Lombardi: Stock Market Commentary & Forecasts, Financial & Economic Analysis Since 1986

Posts Tagged ‘bank stocks’

With Higher Interest Rates Coming, This Is Where You Need to Be

By for Profit Confidential

With Higher Interest Rates Coming, This Is Where You Need to BeWe all know that interest rates are eventually heading higher. It might be in 2014, but more likely not until 2015, when the unemployment rate can decline to 6.5% as the Federal Reserve believes.

But one thing for sure is that interest rates are headed higher. (Read “Small-Cap Stocks the Place to Be—If Economic Growth Is Real.”)

The best way for an investor to take advantage of the situation is to concentrate on big bank stocks.

According to FactSet, the financials will lead the pack in the upcoming second-quarter earnings season, with earnings expected to rise a healthy 17.7%. (Source: “Earnings Insight,” FactSet Research Systems Inc. web site, June 21, 2013.)

The reason why the bank stocks will fare well when rates rise is that they will be able to generate higher revenues from loans as the interest rate-spread widens. That’s how bank stocks make money.

And once the bank stocks return to their original routine of paying out good dividends, they will attract more retail and institutional investors.

And don’t be afraid; bank stocks are much stronger now following the cleaning up and restructuring of the banking sector after the sub-prime credit crisis. Bank stocks can once again be added as long-term holdings.

Recall the bank stress tests by the Federal Reserve earlier this year. As a result of the stricter requirements, bank stocks are more defensive to risk and much improved as far as their balance sheets, liability, and vulnerability to dire market conditions.

The stress test assumed the worst-case scenario for banks and in all, 14 of the 18 banks managed to pass with conditional … Read More

2013 Could Be Another Big Year for Banks

By for Profit Confidential

Another Big Year for BanksThe major bank stocks all closed off 2012 near their respective 52-week highs. 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 and producing stronger units.

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, 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 the economic recovery in the U.S.

Moreover, with the housing market and economy continuing to improve, I feel bank stocks will also to gain altitude. (For more on the housing market, read “Why the Housing Market Is Promising but Overextended.”)

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, … Read More

How the Banking Industry’s Changing for 2013

By for Profit Confidential

Banking Industry’s Changing for 2013The damage done from job losses over the past few years has been quite severe. I think the biggest problem going forward is the realization that the economy, during the past decade, was artificially inflated due to easy monetary policy; therefore, many of the industries were operating far above fundamentally sound levels.

One of these sectors that were running far above optimal levels was the financial services and bank stocks sector. During the last decade, bank stocks drove massive growth in corporate earnings that were based on an economy and financial system that were not structurally sound. Following the bursting of the bubble, approximately 300,000 financial services jobs have been eliminated. The end of the job cuts is not yet here for bank stocks.

In the drive to continue generating some corporate earnings, bank stocks are now coming to terms that their future business levels will be far lower than the past decade. This means job cuts will have to continue. In a sign that management finally understands the structural headwinds, Citigroup, Inc. (NYSE/C) just announced 11,000 layoffs in a variety of business sectors. I think that there will be further layoffs among the bank stocks, as revenue growth simply won’t reach the same growth path as previously estimated, which will endanger corporate earnings gains. (Source: “Wall Street Job Reductions Seen Persisting After Citigroup Cuts,” Bloomberg, December 5, 2012.)

As an example, revenue in the investment banking and trading divisions at the 10 biggest bank stocks is estimated to rise 2.8% in 2012 to $148 billion; however, this is 32% below the 2009 levels, according to Coalition Ltd. (Source: “Wall … Read More

New CEO at Citigroup; Will Anything Change?

By for Profit Confidential

New CEO at CitigroupThe last two years have obviously been extremely difficult for bank stocks. The financial crisis that took hold of not only America but the rest of the world as well has caused extreme strain across the entire financial sector. However, since the financial crisis several years ago, American banks have substantially shifted their risk and investment strategy and are on a much more solid footing now.

While smart investors used the selloff in bank stocks as an opportunity to buy, this investment strategy has not worked for all firms. Not all bank stocks have recovered what they lost, even though they all went up massively this year. While some bank stocks like JPMorgan Chase & Co. (NYSE/JPM) are only down approximately five percent over the last five years, Citigroup is still down a massive amount. Recently, the CEO of Citigroup, Vikram Pandit, was ousted by the Board of Directors, mainly due to the fact that during his tenure, the stock has gone down over 85%.

