SunTrust, Signs of a Solid Investment?

The heat and humidity in central Florida was unbearable a few weeks ago -- summer refused to leave.  A dome of sauna-like high pressure blanketed the state.

The air conditioned lobby of the local SunTrust (STI) branch was a welcome relief.

First thing: You notice the signs, signs everywhere, in the lobby, in the hall, behind the tellers.  More signs than customers, all touting SunTrust's "SOLID" message.  I considered whipping out my camera to snap a picture or two for this post but ... thoughts of being spread-eagled and searched in some administrator's office quickly put that idea to rest.  You can, however, see examples of SunTrust's SOLID message yourself on SunTrust's  web site here.

Mid-December of last year -- in the middle of the crash -- I posted a SA article on how business, at least from a customer's perspective, appeared normal at SunTrust.  See the earlier article here.   SunTrust's stock then was in the upper 20's and dropping -- it was destined to hit a low of 6 in March of 2009.  Now, on October 26 it is just below 20.

The bank recently posted it's 4th straight quarterly loss, revenue is down 21%, non-performing loans up 65% and charge offs up 26% (see here).

From a customer's perspective the changes are more subtle.  Well, there are the signs, "SOLID" is everywhere.  Some signs, such as "SOLID ADDS MORE OOMPH" -- I'm not sure what the meaning is.

Gone are the Home Equity Loan promotional signs.  Indeed, SunTrust froze my own HEL account several months ago.  I did see a small sign on a desk touting auto loans.

I was struck by the quiet and lack of customers, maybe it was the late Tuesday morning time frame. Only two of the seven lobby offices and one one of the five lobby desks had staff.  Six months ago there were Saturday hours, now gone.

During past visits I noted stacks of loan applications on lobby desks.  Now, the desk I sat in front of had only some kind of subpoena -- quickly whisked out of sight.  Even the pens looked like they came from Wal-Mart.

I like SunTrust -- even if they did freeze my HEL account. Staff are mostly friendly and helpful, the lobbies well air conditioned (important in Florida), and branches are convenient.  The website layout is easy to follow and I like the logo (see picture above).

Residential, and commercial real estate values are down close to 50% from 2006  in the northerly suburbs of Tampa.   Considering the 100% loans originated in those boom years all kinds of stuff is now "underwater".  This must be a huge problem for SunTrust and other area banks.  Foreclosures are skyrocketing.

Nearby is a new 16 unit strip mall, quite attractive, completed well over a year ago.  So far it boasts only one tenant, a doughnut shop.  Someone has to be losing a lot of money here. Don't know if it's SunTrust financed, you don't see the "Financed By" signs around anymore.

With ZIRP financial institutions can purchase longer term treasuries and profit from the spread.  This may explain the market for10 year US Treasury Bonds, paying 3.5% despite years of trillion dollar deficits staring us in the face.  Thank you taxpayers, just don't expect to get it back on your savings accounts.

The biggest beneficiaries of tax-payer bailouts pay the least interest on savings.  Back of America (BAC) pays .1% a year, Wells Fargo (WFC) .05%, Chase (JPM) .01%.  See here.  Hmm ... let's see now.  $5,000 in a Chase saving's account (or Washington Mutual, which is now JP Morgan Chase) would earn $5 for the year.  Las Vegas, here we come!

And Suntrust?  Well, SunTrust paid me 1 cent (rounded up?) interest last month on my $162 savings account.  At this rate I will report a grand total of 12 cents in interest income on 2009 taxes!  Sure hope the IRS isn't expending too much time and effort pursuing interest income cheats this year!

Yet Bernanke has to keep rates low.  To increase short term rates would devastate the profit spreads, crashing housing, equity and bond markets yet again.   We would be right back to last fall.  Question is: how long will US savers put up with these abysmal rates?  Recent market jitters are unnerving.

So is SunTrust a "SOLID" investment?  Despite the signs, I would have to say no.  Not picking on SunTrust, same goes for other banks.  Considering the craziness and shenanigans going on with interest rates and the Fed's MBS purchases (which could end) I would avoid investing in any US financial institutions at this point.

Reality is not far from the air conditioned lobby.  A few blocks away, a well dressed, unhappy looking middle aged woman is sitting on the sidewalk, clutching a large flooring special sign, attempting to fend off the mid-day sun.  These people are hired to jump around, wave at passing motorists, entice them to buy.  Sitting down on the job?  Well, you try jumping around and waving all day in Florida's heat and humidity.  But, hey -- she has a job.

Disclosure:  I have no positions in the stocks mentioned above unless you count my SunTrust accounts.

Why the Big Market Run Up?

Since March lows stocks have rocketed up 50% or more and the trend shows no sign of abating.  Back in March there was almost universal pessimism.  So what has changed?

Have fundamentals really improved?  Unemployment is still going up.  Tax receipts are falling drastically and state and local government must make cuts as they cannot "print money".  I guess California at least gave it a try with those infamous "IOU"s.  How green will the shoots stay if government money slows or stops?

In my opinion this is a tax payer fueled rally.  A massive infusion of newly printed money (backed by US taxpayers) is flooding the system.  The major recipients of this largess, the banks, get this money loaned to them at 0%.   They then do what all good bankers do,  reinvest the money at higher interest rates and profit from the spread.  With global crash fears ebbing, money is leaving the safety of short term treasuries, going into longer term treasuries, equities and commodities, all riskier assets.

The suspension of mark-to-market accounting has allowed bank held bad loans (still there and growing) to be kept on the books at face value.  Now we have banks reporting profits, even though the quality of the asset side of the balance sheet has not improved.  Question is:  Can profits generated from investment income compensate for buried-in-the-balance-sheet bad loans?  If Bernanke, and Geithner keep interest rates at 0% perhaps profits can be generated for a while yet by this risky carry trade.  Let's hope they don't start leveraging.

Unfortunately, US taxpayers will pay a terrible price.  Government deficits have quadrupled with no end in sight ($Trillion dollar deficits from now on?).  The simple fact is we cannot realistically pay off this debt short of debasing the US dollar and that may exactly what Bernanke intends to do.  He doesn't dare raise rates, he may have no choice about leaving short term rates low.  I always wondered why hyperinflated economies didn't stop the printing when the initial debts were devalued.  You know stop at 50-100 percent inflation, why go on to thousands or millions percent like Zimbabwe.  Maybe policitcally they had no choice.

Investors know this is dooming the dollar and it is dropping like a rock (see here) while non-printable assets such as gold (see here), oil (see here), grains, and stocks steadily march upward.  Even real estate is showing signs of bottoming.

Devaluing the dollar will cost all Americans dearly.   It will increases the price of just about everything and sets the stage for hyperinflation.  Think of gasoline at $10 or more a gallon, a loaf of bread at $10, a big night out with the family at McDonald for $40.  Health care?  Well, we don't even want to go there.  Savings and fixed income instruments would be devastated.

We have always had to deal with inflation to some extent.  The problem now is it threatens to spin out of control.  Hitting that magic window of 1-3% inflation may no longer be possible.  People in the know are loading up on non-printable dollar denominated assets while most Americans are blithely unaware of the storm clouds of debt towering on the horizon.