Bank Earnings Off to a Rough Start

Even so, the group has booked major gains since November when positive vaccine data from Pfizer Inc. (PFE) triggered a sustained rotation out of COVID-19 beneficiaries and into 2021 recovery plays. As a result, current selling pressure appears technical in nature, driven by overbought readings.

Bond yields are rising while the yield curve steepens, signaling a more favorable banking environment that should generate higher profit margins. Revenue remains a major obstacle, with most quarterly reports so far posting substantial year-over-year revenue declines as a result of the pandemic. Dow component JPMorgan Chase and Co. (JPM) is the only bank of the big three to grow revenue in the quarter, in line with its longstanding market leadership.

JPMorgan Chase

JPMorgan Chase lifted to an all-time high ahead of last week’s strong earnings report and pulled back in a notable sell-the-news reaction. Two days of profit-taking could mark the start of an intermediate correction that targets unfilled gaps at 120 and 126. The Nov. 9 breakout gap between 105 and 110 remains unfilled as well, but that might not come into play until later in the year. When it does, it should mark a low-risk buying opportunity.

Bank of America

Bank of America Corp. (BAC) lost nearly 1% on Tuesday after beating Q4 2020 profit estimates and falling short on revenue, with a 9.9% year-over-year decline. Credit loss provisions dropped sharply during the quarter, indicating less stress on customer budgets as the world adjusts to the COVID-19 pandemic. The company announced it would buy back up to $2.9 billion in common stock in the first quarter, after getting Federal Reserve approval.

Citigroup

Citigroup Inc. (C) has booked the greatest downside of the three banks after beating Q4 2020 earnings by a wide margin on Friday. However, revenue fell 10.2% year-over-year, triggering a shareholder exodus that’s now relinquished nearly 8%. Unlike Bank of America, Citi credit losses went in the wrong direction during the quarter, rising to 3.73% of total loans, compared to just 1.84% in the same quarter last year.

For a look at all of today’s economic events, check out our economic calendar.

Disclosure: the author held no positions in aforementioned securities at the time of publication.

Markets Surge Despite Unprecedented Violence at U.S. Capitol

In a news-filled day, the Dow Jones hit an all-time high on Wednesday (Jan. 6), despite unprecedented unrest taking place in Washington D.C.

News Recap

  • The Dow climbed 438 points or 1.4% and briefly rose more than 600 points earlier in the day. The S&P 500 also gained 0.6% and hit an intraday record, while the Nasdaq fell 0.6%. The small-cap Russell 2000 surged by nearly 4%.
  • The day began with investors focused on the Georgia U.S. Senate special election runoff . Democrat Raphael Warnock defeated incumbent Republican Kelly Loeffler, with other Democrat Jon Ossoff announced as the winner over incumbent Republican Sen. David Perdue later in the day.
  • With a Democrat sweep in Georgia, the party now has control of the Senate. Although it is a 50-50 split (with two independents) in the Senate, both Democrats win, they have full control because Vice President-elect Kamala Harris will serve as the tiebreaker vote.
  • Many believe that because President-elect Biden, a Democrat, has a House and Senate under Democrat control, he could more easily pass higher taxes and progressive policies that may hurt the market. On the other hand, others believe that this Democrat sweep could bring into effect a larger and quicker stimulus relief bill.
  • The real news of the day was what happened at the U.S. Capitol building. After President Trump (and his family) led a “Stop the Steal” rally in Washington, D.C. to protest Congress’ certification of Joe Biden as the next president, angry MAGA supporters did the unthinkable and stormed the Capitol.
  • Wednesday (Jan. 6) was the first time since 1814 that the Capitol building was physically breached by hostile actors.
  • The invasion of the Capitol occurred after Vice President Mike Pence rejected President Trump’s calls to block Joe Biden’s election confirmation. Shortly after, the Capitol went into full lockdown.
  • Later that night, the Capitol was secured and Congress reconvened to officially certify Biden as the president. The CBOE Volatility Index (VIX) moved higher due to the unrest at the Capitol.
  • Caterpillar (CAT) surged 5.5%, while big banks such as JPMorgan Chase (JPM) and Bank of America (BAC) gained 4.7% and 6.3%, respectively. Other names and sectors that could be aided by Biden’s agenda rose as well such as the Invesco Solar ETF (TAN) which boomed 8.4%.
  • Tech lagged on the day due to fears of higher taxes and higher stimulus potential. Facebook (FB) and Amazon (AMZN) each fell more than 2%, while Netflix (NFLX) dipped 3.9%.
  • The 10-year Treasury note yield topped 1% for the first time since March.

