San Francisco, California-based multinational financial services company Wells Fargo reported better-than-expected earnings in the first quarter, largely driven by the release of $1.6 billion in its reserves for credit losses.
The fourth-largest lender in the U.S. reported adjusted earnings per share $1.05, beating analysts’ expectations of $0.69 per share. With $18.06 billion in revenue, Wells Fargo surpassed Wall Street’s consensus estimates of $17.5 billion.
“Our results for the quarter, which included a $1.6 billion pre-tax reduction in the allowance for credit losses, reflected an improving U.S. economy, continued focus on our strategic priorities, and ongoing support for our customers and our communities. Charge-offs are at historic lows and we are making changes to improve our operations and efficiency, but low-interest rates and tepid loan demand continued to be a headwind for us in the quarter,” said Chief Executive Officer Charlie Scharf.
Wells Fargo shares, which slumped more than 40% in 2020, rebounded over 31% so far this year.
Wells Fargo Stock Price Forecast
Sixteen analysts who offered stock ratings for Wells Fargo in the last three months forecast the average price in 12 months of $39.64 with a high forecast of $47.00 and a low forecast of $32.00.
The average price target represents a -0.38% decrease from the last price of $39.79. Of those 16 analysts, nine rated “Buy”, seven rated “Hold” while none rated “Sell”, according to Tipranks.
Morgan Stanley gave the base target price of $47 with a high of $67 under a bull scenario and $21 under the worst-case scenario. The firm gave an “Overweight” rating on the financial services company’s stock.
Several other analysts have also updated their stock outlook. BofA raised the price objective to $44 from $43. Wells Fargo & Company had its price target lifted by Barclays to $42 from $36. They currently have an equal weight rating on the financial services provider’s stock. Seaport Global Securities raised to a buy rating from a neutral and set a $42 target price. Oppenheimer reaffirmed a hold rating on shares.
“Wells Fargo (WFC) appears to be beginning to take action to restructure its business mix as it works to exit the Fed consent order/asset cap and reduce its expense base. While uncertainty remains around the impact of business exits and timing of consent order/asset cap exit, we believe risk more than accounted for in the stock at 9x our 2022e EPS,” noted Betsy Graseck, equity analyst at Morgan Stanley.
“WFC benefit to EPS from rising long end rates is the highest in the group, with each ~50bps increase in the 10yr driving ~4% to NII and as much as ~8% to EPS. We model WFC driving their expense ratio down to 64% by 2023 on reduced risk and compliance spend, operational efficiencies, and branch optimization. Lower expense ratio possible.”
Wells Fargo and Co. (WFC) is ticking higher in Wednesday’s pre-market after beating Q1 2021 top and bottom line estimates by wide margins. America’s third largest bank posted a profit of $1.05 per-share, $0.40 better than expectations, while revenue rose just 2.0% year-over-year to $18.06 billion, beating consensus by $600 million. Credit loss provisions decreased by $5.1 billion, underpinned by “continued improvements in the economic environment.”
Waiting on Fed Approvals
The bank is overhauling its risk management and governance as part of a Fed-guided plan to lift asset caps, which in turn will improve shareholder benefits and allow greater risk taking. It’s now expected that temporary restrictions on bank holding company dividends and share repurchases put into place at the start of the pandemic will end for most firms on June 30. Wells is scrambling to get required policies in place ahead of final approvals later this quarter.
Credit Suisse analyst Susan Roth Katzke summed up improved sentiment recently, noting, “We asked for targets and supporting disclosure to increase clarity on the path to improved returns; both were delivered with fourth quarter results. To be sure, the path forward has its obstacles and revenue growth remains a challenge, but the combination of evident progress, incremental investment, excess capital, and the inherent franchise opportunity reduce the downside risk and render the aspiration of a 15% ROTE achievable, in time”.
Wall Street and Technical Outlook
Wall Street consensus now stands at an ‘Overweight’ rating based upon 14 ‘Buy’, 3 ‘Overweight’, and 10 ‘Hold’ recommendations. No analysts are recommending that shareholders close positions. Price targets currently range from a low of $34 to a Street-high $65 while the stock is set to open Wednesday’s session about $3 below the median $43 target. While modest upside is possible with this placement, prolific gains many have to wait for the Fed’s OK on dividends and buybacks.
Wells Fargo underperformed its rivals after 2016’s disclosure it created millions of fraudulent savings and checking accounts. The stock posted an all-time high in January 2018 and turned sharply lower through 2019 and into 2020 when the bottom dropped out following the Wuhan outbreak. The recovery wave since October has stalled at the .618 Fibonacci retracement of the selloff that began in December 2019, generating much weaker gains than bank indices and commercial rivals that are now trading at multiyear and all-time highs.
The San Francisco-based financial services company reported a net income of $2.99 billion, or 64 cents per share, beating the Wall Street consensus estimates of 58 cents after missing expectations in the last six consecutive quarters. The company’s total revenue plunged 10% to $17.93 billion, missing forecasts of $18.127 billion.
