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Interest Rate Play: Stock Up On Banks
By John Crudele   N.Y. Post
It's really a trick question.

You and anyone else who needs to borrow money might eventually benefit. But these last two interest rate "cuts" have only recently resulted in somewhat lower costs to consumers. At first rates went up.

The answer I want is: Banks.

When the Fed cuts interest rates, it reduces the price it charges banks for money. And if banks don't immediately cut the rate on loans to their clients, then banks earn a higher profit.

It's that simple, just as if a TV maker sold sets to Sears for less but Sears didn't pass along the savings to its customers. When you boil it down, money being "sold" to banks by the Fed is no different than the TV set being sold to Sears.

So you now understand one of the reasons why some market experts are suddenly hot on bank stocks even as the overall stock market and the economy remain frigid.

Salomon Smith Barney, for instance, recently told clients that it expects big banks to have a bang-up first quarter despite the economy. "We expect many banks' net interest margins to improve by about 10 basis points over the next two quarters," say Ruchi Madan and Keith Horowitz, Salomon's bank analysts.

The two say they like recently merged megabank J.P. Morgan Chase the most. But they also see some good things coming for Fifth Third Bancorp, SouthTrust, Bank of America, Bank One and Firstar.

Enough with the name dropping. If you are looking to invest somewhere in these unforgiving times, big banks are as good a place as any.

But there are at least two sides to every story. And the other side of this one says that no matter how many interest rate cuts Fed Chairman Alan Greenspan will bestow on banks, there are still very big risks.

Risk One: Despite the rate cuts, the corporations to which banks loan money see their business fall off and they can't make payments on their loans.

Risk Two: The stock market continues to decline and bank's equity investments in other companies have to be written down. Banks are probably still heavy into tech companies, a result of last year's dot.con orgy.

Risk Three: Like the Japanese, Americans won't borrow at any interest rate. In that case, the margin improvements the folks at Salomon are forecasting never occur.

Another question: Do you feel lucky?

If you do, put a buck or two on bank stocks and let'er spin.

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