11/16/2009 05:12 am ET Updated May 25, 2011

Don't Bank On It!

As tennis superstars Roger Federer and Serena Williams painfully discovered recently, supposedly sure things in life are often as real as the mythical pot of gold at the end of the rainbow.

Both were widely touted as sure-fire winners in the men's and women's singles at the U.S. Open. Alas, each turned out to be a loser.

It all brings to mind an example of what many investors are beginning to believe is another sure-fire winner -- those much-bloodied bank stocks, the chief Wall Street victims of the financial crisis. Six months ago, the Street hated bank stocks. No more. Now it loves them. The reason: they've been going gangbusters, racking up giant gains, in a number of cases several hundred percent or more from their recent lows.

Noteworthy winners are Citigroup, which has risen from a 52-week low of $0.97 to $4.21, and Bank of America, which has soared from $2.53 to $17.16. Wells Fargo, another big winner, climbed from $7.80 to $29.17, while JPMorgan Chase ballooned from $14.96 to $44.36.

Sparking these gains is the over-riding view that the massacre in financial stocks is kaput, given an improving economy, an easing of the credit woes, numerous writedowns of toxic assets and lofty handouts from Uncle Sam.

Reflecting this sunnier view of the financial arena, the brokerage community, virtually ignoring the hefty advances, has bombarded investors with a slew of buy recommendations on a variety of bank shares that promise even juicier gains ahead. Recognizing that bank shares, despite their recent gains, are still way down from their former highs, many investors have been quick to snap at the bait.

If it sounds enticing -- which it is -- a word of warning: A number of pros, plus some prominent financial names, see the path to more gravy in bank shares riddled with significant land mines.

A big unknown -- and obviously a big worry -- is the remaining amount of toxic assets on bank balance sheets. Or put another way, how many of those supposedly sound loans are actually loans that have turned into manure? West Coast liquidity tracker Charles Biderman, CEO of TrimTabs Research, which is partially owned by Goldman Sachs, takes it one step further. "If banks were to mark their assets to market, many would be bankrupt."

Apparently, the International Monetary Fund shares some of Biderman's concerns. It recently estimated that globally banks and other financial institutions face aggregate losses of $4.05 trillion in the value of their holdings as a result of the financial crisis. Of this amount, $2.7 trillion is said to be from loans and assets originating in the U.S.

One of Wall Street's top banking stars, Meredith Whitney of the Meredith Whitney Advisory Group, also sees tougher times ahead for banks. She doesn't believe they have properly reserved for greater than expected losses in home prices, which she sees falling much further in major markets. She feels, in fact, that such banking biggies as Bank of America, HSBC and JPMorgan Chase will all be forced to boost their reserves as real estate losses swell.

In recent weeks and months, the financial press has been sounding off increasingly about what it believes could be the next shoe to drop -- namely, massive losses in commercial real estate. Such losses would hardly be a shocker, what with the streets of America littered with empty retail outlets and office space. All told, banks hold an estimated $1.3 trillion of commercial real estate loans, of which nearly $400 billion is scheduled to mature by the end of next year.

Morgan Stanley recently got its two cents into this act, warning clients that it sees more relative risk in the CRE asset class than in any other asset class. It thinks the current economic cycle could end up with cumulative CRE losses of 10%. However, given the sharp declines in fundamentals and the much longer lag until the impact on bank portfolios is known, Morgan Stanley warns the risk is greater that CRE cumulative losses could migrate toward its bear case of 15%.

Retail and office CRE is viewed as most at risk. As such, Morgan Stanley rates as the most highly exposed banks Associated, People's United, East West, M&T Bank, UCBH, Valley National and TCF Financial.

The bottom line, as far as the stock market goes: Don't fall in love with supposedly sure things because the wrong sure thing can kill you.

In this context, Eastman Kodak, a former darling of institutional investors, comes to mind. The big guns loved the stock when it was in the $40s and $50s. And when it hit an all-time high of $94.75, talk was rampant that a $200 price tag was simply a matter of time. Some money managers literally prayed for a selloff so they could buy Kodak on the cheap. They got their wish, as the stock subsequently tumbled and landed into the $20s. If those bargain hunters are still around, good news. The stock is even cheaper now at around $6.64.

Write to Dan Dorfman at