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The banking crisis: is there one?
For the past three days, I've been trying to get my hands around this supposed "banking crisis," particularly in Europe.
I get why there is concern in Europe, but I don't at all get the selloff in U.S. banks.
You didn't know there was a banking crisis? Everyone seems to think there is some kind of crisis because the stocks—particularly the European bank stocks—seem to be telling us something is wrong:
European banks YTD
Deutsche Bank down 34.6%
Societe General down 25.8%
BNP Paribas down 24.3%
Banco Santander down 24.0%
UBS down 20.9%
Yikes! This is after one month. The concerns about Europe fall into several buckets:
1) ongoing restructuring and litigation charges.
2) Flattening yield curve/negative rates.
3) slower European growth.
4) Asset management slowdown. Asset management has suffered because wealthier clients aren't investing.
5) Book value issues: European banks did not take the big writedowns that U.S. banks took; there's concern there may be more asset writedowns that would cause book values to decline.
6) Capital positions. While the U.S. banks were out raising capital and selling new shares in 2008-2009, the European banks didn't. The result: U.S. banks don't need to raise capital, but European banks probably do.
I get this. What I don't get is what's going on with U.S. banks:
U.S. banks YTD
Fifth Third down 24.8%
Bank of America down 24.3%
Zions down 21.9%
Key down 19.7%
JP Morgan down 14.8%
Yikes again! Even the regionals are getting hit.
Here's the arguments against U.S. banks:
1) international exposure. If you're afraid of the Chinese bogeyman, fine. But regionals who lend to farmers are down too. This might mean something to Citigroup, but your average regional bank does not have international exposure.
2) falling yields. Concerned about lower rates? It's certainly an issue, but consider this: the average U.S. bank has 40 percent or more of its revenues from fees, not rates.
3) we don't believe the book value. Bank stock investors cannot believe that big banks are trading at a significant discount to their tangible book value:
Tangible book value
Goldman Sachs 0.93
Regions Financial 0.89
Bank of America 0.82
Below book value, every one of them. This is pretty rare: outside of 2008, these stocks have not traded below tangible book value.
Don't believe the book value? Here's the problem with that argument: the quality of the book is far better than it was 10 years ago. Bank loans have a 3 to 7 year duration. After 2009, you know what happened if you're a bank: the government moved into your office. The scrutiny is intense. You're lucky if you get a 60 percent loan-to-value ratio.
Bottom line: the Fed knows every loan the banks have, and they check them twice a year.
4) oil loans. This is the big bogeyman, but the stocks are trading like everything is worthless and everyone is going out of business.
Let's take an example. To eliminate international exposure, let's stick with a regional bank. How about Zions? It's a plain-vanilla Utah bank. Straight-ahead commercial and retail banking, along with mortgage loans.
No international exposure. No trading exposure.
They have roughly $40 billion in loans, of which almost $3 billion (7 percent) is in energy. Tangible book value is $5.7 billion. Market cap is $4.3 billion.The difference is $1.4 billion.
If there was some kind of loss, the pre-tax hit would be $2 billion. But the energy portfolio is $3 billion, so the market seems to be assuming that ZION could have a complete loss of almost 70% of the energy portfolio. And bear in mind they already have a 5% loan loss reserve against the energy portfolio, so really the market is assuming 75 percent losses.
You also should know that the recovery rates on failed energy assets are very high. The banks have a lot of protection.
Paul Miller, a bank analyst with FBR, was on our air earlier with the same point: the assumption is that the entire energy portfolio of these banks are worthless, which makes no sense at all.
But no one wants to listen. No one wants anything with energy exposure.
The short answer is, it doesn't make sense, and that's why bank stock traders—and analysts—are puzzled.
And so we have conspiracy theories. "It's the quants." "It's the machines." "It's the momentum guys."
I have no doubt that shorts—in whatever form—are pushing these stocks as far as they can go, into irrational territory. I am quite sure that "the machines" benefit during times of volatility, because pricing is wider and they benefit when that happens.
