) are being crushed here.
So we see that these institutions just can't be owned.
The exact opposite action can be seen in the new banks, the First National Bank of Bristol-Myers Squibb (BMY) and Eli Lilly (LLY) Savings Bank, not to mention the General Mills (GIS) Bank and Trust. These companies have fantastic balance sheets and can increase their dividends at will and have no opponents in Washington.
These kinds of stocks continue to get adherents as the tax-loss selling in the financials reaches horrendous proportions.
The two to watch: Bank of America and Citigroup, where the capital structure is undergoing a pounding, meaning the bonds that have been issued by these institutions are being hammered.
Never forget that bond holders are a heck of a lot more savvy than stock investors.
I am going with the bond buyers -- it's still not too late to sell.