“Expect FY ’21 expense to come down $1 billion to $53 billion which includes $3.7 billion of cost saves from efficiency initiatives and offsets from biz investments, revenue-related comps, and other items. Wells Fargo (WFC) expects restructuring charges to remain flat in ’21 vs. ’20 and notes that operating losses can be unpredictable with $1 billion currently baked into the guide. The guide looks in-line with cons. at $53 billion.”
At the time of writing, Wells Fargo shares traded 7.28% lower at $32.21 on Friday; the stock fell more than 40% in 2020.
“Although our financial performance improved and we earned $3.0 billion in the fourth quarter, our results continued to be impacted by the unprecedented operating environment and the required work to put our substantial legacy issues behind us,” Chief Executive Officer Charlie Scharf commented on the quarter.
Wells Fargo Stock Price Forecast
Fifteen analysts who offered stock ratings for Wells Fargo in the last three months forecast the average price in 12 months at $34.23 with a high forecast of $40.00 and a low forecast of $27.00.
The average price target represents a 6.57% increase from the last price of $32.12. From those 15 analysts, nine rated “Buy”, six rated “Hold” and none rated “Sell”, according to Tipranks.
Morgan Stanley gave a base target price of $40 with a high of $54 under a bull scenario and $20 under the worst-case scenario. The firm currently has an “Overweight” rating on the financial services company’s stock.
Several other analysts have also recently commented on the stock. Compass point raised the target price to $41 from $31. UBS upped their price objective to $41 from $23 and upgraded their ratings to buy from neutral. Citigroup raised the stock price forecast to $37 from $33. JP Morgan upped the target price to $32 from $31.
In addition, Wells Fargo & Company had its target price hoisted by Deutsche Bank to $37 from $35. The firm currently has a buy rating on the financial services provider’s stock. Credit Suisse Group raised their price objective to $35 from $33 and gave the company a neutral rating. At last, Barclays lifted their price target to $36 from $33 and gave the stock an equal weight rating.
“Wells Fargo (WFC) appears to be beginning to take action to restructure its business mix as it works to exit the Fed consent order/asset cap and reduce its expense base. While uncertainty remains around impact of business exits and timing of consent order/asset cap exit, we believe risk more than accounted for in the stock at 7.7x our 2022e EPS and 0.9x BV,” said Betsy Graseck, equity analyst at Morgan Stanley.
“WFC benefit to EPS from rising long end rates is the highest in the group, with each ~50bps increase in the 10yr driving ~4% to NII and as much as ~10% to EPS. We model WFC driving their expense ratio down to 66% by 2023 on reduced risk and compliance spend, operational efficiencies, and branch optimization. Lower expense ratio possible.”
Upside and Downside Risks
Risks to Upside: 1) New CEO’s financial targets higher than expectations. 2) Fed asset cap and consent order lifted in 1H21. 3) Business exits have minimal EPS impact and increase ROE. 4) Rates rise faster than forward curve – highlighted by Morgan Stanley.
Risks to Downside: 1) Fed does not lift asset cap until well into 2022+ 2) Business exits reduce EPS more than 10%. 3) Lower than expected operating leverage. 4) 10-year yield below expectations Macro environment remains challenging through 2021.
Traders Take Some Profits Off The Table At The Start Of The Earnings Season
S&P 500 futures are moving lower in premarket trading as traders take some profits off the table after Biden’s stimulus plan announcement.
Yesterday, U.S. President-elect Joe Biden unveiled a new stimulus plan worth $1.9 trillion which included $1,400 stimulus checks. Early reports suggested that the plan would be worth $1.5 trillion – $2 trillion so Biden’s proposal was in line with traders’ expectations.
Meanwhile, Fed Chair Jerome Powell stated that it was not the time to talk about changing the pace of monthly bond purchasing, refuting rumors about potential cuts to the current asset purchase program.
While the additional stimulus package and the continued bond purchases should be supportive for stocks in the longer run, traders have decided to take some chips off the table at the beginning of the earnings season.
All three banks easily beat analyst estimates on earnings as they released some of the reserves they built to deal with the consequences of the coronavirus pandemic. Stimulus programs provided support to banks’ customers which allowed banks to enjoy stronger results.
Interestingly, the market is not satisfied with the reports, and banks’ stocks are losing ground in premarket trading. Financials enjoyed a very strong rally in recent months so traders may be using better-than-expected reports as an opportunity to take profits.
Retail Sales Declined By 0.7% In December
The U.S. has just reported that Retail Sales decreased by 0.7% month-over-month in December while analysts believed that they would remain unchanged compared to November levels. On a year-over-year basis, Retail Sales increased by 2.9%.
The slowdown in Retail Sales is due to the negative impact of the second wave of the virus. However, Retail Sales may soon get a boost when additional stimulus checks are delivered.
Later today, the U.S. will provide Industrial Production and Manufacturing Production reports for December. Industrial Production is expected to grow by 0.5% month-over-month while Manufacturing Production is also projected to increase by 0.5%.
The major U.S. stock index futures are edging lower in the pre-market session on Friday as investors digested the details of President-elect Joe Biden’s $1.9 trillion stimulus plan revealed Thursday evening local time.
