Yesterday, I gave my thoughts on Barron’s cover story (MorningWord 2/1/16: Crying All the Way to the Bank) where they suggested that it is Time to Buy Bank Stocks. My view was quite simple that the dramatic declines by U.S. bank stocks since their 52 week highs made late last year appears to be something more than you run of the mill correction:
The main take-away for me is quite simple, to dismiss the unknown when it appears that the price action is telling you something that valuation, fundamentals, and the financial press are not is a bit silly. I would add one last point, there are no shortage of 10-20% declines over the last 20 years of the charts above, which seems about right for an economically sensitive sector like the banks, but if you get it wrong on the long side in this group when its in the midst of a once every 5 to 7 year 50% plus decline, you don’t want to be making a bullish argument on tangible book value alone down 25% from the prior high.
A couple weeks ago, when it appeared most U.S. banks were about to break key technical support levels I took a look at how they acted relative to their peers in Europe and Asia, MorningWord 1/19/16: Bank Stocks – The Meh, the Bad and the Ugly, and sadly the U.S. banks are the best of a very bad bunch. European banks trade like they are in a full blown credit crisis, Deutsche Bank (DB) is trading a new all time lows, UBS and Credit Suisse are both down 30% from their 52 week highs and trading at new 10 year lows. And don’t even get me started on emerging market banks.
In both of my previous posts I acknowledge JP Morgan’s (JPM) relative out performance to its U.S. peers. Since our financial crisis (aside from its London Whale situation in 2012) JPM has been viewed as a sort of special bank stock, best of breed, least leverage, best balance sheet, cheap valuation, best managed etc etc etc.
While I know this is NOT 2008 for U.S. banks, it could be a similar sort of set up for those in emerging markets, and who the hell knows that Euro banks are telling us. If this is not your run of the mill correction of the last few years, then I suspect U.S. banks stocks will continue to decline and best of breed like JPM will play catch up.
JPM is definitely oversold in the near term, but far less so than its money-center peers BofA (BAC-down 28% from 52 week highs) and Citi (C – down 33% from 52 week highs) and Goldman Sachs (GS-down 31% from 52 week highs) and Morgan Stanley (MS-down 33% from 52 week highs) both making new 52 week lows.
JPM’s 10 year chart shows it as the only large U.S. bank that has not tested its August 24th low, and the nice round number of $50 as very interesting technical support, just above the long term uptrend from its 2009 financial crisis lows:
I’ll leave you with this, the same peeps that defended the U.S. banks balance sheets back in 2007 and 2008 are out there doing the same now. This time is different, but with most down 25% to 40% in months, I think it makes little sense to take their word for it.
A defined risk bearish bet in JPM could be the best way to play for continued weakness in the space. The next identifiable catalyst for JPM will be the Fed’s stress tests in March and then their Q1 results on April 13th.
BUT HERE IS THE THING, I AM GENERALLY NOT A FAN OF PRESSING A SHORT ON A DOWN 2% DAY IN THE S&P 500, AND DOWN 3.5% IN THE TARGET STOCK, SO I AM GOING TO WAIT FOR A LITTLE BOUNCE. BUT GUN TO MY HEAD, I BUY NEAR THE MONEY PUTS AND SPREAD ON A MOVE TO THE STRIKE.
Hypothetical Trade: JPM ($57) Buy April 55 put for $2.25
We will wait for a bounce and then look to target April expiration and adjust strikes, with the stock a dollar higher possibly buy the April 57.50/50 put spread.