What a newsworthy day Wednesday (Jan. 6) was. What started as a day focused on Senate runoff elections with the balance of Senate power at stake, ended with President-elect Biden being officially confirmed as the next president. But in between? A mob took over the capitol building! Did you ever think you would read that sentence in your lifetime?

Love him or hate him, President Trump is an eccentric character to put it lightly. Scorned, and still convinced that he won the election, Trump and his bruised ego whipped his supporters into a frenzy during a “Stop the Steal” rally and encouraged them to march towards the Capitol and make their voices heard. Somehow the protest turned into a storming of the Capitol after Vice President Mike Pence refused to overturn the election. Pence was later ushered out of the Senate and the Capitol went into lockdown.

What’s truly shocking here is that the markets still went up! In fact, the Dow hit yet ANOTHER all-time high! Whether you like it or not, this has to give you some sort of faith in the resiliency of capitalism,

The results of the Georgia election can be credited for the market surge.

Although some sectors plummeted due to fears of higher taxes and stricter regulations, with full Democrat control of the Presidency, Senate, and House, there is clarity for one, and expectations of further spending and government stimulus.

Goldman Sachs expects another big stimulus package of around $600 billion . While this could be bad for the national debt and have long-term consequences, in the short-term, it could send the economy heating. Small-cap stocks surged as a result.

I still believe that there will be a short-term tug of war between good news and bad news. Many of these moves upwards or downwards are based on emotion and sentiment, and I believe there could be some serious volatility in the near-term. Although markets on Wednesday (Jan. 6) may have been overly excited from the “Blue Wave” thanks to Georgia, consider this: the Capitol was invaded and the pandemic is still wreaking havoc! Even though the markets gained and the 10-year treasury ticked above 1% for the first time since March, the VIX still rose which means that fear is on the rise.

There was no pullback to end 2020 as I anticipated, but I still believe that markets have overheated in the short-term, and that between now and the end of Q1 2020 a correction could happen.

Carl Icahn seemingly agrees with me, and told CNBC on Monday (Jan. 4) that “in my day I’ve seen a lot of wild rallies with a lot of mispriced stocks, but there is one thing they all have in common. Eventually they hit a wall and go into a major painful correction.”

National Securities’ chief market strategist Art Hogan also believes that we could see a 5%-8% pullback as early as this month.

I believe though that corrections are healthy and could be a good thing. Corrections happen way more often than people realize. Only twice in the last 38 years have we had years WITHOUT a correction (1995 and 2017). I believe we are overdue for one since there has not been one since the lows of March 2020. This is healthy market behavior and could be a very good buying opportunity for what I believe will be a great second half of the year.

While there will certainly be short-term bumps in the road, I love the outlook in the mid-term and long-term once vaccines become more widely available. The pandemic is awful right now, and these new infectious strains out of the U.K. and South Africa are quite concerning. But despite this, I believe the positive manufacturing data released on Tuesday (Jan. 5) is a step in the right direction, especially considering all the restrictions that most countries are living through.

The consensus is that 2021 could be a strong year for stocks. According to a CNBC survey which polled more than 100 chief investment officers and portfolio managers, two-thirds of respondents said the Dow Jones will most likely finish 2021 at 35,000, while five percent also said that the index could climb to 40,000.

Therefore, to sum it up:

While there is long-term optimism, there are short-term concerns. A short-term correction between now and Q1 2021 is very possible. But I do not believe, with conviction, that a correction above ~20% leading to a bear market will happen.

Can Small-caps Own 2021?

Small-caps are the comeback darlings of the week. Although I believed that the Russell 2000’s record-setting run since the start of November was coming to an end, it has rallied over 5% in the last two trading days. Thanks to a Democrat sweep in Georgia and hopes of further economic stimulus, small-cap stocks have climbed back towards record highs.

I love small-cap stocks in the long-term, especially as the world reopens. A Democrat-dominated Congress could help these stocks too. But I believe that in the short-term, the index, by any measurement, has simply overheated. Before Jan. 4, the RSI for the I WM Russell 2000 ETF was at an astronomical 74.54. I called a pullback happening in the short-term due to this RSI, and it happened. Well now the RSI is back above 72, and I believe that a bigger correction in the near-term could be imminent.

Stocks simply just don’t always go up in a straight line, and that’s what the Russell 2000 has essentially been between November and December.

What this also comes down to is that small-caps are more sensitive to the news – good or bad. I believe that vaccine gains have possibly been baked in by now. There could be another near-term pop due to hopes of further stimulus, but I believe that it’s likely possible that small-caps in the near-term could trade sideways before an eventual larger pullback.

