The Dow: A Word of Caution

Regarding the fear/greed pendulum.

Alex Dumortier
Alex Dumortier, CFA
Sep 18, 2012 at 10:32AM

This morning, Doug Kass, the manager of Seabreeze Partners, tweeted, "I start the day at my highest net short position of the year." On the face of it, a net short position bears little relevance for an individual investor with a long-term time horizon, but I think it's a useful reminder that, with the Dow (DJINDICES:^DJI) and the S&P 500 (SNPINDEX:^GSPC) having made multiyear highs recently on the back of central-bank largesse, it's worth being cautious, if not fearful, when others are greedy.

And speaking of central-bank largesse, Bloomberg is reporting that Eurozone banks have been growing, rather than shrinking, their balance sheets to $45 trillion at the end of July. (This is, very roughly, twice the size of the U.S. banking system.) James Mackintosh of the Financial Times noted yesterday that the sector is trading at 8.4 times estimated 12-month forward earnings, which happens to be almost exactly where JPMorgan Chase (NYSE:JPM) is valued (8.52 times based on yesterday's closing price).

At first glance, something doesn't add up. At the same price tag, I know I'd rather own the best-run (yes, even after the "London Whale" episode) integrated bank in the U.S. than the entire eurozone banking sector. Although JPMorgan shares have snapped back sharply since the depths of the London Whale fiasco, perhaps there is still some value there.

In the same sector, you'll want to look at the institution The Motley Fool's top banking analyst calls "The Only Big Bank Built to Last."