While he did take over during a difficult time for bank stocks, his investment strategy is obviously flawed. The Board of Directors has decided to appoint Michael L. Corbat as the new CEO. When it comes to bank stocks, Corbat appears to be an interesting choice. First, he’s a long-time member of the Citigroup family. He’s also slightly lower-key than top CEOs like Jamie Dimon. Communicating confidence and leading is extremely important for a CEO. Obviously, considering the strong rebound in the share price and performance of JPMorgan, Dimon is the true standout amongst CEOs for bank stocks.

I see two reasons the board … Read More

JPMorgan Set to Continue Higher in Spite of Frivolous Lawsuit

By for Profit Confidential

JPMorgan Set to Continue Higher in Spite of Frivolous LawsuitWhen it comes to bank stocks, it seems that JPMorgan Chase & Co. (NYSE/JPM) is Public Enemy Number One. It’s unfortunate that so many retail investors have such a negative market sentiment towards JPMorgan since it has the potential for large returns, with a dividend yield of 2.9%.

The latest cheap shot is nothing short of a publicity stunt by a future politician, as the office of New York Attorney General Eric Schneiderman has just filed a civil lawsuit against a unit of JPMorgan, The Bear Stearns Companies, Inc., for alleged fraud.

Of course, I don’t condone fraud; in fact, I think the penalties we have are far too lax when it comes to all companies, not just bank stocks. The problem is that this is clearly not about what’s in the best interest of America, but rather the need for a high-profile case to catch the public attention for the Attorney General to move up the rungs of the political ladder.

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 … Read More

Bank Stocks Looking Better in Spite of Downsizing Move

By for Profit Confidential

Bank Stocks Looking Better in Spite of Downsizing MoveBank stocks have been rallying since the lows in October 2011.

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-day and 200-day moving averages.

Yet while the outlook appears to be encouraging, there is a move amongst some politicians to restrict the size and scope of the big banks as dictated by the Brown-Kaufman amendment. Introduced in 2010, the Brown-Kaufman amendment places a limit on the size of the big banks and the leverage that they can assume on the balance sheets. The proposal is supported by politicians from both the Democrats and Republicans.

Bank Index Chart

Chart courtesy of www.StockCharts.com

A closer look at the statistics supports the growing power of the big banks in America. Assets of the six major banks accounted for about 15% of the country’s gross domestic product (GDP) in 1995; but even with the restructuring of the bank and the increased limits, assets of the major banks now account for about 60% of GDP. In other words, the big banks are getting bigger.

Yet I’m not convinced the government will place a hard cap on the size of the big banks, as Wall Street and these top banks donate lots of cash to Washington.

The reality is that the majority of the big banks have paid back part or all of the government loans.

Bank stocks are showing promise and third-quarter … Read More

Before You Buy Retail Stocks, Read This

By for Profit Confidential

Buy Retail StocksOver the last decade, Internet shopping has changed the retail market sector forever. Whereas once large retail stocks such as Best Buy Co., Inc. (NYSE/BBY) dominated the landscape for electronics, new companies like Amazon.com, Inc. (NASDAQ/AMZN) are taking over with speed, ease of service, and reliability.

Another problem for large retail stocks is beyond the normal hassles for consumers, such as driving to the store with the higher cost of gasoline and increased traffic. But there are new problems that have been highlighted by a recent survey conducted by comScore, indicating that over 60% of consumers have visited an electronic retailer to examine the products in-store, and then purchased the goods online. This is a new threat to retail stocks, as the market sector has never witnessed such a dramatic shift before.

This changing market sector must be addressed by retail stocks like Best Buy. Best Buy itself is under increasing pressure to survive, as corporate earnings have continued to decline. The fact is that consumers want more in this market sector than simply buying a commodity when they visit the physical store of retail stocks. A company that tries to fill this need is lululemon athletica inc. (NASDAQ/LULU). This is one of a few retail stocks that have embraced the new realities of the market sector. One great example of being interactive with clients is how lululemon offers clients in-store yoga lessons. This creates social connections and goes beyond just buying yoga gear.

Best Buy has already initiated the closure of some 50 large-format, traditional stores and has instead opened smaller stores. Retail stocks are now realizing that the … Read More

Do You Want Your Tax Dollars Supporting Bank Stocks?

By for Profit Confidential

Do You Want Your Tax Dollars Supporting Bank Stocks?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 needs 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 … Read More

Bank Stocks Under Attack in Both Europe and the U.S.

