“Once in a Generation Opportunity to Buy Bank Stocks” - Punk Ziegel

Despair not. It’s the Easter weekend. Salvation may be upon us. The financial crisis is over, says Richard Bove of US brokerage Punk Ziegel & Co.

This comment sounds ridiculous given the conviction on the part of most commentators that the worst is yet to come; the extent of the decline is unknown; and that the length of the decline is similarly unclear. However, I do, in fact, believe that the crisis is over. There will be more negative developments but they will be meaningless. Further, let me be clear even though the financial crisis is over the problems facing the economy are not.

Bove’s broad thesis:

A crisis builds up over an extended period of time. It ultimately reaches a crescendo when an event occurs that is so devastating that even the staunchest skeptics become fearful. At this point, the government and participants in the impacted sector get together and start to take actions that will ameliorate the crisis. At this point, the only question is whether the solutions being offered have any chance of working. However, if the solutions are powerful enough, the crisis ends.

In the current crisis, the triggering event was clearly the insolvency of Bear Stearns (BSC/$5.26/Market Perform). This event sent so much fear through the markets that action was taken. The President of the United States was involved, as was the Treasury Secretary, the Chairman of the Federal Reserve, the President of the Federal Reserve of New York, and key industry executives.

The actions taken by the Federal Reserve were innovative, dramatic, and, in my view, brilliant because they went right to the problem.

Bove accepts that hurdles remain.

The first doubt is whether it has the money to succeed in this effort. The Federal Reserve only has $921 billion in assets… In my view, the Fed needs support from foreign central banks to achieve its goals. This help is quite likely because the dollar is plunging in value…

A second fear is that the Federal Reserve will take in so many bad securities through swaps and as loan collateral that bad debts will rise costing the taxpayer money. This is doubtful and is simply fear overwhelming logic…

The Federal Reserve has actually created a template that will increase liquidity in the banking system and, just as importantly, bank profits.

But understand this:

Every study I have read is convinced that housing prices will continue to drop for an extended period. This is as dead wrong as the reports that argued some years ago that housing prices would keep rising for an extended period. Think of this:

• Money supply is growing rapidly;

• Commodity prices are soaring;

• The dollar is falling sharply; and

• Real estate prices are falling.

Does this last line make sense? When was the last time real estate prices fell in a general period of commodity inflation? I cannot think of such a time. I live in Florida where foreigners can and are buying prime real estate at deeply depressed prices with very, very cheap dollars. This may turn out to be the bargain of the century and I mean century.

So, to recap, with the help of President Bush, brilliant Ben Bernanke has created a situation that will pump profits into the US banking system. Foreigners will cheer this on so as to halt the dollar rot. “This is a once in a generation opportunity.”