A quick recap of President-elect Joe Biden’s American Rescue Plan, includes increasing the additional federal unemployment payments to $400 per week and extending them through September, direct payments to many Americans of $1,400, and extending federal moratoriums on evictions and foreclosures through September.
The plan also calls for $350 billion in aid to state and local governments, $70 billion for COVID testing and vaccination programs and raising the federal minimum wage to $15 per hour.
JPMorgan kicks off fourth-quarter earnings season for big banks on Friday at about 12:00 GMT, followed by releases from Wells Fargo and Citigroup.
Earnings expectations for the fourth quarter have been on the rise, thanks to climbing interest rates and expectations for solid trading and investment banking results.
The biggest U.S. banks (with the exception of Wells Fargo) all saw per-share earnings estimates jump by at least 8% in the past month, according to Barclays analysts Jason Goldberg.
Thursday US Stock Market Recap
Wall Street closed lower on Thursday after turning down late in the session as reports emerged about U.S. President-elect Joe Biden’s pandemic aid proposal following earlier data that showed a weakening labor market.
Of the 11 major S&P sectors, only four closed higher with economically-sensitive energy, up 3%, showing the biggest percentage gains as oil prices rose. The biggest percentage decliner on the day was the information technology sector.
The domestically-focused small-cap Russell 2000 Index closed up 2%, while the Dow Jones Transports Index ended up 1% after both sectors, which are seen as big beneficiaries of stimulus, scaled all-time highs during the day.
Helping the transport index was a 2.5% rise in shares of Delta Air Lines after Chief Executive Ed Bastian forecast 2021 to be “the year of recovery” after the coronavirus pandemic prompted its first annual loss in 11 years.
The S&P 1500 Airlines Index closed up 3.4%.
The Philadelphia Semiconductor Index also hit a record high with a big boost from Taiwan Semiconductor Manufacturing Co Ltd. The chip manufacturer’s U.S. shares closed up 5% after it announced its best-even quarterly profit and raised revenue and capital spending estimates.
Well Fargo & Co. (WFC) is trading at a 10-month high on Tuesday after a key analyst upgrade. The banker has underperformed since 2016 when it got hit with a $185 million fine for creating 1.5 million fake deposit accounts and a half-million fake credit cards. Remediation efforts backfired after 5,300 low level employees were fired, in an effort to deflect blame from the executive office. CEO John Stumpf eventually resigned and gave up millions in compensation.
The company reports earnings on Friday morning, with Wall Street analysts looking for a profit of $0.61 per-share on $17.4 billion in Q4 2020 revenue. If met, earnings-per-share (EPS) will mark a 34% profit decrease compared to the same quarter in 2019. The stock has posted a negative 20% return since the scandal, underperforming the industry by an astounding 95%. Given these metrics, small improvements in operating results could generate significant upside.
UBS analyst Saul Martinez upgraded the stock to ‘Buy’, noting, “A positive narrative has emerged (for the banking sector): faster economic growth and expansionary fiscal policy drive rising net interest income (NII) and falling credit costs, while the resumption of share buybacks further boosts profitability and EPS. Wells Fargo is now our top pick … and is our sole Buy rated regional bank.”
Wall Street and Technical Outlook
Wall Street consensus has improved in 2021, with widening yields and higher interest rates set to underpin profits. It’s now rated as a ‘Moderate Buy’, based upon 9 ‘Buy’, 6 ‘Hold’, and 0 ‘Sell’ recommendations. Price targets currently range from a low of $27 to a Street-high $40 while the stock opened Tuesday’s U.S. session right on top of the median $34 target. Friday’s confessional could offer a perfect opportunity for analysts to lift ratings and targets.
Wells Fargo hasn’t bounced as strongly as bank sector funds since March 2020’s 11-year low, recouping just one-third of the losses posted since October 2019. However, price action has finally cleared resistance at the 200-day moving average, setting the stage for additional gains up to broken 2019 support in the low 40s. That marks potential upside of more than 30%, making it an interesting January Effect candidate.
SYNNEX: California-based business process services company’s earnings to decline to $2.89 per share the fourth quarter, down from $4.26 per share reported the same quarter last year. The leading provider of business-to-business information technology services’ quarterly revenue will fall more than 5% to just over $6 billion from $ 6.58 billion a year ago.
“For the fourth quarter of fiscal 2020, revenues are expected between $6.45 billion and $6.65 billion. Non-GAAP net income is estimated in the range of $190.5 to $203.5 million. Moreover, the company projects non-GAAP earnings between $3.68 and $3.93 per share,” noted analysts at ZACKS Research.
CARNIVAL: The world’s largest cruise ship operator is expected to report a loss for the third consecutive time in the fourth quarter. The Miami, Florida-based company’s revenue will plunge nearly 100% to $142.09 million from $4.78 billion posted in the same period a year ago. Carnival is expected to report a loss of $1.83 per share, worse compared to a profit of 62 cents per share registered in the same quarter last year.
