Bank Stocks Plunge - Analyst cites year 2000 risks

-- Mr.K (Mr.K@lunch.time), May 24, 1999

Answers

Michael Mayo, the analyst, is a brave man.

Wonder if the ABA will be leaving him voice-mail messages.... or maybe they're still busy trying to convince KIA to pull the bank-run ads.

-- Lisa (lisa@work.now), May 24, 1999.

Thanks for the heads up, Mr. K. It's turning into a very interesting week for Y2K. <:)=

-- Sysman (y2kboard@yahoo.com), May 24, 1999.

Can someone please cut and paste it here? I can't seem to get the link to work.

Thanks!

R.

-- Roland (nottelling@nowhere.com), May 24, 1999.

Screaming Sectors

Three big names get 'sell' ratings Bank stocks plunge Analyst cites year 2000 risks

By Debra McGarry, CBS MarketWatch Last Update: 11:52 AM ET May 24, 1999

Movers & Shakers  Stock Discussion  Sector Indexes  Market Snapshot

NEW YORK (CBS.MW) -- Bank shares took a dive Monday after an analyst at Credit Suisse First Boston downgraded his stock ratings on several of the banks.

The Philadelphia Bank Index lost 3 percent, led by Bank One (ONE: news, msgs), which fell 2 1/4 to 57 9/16; J.P. Morgan (JPM: news, msgs), which was down 2.1 percent to 135 13/16; and Citigroup (C: news, msgs), which dropped 1 15/16, or 3 percent, to 65 7/8.

Analyst Michael Mayo at CS First Boston sliced Citigroup, J.P. Morgan and Bank One to "sell" from "hold," while it cut BankBoston Corp.'s (BKB: news, msgs) rating to "hold" from "buy."

Mayo said owning bank stocks does not currently seem to be worth the risk as "pressures are mounting and positive factors like strong capital markets might not last."

Mayo cited year 2000 risks, such as delays in merger savings and productivity projects, and possibly a reduction in market-sensitive revenues around year-end for the downside potential.

"In general, with or without Y2K, banks have grabbed more of the low-hanging fruit in the near term. The days of setting new efficiency records have stalled out for now," Mayo said

Banks need to spend more money to keep momentum in productivity initiatives continuing, Mayo said. Heads of Citigroup, J.P. Morgan and some foreign banks can expect some capital-markets slowdown for the few months around year-end because of concerns surrounding the turn of the century, he wrote.

Other bank stocks suffering a decline included Fleet Financial Group (FLT: news, msgs), which dropped 1 3/16 to 40 3/4; Chase Manhattan (CMB: news, msgs), whch was down 2 1/2 to 76 7/16 and; U.S. Bancorp (USB: news, msgs), which fell 15/16 to 31 3/4.

-- a (a@a.a), May 24, 1999.

Also, from Yahoo news... <:)=

Monday May 24, 1:30 pm Eastern Time

U.S. bank stocks drop on rare "sell" rating

NEW YORK, May 24 (Reuters) - U.S. financial services stocks fell on Monday after a top Wall Street analyst made the unusual move of recommending investors sell multinational bank stocks because of year 2000 computer concerns and other issues.

Stocks in such blue-chip issues as Citigroup Inc. (NYSE:C - news), Chase Manhattan Corp. (NYSE:CMB - news), J.P. Morgan & Co. Inc. (NYSE:JPM - news) and Bank One Corp. (NYSE:ONE - news) all tumbled when Credit Suisse First Boston banking analyst Michael Mayo warned that the millennium computer bug could cut banks' profits. Mayo also said that their revenues from capital markets are ``unsustainably high.''

The sell-off in the wake of the rare ``sell'' recommendation was not limited to the money-center banks, but spread to some larger regional banks and major brokerages, too.

In a research report, Mayo said that even if U.S. banks are fully prepared for the date roll-over -- forecast to create problems as some computer systems interpret the new year as 1900 rather than 2000 -- they are still vulnerable to ``third party risk.''