I truthfully hope small-caps decline a minimum of 10% before jumping back in for long-term buying opportunities.

SELL and take Wednesday’s (Jan. 6) profits if you can- but do not fully exit positions .

If there is a pullback, this is a STRONG BUY for the long-term recovery.

Thank you for reading today’s free analysis. I encourage you to sign up for our daily newsletter – it’s absolutely free and if you don’t like it, you can unsubscribe with just 2 clicks. If you sign up today, you’ll also get 7 days of free access to the premium daily Stock Trading Alerts as well as our other Alerts. Sign up for the free newsletter today!

For a look at all of today’s economic events, check out our economic calendar.

Thank you.

Matthew Levy, CFA
Stock Trading Strategist
Sunshine Profits: Effective Investment through Diligence & Care

* * * * *

All essays, research, and information found above represent analyses and opinions of Matthew Levy, CFA and Sunshine Profits’ associates only. As such, it may prove wrong and be subject to change without notice. Opinions and analyses were based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are believed to be accurate, Matthew Levy, CFA, and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Levy is not a Registered Securities Advisor. By reading Matthew Levy, CFA’s reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading, and speculation in any financial markets may involve high risk of loss. Matthew Levy, CFA, Sunshine Profits’ employees, and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

 

Bank of America Shareholders Running For The Exits

Bank of America Corp. (BAC) is trading lower by nearly 4% in Wednesday’s U.S. session after beating Q3 2020 estimates by a penny and missing the mark on revenue. The banking giant earned $0.51 per-share, marking a 32% decline compared to the same quarter in 2019. Revenue fell 11.6% year-over-year to $20.3 billion while the company increased provisions for credit losses by $1.4 billion to address a 5% increase on loans that now stand at $319 billion.

U.S. Banks Selling Off

Major U.S. commercial banks are getting sold this week, despite seemingly upbeat third quarter earnings reports. Citigroup Inc. (C) has posted the largest losses so far, dropping more than 5% despite beating profit estimates by $0.53 on Tuesday.  Even sector leader JPMorgan Chase and Co. (JPM) is losing ground, down by more than 1%. The broad-based sell-the-news reaction suggests these stocks were over-valued, even though they’ve been exceptionally weak 2020 performers.

Cautious executive commentary following the releases has added to deteriorating sentiment. Chase warned that it will take another round of government stimulus to make them more comfortable about current reserves set aside for a downturn that could trigger a wave of defaults. Citigroup expressed caution as well, stating it now expects a “somewhat more muted and slower recovery in both unemployment and GDP through 2022.”

Wall Street And Technical Outlook

Wall Street currently views Bank of America as a ‘Strong Buy’ based upon 5 ‘Buy’ and 1 ‘Hold’ recommendation. No analysts are recommending that shareholders sell positions and move to the sidelines at this time. Price targets currently range from a low of $23 to a Street-high $37 while the stock is now trading at the low target. This humble placement after earnings suggests that price targets will need to come down from current levels.

Bank of America lifted to an 11-year high in December 2019 and rolled over in February 2020, breaking multiple support levels before bottoming out at a 3-year low in the upper teens. It’s now failed 4 attempts to remount the 200-day EMA, which was broken on heavy volume in the first quarter. Relative strength readings are deteriorating, predicting the stock will eventually test and potentially break the first quarter low.

For a look at all of today’s economic events, check out our economic calendar.

Buffett Buyers Lift Bank Of America Shares To 2-Month High

Bank of America Corp. (BAC) is trading near a 2-month high after legendary investor Warren Buffett and his Berkshire Hathaway Inc. (BRK/A) purchased more than 20 million shares. The transactions, dated between July 28 and July 30, place a $520 million bet that U.S. bank chains will recover from adverse economic conditions in the next one or two years. The high stakes wager looks dangerous from an outsider’s viewpoint, given high odds for a protracted recession in a low interest rate environment that weakens industry profits.

Bank Of America Plagued By Industry Headwinds

The commercial banking sector has lagged major indices since the 2008 economic collapse, undermined by weak investment, low interest rates, and the funneling of corporate profits into stock buybacks, rather than capital spending that generates consistent loan income. Bank of America has underperformed both broad benchmarks and industry peers during this period and is now trading at October 2008 price levels.

The stock sold off after July earnings, despite beating top and bottom line Q2 2020 estimates. CEO Brian Moynihan set a somber tone during the conference call, warning that “economic predictions have been revised, and the forward path has deteriorated from last quarter. Baseline projections now extend the length of the recessionary environment deep into 2022. We provide substantial additional reserves for expected future credit losses this quarter to reflect that, and that has impacted our earnings.”

