In the last two weeks of the year, we see two phenomenon: 1) most of Wall Street takes off and 2) those that do not pay little attention to what is going on.
But someone is always trying to take advantage of someone else's inattention, and I see a couple signs of that happening in two groups: regional banks and commodity stocks, particularly steel and iron ore.
Regional banks are ending 2014 on an up note. For the most part, regional banks have under-performed the S&P 500 and even their larger brethren. No regional bank has performed better than Wells Fargo's 22-percent gain in 2014, or even Bank of America's 16.4-percent gain. Most would be happy to have JPMorgan's 8-percent gain, or even Citigroup's 5.2-percent gain.
The SPDR Regional Banking ETF, a basket of regional bank stocks, is little changed on the year, but has recently been showing signs of life. It is up 3.8 percent in December, well outperforming the S&P 500, which is up less than 1 percent for the month.
Regional Banks in December:
- SunTrust up 8.4%
- Regions Financial up 6.3%
- PNC up 5.7%
- Huntington Bancshares up 5.4%
- KeyCorp up 4.4%
Are they getting pricey? Big regionals like PNC, KeyCorp, and BB&T are trading at roughly 13 times forward earnings—not cheap but also nowhere near overvalued.
What's going on? This seems to be a play on: 1) an improving economy in 2015 (we have already seen signs that commercial and industrial loans are picking up) and 2) a steepening yield curve, which would improve bank profits, though that has not happened yet.
One potential headwind is regulatory scrutiny of M&A. The proposed merger of M&T Bank and Hudson City Bancorp has been delayed again due to regulatory issues. It is now scheduled to close on April 30. If this deal would have been approved this year, regional banks would have likely performed better.
As for commodity stocks, no group has been more beaten up, and I am not just referring to oil stocks. Steel steel and iron ore stocks are down 20 to 40 percent or more. But in the last few weeks there are again signs of a bottom. The thinking is that the stocks are starting to get attractive even with greatly reduced earnings. Freeport McMoran, for example, is trading at roughly 11 times forward earnings.
Several other stocks in this group have shown signs of life in the past couple weeks. Just this week a small group are outperforming:
If you think the global economy will sink further in 2015, you should certainly stay away from this group. But at least a few are betting that even a bottoming in the global outlook will benefit this group.