Banks Lose Their Post as Drivers of Rally

12-Oct-2010

I like this.

By

An eternal optimist, Liu-Yue built two social enterprises to help make the world a better place. Liu-Yue co-founded Oxstones Investment Club a searchable content platform and business tools for knowledge sharing and financial education. Oxstones.com also provides investors with direct access to U.S. commercial real estate opportunities and other alternative investments. In addition, Liu-Yue also co-founded Cute Brands a cause-oriented character brand management and brand licensing company that creates social awareness on global issues and societal challenges through character creations. Prior to his entrepreneurial endeavors, Liu-Yue worked as an Executive Associate at M&T Bank in the Structured Real Estate Finance Group where he worked with senior management on multiple bank-wide risk management projects. He also had a dual role as a commercial banker advising UHNWIs and family offices on investments, credit, and banking needs while focused on residential CRE, infrastructure development, and affordable housing projects. Prior to M&T, he held a number of positions in Latin American equities and bonds investment groups at SBC Warburg Dillon Read (Swiss Bank), OFFITBANK (the wealth management division of Wachovia Bank), and in small cap equities at Steinberg Priest Capital Management (family office). Liu-Yue has an MBA specializing in investment management and strategy from Georgetown University and a Bachelor of Science in Finance and Marketing from Stern School of Business at NYU. He also completed graduate studies in international management at the University of Oxford, Trinity College.







By Jonathan Cheng and Dan Fitzpatrick, WSJ

Amid the stock market’s gains in the third quarter, one notable group was left behind: financial companies.

After years in which financial stocks drove the performance of the broader market, their diverging fortune is causing some investors to wonder if it is time to rethink the truism that as financials go, so goes the market.

During the third quarter that just ended, the Standard & Poor’s 500-stock index posted a gain of 10.7%, but it didn’t get much help from some of the country’s biggest banks. The Keefe, Bruyette & Woods Bank Index—which tracks 24 bank stocks, with the four heaviest weightings for Citigroup(NYSE: CNews), J.P. Morgan Chase (NYSE: JPMNews), Bank of America (NYSE: BACNews)and Wells Fargo (NYSE: WFCNews)—was little changed.

Bank of America tumbled 8.8% and Wells Fargo slipped 1.9%. Citigroup, J.P. Morgan Chase and Morgan Stanley(NYSE: MSNews) saw their shares gain modestly, by between about 4% and 6%, clipped by uncertainty over new rules from U.S. and global banking regulators.

Financials, taken more broadly, have also been the worst performing sector on the S&P 500 since that index reached its 2010 peak on April 23.

By contrast, banks were the dominant force in the market’s rally that began last year, charging up 131% from the beginning of March 2009 to end of April 2010, leading the S&P’s 61% gain.

As company earnings season gets into full swing this week—with Intel (NASDAQ: INTCNews), Google (NASDAQ: GOOGNews) and General Electric (NYSE: GENews) all scheduled, as well as J.P. Morgan on Wednesday—the importance of financials may again be put to the test.

In times past, the market took its cue from the big banks. When Goldman Sachs Group (NYSE: GSNews) earned a record $3.44 billion in the second quarter of 2009, the markets soared on hopes of a comeback for the financial-services industry. This time, with banks weighed down by the uncertainty of regulatory changes, the stock market may leave them behind.

John Lynch, chief equity strategist at Wells Fargo Funds Management Group, is one who says that means the stock market may generally be breaking free from its reliance on financials.

He notes that financials account for about one-sixth of the broader market by market capitalization and profitability—far off their peak in recent years, when financials accounted for about a quarter of the market’s capitalization and a third of its profitability, he said.

“That old adage of ‘As financials go, so goes the market’—I don’t think that’s true this time,” Mr. Lynch says, referring to the coming earnings season. “Banks will participate in the markets, but they’re not going to lead, and I think that’s because of what we’re seeing with the regulatory overhang.”

Banks, Mr. Lynch says, are using the benefit of record-low short-term interest rates not to lend but instead to make opportunistic trades that do little to prop up earnings and the economy over the longer term.