Wall Street And Technical Outlook

Wall Street has issued no upgrades or downgrades since the purchase, maintaining a ‘Moderate Buy’ consensus based upon 5 ‘Buy’, 5 ‘Hold’, and 1 ‘Sell’ recommendation. Analyst caution makes sense, given adverse economic conditions as well as Buffett recently taking a $9.8 billion write down on a losing Precision Castparts bet. Price targets currently range from a low of $23 to a street-high $38 while the stock is now trading about $1 below the $27.50 median target.

Technical speaking, Bank of America remains stuck in a major downtrend after breaking the 200-day EMA on heavy volume in February 2020. It failed a June test at this resistance level while the uptick into August has lifted price back to this inflection point. Unfortunately, even stronger resistance is situated less than three points above this barrier, lowering odds the stock will rally back to the February 2020 high until 2021, at the earliest.

Bank of America Struggling To Hold Above March Low

Bank of America Corp. (BAC) sold off despite beating Q2 2020 estimates last week and is now trading just 6 points or so above March’s 3-year low. Revenue fell 3.5% year-over-year to $22.3 billion while credit loss provisions rose to $5.1 billion, which includes a $4.0 billion reserve build for future bad loans as a result of the COVID-19 pandemic. Net interest income fell 11% due to lower rates that have made it harder for commercial banks to book consistent profits.

Bank Of America Sector Headwinds

Rivals haven’t fared much better during earnings season, with shareholders walking away from banking stocks, due to growing fears about a protracted recession that dampens business activity for months to come. 2019’s historic drop in bond yields stoked growing sector headwinds, which have escalated to hurricane force due to the Federal Reserve’s multi-trillion dollar stimulus program, which has raised the specter of negative interest rates.

DA Davidson analyst David Konrad highlighted banking industry challenges when he downgraded Bank of America earlier this month, lowering his price target from $27 to $25. He noted the company’s strong balance sheet and comparatively low risk profile but warned those risk constraints could undermine quarterly results. He also stressed collapsing LIBOR spreads in the adverse rate environment, negatively impacting the sector’s net interest income outlook.

Wall Street And Technical Outlook

Wall Street consensus currently rates the stock as a ‘Moderate buy’, computed from 5 ‘Buy’ and 5 ‘Hold’ recommendations. One analyst recommends that shareholders close out positions at this time. Price targets range from a low of $21 to a street high $41 while the stock is now trading less than $4 under the median $ 27.70 target.  The proximity of current price to the median and lack of bullish catalysts suggests limited upside potential.

Bank of America broke out above 2018 resistance in the fourth quarter of 2019 and topped out at a 12-year high in the mid-30s in December. It’s been all downhill since that time, failing the breakout during the first quarter rout. The stock has booked limited upside in the last 4 months while accumulation has barely budged. None of this bodes well for the technical outlook, raising odds the stock will test the downtrend low in coming months.

 

European Markets slip Ahead of the ECB

China Q2 GDP showed a 11.5% rebound, more than reversing the -10% fall in output seen in Q1, suggesting a nice v-shaped recovery in economic activity. The annualised number recovered to 3.2% from -6.8%.

If you had any doubts about the accuracy of China’s GDP numbers before this morning’s announcement, these figures only serve to reinforce that scepticism, as they appear to completely diverge from most of the data that has come out of China since April. In terms of the trade data, both imports and exports have been weak, while retail sales have also struggled.

Retail sales have declined in every month, by -7.5%, -2.8% and -1.8% in June, and with the Chinese consumer now making up around half of China’s economic output, I would suggest these numbers in no way reflect the real picture regarding China’s economy at this moment.

After yesterday’s strong session, markets here in Europe have taken their cues from the weakness in Asia markets and opened lower, as some of the vaccine optimism of yesterday starts to taper off.

On the results front Ladbrokes and Coral owner GVC Holdings have fallen back after reporting a decline in group net gaming revenue of 11%, in the first half of the year, largely down to the suspension of sporting events. The biggest falls in like for like revenues were in the UK and Europe with sharp drops of 86% and 90% in Q2, largely down to the wholesale closure of stores, though with the re-opening of shops in June these numbers are now starting to pick up again.

On the plus side, helping offset that weakness online gaming revenue rose, rose 19% in H1, with a 22% rise in Q2, with a strong performance in Australia. Management said they expect first half earnings to be within the range of £340m-£350m, while CEO Keith Alexander is set to retire and will be replaced by Shay Segev.

