We've come a long way from last fall's mixed messages and muddled, conflicting actions. But even the most seasoned administrations fumble a message once in awhile, and this new administration is no exception—delivering a bit of a head-scratcher this week.
First, hoping to avoid confronting Congress for more bailout funds, the Treasury laid out a verypreliminary plan to convert the government's preferred shares to common shares. Simple, fast, yet that would give them significant voting interests in the nation's largest banks, essentially amounting to "back-door" nationalization. And it didn't end there. Treasury Secretary Geithner went on to say he welcomes banks giving back federal funds—but almost immediately warned acceptance of returned funds is contingent on his assessment of the systemic impact. Put another way, the standards won't simply be that banks who are willing and able to repay their debts can. Rather, the government will decide what's best and when. That casts a shroud of uncertainty over how quickly and easily the feds will relinquish their direct stewardship of certain banks.
Neither idea sounds optimal, but neither looks like a foregone conclusion at the moment. And while that may be a good thing, it also underscores a different issue. These days, it seems federal officials can't resist thinking out loud—into a microphone with 25 members of the press present. That's not to say established plans likely to be enacted shouldn't be discussed in detail with the public. Probable government actions should be transparent. But public brainstorming roils markets and generally increases uncertainty as one "preliminary idea" after another is unveiled and subsequently scrapped.
Washington's communication skills are hugely important to hypersensitive markets right now. We've noted the feds have shown some improvement of late—last week's announcement of solid dates for stress test results and their backing methodology, for example. Yet the biggest risks facing financial stocks right now are more government missteps. And those risks will remain in place for a while, making it darn near impossible to handicap banking sector investment performance.
But as long as banks' core capital markets lending capacity (which the feds have indicated unmitigated support for) remains intact, a broad financial sector and economic recovery can still take place. That means investing in big banks may not yield stellar results while uncertainty persists, but diversified investment in stocks may still richly reward those bold enough to hold on for the initial big bounce of the inevitable bull.
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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.