“We think the cruise industry will be one of the slowest sub-sectors to recover from the COVID-19. Cruising needs just not international travel to return, but ports to reopen, authorities to permit cruising, and the return of customer confidence,” said Jamie Rollo, equity analyst at Morgan Stanley.
“We expect cruising to resume in January 2021, and only expect FY19 EBITDA to return in FY24 given historically CCL has lacked pricing power, and EPS to take even longer given dilution of share issues and higher interest expense. We see debt doubling in FY21 vs FY19 due to operating losses and high capex commitments, and leverage looks high at 4-5x even in FY23-24e, so we see risk more equity might need to be raised,” Rollo added.
According to the mean Refinitiv estimate from eleven analysts, Carnival Corp is expected to show a decrease in its fourth-quarter earnings to -186 cents per share. Wall Street expects results to range from a loss of $-2.10 to a loss of $-1.64 per share, Reuters reported.
“Delta is the airline most exposed to corporate travel, which was positive pre-pandemic. Corporate travel remains down 85% and the only corporate traveller flying now appears to be those at small and medium-sized businesses. Delta had hoped for a recovery in business travel in 2H21, but it is becoming increasingly clear that business travel will not be a meaningful contributor to revenue in 2021 as vaccination timelines continue to shift out,” said Helane Becker, equity analyst at Cowen and company.
BLACKROCK: The world’s largest asset manager is expected to report a profit of $8.66 in the fourth quarter, which represents a year-over-year change of more than +3%, with revenues forecast to grow over 7% year-over-year to $4.27 billion.
“We believe BlackRock is best positioned on the asset management barbell given leading iShares ETF platform, multi-asset & alts combined with technology/Aladdin offerings that should drive 10% EPS CAGR (2020-22e) via 5% average long-term organic growth & continued op margin expansion. We see further growth ahead for Alts, iShares, international penetration, and the institutional market in the US,” said Michael Cyprys, equity analyst at Morgan Stanley.
“We expect the premium to widen as BlackRock takes share in the midst of market dislocation and executes on improving organic revenue growth trajectory.”
“Citi is trading at just 0.7x NTM BVPS implying a through the cycle ROE of just 7%, well below our 9% estimate for 2023. While there is uncertainty around how much Citi needs to invest in technology to address the Fed and OCC consent orders around risk management, data governance and controls, we believe the stock is cheap even if expenses remain elevated. We have modelled in expenses rising to $44B for 2021 and 2022 well above $42B in 2019,” noted Betsy Graseck, equity analyst at Morgan Stanley.
“Moreover, Citi is not getting credit for its diversification (only 40% of total loans are consumer and only half of those are credit card). Citi also has a more resilient wholesale business, skewed to FX, EM and cash management.”
WELLS FARGO: The multinational financial services company is expected to report a profit of $0.58 in the fourth quarter, which represents a year-over-year slump of more than 30%, with revenues forecast to decline about 9% year-over-year to $18 billion. Seaport Global Securities also issued estimates for Wells Fargo & Company’s Q2 2021 earnings at $0.60 EPS and FY2022 earnings at $3.10 EPS.
“Net interest income is anticipated to be $40 billion for 2020, lower than the previous guidance due to lower commercial loan balances and higher MBS premium amortization. Management expects fourth-quarter origination volume to be similar to third-quarter levels despite typical seasonal declines and fourth-quarter production margins should remain strong,” noted analysts at ZACKS Research.
“The company expects internal loan portfolio credit ratings, which were also contemplated in the development of allowance, will result in higher risk-weighted assets under the advanced approach and under the standardized approach in the coming quarters, which would reduce CET1 ratio and other RWA-based capital ratios.”
Bank stocks came under heavy selling pressure earlier this year as the coronavirus pandemic upended economic activity, causing banks to significantly beef up their bad debt provisions. However, the group has almost doubled the broader market’s performance over the last month as investors bet that a vaccinated population and ongoing levels of record stimulus spending will spark a strong recovery in 2021.
Below, we look at three large-cap banking stocks that each trade above their 200-day simple moving average (SMA).
JPMorgan Chase & Co.
With a market value upwards of $370 billion and issuing a 3.01% dividend yield, New York-based JPMorgan Chase & Co. (JPM) operates as a financial services company through four segments: consumer & community banking, corporate & investment bank, commercial banking, and asset & wealth management.
The financial giant eased concerns of ongoing loan defaults during its latest quarterly earnings release, disclosing that it had reduced provision for credit costs by $569 million.The bank had added more than $15 billion to loan loss reserves in the first half of 2020. Technical analysis shows price continuing higher after the 50-day SMA crossed above the 200-day SMA, marking the start of a new uptrend. Further bullish momentum may see the stock retest its 52-week high at $141.10.
Citigroup Inc. (C) provides diversified financial services and products in over 100 countries to consumers, corporations, governments, and institutions. Like its competitors, the bank slashed its loan loss provisions in the third quarter, with net credit losses declining to $1.9 billion from $2.2 billion in the previous three-month period. Moreover, the bank’s CEO Michael Corbat told investors that credit costs have stabilized and deposits continue to increase, per CNBC.
