Looking back at the gyrations of Mr. Market last week, it is amazing that the major indices ended in positive territory for the week. Huge injections of liquidity by central banks on both sides of the Atlantic certainly helped prop up the markets and this was repeated once again on Monday. There have been rumors about the potential of a large hedge fund blowing up and Goldman Sachs (GS) had to pump $3 billion into one of its hedge funds to keep it afloat. In addition to the two failed Bear Stearns (BSC) hedge funds, three funds from French bank BNP Paribas (BNPQY.PK) were suspended last week. It appears that the Europeans had an equally (un)healthy appetite for John Doe’s exotic mortgage.
I was very surprised to see ABN Amro (ABN) drop last week based on speculation that the takeover of this Dutch bank may fall apart. Potential suitor Barclays (BCS) took a harder hit and I am glad I liquidated our position in Barclays as discussed in the portfolio readjustment section of the August investment newsletter. A lot of investors are getting interested in the battered financial sector and indeed some of the large banks have attractive valuations while paying a sizable dividend. However the headwinds against the large commercial banks are strong with slowing mortgage originations, low interest spreads and a consumer that may finally be scaling back as seen by declining retail sales in July. Unlike Quant Investor who prefers Bank of America (BAC), the only large bank that I find mildly interesting is Citigroup (C) based on its international diversification, a 4.6% dividend yield and a 17.82% Return on Equity (ROE).