One reaction that should not surprise long-term investors is that the market will move far quicker and further than most people expect. Even before the Federal Reserve has made any statement regarding the timing of reducing its asset purchase program, investors have already begun selling their fixed-income investments, which is causing yields to rise.
This is now resulting in higher mortgage rates.
According to the Mortgage Bankers Association, the average for 30-year mortgage rates increased to 4.15% last week, a substantial move from May’s average for 30-year mortgage rates, which was approximately 3.59%. (Source: “Mortgage Rates on Six Week Streak Higher,” Wall Street Journal, June 13, 2013, accessed June 14, 2013.)
Even though long-term mortgage rates at 4.15% are still near historically low levels, this has impacted refinancing, which will in turn affect certain bank stocks that have benefited from the boom of lower mortgage rates.
The Mortgage Bankers Association also reported that applications for mortgage refinancing are down 36% since the beginning of May. This is a direct result of higher mortgage rates.
Many bank stocks have benefited from refinancing revenue brought on through lower mortgage rates. This revenue generation appears to be in jeopardy, at least resulting in lower revenue growth rates, since fewer homeowners will refinance as mortgage rates continue to rise.
However, the positive sloping yield curve is a benefit for bank stocks, as they make the spread between paying short-term rates and lending at long-term rates. The greater the spread, the larger the possibility of profits.
The question regarding bank stocks is: will new lending be large enough to compensate for the decline in refinancing … Read More
Bank stocks have been one of the strongest sectors in the market over the past year. Bank stocks have rallied sharply after many investors dumped shares on fears that the financial crisis might worsen. Those fears obviously never materialized, and many bank stocks have begun to resume paying dividends and generating profits.
There are two questions I am often asked: 1) is it too late to incorporate bank stocks into one’s investment strategy; and 2) if someone has already owned bank stocks over the past couple of years, is this the time for that investor to start taking profits?
Since the fall of 2011, an index of bank stocks has almost doubled in value. Clearly, an investment strategy that owns a number of bank stocks has seen significant gains in this sector. But no one can rationally expect this type of return to continue forever.
Part of my cautious view on bank stocks, in terms of reducing the sector weighting in an investment strategy, is the fact that there is a limit to upside capital appreciation in every sector. A big question when developing an investment strategy: what is the future outlook for the sector?
Obviously, the low-hanging fruit has already been picked when it comes to bank stocks. Regardless of what was thought about bank stocks in the past, as an investor you are only interested in the potential for growth in earnings and revenues. Large gains have already been realized; now we need to consider how bank stocks fit into an investment strategy over the next decade.
Large concerns for bank stocks shareholders are increased regulation and a … Read More
One of the most dangerous periods for an investor is when they become too complacent. As the combined view of all investors, market sentiment ends up becoming overly bullish, running far ahead of the fundamentals. This has now occurred in several sectors, but one that investors should be aware of is in bank stocks, especially in Europe.
Bank stocks around the world have risen tremendously, pushed higher by a wave of positive market sentiment. The general consensus is that following the financial crisis over the last few years, the worst is over. I would caution investors that there are still significant hurdles for many global bank stocks.
Recently, the Bank of England stated that many investors are underestimating potential risks. As we all know, the global economy is still weak, yet share prices have soared, including bank stocks. Market sentiment has shifted from massively bearish to extremely positive over the past couple of years.
As the minutes of the Bank of England’s last meeting note, the committee recommended that bank stocks in the U.K. raise an additional $38.0 billion for potential pitfalls related to the euro area as well as their real estate exposure. (Source: Moshinsky, B., “BOE Says Investors May Be Taking ‘Too Rosy’ a View of Stresses,” Bloomberg, April 5, 2013.)
Investors have piled into bank stocks with positive market sentiment on the belief that the worst is over, especially in Europe. Many bank stocks within Europe are closely intertwined with other nations on that continent. As we’ve just seen from the recent Cyprus fiasco, there are still significant pitfalls ahead.