The stock has a market capitalization of $119 billion and offers a 3.68% dividend yield. From a technical standpoint, the price trades above both a multi-month downtrend line and the 200-day SMA, which may see the bulls test the top of a previous trading range at $73.
Wells Fargo & Company
Wells Fargo & Company (WFC) serves its customers through three business divisions: community banking, wholesale banking, and wealth- and investment management. Although the 168-year-old bank reported a 19% year-over-year (YoY) decline in Q3 net interest income, it set aside just $769 million for credit losses – down substantially from the $9.5 billion put aside in the second quarter.
The company has a market value of $119.36 billion and pays investors a 1.43% dividend yield. Chart wise, since hitting its 2020 low in late October, the price has gained nearly 40% to now trade back above the 200-day SMA. Ongoing buying could see the stock test major resistance levels at $34 and $43.
In the last five trading days (November 4 – November 10) the broad stock market has extended its over eleven-year long bull market. On Monday, November 9 the S&P 500 index reached new record high of 3,645.99 following news about Pfizer’s coronavirus vaccine and the U.S. Presidential Election outcome.
The S&P 500 index has gained 4.08% between November 4 and November 10. In the same period of time our five long and five short stock picks have lost 2.33%. So stock picks were relatively weaker than the broad stock market. Our long stock picks have gained 1.39% but short stock picks have resulted in a loss of 6.05%.
There are risks that couldn’t be avoided in trading. Hence the need for proper money management and a relatively diversified stock portfolio. This is especially important if trading on a time basis – without using stop-loss/ profit target levels. We are just buying or selling stocks at open on Wednesday and selling or buying them back at close on the next Tuesday.
If stocks were in a prolonged downtrend, being able to profit anyway, would be extremely valuable. Of course, it’s not the point of our Stock Pick Updates to forecast where the general stock market is likely to move, but rather to provide you with stocks that are likely to generate profits regardless of what the S&P does.
This means that our overall stock-picking performance can be summarized on the chart below. The assumptions are: starting with $100k, no leverage used. The data before Dec 24, 2019 comes from our internal tests and data after that can be verified by individual Stock Pick Updates posted on our website.
Below we include statistics and the details of our three recent updates:
November 10, 2020
Long Picks (November 4 open – November 10 close % change): PEG (+2.17%), IFF (+4.81%), LMT (+0.06%), CSCO (+4.56%), PHM (-4.68%) Short Picks (November 4 open – November 10 close % change): ADI (+10.12%), APTV (+7.60%), CBRE (+9.51%), WEC (+1.03%), FMC (+1.98%)
Average long result: +1.39%, average short result: -6.05%
Total profit (average): -2.33%
November 3, 2020
Long Picks (October 28 open – November 3 close % change): D (+2.09%), FB (-4.84%), WYNN (+5.46%), BKR (+15.24%), ARE (+1.53%) Short Picks (October 28 open – November 3 close % change): PXD (+1.27%), DRE (+8.66%), ITW (+7.09%), CMS (+0.72%), CMCSA (-0.63%)
Average long result: +3.90%, average short result: -3.42%
Total profit (average): +0.24%
October 27, 2020
Long Picks (October 21 open – October 27 close % change): PPL (+1.96%), WDC (-3.40%), WYNN (-0.25%), XOM (-2.06%), LIN (-3.02%) Short Picks (October 21 open – October 27 close % change): WMB (-1.12%), SHW (-0.23%), TROW (-2.61%), WEC (+1.63%), NVDA (-1.68%)
Average long result: -1.35%, average short result: +0.80%
Total profit (average): -0.27%
Let’s check which stocks could magnify S&P’s gains in case it rallies, and which stocks would be likely to decline the most if S&P plunges. Here are our stock picks for the Wednesday, November 11 – Tuesday, November 17 period.
We will assume the following: the stocks will be bought or sold short on the opening of today’s trading session (November 11) and sold or bought back on the closing of the next Tuesday’s trading session (November 17).
We will provide stock trading ideas based on our in-depth technical and fundamental analysis, but since the main point of this publication is to provide the top 5 long and top 5 short candidates (our opinion, not an investment advice) for this week, we will focus solely on the technicals. The latter are simply more useful in case of short-term trades.
First, we will take a look at the recent performance by sector. It may show us which sector is likely to perform best in the near future and which sector is likely to lag. Then, we will select our buy and sell stock picks.
There are eleven stock market sectors: Energy, Materials, Industrials, Consumer Discretionary, Consumer Staples, Health Care, Financials, Technology, Communications Services, Utilities and Real Estate. They are further divided into industries, but we will just stick with these main sectors of the stock market.
We will analyze them and their relative performance by looking at the Select Sector SPDR ETF’s .
Based on the above, we decided to choose our stock picks for the next week. We will choose our top 3 long and top 3 short candidates using trend-following approach, and top 2 long and top 2 short candidates using contrarian approach:
buys: 1 x Energy, 1 x Financials, 1 x Materials
sells: 1 x Real Estate, 1 x Consumer Discretionary, 1 x Technology
Contrarian approach (betting against the recent trend):
Stock broke above downward trend line, possible uptrend continuation
The resistance level is at $114
The support level is at $104
Summing up , the Energy, Financials and Materials sectors were relatively the strongest in the last 30 days. So that part of our ten long and short stock picks is meant to outperform in the coming days if the broad stock market acts similarly as it did before.