But let's limit the hysterical rhetoric. What is happening now is that guys who were long these stocks (hedge fund types, generalists) are being forced to sell simply to reduce exposure. It's forced selling. These guys know that the fundamentals are good: the consumer is stronger, the books are stronger—but they can only take so much downside before they have to reduce risk.
Let's hope that some sanity returns soon.
The ETF.com "Inside ETF" conference is in full swing, with a record 2,200 participants jamming the Diplomat Hotel in Hollywood, Florida.
Here are the five questions I am most commonly asked about exchange-traded funds.
1) How big is the ETF business?
It's big and getting bigger. There is $2.1 trillion in ETF assets under management in the U.S. At the end of 2015, $3 trillion worldwide. That is still small in comparison to the roughly $11 trillion in assets under management at mutual funds, but the mutual funds have been steadily losing assets for years.
ETFs are cheaper and more tax efficient than most mutual funds. They are simply a better deal for most investors. There are now north of 1,600 ETFs, and more than 70 ETF providers.
The ETF.com "Inside ETF" conference, the biggest exchange-traded fund conference in the world, kicks off Sunday night with north of 2,000 participants and four days of packed events.
Despite higher volatility and lower returns, 2015 was another record year for ETF flows, with roughly $242 billion in net inflows, an increase of about 10 percent. By comparison, mutual funds had $125 billion in outflows.
That's $2.1 trillion in assets under management, and while it is still small in comparison to the roughly $11 trillion in assets under management at mutual funds, the mutual funds have been steadily losing assets for years.
That was enough money to attract a lot of new providers. Jeff Gundlach of DoubleLine Capital. John Hancock. Goldman Sachs. Eaton Vance. Even Kevin O'Leary of "Shark Tank" got into the ETF act last year.
There are now north of 1,600 ETFs, and more than 70 ETF providers.
I'll be reporting Monday and Tuesday from the conference. Here's an early peak at the hot topics everyone is talking about.
This is one crummy, unenthusiastic rally. We should have done better today.
1) Draghi implies more stimulus coming, and they sell into it. ECB Chief Mario Draghisaid downside risks had increased, and strongly implied more stimulus was coming. This was applauded initially, with both Europe and U.S. futures rallying. It was an echo of Bertrand Russell's famous line: "When the facts change, I change my mind."
It was widely believed that some of these comments were directed at the Federal Reserve, a veiled request for them to back off on the perception that they are on an aggressive path to hike rates.
What happened? Our markets open up, and they immediately sell into it.
2) a huge oil rally, and they sell into that. The only thing that saved us from a humiliating plunge was oil, which staged a dramatic turnaround shortly after the U.S. open and took the whole market up with it.
But — and here's the worrisome part — the second oil stopped rallying at noon the market stopped going up and began gently rolling over.
And for the rest of the afternoon, it's meandered around in a very narrow range.
Volume is heavy but much lighter than yesterday. There were only two stocks advancing for every one declining.
That's it? After yesterday, when we had 30 stocks DECLINING for every one advancing?
After 40 percent of the stocks listed on the NYSE were at 52-week lows, and after one of the worst Januarys EVER, this is all we can do?
This is one tough, nasty, skeptical market.
Is this capitulation? Do you believe we are in a bear market, or not?
One thing's for sure: for a brief moment in the middle of the day, we were in Twilight Zone territory. Rod Sterling should have been the stocks reporter. Consider the following:
The CBOE Put/Call ratio, the ratio of put contracts to call contracts being purchased, was 1.75 just prior to the open. That means there were 175 put contracts being purchased for every 100 call contracts. That is extremely high and indicative of a panic.
At 12:30 p.m., ET, there were:
1) 1,347 new lows at the NYSE, roughly 40 percent of the NYSE and the highest levels since November 2008.
2) 30 declining stocks for every one advancing stock at the NYSE — again, levels that not seen since 2008.
3) twice normal volume.
All of this is suggestive of at least a short-term selling climax. And that's exactly what happened. Stocks rallied, and rallied hard. The Dow transports rallied almost 300 points from top to bottom (about 5 percent).