Market sentiment is clearly being pushed upward … Read More
Bank stocks are providing excellent leadership this year. In fact, if it weren’t for the credit crisis that surfaced in 2008, financial institutions, such as banks, credit, and insurance companies may still be playing Russian roulette on their balance sheet as far as risk.
It now appears that bank stocks are cutting down on the amount of risk that they are willing to take on. The Goldman Sachs Group, Inc. (NYSE/GS) is now at a point where the potential loss that can occur from trading is at a seven-year low. The other major Wall Street banks are also seeing a reduction in their risk. (Source: LaCapra, L.T., “Goldman trims risk-taking to lowest level in 7 years,” Reuters, March 1, 2013.)
The major bank stocks all closed 2012 near their respective 52-week highs and have started 2013 with a bang, with the KBW Bank Index up 5.8%, slightly below the comparative return of the S&P 500 and the Dow, but above the NASDAQ. The attraction to the bank stocks has been driven by an improving banking industry that is assuming less risky businesses while shoring up their balance sheets and producing stronger units.
The chart of the Philadelphia Bank Index below shows the upward move of bank stocks from their 2011 bottom. Bank stocks staged a nice rally but retrenched in March to May 2012 on the European bank concerns, and Moody’s Investor Services downgraded the sector. The group has since staged a rally back above the 50- and 200-day moving averages (MAs). But there was some topping on the charts, followed by the recent selling, as indicated by the blue … Read More
One of the strongest market sectors in the stock market over the past year has been the financial market sector. Bank stocks have been on a tear, moving up massively since the lows in June. Looking at the entire market sector through the Financial Select Sector SPDR (NYSEArca/XLF) exchange-traded fund (ETF), the index is now up almost 36% from the lows in June.
Bank stocks have benefited from several factors. Low Treasury yields make the dividend yields from bank stocks highly attractive; the entire market sector has also reduced its risk profile, while eliminating costs. The end result has been a group of companies that offer significant upside.
However, the hunt for safety by average citizens might hurt bank stocks going forward. The latest data by Credit Suisse Group AG shows that for the top-eight banks, the average loan-to-deposit ratio fell in the fourth quarter 2012 to 84%, compared to 87% during the same time period in 2011. In 2007, the loan-to-deposit ratio was 101%. (Source: Dexheimer, E., “JPMorgan Leads U.S. Banks Lending Least of Deposits in 5 Years,” Bloomberg, February 20, 2013.)
The loan-to-deposit ratio shows how much of the deposits bank stocks have lent out. Bank stocks are having trouble lending due to several reasons. These include a lack of demand as well as an increase in regulations to try and reduce risks.
For investors in the financial market sector, this is a double-edged sword. On the one hand, it is positive that bank stocks are being more selective in who they are doing business with. This means that any loans that have been issued over the past … Read More
The major bank stocks all closed off 2012 near their respective 52-week highs; and they’ve started 2013 with a bang. Driven by an improving banking industry that is assuming less risky businesses while shoring up their balance sheets and producing stronger units, the KBW Bank Index is up eight percent, outperforming both the S&P 500 and the Dow Jones.
The subprime credit crisis that surfaced in 2008 and drove the U.S. and the global economy into a recession was not what we wanted to see; but in some sort of twisted way, the events have led to an industry that has restructured the way banks do business—more specifically, the amount of risk that is assumed by a bank via sophisticated strategies. So far, this shift in structure, coined the “Volcker Rule” because it was set in place by economist and ex-Federal Reserve Chairman Paul Volcker, appears to be capping the number of speculative trades made by the banks, which is good.
Banks have altered the way they do business, and they’ve shown positive strides along the way.
In my view, the operating results have been fairly good, and this indicates that the banks will be able to grow their business volume across the board during the U.S. economic recovery.
Moreover, with the housing market and the U.S. economy continuing to improve, I feel bank stocks will also see some gains.
Most of the big banks have paid back part or all of their government loans. Overall, bank stocks are showing promise and delivering better results.
