The Prospect Of Higher Rates Boost Big Banks

The prospect of rising interest rates has propelled bank stocks to all-high highs. Citigroup (C), JPMorgan (JPM), Bank of America (BAC), and Goldman Sachs (GS) have appreciated double digits over the past three months, breaking out to all-time highs. Rising interest rates combined with the highly disruptive COVID-19 backdrop abating has served as the foundation for this move higher. The big banks responded and evolved in the face of COVID-19 to the real possibility of widespread loan defaults, liquidity issues, ballooning credit card debt, and stressed mortgages. To exacerbate these COVID-19 impacts, interest rates, Federal Reserve actions, yield curve inversion, and liquidity heavily weighed on the sector.

Along with this turn higher, balance sheets have become even stronger now that share buybacks have been halted and dividend payouts were arrested. Large capital reserves have already been put aside for anticipated financial challenges. The big banks have demonstrated their ability to evolve in the face of COVID-19 and present compelling value. Now with the prospect of rising rates, this may serve as a long-term tailwind for banks to appreciate higher.


COVID-19 and Financial Crisis – Lessons Learned

The big banks are far stronger and more prepared than they were during the 2008 Financial Crisis. Lessons learned from the Financial Crisis yielded rigorous annual stress tests that forced banks to maintain a slew of fiscal discipline measures. With the Federal Reserve working in-hand with the banks, a financial bridge to those businesses and consumers negatively impacted by COVID-19 as a stop-gap measure has been afforded. As this pandemic subsides and economic activity rebounds the banks' present value. Add in the prospect of higher rates, and the banks are set-up for long-term appreciation. Their strong cash positions and healthy balance sheets are allowing dividends to continue as the economy transitions through the damage of the pandemic. Continue reading "The Prospect Of Higher Rates Boost Big Banks"

Why It's Different This Time

The other day I completed a survey for my brokerage company, and one of the questions they asked was, "Is the current crisis worse than the 2008 financial crisis?" A couple of months ago, when our state and region were mostly in lockdown, I would have answered with a resounding and unhesitating, "Yes!"

Now I'm not so sure. Admittedly, I don't live in one of those states where the virus is now spiking, and things here are close to back to normal, so maybe my vantage point is too subjective. Nevertheless, I would have to say this crisis is far from as bad as the previous one, which may explain why the stock market has behaved the way it has, namely prices are off only a little from where they began the crisis, with only that short, sharp drop in February and March.

One reason, of course, is that the economy, as a whole, has rebounded strongly over the past couple of months as most of the country has reopened, at least to some degree, even as millions of people continue to work remotely. But the main reason is that that the lessons we learned from 2008 have been brought to bear in this crisis, namely that the government and the Federal Reserve have thrown much more money and resources at the problem than they did 12 years ago, which has mitigated the damage to a great degree.

As we've seen in the second-quarter earnings reports released so far by the big banks, the measures taken after 2008 to make sure they've built up enough capital to withstand another global crisis have paid off. Other than Wells Fargo (WFC) – which is still in the Fed penalty box, forbidden to grow assets – which reported a big loss, the other big banks reported flat Goldman Sachs (GS) or reduced JPMorgan Chase (JPM), Citigroup (C), and Bank of America (BAC) earnings compared to a year ago. It could have been a lot worse. Who would have thought they'd be able to pull that off three or four months ago? Let's give the Dodd-Frank Act and Fed capital requirements the props they deserve. Continue reading "Why It's Different This Time"

The Financial Cohort and COVID-19 Destabilizing

COVID-19 ushered in the real possibility of widespread loan defaults, liquidity issues, ballooning credit card debt, and stressed mortgages. To exacerbate these COVID-19 realizations, a delicate balance between interest rates, Federal Reserve commentary, yield curve inversion, and concerns over a potential/scale of depression in late 2020 must be attained. The financial cohort is in a difficult space as the broader economic backdrop continues to dictate whether these stocks can appreciate higher. Ironically, in 2019 banks logged record share buybacks and increased dividend payouts stemming from successful stress tests. The initial shock of the COVID-19 pandemic resulted in the market capitalizations of many large banks to be cut by ~50%. Some of the largest banking institutions such as Citigroup (C), Goldman Sachs (GS), JPMorgan (JPM), and Bank of America (BAC) were sold off in the most aggressive manner since the Financial Crisis. At these depressed levels, are the banks investable in light of the COVID-19 backdrop?

Destabilizing Effects of COVID-19

COVID-19 has materialized into the black swan event that only comes along on the scale of decades. This COVID-19 induced sell-off has been the worst since the Great Depression in terms of breadth and velocity of the sell-off. This health crisis has crushed stocks and decimated entire industries such as airlines, casinos, travel, leisure, and retail with others in the crosshairs. The S&P 500, Nasdaq, and Dow Jones have shed approximately a third of their market capitalization, with the sell-offs coming in at 33%, 29%, and 36%, respectively, in late March. Some individual stocks have lost over 80% of their market capitalization and now run the risk of filing for bankruptcy.

The longer the COVID-19 economic shut down persists, the higher the unemployment will rise. More companies will run the risk of Continue reading "The Financial Cohort and COVID-19 Destabilizing"