Gross: Avoid Bank Stocks

B. Gross, some guy from Janus, said to avoid bank stocks, not so much because of their exposure to deleterious oil balance sheets, but because the negative yield situation that prevails in Europe and Japan renders them without room to grow.

Moreover, he likened them to a utility stock.

“The recent collapse in worldwide bank stock prices can be explained not so much by potential defaults in the energy/commodity complex, as by investor recognition that banks are now not only being more tightly regulated, but that future Return On Equity’s will be much akin to a utility stock.”

Gross warned investors: “Banking/finance seems to be either a screaming sector ready to be bought or a permanently damaged victim of write-offs, tighter regulation and significantly lower future margins. I’ll vote for the latter.”

Gross said investors should not reach for the “tantalizing apple of high yield or the low price/book ratio of bank stocks.” Those prices are where they are because of low/negative interest rates, Gross said.

Additionally, investors should not reach for the seemingly momentum-driven higher prices of German bunds and U.S. Treasuries that negative yields have produced, Gross said.
“A 30-year Treasury at 2.5 percent can wipe out your annual income in one day with a 10 basis point increase,” Gross said.

“The secret in a negative interest rate world that poses extraordinary duration risk for AAA sovereign bonds is to No 1, keep bond maturities short and No 2 borrow at those attractive yields in a mildly levered form that provides a yield and expected return of 5-6 percent.”

Lots of warnings taking place in this article. One of them should’ve said “do not invest with me at Janus because I’m washed up.”