While risk surrounding the bank stocks has declined, there are still issues that could hamper … Read More
Last year was a great year to be an investor in bank stocks. We’ve seen a dramatic rebound in the price of most major bank stocks in America as the earnings outlook has improved. Clearly, the earnings outlook at the beginning of last year was far too pessimistic for the majority of bank stocks.
The question: what’s in store for bank stocks in 2013?
Wells Fargo & Company (NYSE/WFC) just released its earnings numbers, and they were very strong, as the firm reported a 24% jump to $5.1 billion in profit for the fourth quarter of 2012 from the year-ago period. For the full year, the company had record income of $18.9 billion, up 19% from 2011. (Source: “Wells Fargo reports record full-year in quarterly net income,” Wells Fargo & Company, January 11, 2013.)
An area of concern is that the net interest margin was down to 3.56%, from 3.89% the previous year. This is the difference between the rate it charges borrowers and the interest it pays depositors.
Refinancing of mortgages accounted for approximately 75% of the total revenue. Clearly, the lower rates that the Federal Reserve has engineered have encouraged a large number of homeowners to refinance, freeing up excess funds to use in other ways.
However, while it seems a great time to be invested in bank stocks, the earnings outlook might be a bit more complicated. The big problem for bank stocks is that they are not able to find enough places to lend in comparison to the massive inflow of deposits.
Bank stocks currently hold $10.6 trillion in deposits at the end of 2012. This … Read More
The major bank stocks are all near their respective 52-week highs and an upside break appears to be in the works, as the banking industry continues to assume less risky businesses while shoring up their balance sheets.
The subprime credit crisis that surfaced in 2008 and drove the U.S. and global economies into a recession was not what we wanted to see; but in some sort of twisted way, the events have led to an industry that has restructured the way banks do business, specifically the amount of risk that is assumed by a bank via sophisticated strategies. So far, the change coined the “Volcker Rule,” set in place by economist and ex-Fed Chairman Paul Volcker, appears to be capping the speculative trades made by the banks, which is good.
Banks have altered the way they do business and have shown positive strides along the way.
In my view, the operating results have been fairly good, and they indicate that the banks are able to grow their business volume across the board during an economic recovery in the U.S.
And with the housing market and economy continuing to improve, I feel that bank stocks will also gain altitude.
The majority of the big banks have paid back part or all of their government loans. Bank stocks are showing promise and delivering better results.
The bank stocks risk has declined, but there are still issues that could hamper the ability of bank stocks to deliver. According to Trepp, a real-estate research service, about one out of every eight bank stocks failed the stress test. (Source: “Q2 2012 Trepp Capital Adequacy Stress … Read More
The market is moving lower, and there’s nothing that appears to be supporting it. The S&P 500 has lost nearly eight percent since its peak of 1,465 in September.
The fact that the S&P 500 failed to hold above 1,400 was not a surprise, based on my technical analysis. In May, the break at 1,400 was the S&P 500’s fourth top above 1,400 since 2008.
Since the election, the market has edged lower in six of seven sessions due to heightened stock market risk.
On average, only about 37% of U.S.-listed stocks are trading above their respective 200-day moving averages (MAs), versus 61% a month ago. The short-term weakness is even more prevalent with about 19% of stocks above their respective 50-day MAs, versus 61% a month ago.
What happened to what were supposed to be the best six months of the year for investment gains?
Based on historical records, investing in the six months from November to May has produced the best returns for stocks versus the June to October period, according to the Stock Trader’s Almanac.
So far, November has been horrible, with the key stock indices down more than four percent. But as I said when I previously discussed this pattern, things could be different this time around, given the abundant stock market risk, including the financial crisis in the eurozone, a stalling economy in China, tension in the Middle East, and the presidential election and upcoming fiscal cliff in the U.S.
