US banks have been able to raise many billions of dollars in the past few weeks by selling shares to investors, but the jury is still out on whether this is the savviest of "smart money" - or just plain dumb. Last year, banks were hard pressed to squeeze even a dime out of investors amid worries of mounting credit losses, failures and even nationalization.
Now, US financial firms sold more than $34b of stock, including $26.2b in the 13 days since stress-test results.
GS, MS and Citi are among more than 30 financial firms that have tapped equity markets with offerings that were all well oversubscribed. BofA, the largest consumer bank with the biggest stress-test capital shortfall, on Tuesday raised $13.5b.
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"WFC was a dream. We didn't just buy it low, we shorted it at $30 all the way down and then flipped around and then went long it at $10. That is the dream. That almost never happens." T2 Partners booked some profits in WFC shares recently in the mid 20s.
So who is buying all these new shares? "Some of the demand is from hedge funds caught short, using these deals to cover their shorts," said M. Fitzgibbon, research head at Sandler O'Neill. "Some of it is institutional money managers who feel like they missed the bottom and are chasing these stocks now." Several factors - the barrage of Fed. rescue plans and easing worries of failure or government takeovers - combined to lift bank shares off more than 16-year lows on March 6. Since then, the KBW Banks Index has nearly doubled.
"The days of nationalization fears, the days of depositors lining up outside of banks, I think those days are behind us," said J. Polun, who analyzes US bank stocks at mutual fund T. Rowe Price, which manages more than $269b in assets.
Investor appetite for bank stocks is an important barometer for the health of the markets and for the broader economy. Fed. Bernanke in a "60 Minutes" interview in March said one of the first signs of imminent recovery will be when a big bank raises private capital.
Equally important, analysts and bankers said money managers may not love bank stocks but feel pressure to keep pace with rivals by rebalancing portfolios that had shed financial stocks.
"A number of the large mutual funds were underweight financials because they were underperforming, but now that they are performing well again, these funds have to recalibrate the weightings or they will underperform the overall market," said J. Castle, Barclays's Americas equities syndicate head.
Sentiment among fund managers around the world has turned bullish since February, when Wall Street's implosion was still fresh and the specter of government takeovers haunted investors. Investor pessimism on bank stocks started to recede in April, according to Merrill.
The net % of respondents underweight banks swung significantly in April to a net 26% from a whopping 48% in March, the Merrill survey found.
"Apocalyptic bearishness of a mere 3 months ago has been replaced by fairly typical early-cyclical sentiment readings," said M. Hartnett, Merrill's international investment strategist. Skeptics say there are many reasons to be cautious about diving back into the banks.
Investment firms and SWFs from all over the world were burned badly in 2007 when they injected capital into banks like Citi, Merrill and WM through private placements and public stock offerings. Rather than catching the bottom, the credit crunch only worsened and their stakes plunged in value.
Yet analysts and investors today say the US government helped put a floor under the financial sector with its wide range of bailout moves and firm commitment to reviving markets. Together, these programs and the piles of cash sitting on the sidelines combined to spark the rally.
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