Are Bank Earnings About To Tumble?

Bank stocks took a big hit on Wednesday with investors worried that bank profits are about to tumble.

The concern has everything to do with the shape of the yield curve. “Daily momentum is pointing to a flatter yield curve,” says John Briggs of RBS Securities in a Bloomberg report.

“With the Fed on hold, low inflation expectations and weak economic data, the front end has been anchored, which has led to the flattening,” Briggs explains.

As you may know, a yield curve widely monitored by investors compares the yield of 3-month, 2-year, 5-year and 30-year Treasuries.

When the curve gets flatter it means the yields of shorter and longer-term Treasuries are very close to each other.

That’s bad for banks because banks pay interest on their deposits based upon shorter-term interest rates while making loans tied to longer-term interest rates. The difference between interest paid and received—the margin—is typically influenced by the slope of the yield curve

As a result -- historically -- a flat yield curve has tended to foretell pressure on bank earnings, according to the FDIC.

What’s the trade?

I understand that the yield curve is at its narrowest point since May 2009 but it’s still fairly wide, counters Karen Finerman and banks have already taken a big hit. I’m still long JPMorgan and Bank of America. I like them though I will scale down what I think they can earn over the next few years.

I’m concerned about the flatter yield curve, says Brian Kelly. I sold my long financials position and I went short the brokers with IAI.

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Trader disclosure: On Aug 11, 2010, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s Fast Money were owned by the Fast Money traders; Terranova owns (AKAM), (BAX), (FCX), (MOS), (PFE), (SU), (XBI); Terranova owns (GLD) Calls; Adami owns (AGU), (BTU),. (NUE), (C), (GS), (INTC), (MSFT); Adami’s wife works at Merck; Finerman and Finerman’s Firm owns (BAC); Finerman and Finerman’s Firm owns (JPM); Finerman & Finerman's firm owns (RIMM); Finerman owns (AAPL); Finerman's firm owns (ARM); Finerman’s firm owns (BBY); Finerman's firm owns (LEA); Finerman’s firm owns (KFT); Finerman’s firm owns (TSX); Finerman’s firm owns (GYMB); Finerman’s firm owns (PLCE); Finerman's firm owns (WMT); Finerman's firm owns (DAN); Finerman's firm is short (IJR); Finerman's firm is short (MDY); Finerman's firm is short (SPY); Finerman's firm is short (IWM); Finerman’s firm owns S&P 500 puts; Jon Najarian owns (AKAM) short calls

For Brian Kelly
Accounts managed by Kanundrum Capital own (C)
Accounts managed by Kanundrum Capital own (GLD)
Accounts managed by Kanundrum Capital own (SLV)
Accounts managed by Kanundrum Capital own (TLT)
Accounts managed by Kanundrum Capital own (ANDE)
Accounts managed by Kanundrum Capital own (UNG)
Accounts managed by Kanundrum Capital are short (IAI)

For Kaushik Roy
Wedbush Securities Is A Market Maker In (WDC), (STX)

For Dan Greenhaus
***No Disclosures***

For Brian Stutland
***No Disclosures***

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