Investment Contrarians

bank stocks

Price Action of the Bank Stocks Indicates Changing U.S. Economic Landscape

By for Investment Contrarians | Oct 16, 2013

U.S. Economic LandscapeOne of the most eagerly anticipated sectors to watch during this earnings season is bank stocks and how they are dealing with the shift in interest rates and the impact on the housing market.

Obviously, it’s crucial to watch bank stocks since they can give us information about the health or direction of the economy in general. Take Wells Fargo & Company (NYSE/WFC), for example; the company is the largest lender in the housing market, and its latest third-quarter financial results are quite interesting.

As I have been saying for most of this year, higher interest rates will be coming, and this will lower expected revenue in the housing market division. Wells Fargo has just validated this forecast by reporting significantly lower levels of mortgage origination, which includes both home purchases and refinancing.

Wells Fargo reported a 43% year-over-year decline in mortgage banking income, at $1.61 billion for the quarter. Total mortgage originations, which include refinancing, dropped 42% year-over-year to $80.0 billion for the latest quarter. (Source: “Wells Fargo Reports Record Quarterly Net Income,” Wells Fargo & Company web site, October 11, 2013.)

With higher interest rates, the housing market is indeed feeling the pinch, and bank stocks need to dramatically shift their business structure into higher growth areas. Wells Fargo is one of the leading bank stocks in America, and it’s trying to move away from the housing market-related business into both the retail side of banking, as well as business loans.

In these sectors, things are certainly better for bank stocks than the housing market. Net income from the retail banking division was $3.34 billion, up 22% from … Read More

Why I Think You Can Still Ride the Market Higher

By for Investment Contrarians | Jul 10, 2013

Why I Think You Can Still Ride the Market HigherI have to admit that my hat’s off to the U.S. economy. Outcomes in the first half of the year were far better than I expected. And the second half seems to have started where the first half ended—on a high note.

I’m not complaining. There have been nice trading profits made in the upswing, and—like any smart investor—I have taken some profits off the table, especially in cases where the advance has been too big not to cash in on it.

And as we move into the second half of the year, the trading and direction will continue to be focused on the Federal Reserve and whether the central bank will indeed begin to taper its bond buying stimulus, as it has indicated.

The creation of 195,000 new jobs in June was more than expected, and that number clearly gave the stock market some confidence. But what really made traders happy was that the unemployment rate stabilized at 7.6%. The feeling among many is that as long as the jobless rate holds above 7.2%, the Federal Reserve will hold off on tapering until 2014, continuing to boost stocks.

The Federal Reserve has done a great job in driving up the overinflated housing and stock markets by supplying easy money. As I have said on numerous occasions, while the economy looks strong at first glance, cracks will begin to show when the massive buildup of the national debt and the burdensome consumer debt become more evident as interest rates ratchet higher.

The mountain of debt created by the Federal Reserve will become a major issue—count on that.

Of course, we’ll … Read More

Mortgage Rates on the Rise; Repeat of Lead-Up to 2008?

By for Investment Contrarians | Jun 18, 2013

Mortgage Rates on the Rise; Repeat of Lead-Up to 2008One 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

Is It Time to Book Profits in Bank Stocks?

By for Investment Contrarians | May 14, 2013

Time to Book Profits in Bank 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

Danger: Market Sentiment Too Bullish in This Sector?

By for Investment Contrarians | Apr 11, 2013

Danger: Market Sentiment Too Bullish in This SectorOne 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