Sovereign Wealth Funds' Timing in Bank Stock Sales Seems Right
The rich get richer. A story the other day in The New York Times catalogued the extremely healthy profits recorded by foreign governments that have been closing out their stock positions in American banks.
The sovereign wealth funds - immense state investment pools funded by export earnings - put billions of dollars into bank shares at rock-bottom prices during the credit crisis when few others would touch them. Now they are reaping the benefits of their sound judgment, intestinal fortitude or just plain luck.
Kuwait's sovereign wealth fund turned a $1.1 billion profit on a $3 billion stake in Citigroup, the Times story said. The sovereign wealth funds of Singapore, Qatar and Abu Dhabi have also sold their bank holdings for "comparably large gains," it said.
If these big investors are taking the money and running, should you do the same?
Their selling does not necessarily mean that they expect bank stocks to head down again. The funds' ownership no doubt was driven by an interest in keeping the global financial system afloat. Now that that goal has been accomplished, knock on wood, they can make a graceful and profitable exit.
There are reasons to be concerned abut the sector's immediate prospects, however. One is the very iffy outlook for commercial real estate. Rents and property values continue to fall, and many malls have vacancies, even in the holiday season. Those conditions do not bode well for banks' loan books.
The comparative weakness of bank stocks is another good excuse for caution. The Standard & Poor's index of financial companies has gone precisely nowhere for the last four months, while the 500-stock index is up about 8 percent.
When a sector begins to underperform, it's often time to cut and run. Come to think of it, when the weak sector is as important as financials, it often heralds a poor run for the whole market.
Read more:
- Too Many Bears for a Correction to Begin
- Merrill's Bartels, Deadly Accurate All Year, Warns of a Correction
- The Dow Hits 10,000 Again, but the Small Have Gotten Smaller