``A Y2K problem with a bank in an emerging market country has the potential to cause glitches for banks in the United States,'' Mayo wrote. As the year progresses, the millennium issue might also delay merger savings, productivity projects and market-sensitive revenues, he said.

Because sell ratings are extremely rare on Wall Street, especially on such widely-held stocks like the multinational banks, the downgrade spooked investors and bank and broker shares stumbled in New York Stock Exchange trading.

Fewer than 1 percent of all U.S. analysts stock recommendations are sells, whereas buy ratings account for about two-thirds of the total, according to market research firm First Call Corp.

Chase shares fell $2.69 to $76.31, Citigroup fell $2.75 to $64.94, Bank of America Corp. (NYSE:BAC - news) dropped $3 to $64.69, J.P. Morgan lost $2.94 to $135.75, Bank One fell $2.31 to $57.50 and Wells Fargo (NYSE:WFC - news) eased $1.38 to $40.25.

Declines in bank stocks after the downgrade also hit the benchmark Dow Jones Industrial average, which shed 125 points to 10,704. The Nasdaq Composite fell 2.5 percent to 2456.

``The risks of owning bank stocks do not seem worth the returns,'' Mayo wrote in a research report. ``On the one hand, improved global growth and greater financial services consolidation offer potential. On the other hand, risks related to Year 2000, capital markets, efficiency and asset quality create downside potential.''

While banks' computer systems were generally prepared for the millennium, next year still posed a threat because banks' counterparties might not be ready, Mayo said. Some big banks also have said the capital markets business could fall off in the last months of 1999, out of caution.

Stock and bond underwriting levels could slow regardless, because they are unsustainably high right now, Mayo added. Much of the new capital markets business are old deals that were put off during last year's global market turmoil, he said.

``Activity in early 1999 has been overstated due to pent-up demand following capital markets turmoil in late-1998,'' Mayo said. ``The level of stock and bond underwriting in the first quarter 1999 was the second best ever. Many banks said specifically that their growth has been above trend.''

``We think banks may be the safest place to keep your money for the year 2000, it's the bank stocks we're worried about,'' Mayo said.

Brokerage stocks also fell on Monday. Merrill Lynch and Co. (NYSE:MER - news) stock dropped $3.19 to $71.94, Morgan Stanley Dean Witter (NYSE:MWD - news) fell $3.88 to $91 and Lehman Bros Holdings (NYSE:LEH - news) lost $3.31 to $52.25.

-- Sysman (y2kboard@yahoo.com), May 24, 1999.

And does anybody know?????? Where is all the money going from the stock sell off? Into mattresses? Doesn't seem to be going into the tech stocks as they are selling off too. Med stocks are staying the same and has anyone noticed last week, how low the shares-traded numbers were? Is this the beginning? Is the genie out of the lamp? Interesting the bank sell notice came out the day after the 60 Minutes show. Is this a new time controlled spin to the other direction? As others have said - hmmmmmm

-- Valkyrie (anon@please.net), May 24, 1999.

"We think banks may be the safest place to keep your money for the year 2000, it's the bank stocks we're worried about," Mayo said.

Well lessee...from "non-problem" to "Banks Get It" to "Banks are still the safest place for your money" to "Banks may be the safest place for your money" to "SELL SELL SELL!!"

Could "Closed for the Bank Holiday" be far behind?

-- a (a@a.a), May 24, 1999.

I get Goldman Sachs analyst reports. Interestingly, they've just initiated a y2k series with the first arriving today entitled, "Y2K -- A Legal Perspective". Casual scanning suggests they are making a serious effort to evaluate risk. Should make for interesting reading tonight. Genie may be out of the bottle at least a little.

-- Dave Collum (aaa@aaa.com), May 24, 1999.

Oh, Oh,

Market closed down almost 180. Y2K fears. Be prepared!!