We are seeing some selling capitulation in the market because of the abundant stock market risk and lack of any positive news that would encourage … Read More
Recent analysis by management consultants regarding stress tests for bank stocks within the eurozone are showing more signs of concern for investors around the world. One of the biggest concerns is the eurozone’s Spanish banking system. Spanish bank stocks have seen their bad loans increase as a percentage of total lending for 17 straight months. According to Bloomberg, bad loans went up 0.72% in 2006 and stood at a massive 10.5% in August. (Source: “Spain Banks Face Pain as Worst-Case Scenario Turns Real,” Bloomberg, October 18, 2012.)
That is a shocking increase for bank stocks to deal with, considering the economy is still in decline. The eurozone itself is experiencing massive economic difficulties, and there appears to be little relief for bank stocks in that region over the short term. Bloomberg also noted that management consultant firm Oliver Wyman Group considered a decline of 6.5% in Spanish economic activity from 2012 to 2014 during its stress test. What was surprising to me was that the Bank of Spain only gave this scenario a one-percent chance of occurring. I’m not sure how they came to that figure, but a six-percent decline is very realistic for the Spanish economy over the next couple of years.
The problem for the eurozone is that bank stocks within the union have assets that continue to underperform, this creates a reduced incentive to increase lending and transactions that are needed to grow an economy. Much like an individual who has taken on too much debt, bank stocks have less excess reserves to spend, and even less willingness to spend them. Bank stocks are obviously an integral … Read More
The sub-prime credit crisis that surfaced in 2008 drove Lehman Brothers to bankruptcy, caused significant upheaval, and drove the U.S. and global economy into a recession. The aftermath was a structural change to the way banks do business, specifically the amount of risk that is assumed by a bank via sophisticated strategies. So far, the change coined the “Volcker Rule,” set in place by economist and ex-Federal Reserve Chairman Paul Volcker, appears to be capping the speculative trades made by the banks, which is good.
Banks have altered the way they do business and have shown positive strides along the way. JPMorgan Chase & Co. (NYSE/JPM), the first of the major bank stocks to report earnings, blew away revenues and earnings estimates. Wells Fargo & Company (NYSE/WFC) beat on earnings but fell slightly short of estimates despite an eight percent year-over-year increase. In the case of JPMorgan, the recovery in the housing market and the demand for mortgages helped drive revenues. (Source: “Mortgage boom leads to profit surge for JPMorgan, Wells,” Yahoo! Finance, October 12, 2012.)
In my view, the results are fairly good for the two bank stocks, and they indicate that the banks are able to grow their business volumes across the board despite the mixed economic recovery in the U.S. And with the housing market and economy continuing to improve, I feel bank stocks will as well.
The majority of the big banks have paid back part or all of their government loans. Bank stocks are showing promise, and expectations are the third-quarter earnings season will provide some upside surprises. Of course, the impact from the stalled … Read More
We all know that politicians are willing to do anything to get into the limelight, gain favor among the citizens, and then use this leverage for their own gain. The latest lawsuit against JPMorgan Chase & Co. (NYSE/JPM) is so stupid and ridiculous that it would be funny if it weren’t going to cost taxpayers millions of dollars to pay for all of the lawyers involved.
To begin with, we all know that for an attorney general to move up the rungs of the political ladder, to Governor for example, they need a high-profile case to catch the public attention. With bank stocks being Public Enemy Number One, New York Attorney General Eric Schneiderman has decided to use the public’s anger against bank stocks to his favor. The New York Attorney General’s office has just filed a civil lawsuit against The Bear Stearns Companies, Inc., now a unit of JPMorgan, for alleged fraud.
When bank stocks were in the middle of the financial crisis several years ago, market sentiment for the group was extremely poor. No one was willing to lend or help out other bank stocks with such a negative market sentiment. The federal government essentially forced JPMorgan to take over Bear Stearns. Initially JPMorgan balked, stating that it didn’t have enough time to conduct due diligence. The federal government essentially said, “Don’t worry; we’ll cover you.”