We hope you enjoyed reading the above free analysis, and we encourage you to read today’s Stock Pick Update. There’s no risk in subscribing right away, because there’s a 30-day money back guarantee for all our products, so we encourage you to subscribe today .
Stock Trading Strategist
Sunshine Profits – Effective Investments through Diligence and Care
* * * * *
All essays, research and information found above represent analyses and opinions of Paul Rejczak and Sunshine Profits’ associates only. As such, it may prove wrong and be a 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, Paul Rejczak 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. Rejczak is not a Registered Securities Advisor. By reading Paul Rejczak’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. Paul Rejczak, 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.
Investors also appeared to be unconcerned that the vaccine prompted some side effects in these early stage trials, however Asia markets were slightly more mixed with the Bank of Japan leaving rates unchanged.
The Nikkei225, and Korean markets pushed higher, however Chinese and Hong Kong markets slid back in the wake of President Trump signing the legislation revoking Hong Kong’s special trade status.
Markets here in Europe have taken their cues from the late rally in the US, opening higher as the tug of war between the bulls and the bears continues with respect to the next significant move.
The DAX is once again trading back close to the highs we saw in early June, while the FTSE100 is once again back above the 6,200 level, having been in a fairly broad 6,000/6,400 range for the past four weeks.
Luxury fashion retailer Burberry has had to contend with a number of challenges over the last 12 months, from the disruption of its Hong Kong business as well as the fallout from weaker Chinese demand and the spread of coronavirus. In May the company reported full-year numbers that saw operating profits slide 57% to £189m Revenues were hit hard by the costs of the disruptions in Hong Kong as well as the closure of various stores due to coronavirus pushing their impairments up to £245m.
This morning’s Q1 numbers are slightly better, with Q1 sales declining 45% while Q2 sales are expected to fall by between 15% and 20%. Retail revenue almost halved from £498m to £257m. This is a little disappointing but not altogether surprising, and given recent news of further restrictions in Hong Kong, could be viewed as being on the optimistic side, which probably helps explain why the shares are lower in early trade.
The improvement in Q1 is mainly down to stores in mainland China and Korea re-opening, however given the recent challenges posed by coronavirus, management appear to be looking towards making some savings in the way the business is run by introducing some changes, taking a restructuring charge of £45m.
Some of these changes, as well as some office space rationalisation could mean a reduction in headcount at its London Head Office, delivering annual savings of £55m.
Electrical retailer Dixons Carphone reported its latest full year numbers, which saw revenues come in around 1% above expectations, at £10.17bn, and down 3% on 2019 levels.
The company posted a loss after tax of £163m, largely down to the impact of Covid-19, which impacted the UK and Ireland mobile operations causing revenues to fall 20%. This was primarily down to the closure of stores at the end of March. All other areas of the business saw revenues increase over the period. While losses have reduced, and the outlook set to remain uncertain, the shares have slipped sharply in early trade, however all other areas of the business performed quite well, which suggests that investors might be overreacting to the losses in the mobile division, which Dixons is pulling away from in any case.
Fast fashion retailer ASOS latest update for the four months to the end of June, has seen the shares push back up towards this year’s high on expectations that profits are likely to be at the upper end of forecasts. Group sales saw an increase of 10% to just over £1bn for the period, with the customer base seeing a rise of 16%. Most of the sales growth came in its EU market, with a rise in sales of 22%. Gross margins were lower to the tune of 70bps, a trend that seems likely to continue given the current environment.
In a sign that fashion companies are becoming increasingly nervous about their brand reputation, ASOS also announced that they were axing contracts to suppliers who were found to be in breach health and safety, as well as workers’ rights regulations.
Homeware retailer Dunelm Group was one of the few success stories in UK retail last year, with the company posting strong operating profits and paying a special dividend. We are unlikely to see anything like that this year. The company closed all of its stores on the 24th March, furloughing employees under the governments job retention scheme, at a cost of £14.5m, and has slowly been reopening the business since late April, when it reopened its on line operations. At the time it said it had enough capital to withstand store closures of up to six months.
Fortunately, that hasn’t come to pass, and the company never had to draw on its £175m financing facilities. All of its stores have now re-opened, with one-way systems and strict social distancing guidelines in place. The in-store coffee shops are expected to reopen by the end of July, while the share price has managed to recover most of its losses for this year. This morning’s Q4 update, has seen total sales for the quarter decline by 28.6%. Online sales more than made up for that with a rise of 105.6% year on year, with the month of May seeing a 141% increase.
In terms of the full year numbers, sales were only down 3.9% on the prior year at £1.06bn, with profits before tax expected to be in the range of £105m to £110m, down from £125.9m the previous year, which given the disruption over the last few months is a pretty decent performance.
