Don’t bank on the banks

by Dan May 3, 2012 3:14 pm • Commentary

When the past few years have been filled with headlines about the banking and financial system, global debt dynamics, leverage, and central bank assistance to bail out those banks, it stands to reason that we should all pay attention to what bank equity and debt are doing.  They play a central, crucial role in our modern financial system, for better or for worse, and the impact of bank activities on asset markets, given their incredible leverage, is likely larger than all other financial market participants.  If you’re curious, that’s why we keep talking about the banks.  They’re the biggest traders, the biggest market makers, the biggest movers and shakers in the market, again, for better or for worse.  So ignore the whales at your own risk.

We’ve already noted the weakness in U.S. and particularly European banks on numerous occasions over the past month.  If it isn’t already evident, here are 3 charts that are examples of their glaring underperformance:

KBE vs. SPY:

DB vs. EWG:

STD vs. EWP:

But what we noticed today is that this last month’s underperformance of the banks extends to almost every large global market.  Starting in our own hemisphere, Brazilian banks have been particularly weak against the Brazilian index.  Here is ITUB and BBD vs. EWZ :

Canadian banks are not quite as weak, but still broadly underperforming the Canadian index, as evidenced by CM, BNS, and TD vs. EWC:

In Japan, Nomura has had a horrible month relative to the index, shown by NMR vs. EWJ:

And even in South Korea, banks have been hit, with KB vs. EWY one example:

All Charts in the post courtesy of

We bring this up because our negative focus on U.S. financials feels increasingly justified given not only slowing global growth, but also obvious signs that the banking system globally is far from healthy.  Our hunch is that European bank weakness is infecting its global peers given how far and wide the European bank tentacles spread prior up until 2008.  And none of this makes us feel warm and fuzzy with regards to stocks.