Here's the problem: this only suggests that the selling has halted for the moment. In bear markets, you always get rallies. Some of the last for a day; some for a few days. But then the markets drop again.
So, to answer the question, "Is this the bottom?," you have to have a conviction on the markets. If you believe this is just a garden variety sell-off (and so far this is a garden-variety sell-off, since the S&P 500 is roughly 13 percent off its May historic high), then there is a good chance we are near the bottom.
But if you think we are headed for a steeper drop — and many feel we could drop another 10 percent or more — then today's action, and the likely modest bounce we will get tomorrow, is just a brief respite.
Ladies and gentlemen, place your bets.
One of the most frustrating—and unsuccessful—quests in 2016 has been the Search for a Successful Strategy.
Sorry about the large caps, but it has assumed an almost mythical status among traders who cannot abide simply going to cash.
The first thing investors noticed—this started at the end of December—is that traders are taking down exposure across the board. For the most part, investing by regions has produced the same losses:
Major indexes 2016
S&P 500 down 8.0%
EAFE down 8.0%
All-World down 8.5%
All-World ex-U.S down 9.1%
See? Everything is down 8 to 9 percent. Good luck there looking for something that outperforms.
Value versus growth was another big debate at the end of 2015. For the most part, growth stocks (largely tech, internet, healthcare) have outperformed value (largely energy, autos, industrials, financials) for the past several years.
Many predicted that would change in 2016. So far, they have been wrong as well:
Value vs. Growth 2016
Value down 7.8%
Growth down 7.9%
value: energy, autos, industrials, financials
growth: tech, internet, healthcare,
One of the only strategies I have seen that works (or at least produces less losses) is sell high volatility, buy low volatility.
High vs. low volatility
High Volatility down 16.8%
Low Volatility down 4.7%
High volatility are stocks that have a high sensitivity to market movements (typically energy, tech, solar, biotech); low volatility (typically consumer staples and utilities) do not.
You can see this in the performance of several high volatility names:
High Volatility 2016
Freeport-McMoran: down 42%
Wynn Resorts: down 14%
Cameron Int'l: down 7%
First Solar: down 6.8%
And the better performance of stocks that are low volatility:
Low volatility 2016
Campbell Soup: up 3.3%
Clorox: up 0.6%
Kellogg: down 1.4%
Coke: down 2.4%
P&G: down 4.2%
There's an old saw on Wall Street, that there's two types of selling: intellectual and non-intellectual. Intellectual selling is where you don't like a stock because you don't like the earnings prospects, or the economic prospects. Non-intellectual selling is when you are being forced to sell when you don't want to.
We seem to have entered the non-intellectual part of the selloff.
This is an important day. It's important we hold some gain, even a modest one. On Friday, the markets sank, but it's not that they sank, it's where they sank to. We ended essentially at the August lows (let's not quibble about a few points here and there), which were the lows for last year.
Dow: 15,666 (August low)
S&P 500: 1,867 (August low)
Nasdaq: 4,500 (August low)
Now, you can believe in technical analysis or not (a lot of you think it's a bunch of voodoo, I know). That doesn't really matter. What matters is when the trading community is confused on the fundamentals (as they are now), they turn to technicals because it at least offers some guidance on what to do.
And when the major indices are all on the verge of breaking through the lows of last year, that is a big deal.
So much wailing and gnashing of teeth were evident over the weekend.
That's why it was important that we bounce Tuesday. Crashing decisively below the August lows would bring out an even more intense round of wailing and gnashing of teeth. Wall Street is starting to resemble a never-ending Irish wake.
The key, of course, is oil, which does not behave. We are rolling over into a new contract tomorrow, so we will get a modest bounce, but that is not going to fool anyone. Oil stability is a necessary--but not sufficient--element in market stability.
Would even stable oil calm the current spate of gnashing and wailing? My friend Zach Karabell wrote an amusing piece for Politico over the long weekend, "An Economy of Chicken Littles," in which he takes on the sudden surge of "Chicken Little" analysts and strategist predicting the end of the world. He notes that the number of jobs created, modest GDP growth, and lower gas prices are all positive trends.