In terms of the future, costs are expected to increase to the region of £150k per week, however given how badly coronavirus has affected other retailers, Dunelm has ridden out the storm remarkably well.
The pound is holding up well after a weak session yesterday with the latest inflation numbers showing a modest uptick in June to 0.6%, with core prices rising 1.4%, from 1.2% in May.
Crude oil prices are a touch higher this morning ahead of an online meeting of OPEC+ monitoring committee which could decide whether the group is inclined to maintain the production cuts currently in place, which are due to expire at the end of this month.
US markets look set to open higher, building on the momentum seen in the leadup to last nights close, with the focus once again back on the latest bank earnings numbers for Q2.
Having seen JPMorgan, Citigroup and Wells Fargo collectively set aside another $28bn in respect of non-performing loans yesterday, that number is set to increase further when the likes of Bank of America, Goldman Sachs and Bank of New York Mellon report their latest Q2 numbers later today.
In Q1 US banks set aside $25bn in respect of credit provisions, and the key takeaway from yesterday was that while these banks trading divisions were doing well, their retail operations were starting to creak alarmingly. This is why Wells Fargo suffered its worst year since 2008, given that it lacks an investment banking arm, and could well see the bank embark on some significant cost saving measures over the course of the next few months.
The difference between Wells Fargo and JPMorgan’s numbers couldn’t have been starker, with Wall Street trading operations doing well, while Main Street painted a picture of creaking consumer finances.
Dow Jones is expected to open 190 points higher at 26,832
S&P500 is expected to open 15 points higher at 3,212
The Market Ignores New Virus Containment Measures And Continued Deterioration In U.S. – China Relations
S&P 500 futures are mixed in premarket trading despite California’s decision to introduce new virus containment measures and additional deterioration in U.S. – China relations.
Facing a surge in the number of new coronavirus cases, California decided to shut bars and close indoor dining. In addition, the hardest-hit counties will have to close gyms, hair salons and churches.
Yesterday, this decision led to a massive reversal of S&P 500 during the trading session but this sell-off did not get any continuation.
Meanwhile, U.S. – China relations got a fresh blow after U.S. rejected China’s claims in the South China Sea, calling them “unlawful”. At this point, the market continues to ignore risks of a new round of U.S. – China trade war.
Citigroup, JPMorgan and Wells Fargo Open The Earnings Season For Banks
Banks’ earnings are the main reason for market optimism this morning. Citigroup, JPMorgan and Wells Fargo have just provided their second-quarter reports.
JPMorgan reported earnings of $1.38 per share and increased its reserves by $8.81 billion. Analysts expected earnings of $1.23 per share.
Citigroup’s earnings were much better than expected at $0.50 per share compared to analyst consensus of $0.27 per share. Not surprisingly, Citigroup increased its reserves by $5.6 billion.
Wells Fargo reported a loss of $0.66 per share which was worse than the analyst consensus which called for a loss of $0.10 per share. The bank had to increase its reserves by $8.4 billion. In addition, Wells Fargo decided to cut its dividend by as much as 80%.
Citigroup and JPMorgan shares are up in premarket trading while Wells Fargo is under pressure which is not surprising given the massive dividend cut. The huge increase in reserves was expected given the current market situation. In my opinion, it’s a good start for the earnings season as stronger banks easily exceeded analyst expectations.
Inflation Rate Gets Back To The Positive Territory
The U.S. has just provided Inflation Rate and Core Inflation Rate reports for June. Inflation Rate increased by 0.6% month-over month in June compared to a decrease of 0.1% in May. On a year-over-year basis, Inflation Rate was also 0.6%.
Core Inflation Rate grew by 0.2% month-over-month. On a year-over-year basis, Core Inflation Rate increased by 1.2%.
Both Inflation Rate and Core Inflation Rate were a bit higher than expected which shows that customer activity has likely started to rebound in June.
It’s a bumper week for US bank results, with Bank of America, Citigroup, Goldman Sachs, JPMorgan Chase and Wells Fargo all revealing how they fared in Q2. These results are likely to be closely scrutinised for further evidence that US banking chiefs are concerned about setting aside higher provisions in respect of large-scale loan losses, after the $25bn set aside at the end of Q1.
The impact on the US, UK and European banking sectors has been fairly similar in terms of share price performance, with banks a serial drag on all of the major indices. The S&P 500 is now back to slightly negative year-to-date, while the CMC Markets US Banks share basket is down 35%.
CMC bank baskets sector comparison (2020)
One shouldn’t read too much into this similar performance given that US banks have come down from a much higher baseline. But the declines do highlight where the pressures lie when it comes to the weak points in the global economy, as rising unemployment puts upward pressure on possible loan default rates.
This higher baseline for US banks came about in the aftermath of the financial crisis, when US authorities took much more decisive action to shore up their banking sector in the wake of the collapse of Lehman.
The thought process as the crisis was unfolding was that capitalism needed to take its course in allowing both Bear Stearns, as well as Lehman, to collapse in order to make the point that no one institution was too big to fail. It’s certainly a sound premise, and in most cases allowing a failing business to fold wouldn’t have too many long-term consequences.
