Summary
Is the trend of institutional investors leaving BoA as well as well as other larger FI's tell a story of things to come? What is the motivation behind these moves? A lack of faith in BoA strategies ? Concerns about capitol? Are more loan losses that are still predicted to come in the 2nd through 4th quarter helping to squash a continued rally?
Analysis
This latest move by Temasek to dump its position in B of A could be the signal of a pretty significant event. Other institutional investors in B of A as well as other larger FI's are also watching this event as ha harbinger of things to come. The big question is why now? Is it the overall continued uncertainty of the bank itself? Is it continued concern about the Merrill integration? Is it fear of the possible need to increase loan loss reserves due to forecasted loan losses? Is it the government’s hooks into the fabric of the banking system? Or is it a combination of these issues and possibly others as well. The fact is that our own governments continued assault on most of the banks reputations, management, board make up and practices continues to weaken the FI's standing in the country as well as the world.
Institutional investors by themselves are normally the most consistent and conservative in their investment strategies. They are typically in for the long haul based on a maximization of their return on investment. However, based on the questions that are posed above is there enough instability still remaining in the domestic and global banking sector to disrupt the long haul strategy. Even with financials stocks bargain basement pricing generally speaking, those that have a stake in the bank’s stock normally would remain in place. To exit now with a loss is a concern unless there is further systemic risk that would indicate even further dilution of the financials capital positions. To some the institutional investors play would be to jump into the financial market and wait for the normal appreciation based on the upticks in this current economic cycle. Of course the end game is yet to be played out.
The biggest fear, from my perspective, and most likely the perspective of most institutional investors, is that the governments continued back door maneuvering or under current to control compensation, executive management and board seats through the TARP investments that were made creates a powerful incentive to divest institutional investment or to remain out of it. The fact that many of these banks were strong armed into taking these funds and are no not being allowed to repay them speaks volumes to the fear of either a semi-nationalization strategy or a full nationalization strategy. Every time we watch the new Treasury Secretary speak about the financial sector, fear creeps back into the markets, which is evident in their share prices. As long as these subliminal messages continue to come into the market the longer it will take for any recovery to take root and hold on.
The founding fathers mandate to the government, as it relates to the public sector has always been “Do no harm”. At this point in time that mandate has “left the building”. Whether it be institutional investors or private capital, the sidelines right now look very very comfortable. So, will we see more and more institutional investors pull out of their current positions? I think we already have the answer to that question.