By for Profit Confidential

credit crisisIt’s not enough we have to deal with the dire economic situation in the eurozone and Europe, but now bank stocks are under attack, especially from Moody’s Investors Service, which is negative on the banking sector. The quality of bank stocks has been improving, but clearly the credit rating agency is a bit on the cautious side and likely making up for not being tough enough with its ratings leading up to the credit crisis in 2008 that drove the global economies into a recession.

The European debt crisis led Moody’s to downgrade 16 Spanish banks, seven German banks, and three Austrian banks. As you know, the situation in the eurozone is a mess and will worsen, especially if the global economies stall, which I discussed in “Europe’s Meltdown: The World’s Economies You’ll Want to Keep on Your Radar.”

Moody’s is also growing a bit wary about the big U.S. bank stocks, especially given their continued appetite for risk in trying to attain profits. 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 a bank must satisfy its shareholders.

What Moody’s has done is classify the big banks into three categories from the top banks … Read More

Is This the Time to Buy JPMorgan?

By for Profit Confidential

Buy JPMorganThe recent testimony by Jamie Dimon, CEO of JPMorgan Chase & Co. (NYSE/JPM), in front of the Senate’s panel proves two things: 1) Dimon is quite cool under pressure; and 2) lawmakers know very little about the financial market sector and bank stocks. In response to the reported $2.0-billion loss at one of JPMorgan’s divisions based in London, lawmakers have decided to put the hammer down on bank stocks to try to reduce risk and volatility. Conversely, bank stocks want to keep as little regulation as possible to enable them to make profits. With all of this uncertainty, many investors have jumped ship, and it has made me question if an opportunity exists to get into bank stocks and the financial market sector while others are leaving it.

Dimon reiterated that these losses were hedged trades and not proprietary trades. The difficulty is differentiating one from the other with all bank stocks. To understand this better, think of bank stocks like a store selling clothing. Part of the requirements for bank stocks is to hold inventory for clients to make markets and facilitate trades. To not allow any flexibility in the system would be similar to having a clothing store with no clothes, while having any clothes might be viewed as proprietary speculation on how many shirts would actually sell. Of course, this is ridiculous, as is having handcuffs on bank stocks.

However, things do need to change in the financial market sector, as we’ve seen by the crisis in 2008. Obviously, the existing financial market sector is not perfect. Ultimately, the incentive and punishment system must be in … Read More

Why the Pros Are Dumping Tech Stocks in Favor of Boring Companies

By for Profit Confidential

Financial gurusSomething you need to make note of: technology and growth stocks are being sold by institutional investors. Following where the professional money is flowing gives us another tool to evaluate the stock markets and get a sense of what is happening. The pros generally have better access to a company’s executives and management and may be privy to better information, although they will surely never tell you this. Just try calling the chief executive of a company to talk about things. Your call will never be connected. However, if you were a top Wall Street analyst, your call would likely be connected.

So, now that we’ve established that the pros have an information advantage, your key task is to find out what these pros are buying or selling.

The concept of following the money of institutional investors is based on the belief these experts are likely to understand the company’s situation more than anyone outside of the executive management group. By looking at the flow of money from institutional investors and monitoring what stocks they are buying, you can get a much better sense of what stocks may be in favor at that time. This especially holds true for the top-ranked institutional investors and money managers who are tops in the money management business, because they are the very best and produce the best returns for clients.

Institutional investors control vast sums of capital and can sway the direction of a stock that they buy or sell. These institutional investors are also extremely accountable to their investors; hence, there is a high level of quality research and due diligence … Read More

If Banks Don’t Trust Each Other, Why Should You Trust Them?

By for Profit Confidential

bank stocksOne of the most common questions I get asked is about bank stocks. Investor sentiment for bank stocks has oscillated from panic selling to a mad rush to buy them. One of the things to take into account is that, even though the water in the U.S. financial industry has been somewhat calm, the situation is still quite fragile. Bank stocks are not the pillars of responsibility they once were many years ago. The latest example is JPMorgan Chase & Co. (NYSE/JPM), which announced $2.0 billion to $4.0 billion in losses related with European trades, the details of which are located in the article: What You Don’t Know About Banks Will Hurt You.

But the current environment in U.S. bank stocks pales in comparison to Europe. The investor sentiment there is so bad that even banks are starting to refuse to do business with each other. If bank stocks don’t trust other bank stocks, how can an investor rationally invest in any of them? This is what caused the financial crisis in 2008, as liquidity dried up amongst bank stocks in the U.S., ultimately leading to the demise of one of the oldest bank stocks: Lehman Brothers Holding Inc., established in 1850.

