While hedge funds may be front-running earnings reports , it’s not a great idea for the retail investor — especially not when it comes to bank earnings, David Katz, chief investment officer for Matrix Asset Advisors, warned.
After Citigroup and Wells Fargo earnings came in better-than-expected, investors are wondering whether other big-name banks will follow suit.
Even if they do, investors shouldn’t bet on a share price pop, Katz said.
“The market has been schizophrenic. For the last two to three quarters, regardless of earnings beats, bank stocks have either traded lower, or not really had an uptick,” Katz told CNBC’s “Squawk on the Street.”
The latest examples of this “schizo” market came in just last Friday: Wells Fargo reported a 17 percent profit increase in the second quarter on strong mortgage banking income — but shares wavered on the news and edged down in Monday morning trading.
Separately, JPMorgan Chase’searnings report — losing $4.4 billion in the second quarter, followed immediately by a 6 percent share price jump on Friday — almost defied logic. Whether the cause was short-covering, or other factors, the move surprised the Street.
By comparison, Citigroup’s Monday results seem straightforward, and here Katz breaks down what they mean for the sector.
“Citi did a very good job on the expense side, but the capital markets business (allocations to stocks and bonds) was weak. That’s going to be what’s going on with a lot of the banks,” said Katz. “But they're finally going to be getting help from the mortgage business, which is picking up. You saw that with Wells Fargo.”
Katz said bank earnings are still too much of a “mixed bag” to call ahead of time, and said investors would be safer to get in “after the fact” — when share prices should better reflect earnings.
We’ll soon find out if he’s right: Quarterly earnings reports from Goldman Sachs, Bank of America, and Morgan Stanleywill be announced this week.
The takeaway? Buy banks at your own risk.
“It’s going to be a treacherous earnings season,” he concluded. “We don’t have a lot of high expectations for the upcoming quarter.”
—By CNBC.com’s Jennifer Leigh Parker
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David Katz personally owns shares in Morgan Stanley, Wells Fargo, and JPMorgan. Matrix Asset Advisors also currently holds positions in these stocks. Neither Katz or his firm invests in Citigroup, Bank of America, or Goldman Sachs.
Follow Jennifer Leigh Parker on Twitter @jparker741 .