Now that the political tide on bank stocks has shifted with market sentiment, the bull’s-eye is on the back of JPMorgan, among other bank stocks. Obviously, this is a lesson: if you are a business leader, you can never trust the word … Read More
Japan’s economy has been in a comatose state for over two decades, and the country continues to face hurdles that threaten the next several years. And just when Japan’s gross domestic profit (GDP) growth was showing some life, the eurozone mess surfaced and wreaked havoc.
From 1981 to 2010, Japan’s average GDP growth was 2.2% with a high of 9.4% in March 1988; but this seems to now be in the distant past, based on the soft projections going forward.
In the second quarter, Japan’s GDP growth was a meager 0.3%, well below the 0.6% estimate and the promising 1.3% in the first quarter. Over the past decade, Japan’s GDP growth expanded at a snail’s-pace average of 0.2% quarterly.
In the following chart, take a look at the comparative GDP growth over the past five years between China and Japan; notice the significant difference in GDP growth between the two countries.
Chart copyright Lombardi Publishing, 2012; data source: www.data.worldbank.org
Japan is blaming its stagnant GDP growth on the economic stalling in Europe, along with the high level of the yen and its impact on exports.
And just like the U.S., Japan relies on domestic private consumption, but that accounts for about 60% of Japan’s economy versus about two-thirds for the U.S.
Japan was the second largest economy in the world, before it was surpassed by China in 2010. The country has an unemployment rate of over four percent—something that was not a norm in the country’s boom days. In June, the unemployment rate was 4.3%, which is much better than the 8.3% in the U.S. but well below Japan’s long-term … Read More
The subprime credit crisis that surfaced in 2008 drove Lehman Brothers to bankruptcy, along with causing significant upheaval and driving the U.S. and global economies into a global recession. The aftermath was a structural change to the way banks do business, specifically, the amount of risk assumed by a bank via sophisticated strategies.
The majority of the big banks have paid back part or all of the government loans. Bank stocks are showing promise and the third-quarter results are expected to provide some upside surprises. Of course, the impact from the stalled European economies is a wildcard.
The chart of the Philadelphia Bank Index shows the upward move of bank stocks from the 2011 bottom. Banks staged a nice rally, but retrenched in March to May 2012 on the European bank concerns and after Moody’s Investor Services downgraded the sector. The group has since staged a rally back to above the 50- and 200-day moving averages.
Chart courtesy of www.StockCharts.com.
Moody’s grew a bit wary about the big U.S. bank stocks, especially given their continued appetite for risk in trying to attain profits. The reality is that the big money for banks lies with investment banking and trading, and not personal and commercial banking.
A bank can make billions from a single high-gamble trade. Could you imagine how long it would take to make this from fees for retail banking? This is the reason why many of the bigger bank stocks continue to trade speculatively despite the establishment of the Volcker Rule, proposed by economist and ex-Fed Chairman Paul Volcker to restrict some speculative activities. The reality is that … Read More
The S&P 500 topped 1,400 on Tuesday for the first time since May 3. The upward move was also the fourth top above 1,400 since 2008. In January, my stock analysis estimated the S&P 500 could test 1,400 this year, so the upward move has come a bit early.
Some in the media are even whispering about 1,500, but the last time the index was at this level was in October 2007 at the historical high.
The word “overextended” comes to mind at this juncture, based on my stock analysis. The fact is that since the amazing climb of the S&P 500 from 1995 to 2000, the index peaked on two separate occasions in 2000 and 2007, at above 1,400 and 1,500. And my stock analysis is looking at whether the current run-up from 2009 is sustainable and whether the index is heading for its third peak since 2000. You cannot tell at this moment, but, as the S&P 500 edges towards 1,561 (last achieved on October 8, 2007), it should become clearer, based on my stock analysis.
That high point may be tested in 2013 if the S&P 500 can rally another 11.5% from the 1,400 level. Again, it will be interesting to see if the index can break higher to a record high.
I’m not even convinced 1,400 will hold by the year-end, based on my stock analysis.