Unfortunately, due to the complex nature of some the financial instruments designed by bankers and portfolio managers, it was a premise that was destined to fail. Its failure still scars policymakers’ reaction function when they make policy decisions today.
It soon became apparent in the fall of Lehman, that allowing one big player to fail caused widespread panic in the viability of almost every other financial institution. Like pulling one Jenga block out of a tower of financial complexity, it undermined the stability of the entire construct.
Some institutions continue to be too big to fail, as well as being too big to bail out, meaning that global policymakers only have the tools of annual stress tests to ensure that these institutions have the necessary capital buffers to withstand a huge economic shock.
Since those turbulent times when US authorities forced all US banks to clean up their balance sheets, by insisting they took troubled asset relief program (TARP) money, whether they needed to or not, the US banking sector has managed to put aside most of its problems from the financial crisis.
As can be seen from the graph below, the outperformance in US banks has been remarkable. However a lot of these gains were juiced by share buybacks, as well as the tailwind of a normalised monetary policy from the US Federal Reserve from 2016 onwards, and a US economic recovery that peaked at the beginning of 2019.
US banks’ share price performance
It should also be noted that while Bank of America has been by far the largest winner, it was also one of the biggest losers in 2008, due to its disastrous decision to purchase Countrywide. The deal prompted the Bank of America share price to plunge from levels above $50 a share to as low as $3 a share, costing the bank billions in losses, fines and aggravation.
UK and European banks shares in similar plight
UK authorities have also gone some way to improving the resilience of its own banking sector, though unlike the US, we do still have one big UK bank in the hands of the taxpayer, in the form of Royal Bank of Scotland. Others have been left to fend for the scraps in fairly low-margin banking services of mortgages, loans and credit cards.
UK banks’ trading operations were also curtailed sharply in the wake of the financial crisis, in the mistaken belief that it was so-called ‘casino’ investment banking that caused the crisis, rather than the financial ‘jiggery-pokery’ of the packaging and repackaging of CDOs of mortgages and other risky debt.
In Europe, authorities have made even fewer strides in implementing the necessary processes to improve resilience. The end result is that the banking sector in the euro area is sitting on very unstable foundations, with trillions of euros of non-performing loans, and several banks in the region just one large economic shock away from a possible collapse.
The current state of the banking sector
While we’ve seen equity markets remain fairly resilient in the face of the massive disruption caused by the coronavirus pandemic, the same cannot be said for the banking sector, which has seen its share prices sink this year.
Nowhere is that better illustrated than through our banking share baskets over the last 15 months.
Banking sector vs US SPX 500 comparison
Despite their fairly lofty valuations, the share price losses for US banks have seen a much better recovery from the March lows than has been the case for its UK and European counterparts.
This has probably been as a result of recent optimism over the rebound in US economic data, although the recovery also needs to be set into the context of the wider picture that US banks are well above their post-financial-crisis lows, whereas their European and UK counterparts are not.
Another reason for this outperformance on the part of US banks (black line) is they still, just about, operate in a largely positive interest rate environment, and also have large fixed income and trading operations, which are able to supplement the tighter margins of general retail banking. They have also taken more aggressive steps to bolster their balance sheets against significant levels of loan defaults.
In Q1, JPMorgan set aside $8bn in respect of loan loss provisions in its latest numbers, while Wells Fargo set aside $4bn. Bank of America has set aside $3.6bn, while Citigroup has set aside an extra $5bn. Goldman Sachs also had a difficult first quarter, largely down to setting aside $1bn to offset losses on debt and equity investments.
With New York at the epicentre of the early coronavirus outbreak, Bank of New York Mellon’s loan loss provision also saw a big jump, up from $7m a year ago to $169m. Morgan Stanley completed the pain train for US banks, with loan loss provisions of $388m for Q1, bringing the total to around $25bn.
What to look out for as US banks report Q2 figures
As we look ahead to the US banks Q2 earnings numbers, investors will be looking to see whether these key US bellwethers set aside further provisions in the face of the big spikes seen in unemployment, and the rising number of Covid-19 cases across the country.
Another plus point for US banks will be the fees they received for processing the paycheck protection program for US businesses. It’s being estimated that US banks that are part of the scheme have made up to $24bn in fees, despite bearing none of the risk in passing the funds on from the small business administration.
In the aftermath of the lockdowns imposed on the various economies across Europe, the Eurostoxx banking index hit a record low of 48.15, breaking below its previous record low of 72.00 set in 2012 at the height of the eurozone crisis. It’s notable that UK banks have also underperformed, though it shouldn’t be given the Bank of England’s refusal to rule out negative rates, which has helped push down and flatten the yield curve further.
This refusal further suppressed UK gilt yields, pushing both the two-year and five-year yield into negative territory, and eroding the ability of banks to generate a return in their everyday retail operations.
It’s becoming slowly understood that negative rates have the capacity to do enormous damage to not only a bank’s overall probability, but there is also little evidence that they can stimulate demand. If they did, Japan, Switzerland and Europe would be booming, which isn’t the case.