On The US Financial Service Sector

I ran into an old friend this weekend who works as a senior foreign exchange trader at one of the larger NYC commercial banks.

This particular trader is very common-sensible and experienced, both in trading and banking. Conversations with him are always a pleasure.

After discussing the volatility in the currency and energy equity markets, he asked what I thought about financial service equities.

When I related the opinions contained in these recent posts about commercial and investment banks- here, here, here and here- he readily agreed.

Furthermore, he concurred with me that among investment banks, there only seems to be sufficient talent and cultural maturity to staff one successful publicly-held investment bank, i.e., Goldman Sachs. Other than that, he agreed that private equity and hedge funds employ the next-best non-commercial bankers, with the other, smaller three investment banks- Merrill, Lehman and Morgan Stanley- now populated by also-rans.

The nearby Yahoo-sourced price chart for Goldman, Merrill, Morgan Stanley and Lehman clearly shows that only the first one has outperformed the S&P500 Index over the past five years. And even Goldman hasn't done that consistently.

On the commercial banking side, my friend prophesied dismal prospects for growth on the order of perhaps 5% per annum, like a bond return. In this, he shares the view of my friend B and me that the largest US commercial banks are now so large as to prohibit effective management of both risk and growth.

Again, the nearby five year Yahoo-sourced price chart shows that Chase, BofA, Wachovia and Citi have all underperformed the Index for the past five year period.

As I told my friend, I wouldn't hold any financial services equity right now. Or, perhaps better put, I don't see my quantitative equity selection process producing any financial service equities anytime soon. I suppose it's technically possible, but, given these charts, barely.

I sure hope so.