Following the break at 1,400 in March, the S&P 500 retrenched and failed to hold on two subsequent attempts at 1,400 in late April and early May.
The reality is the market is betting on a resolution and calm returning … Read More
With his recent comments on the idea of breaking up the big bank stocks, Sanford Weill, former CEO of Citigroup, Inc. (NYSE/C), joins an increasingly large group of analysts, experts, and former employees within the sector who are raising concerns and voicing opinions that the current banking situation is in need of structural change. The comments from Weill and others who have worked in the financial sector are surprising in that their investment strategy for many years has been to increase the size and scope of the big bank stocks.
This is certainly a 180-degree shift in thinking regarding bank stocks and an investment strategy for them. With the financial crisis that ensued several years ago, it has become quite apparent that the complexity and incentive structure at bank stocks need to change. The government coming in and supporting bank stocks when trouble arises has skewed the incentive structure and investment strategy of the people who work there.
I am all in favor of capitalism. One of the largest reasons that America has become the largest economic nation in the world in such a short time span is because of the incentive structure system built in a capitalist society. The problem is that in recent times, the incentive structure regarding the investment strategy of bank stocks has distorted the system. The hunger in a capitalist society is encouraged through the attainment of large rewards through risk-taking. Money is risked on new products and innovations, with successful investors benefiting. However, when a risky investment strategy has very little downside—for example, by having the government support losses—this changes the calculation for those … Read More
There are many viewpoints regarding Jamie Dimon, CEO of JPMorgan Chase & Co. (NYSE/JPM), some of which have gone south since the situation regarding their multi-billion-dollar loss was announced, related to European credit trades. The real issue for investors should not be a moral one, since no rules were broken, but rather the analysis of the firm in relation to other bank stocks. Where does JPMorgan Chase fit in relation to other bank stocks, and what does the future hold for its corporate profits?
The latest quarterly report on corporate profits places a big spotlight on the fact that JPMorgan is a hugely profitable firm, a giant amongst the bank stocks. While the market sector has experienced volatility, JPMorgan is so profitable that it appears able to weather the storm.
For the latest quarter, the firm took a $4.4-billion loss for the trading losses of its London-based risk department. For many firms that would be a massive hit. For JPMorgan, it translates into a decrease in corporate profits of only 8.7% to just under $5.0 billion, compared to $5.4 billion the previous year. These corporate profits come from revenue of $22.2 billion.
For all of the concerns regarding JPMorgan and other bank stocks regarding some of the questionable trading, it amounted to a tiny slice in the corporate profits for the firm. This speaks volumes to the potential for massive corporate profits over the long term.
But, I would not necessarily jump in yet. Bank stocks could get hit this fall, as the European mess continues to evolve. This unraveling of a continent could cause massive upheaval for the financial … Read More
With the financial crisis that erupted in 2008, politicians and regulators are looking for increased ways to clamp down on big banks in an attempt to ensure that the situation will not repeat itself. Keeping big banks safe from another financial crisis is certainly not an easy task. This means more regulation on the big banks.
Regulation in and of itself doesn’t necessarily have to be bad, it just depends on the scale and scope. The problem is when regulation impairs the normal functioning of the financial system and when there are unintended consequences that go beyond the big banks. In trying to stop a future financial crisis, you don’t want to crimp smaller sectors just to keep the big banks from making stupid mistakes. There is a fine line that must be drawn.
One unintended consequence of this new regulation to prevent another financial crisis is that smaller banks are no longer able to survive in this new financial world. One reason is the more stringent international capital requirements under the Basel III rules. These new rules tie up more capital for small lenders and lower overall returns. In addition, there are new regulations to govern the day-to-day operations of banks on top of unusually low interest rates, all of which combines to result in extremely small profit margins.
So far in 2012, while there hasn’t been a financial crisis, there have been a large number of small banks that have merged. The interesting point is that according to The Wall Street Journal, the average deal value for bank mergers in 2007 was $251 million, setting a record. So … Read More