-- GeeGee (GeeGee@madtown.com), May 24, 1999.

Evenin' Sysman :-) Yes, it is a verrrry interesting Monday. The rest of the week may be equally interesting. Especially with the cascade of responses generated by the 60 minutes piece.

I wrote to the opinion /suggestion department of CBS. They were kind enough to send a reply, but I wonder if it is a "canned reply". It could have been .... or not. My request involved an extremely brief synopsis of fact about our local government, and a request for them to do a feature, *at LEAST* an hour long.

Would be great if they'd hurry up and do it. Time's a-wastin'.

Mr. K

-- Mr.K (Mr.K@home.finally), May 24, 1999.

As I indicated on another related thread, if this is not a Major wake up call I don't know what would be. The importance of this action today cannot be overstated.

Ray

-- Ray (ray@totacc.com), May 24, 1999.

Re today's down market:

"I just think it's a cautionary market and therefore vulnerable," said Charles Payne, president and chief analyst at Wall Street Strategies. "You've got to wait this out. I still don't get that real sense of panic, but the thing that does bother me is there's no leadership."

Boy, doesn't THAT sound familiar?

-- Mac (sneak@lurk.hid), May 24, 1999.

I still don't get that real sense of panic

Now...if he were to pull his head out of his sandbox, he might get a clue as to what is about to happen.

Is it just me, or do other people realize that "upper-class" economically inclined folks don't "read" reactions with the same perspective that other "classes" do? Don't they seem somewhat removed from reality? Isn't true "living" (without extreme finanacial expenditure for wanted , not needed comforts) a lot more BASIC than they are used to? Seems to me that they have lost the pulse of America. That is why we are in this fix. They've only been taking the pulse of a few, and let the majority of the vital organs die.

Sorry if it's a strange metaphor - hope it comes across to you like it does to me....

-- Mr.K (Mr.K@home.tonight), May 24, 1999.

Watch the put-call ratios. I think there will be an increase in puts on the indexes. It may give a little warning to what I think is about to happen. The great players make just as much on the way down. There will be no joy if I am right on this one. Just an opinion.

-- Mike Lang (webflier@erols.com), May 24, 1999.

Mike, good to see you at the Lonestar!

Mind giving a short primer on put-calls for us Wallstreet-challenged Yourdonites?

-- Bingo1 (howe9@pop.shentel.net), May 24, 1999.

Sounds like he's saying to take your money out of bank *stocks* and put it into bank *accounts*. What a nuisance it must be to have all that money, wondering where to keep it safe.

-- Flint (flintc@mindspring.com), May 24, 1999.

no nuisance Flint just buy gold - easy

-- Andy (2000EOD@prodigy.net), May 24, 1999.

Andy:

Depending on what you expect, I tend to agree with you here. If you think the probability of meltdown is high enough, who really cares if you take a 40% loss -- the alternative is losing everything.

As I understand it (not well, I admit) there's quite a bit of overhead involved in converting your assets into physical gold, taking delivery, storing that gold for a while, then reselling the gold and purchasing assets again. I read somewhere that if you did all of that, say, next week, you'd lose somewhere around 25% doing the deal. If y2k is mild, that's a sizeable loss. If y2k is calamity, it's trivial. Place your bets early.

-- Flint (flintc@mindspring.com), May 24, 1999.

PUT: The purchaser pays for the right to sell an underlying asset like a specific share of stock or an index at a fixed price over a specific period of time.

CALL: The purchaser pays for the right to buy an underlying asset at a fixed price over a specific time.

One could buy calls, buy puts, sell calls or sell puts depending on ones short term price expectations. Or one could buy and sell a combination of options.

Examples: 100 shares of XYZ trade at $10 each or $1000 for the 100 share lot. A $10 Put for August 1999 might sell for $0.50 per share or $50 for 100 shares. The purchaser of the Put pays the issuer the $0.50 per share for the right to sell XYZ at $10 until August 1999. By August 1999, the purchaser can either exercise his option and sell 100 shares of XYZ at $10 per share or allow his $0.50 per share investment to expire worthless.

