The financial melt-down continued yesterday. It was particularily brutal among the banks with Goldman's downgrade of Citigroup (C) to sell. Goldman's analyst said C's writedowns may total $15 billion over the next two quarters. Washington Mutual (WM) took it on the chin Monday losing an additional 7.3%. WM is down nearly 50% since early October.
This comes at a time when the world's biggest financial institutions are paying more to borrow in the corporate bond market than industrial companies. Below are excerpts from a recent article on Bloomberg:
Investors are demanding extra compensation for the risk of owning Citigroup Inc., Merrill Lynch and Barclays Plc on concern that the $50 billion in losses already reported from subprime mortgages will increase. The total damage may reach $400 billion worldwide, Deutsche Bank AG analysts said this week in a report, and Wells Fargo & Co. Chief Executive Officer John Stumpf said the housing market is the worst since the Great Depression.
U.S. financial firms, which are rated A+ on average by Standard & Poor's, are paying similar yields to companies rated two or three levels lower, Merrill Lynch data show.
Until credibility can be restored, the banks are going to have to pay prices to investors that they thought were unthinkable until six months ago,'' said John Atkins, corporate bond analyst at research firm IDEAglobal in New York.
This lack of credibility is also showing up in the banks valuations and thus their dividend yields. There are still a lot of uneasy people out there. However, this is creating quite an extraordinary buying opportunity. I am not gulping, but I am nibbling at some of the larger regional banks.
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Bought BAC a while back when the CAD was $1.07 and BAC was $50. I am not sure I will buy any more until things get clearer. However when things get clearer these banks will have all adjusted back up to lower yields...IMO.
MG: I first got into BAC in Apr/2005 at $44.63/share. It is current my 3rd largest holding in my dividend portfolio. Near-term it will suffer along with the other banks, but my hope is it will weather the storm a little better than the rest. Time will tell..
Best Wishes,
D4L