Some money managers say they expect the relative performance of financial stocks and the broader market to continue to separate, as investor worries about the economy ease, allowing them to look more closely at the performance of individual companies and industries. Banks may well be the losers from that deeper scrutiny.

“We’re finally approaching a point where we can differentiate, and not everything is going to be correlated,” said Phil Orlando, equity strategist at Federated Investors. “I think what we’ve seen the last few years is everything was correlated, but now we’re two years past the crux of the crisis and we’re beginning to heal….We can start to separate the wheat from the chaff.”

Many say the decoupling shows how the fate of the banks is becoming in some ways detached from other companies that now are able to tap the bond markets for financing and aren’t laboring under a cloud of potentially onerous and confusing regulations.

These days, investors are confused as to what it even means to be a bank. Investors say they still don’t have enough information about where future profits are going to come from, how new international capital rules and implementation of the U.S. financial overhaul package could crimp the banks’ businesses, and what new costs banks will have to eat as they reckon with ongoing problems resulting from the U.S. housing collapse.

Bank of America, J.P. Morgan, Wells Fargo and Citigroup are searching for the appropriate operating models after two years of loan losses, tumbling stock prices and new legislation that promises to squeeze profits on everything from derivatives to debit cards. J.P. Morgan, Citigroup and Bank of America have decided to make more of an international push as they search for new revenue, while Wells is betting on loan growth in the U.S. to boost results.

J.P. Morgan Chief Executive James Dimon tried to counter investors’ doubts last month, saying at a conference, “We’re going to earn it all back, whatever it is.”

The mounting furor about the use of so-called robo signers to approve hundreds of foreclosure documents a day without carefully reviewing their contents adds yet another unknown. “Are there frauds and errors in a lot of these foreclosure files?” said Jeffrey Harte, an analyst with Sandler O’Neill & Partners.

Four of Bank of America’s top 10 shareholders have sold 10% or more of their holdings since March, and the bank’s shares are down 34% since reaching a 52-week high of $19.86 in mid-April.

Chief Executive Brian Moynihan spent late summer and early fall trying to convince large investors that, despite the more than $4 billion a year Bank of America expects to lose because of new legislation, the Charlotte, N.C., lender is still a solid long-term bet as it works to shed noncore assets, clean up its balance sheet and reject more volatile earnings in exchange for consistent returns.

During a speech Friday to the National Press Club, Mr. Moynihan worked to reassure his audience that big banks still matter.

“While I may understand why people might question the value of large institutions these days, it seems misplaced,” he said. “Companies across our industry, my own included, made poor business judgments that certainly affected our economy, our customers and the communities where we live and work. However, U.S. global financial-services companies remain vital to the success of our customers and in fact to the success in the countries we operate in, including and especially the United States.”

Some think the relationship between banks and the broader market will soon revert to past norms. To these observers, a strong showing from the banks during earnings season could lay a foundation for a further rally. But if banks show signs of strain under the slow economic recovery and the specter of further financial regulation, the picture for the broader stock market could be bleaker.

As the economy improves, “we’re beginning to see rotation in the market, and that’s a healthy thing. But I think it’s still financials that people are watching,” says Ralph Fogel, investment strategist with Fogel Neale Partners, who says he “can’t imagine” an earnings season that doesn’t revolve around the financials.

Cort Gwon, director of trading strategies and research at FBN Securities, says, “If the banks aren’t participating, it’s going to be a lot harder for the markets to rally. You cannot have a sustained rally without the financials.”

Wall Street analysts have muted expectations for big banks’ third-quarter results, having slashed estimates for Citigroup, J.P. Morgan, Wells Fargo and Bank of America. Trading revenues are expected to be lackluster and loan growth anemic. They expect some improvements in credit costs but not enough to pronounce a full-throated comeback.

“We don’t expect any home runs; we don’t expect any shutouts,” said Christopher Wolfe, a managing director with Fitch Ratings in New York.

Write to Jonathan Cheng at jonathan.cheng@wsj.com and Dan Fitzpatrick at dan.fitzpatrick@wsj.com.


Tags: , , ,

Post a Comment

Your email is never published nor shared. Required fields are marked *

*
*

Subscribe without commenting