Energy provider SSE has said that coronavirus impacts on operating profits are in line with expectations, with profit expected to be in the range of £150m and £250m, though this could well change. The company has said it still expects to pay an interim dividend of 24.4p in November, in line with its 5-year plan to 2022/23.

In terms of renewable output, this came in below plan, but was still higher than the same period a year ago.

Purplebricks shares are higher after announcing the sale of its Canadian business for C$60.5m to Desjardins Group

Aviva announced that it has completed the sale of a 76% stake in Friends Provident to RL360 for £259m.

Royal Bank of Scotland also announced that from 22nd July 2020 it would henceforth be known as NatWest Group, subject to approval as it strives to draw a line under the toxicity of the RBS brand. This toxicity has dogged the bank since the 2008 bailout, along with the various scandals, around rate fixing, PPI and the GRG business, that have swirled around the bank since then. Investors will certainly be hoping so given the current share price performance, and hope that the change in name isn’t akin to putting lipstick on a pig.

Consumer credit ratings company Experian latest Q1 numbers have shown a large fall in revenue growth across all of its regions with the exception of North America, and which helped mitigate a lot of the weakness elsewhere.

The euro is slightly softer ahead of this afternoon’s ECB rate decision, which is expected to see no change in policy. At its last meeting the European Central Bank hiked its pandemic emergency purchase program by another €600bn to €1.35trn, with the time horizon pushed into the middle of June 2021. The ECB still needs to formally respond to the challenge of the German court irrespective of its insistence it is covered under the jurisdiction of the European Court.

Even where Germany is concerned optics are important, particularly if the ECB wants to be seen as a responsible arbiter of the economy across all of Europe, and the PEPP still remains vulnerable to a legal challenge, due to its difference with the previous program. The bank could also indicate if it has any plans to start buying the bonds of so called “fallen angels”. These are the bonds of companies that were investment grade, but have fallen into “junk” status as a result of the pandemic.

This morning’s UK unemployment numbers don’t tell us anything we don’t already know. The ILO measure came in at 3.9% for the three months to May, however the numbers don’t include those workers currently on furlough, and while a good proportion of these could well come back, there is still a good percentage that won’t.

On the plus side the reduction in jobless claims from 7.8% to 7.3% suggests that some workers did return to the work force in June, as shops started to reopen, however the number was tiny when compared to the claim increases seen in April and May, which saw the May numbers revised up to 566.4k.

To get a better idea of where we are in the jobs market the ONS numbers do tell us that there are now around 650k fewer people on the payroll than before the March lockdown, and that number is likely to continue to rise as we head into the end of the year and the furlough runs off.

The pound is little moved on the back of the numbers, while gilt yields have edged slightly higher.

US markets look set to take their cues from the weakness seen here in European markets, with the main attention set to be on the latest June retail sales and weekly jobless claims numbers.

Retail sales are expected to rise 5% in June, some way below the 17.7% rebound seen in the May numbers which reversed a -14.7% fall in April. The strength expected in the June number seems optimistic when set aside the employment numbers, and the 13m people still not working since March. This suggests that this number could well be highly fluid and while a lot of US workers have managed to get their furlough payments, it doesn’t necessarily follow that they will spend it.

Weekly jobless claims are still expected to be above the 1m mark, with a slight reduction expected to 1.25m from 1.31m. Continuing claims are expected to fall further to 17.5m, however these could start to edge higher in the coming weeks as US states issue orders to reclose businesses in the wake of the recent surge in coronavirus cases.

Twitter shares lost ground lost night after the bell as it became apparent that the accounts of high profit individuals like Elon Musk, Warren Buffet and former US President Barack Obama were hacked by a bitcoin scammer. All verified accounts were shut down as a result as Twitter scrambled to get on top of the problem. It’s difficult not to overstate how embarrassing this is for Twitter given that the blue tick offers certainty that the user of the account is the person they claim to be. To have them hacked is hugely embarrassing, and undermines the integrity of the whole blue tick process.

American Airlines shares are also likely to be in focus after the company announced that 25,000 jobs could be at risk, when the furlough scheme runs its course. United Airlines has already said it could cut up to 36,000 people, up to 45% of its workforce.

Netflix Q2 earnings are also due after the bell with high expectations that the company can build on its blow out Q1 subscriber numbers of 15.8m. Q2 is expected to see 7m new subscribers added.

Bank of America is also expected to post its latest Q2 numbers with the main attention on how much extra provision for bad loans the bank will add to its Q1 numbers.

Dow Jones is expected to open 160 points lower at 26,710

S&P500 is expected to open 18 points lower at 3,208

For a look at all of today’s economic events, check out our economic calendar.

By Michael Hewson (Chief Market Analyst at CMC Markets UK)