Bullish over bank failures

. Herb Greenberg

April 12, 1991|By Herb Greenberg HTC | Herb Greenberg HTC,Chronicle Features

Here's a nutty notion: Bank failure as a bullish stock-market indicator.

Don't laugh!

That's how come respected banking expert Tracy Herrick, a director and adviser of San Francisco-based Anderson Capital Management, turned bullish on the market in early January, days before the powerful rally began.

He told clients in a published report to start loading up on stocks the day Bank of New England officially failed, saying that bank calamities have been a reliable buy signal in the past.

Just look at the explosion in stock prices that occurred shortly after Continental Illinois Bank ran into trouble in 1984, or after the one-two punch in 1982 of Chase Manhattan's Mexico bond crisis and the flop of Oklahoma's Penn Square. "All occurred in a recession or slowdown," he says, "and all scared the daylights out of the Fed."

When there's fear at the Fed, he says, the knee-jerk reaction by the regulators is to flood the economy with cash, to spur lending activity and prevent another failure. Much of that money winds up invested in stocks, causing prices to soar.

One of the most common measures of money supply, M2, has leaped more than $30 billion since the middle of January, and Herrick thinks it will rise even more, since it takes six months to a year of sustained money-supply growth to end a recession.

The Fed's scrambling to avoid other bank failures not only helps the market as a whole, Herrick says, but also constitutes a strong reason to buy bank stocks in particular.

His favorites are the weakest of the big banks, Chase Manhattan and First Chicago, "since they'll go up with the group and their problems will be temporarily solved by the additional liquidity."

As for the quality banks, such as Morgan Guaranty: "They're not going to have a good run, because everybody already knows they're good."

SKULL AND CROSSBONES: Glenn Cutler of the San Bruno, Calif.-based Daily Market Comment offered this cheery admonition the other day to his subscribers: "While there have been joyous gains on many fronts in the stock market, there is a rather sobering side to the fun and frolic that must be recognized, lest we lose all sense of reality."

"Highfalutin stock prices, especially in smaller issues, also bring out the very worst the market has to offer. Stock frauds, scams, phony offerings and over-zealous promotions find excellent cover under the enthusiasm of a jubilant market. Or, when the wind blows, even the turkeys fly.

"Promoters and cons come out of the woodwork when stocks are flying. Stock offerings that could never (and should never) get done are suddenly promoted as 'hot deals' as a means to create a self-fulfilling prophecy. Some promotions are actually legitimate companies, but the promoters lose all concept of realistic valuation. . . .

"Folks, don't let your greed blind your sensibilities."

(BABY) FOOD FOR THOUGHT: Roger Spencer, PaineWebber's folksy Chicago-based food-industry analyst, thinks that Gerber Products, the Michigan-based baby-food company, is starting to look appetizing.

Speaking of the baby-food market, which has been flat, Spencer says that an upturn "is inevitable in the not-too-distant future."

Gerber currently sells for about $61 on the New York Stock Exchange.

Since Gerber has been able to turn in respectable earnings gains (he expects 18 percent this year) on lackluster sales, he concludes: "This is a party we would rather arrive at a little early rather than a little late."

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