Headline risks are everywhere, and as an investor, you must keep your head on a swivel and human reactions in check so that you’re not drawn into well-written narratives that promise to unveil the mystery of financial markets, says Landon Whaley of Whaley Global Research.

This week’s headline risk comes courtesy of the Old Institution and articles like this one that drives me up the freakin’ wall.

These “where to invest $10,000” commentaries prey on the greedy Gordon Gekko hiding inside investors. Once Gekko takes control of the investment decisions, investors tend to do dumb things with their money like they do when they chase headlines. Typically, the “best ideas” shared in these fluff pieces are disasters waiting to happen.

Enter Sarah Ketterer, CEO and fund manager at Causeway Capital Management.

The Banks

Sarah believes, “The largest, best-managed European lenders trade at record low valuations—yet their balance sheets are strong enough to absorb all but the most draconian of economic outcomes.”

If there is one thing Wall Street-types love, it’s a “valuation”-based argument for investing.

Sarah goes on to say, “Investors have abandoned these stocks, in part because the banks have suspended dividends and share buybacks during the pandemic at the request of regulators…”

But don’t worry about the fact that Eurozone banks have gotten monkey hammered this year. Why shouldn’t you be troubled by this year’s performance? Here’s Sarah with the answer: “…Many of the companies are likely to again pay dividends next year. That resumption, along with a revival in buybacks, should reward shareholders for their patience.”

Oh, I see! These filthy banks may start paying dividends and buying back their shares again next year. Does that thesis sound like a good reason to invest in EU banks today?

Sarah then puts the exclamation point on her bullish call saying, “The average European bank trades at a miserly 40% of tangible book value. With a potential economic recovery, they should trade at 80%—that would mean a doubling in the share price, with room still for further increases.”

The Reality

Given all the uncertainty going forward about behavioral changes, virus spread, and the duration of the second round of lockdowns gripping the Eurozone, who in their right mind is making a play on banks? 

The reason there could be a “doubling in the share price” is because these banks have been skinned like they just spent the weekend at Uncle Bill’s cabin.

The iShares MSCI Europe Financials ETF (EUFN) was down -45% earlier this year and is still near-crash mode (-17.4%). Not only that, but since the Eurozone began experiencing fall and winter FGs back in January 2018, EUFN has lost -24.8% and experienced a maximum drawdown of -53.3%. Folks, these banks are not a “valuation”-based bargain; they’re a falling Ginsu knife.

The Bottom Line

Despite what my ex-girlfriend would say, I understand what it's like to be human. Seeing markets (EU banks) get crushed can make the greed monster inside you come alive. While the temptation to buy decimated stocks is great, you must resist the urge to do anything that runs contrary to the prevailing fundamental gravity.

The Eurozone FG hasn’t been conducive for buying banks since December 2017, and it's not bullish for banks today.

Could that change at some point next year? Absolutely. But you don’t make decisions today based on what might happen next year. More importantly, you don’t make decisions today or at any time based on valuation. You make decisions today based on the most likely economic and financial market outcomes over the next one-to-three months; then, you wake up tomorrow, evaluate the new incoming data, and wash, rinse, repeat.

To learn more about Lanndon Whaley, please visit WhaleyGlobalResearch.com.