The latest information from the Bank for International Settlements shows that European cross-border lending between bank stocks plummeted in the fourth quarter. According to the report, this was the lowest level of European cross-border interbank lending since the financial crisis in 2008! People who are discussing the possibility that bank stocks are turning the corner are not seeing what’s happening behind the scenes. This drop isn’t … Read More

Goldman Sachs’ European Bet

By for Profit Confidential

European Central BankRecently, bank stocks have taken big hits following news of the trading debacle involving JPMorgan Chase & Co. (NYSE/JPM), causing the firm over $2.0 billion in losses. This has caused a market sector selloff across the entire investment banking space. But some interesting developments have occurred with some bank stocks.

The Goldman Sachs Group, Inc. (NYSE/GS) has recently disclosed that it actually increased its holdings of Italian sovereign debt. This was offset by selling Italian bank stocks. This is a very interesting trade. As of March 31, 2012, exposure to Italian government debt was over $8.0 billion, as opposed to just over $3.0 billion at the end of December 31, 2011. Conversely, Goldman reduced its holdings of Italian bank stocks to only $623 million, as opposed to almost $7.0 billion as of December 31, 2011.

Goldman Sachs is building a large inventory of Italian debt in its thinking that clients will want further exposure to sovereign debt versus holding Italian bank stocks. Many bank stocks in Europe continue to need more recapitalization and this will weigh down their share price for some time. Short-term sovereign debt of less than three years is actually backed by the European Central Bank (ECB), so is seen as a safer trade than the bank stocks. In that regard, Goldman has made a shrewd decision to avoid bank stocks in Italy, as I definitely see more problems arising in the future.

Goldman Sachs has been hit recently as well as many other bank stocks in a selloff across the entire market sector. However, over the long run, Goldman Sachs has found a way to produce … Read More

What You Don’t Know About Banks Will Hurt You

By for Profit Confidential

bank stocksThe latest revelation that JPMorgan Chase & Co. (NYSE/JPM) suffered a multi-billion loss on bad investments is yet another warning sign that bank stocks are littered with questionable trades that the average person simply can’t decipher. The investment strategy developed by bank stocks over the past decade has been questionable at best. The strategy of taking excess liquidity and using those funds in an investment strategy to enhance earnings, which then leads to higher bonuses, has littered the bank stocks with billions in losses over the past decade.

bank stocks

Chart courtesy of www.StockCharts.com

JPMorgan estimates that, while it tries to unwind the position, it will cost an additional $1.0 billion. I’ve actively traded around several large blowups due to bad trades, such as Amaranth Advisors, and things get far worse before they get better. Amaranth Advisors was a huge player in the natural gas markets. As its investment strategy started going south, everyone on the street smelled blood in the water. This exacerbated the company’s losses, as its positions got squeezed. Amaranth ended up losing over $5.0 billion in one week, with the entire firm shutting down shortly after with losses well in excess of $6.5 billion, out of total asset size of $9.0 billion.

This is similar to legendary hedge fund manager John Paulson. His firm, Paulson & Co., was squeezed out of his investment strategy in being long gold during the fall of 2011. The street got wind of his investment strategy and proceeded to squeeze him, forcing even larger losses that snowballed into more selling.

The street is extremely smart in figuring out large players and their respective … Read More

Bank Stocks: A Play on the Economy

By for Profit Confidential

economic growthAs the economic recovery continues, the key benefactors will be the big and regional bank stocks, which benefit from growing businesses, real estate activity, and consumer credit. Banks represent the fuel driving the economic growth—a reason why I’m positive on the bank stocks.

The reality is that the nation’s banks have steadily charted a recovery since the collapse of Lehman Brothers in late 2008 that drove bank stocks in a downward spiral that inevitably required hundreds of billions in bailout infusion from government bailouts in order to survive.

In my view, this chaotic event in bank stocks was an opportunity that only appears once in a while. It was clear in my mind that the U.S. government could not afford to let the major banks fail, as it would have likely triggered a mass selloff in the U.S. For example, there was absolutely no way the government would allow the Bank of America Corporation (NYSE/BAC) or Citigroup Inc. (NYSE/C) to fail, as this would drive down banking competition nationwide, which would not be good for competition and for confidence in the U.S. bank sector.

A look at the KBW Bank Index (BKX) chart shows the steady upward move in the index, up over 43% since October 2011. Money was made and I feel there will be more gains coming.

Chart courtesy of www.StockCharts.com

I continue to like the progress of the bank stocks, but remain concerned with some of the bad stuff on the balance sheets and the government’s new restrictions on banking activities as set by the Volcker Rule to restrict some speculative activities.

The progress of bank … Read More

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