Using same scenario, a $15 call would allow the buyer to purcahse XYZ at $15 anytime until August 1999 and might sell for far less since it is further out of the money. Out of the money means the stock price is currently trading below the strike price of the option.

One could buy Puts if one thought the stock price or the market index was going down OR could buy calls if one though the stock price or index was going up. Conversely, on e could sell Puts if one thought the future price would be equal to or greater than the current price OR sell Calls if one though the future price would be equal to less than the current price.

The Put:Call ratio is another measure of savvy investor sentiment.

The price of any option has two components:

1. Related to the price of the underlying stock compared to the strike price of the option.

2. Related to the time left until expiration of the option.

Typically, option market are made with a fixed time horizon and the time value steadily drops to zero at time of expiration. The option price goes up and down pretty much in pace to the price movement of the underlying stock or index.

I am told that most (est 70%) expire unexercised and worthless as most options are speculations with no intent of owning the underlying stock. I've made more writing covered calls as insurance against stocks that I own than I have made speculating. And I have sold all underlying stocks.

For me Y2K is too speculative and the market is just beginning to factor Y2K on their time horizon. So while the sale of a call or a purchase of a Put could payoff, it will require nerves of steel because the volatile market can easily move against you. One word of advice, if you are new to options now may not be the time to specualte using options - it is too easy to lose your whole investment.

One more caveat: An option has no underlying value. An option is only a right to buy or sell a given share or an index. Unlike stock shares, the owner of an option has no asset value in the option. To the best of my knowledge, brokers will not allow options to be used as collateral for margin. Basically options capture only the price differential of a stock or index. Options are very speculative.

In theory, one could sell a Call and use the proceeds to buy a Put; which turns a profit on a large negative price move but looses all if price is unchanged or moves up.

Hope this helps. The above is informational and not intended as investment advice.

-- Bill P (porterwn@one.net), May 24, 1999.

Bill -

nothing personal, but it's stuff like put:call margins that make me really glad I'm too poor to have to worry about that stuff, you know?

Arlin

-- Arlin H. Adams (ahadams@ix.netcom.com), May 25, 1999.

I'm kinda glad I doen't have any money in the market. Being the geek that I am, I'ld have a bunch in tech stocks. Nasdaq down 2.6% today, down about 9% the past month. Oh, it's nice when it goes up, but...

I don't think it'll take much to push a big-time inflated market over the edge. Now the banks are joining in... I'll have a close eye on the chart tomorrow.

I'll take my 4 or 5.2% a year, for now, thank you very much! <:)=

-- Sysman (y2kboard@yahoo.com), May 25, 1999.

Thanks a bunch Bill. An uncle of mine lost the whole enchilada in 1987. Something to do with what you described.

Hey Arlin, the question is, "Would you participate in put-call gambling if ya did have a bundle"? Not me boy. Gambling is one vice I've never had.

-- Bingo1 (howe9@pop.shentel.net), May 25, 1999.

What Bill left out is that, under the wrong circumstances, you end up losing MUCH MORE than what you put up to do whatever you were trying to do.

And THESE are so much more straight forward than the derivatives the BIG banks are using.

Chuck

who is, as a local radio talk show person said in 1984, "Glad all my money is tied up in debt", (as the market melted down that October)

-- Chuck, a night driver (rienzoo@en.com), May 25, 1999.

or was it '87?

senior moment again. sheesh

-- Chuck, a night driver (rienzoo@en.com), May 25, 1999.

Dow down another 123.58 today. Nasdaq down 72.88, or 2.97%. Hummm... <:)=

-- Sysman (y2kboard@yahoo.com), May 25, 1999.

It was in positive territory most of the afternoon, but then it dipped. Lots of volatility.

-- Tim (pixmo@pixelquest.com), May 25, 1999.