He acknowledges Wall Street has had a long history of market Cassandras but that the current crop "sound more like Chicken Little, full of hysteria and short on substance...fiction as an electoral strategy does us no good, nor does calling for a collapse in the financial system help manage its challenges. Those tactics are the rhetorical equivalent of shouting fire in that crowded theater, designed to generate panic and fuel hysteria. They are wrong, and they should be called out."
Amen to that. The problem is, the Chicken Littles have been right on oil. And--as every good behavioral economist will tell you--being right on a big event even once gives you a cache you can live off of for years, even if everything else you say is completely wrong. Having been right on one thing, is it any wonder some of these Chicken Littles are strutting?
It's the day after the Powerball lottery. The joke on trading desks all week is that Wall Street has been selling stocks to play the lottery.
Now the lottery is over, and we are rallying. This makes sense, no?
Coming into work, the new joke was that we were rallying but it would all fall apart by midday, because that is all we do anymore Rally at the open, fall apart midday.
It hasn't happened today, thanks to a rally in oil and a set of indicators that have been in oversold territory for days on end, including a high put/call ratio, the VIX in backwardation (the front month contracts are higher priced than contracts further out), and horrible sentiment from rank-and-file traders (the American Association of Individual Investors weekly sentiment indicator hit an 11-year low this week).
So is this a bottom? I doubt it. Traders are grappling with big issues that they can't quite get their heads around. They want:
1) China currency stability
2) Oil stability
3) Good guidance on earnings
4) the Fed to lower its rate hike expectations.
Then there's the biggest head-banger of all: how much is the global economy decelerating?
I am not expecting all these issues to be resolved in the next month, or that stocks can't find a bottom until everything on this list is cured.
But I am saying we haven't fallen enough to create the impression that stocks are a bargain.
Just think about it: right now, we are in the middle of a garden variety correction. The S&P 500 is roughly 10 percent off its historic high it hit in the middle of last year.
But remember, the S&P 5000 went from 700 in 2009 to 2,100 in 2015. Now it's at roughly 1,900.
We're going to rally for seven years and then just get away with a garden-variety 10 percent correction? It doesn't seem enough.
That's why the rally seems tentative. No one is going all in, because there is still too much downside risk.
But we are making progress. Chinese authorities getting control of the currency would be a huge help. Oil holding at $30 would be big. And JPMorgan decent earnings was a big help (S&P futures rallied pre-open when their report came out).
And the Fed? St. Louis Fed President James Bullard said the continuing drop in oil had caused a "worrisome" drop in inflation that may make further rate hikes hard to justify.
THAT is a big help.
I have often used the phrase "earnings recession" to describe the three consecutive quarters of negative earnings growth we have seen:
S&P 500 Earnings:
Q2 2015: -0.7%
Q3 2015: -1.5%
Q4 2015 (est.) -5.5%
But after looking at very early numbers for earnings in the fourth quarter, I've decided I am more concerned about a "revenue recession."
Q1 2015: -2.9%
Q2 2015: -3.3%
Q3 2015: -3.9%
Q4 2015 -3.3%
Why am I more concerned about revenues? Because the trend is implying that global business activity is deteriorating.
With earnings, we can get all sorts of financial engineering, like cost cutting, or buybacks.
But consistent lack of topline growth — which we are seeing — really calls into question the sustainability of earnings growth.
Here's what worries me: so far, 23 S&P 500 companies have reported earnings for the fourth quarter. Of the 23, about 75 percent have beat on the bottom line.
That's not what worries me. What worries me is that 19 of the 23 have missed on revenue growth, according to Earnings Scout.
Strange, no? Three-quarters beat on bottom line, but the same portion misses on topline.
That's disappointing. And we are not talking about a lot of industrials and energy names that have reported. We are talking consumer names. Nike. Bed Bath and Beyond. Walgreen. Autozone. Costco. Federal Express. General Mills.
These companies have two problems: they are multinational — they get much of their revenues overseas, so the global slowdown is really affecting them. And second, the strong dollar is really hurting them. I will be doing a lot of reports around the impact of that dollar on these company's earnings.