Jon Markman: Avoid bank and brokerage stocks

Somehow, the big banks have to find a way to retain investors' confidence despite a January that is likely to feature many of the same problems we witnessed earlier this month. In early October, you may recall, institutions such as Wachovia (WB, news), Bank of America (BAC, news) and Merrill Lynch (MER, news) did an about-face from assertions that their businesses were not harmed by the credit crunch when they announced massive write-downs on asset-backed paper.

Investors will let them get away with that sort of rudeness only once. If the banks do it again -- after potentially being forced to take a lot of debt onto their balance sheets from failed "structured investment vehicles" -- shareholders are likely to slaughter the bank stocks, pushing them down at least another 20%.

[Banking analyst Richard] Bove contends that for every $1 in uncollected debts that they have written off so far, the banks have uncovered another $2.50 from failed mortgages, auto loans and commercial lending. "Bad loans are going onto their balance sheet faster than they can write them off," he said.

Once investors determine that the banks' bad loans are out of control and that the risk cannot be adequately measured, they will sell first and ask questions later. So, we are about to enter even more interesting times. A debt-led recession punctuated with joblessness and foreclosure is almost certainly en route. The only questions are whether it comes early next year or in 2009, and how deep a hole we'll need to dig for the burial. Whatever the timing or depth, continue to avoid the bank and brokerage stocks.

~ Jon Markman, "Why we need a recession -- soon," MSN Money, October 25, 2007