Bank of America Firing on All Cylinders Ahead of Earnings

Bank of America Corp. (BAC) is testing March’s 13-year high near 40, thanks to the relentless rise in interest rates, and is well-positioned for additional gains following next week’s Q1 2021 earnings release. Investors have taken note, lifting accumulation readings to the highest highs of the century, confirming renewed optimism that could finally signal a successful assault on 2006’s all-time high in the mid-50s.

Infrastructure Investment Paying Off

The Federal Reserve added to positive sentiment in March, announcing that all restrictions on bank dividends and share repurchases will end for most firms after June 30. The central bank allowed limited dividends and buybacks in the first quarter as part of the recovery from 2020’s pandemic-driven system shock. Banks have built a sizable cash hoard in the improving economic conditions and could deploy that capital aggressively when the last chains come off.

CEO Brain Moynihan outlined growing tailwinds in a recent interview, noting “The key is we’ve been able to invest $3.5 billion a year in technology. We’ve been able to open up branches in many new cities. We’ve been able to raise minimum wages, while we’ve kept expenses down. Now that’s the magic in a franchise, so when rates rise, which they will at some point—and when they did in ’16 and ’17—the earnings rise sharply, because we have no more expenses to deploy and all the revenue that comes in from the deposit base.”

Wall Street and Technical Outlook

Wall Street consensus stands at an ‘Overweight’ rating based upon 15 ‘Buy’, 3 ‘Overweight’, and 9 ‘Hold’ recommendations. One analyst now recommends that shareholders close positions and move to the sidelines. Price targets currently range from a low of $30 to a Street-high $45 while the stock closed Friday’s session less than $2 above the median $38 target. Look for ratings and targets to go higher if Bank of America posts strong first quarter results.

The stock fell to a 26-year low in 2009 and turned higher into the new decade, stalling in the upper teens in 2010. It finally cleared that resistance level after the 2016 presidential election, stalling at the .618 Fibonacci retracement of the 2006 to 2009 decline in October 2019. The March 2020 selloff printed the third higher low since 2009, yielding a breakout that’s now targeting the .786 retracement in the low to mid-40s.

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. 

Goldman Sachs Surges After Surprise Fed Decision

Shares in Goldman Sachs Group, Inc. (GS) gained over 6% Monday, leading banking stocks higher after the Federal Reserve gave bank buybacks the greenlight from as early as next month after major players in the group passed a range of specifically designed coronavirus stress tests. The surprise decision reverses the central bank’s halt on buybacks that has been in place since June to ensure lenders had sufficient balance sheet strength to survive the pandemic ravaged economy.

Under the Fed’s new rule, banks’ total capital distribution, which includes buybacks and dividends, will be limited to 100% of average quarterly net income over the four most recent quarters. After the announcement, Goldman said it plans to recommence its share repurchase program in the first quarter of 2021. This year, the New York-based investment bank has bought back $1.93 billion of its shares, compared to buying back $5.34 billion in 2019.

Through Monday’s close, Goldman Sachs stock has a market capitalization of $88.42 billion, offers a 2.1% dividend yield, and trades 15.06% higher over the last month. Year to date (YTD), the shares have added around 12%. From a valuation standpoint, the stock trades at just over 10 times projected earnings, roughly in-line with its five-year average multiple.

Wall Street View

Morgan Stanley analyst Betsy Graseck believes Goldman has the most to gain from the Fed’s buyback reversal decision due to the substantial revenue it has generated from trading in the trailing four quarters.

Even before yesterday’s announcement, other sell-side firms on the Street were mostly bullish about the bank’s prospects. It receives 16 ‘Buy’ ratings, 9 ‘Hold’ ratings, and just 1 ‘Sell’ recommendation. Price targets range from as high as $407 to as low as $200. Monday’s $256.98 close sits 6.5% below Wall Street’s 12-month median price target of $273.75.

Technical Outlook and Trading Tactics

Goldman shares broke out to a multiyear high on above-average volume Monday, which may lead to further momentum-based buying in subsequent trading sessions. Furthermore, the bullish move received confirmation from a cross of the moving average convergence divergence (MACD) indicator back above its signal line.

Active traders could play the breakout by using a trailing bar stop to let profits run. To do this, remain in the position until the price closes beneath the current day’s low or the previous day’s low, whichever is lower. For example, place an initial stop-loss order under Friday’s low at $240.56.

For a look at today’s earnings schedule, check out our earnings calendar.

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.

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.

 

Corona Virus Dropping more than Bodies – Interest Rates under a Global Pandemic

Low Interests Rates Are Propping Up The Global Economy

With central bankers cutting their prime interest rates to 0.0% or near 0.0%, investors are right to worry. The main concern is that the economic outlook is getting worse and the central banks may not be able to do anything about it.

The problem is that the major world powers already had low-interest rates. The U.S., the EU, Japan, the UK, and Australia are only the tip of the iceberg, low-interest rates were a common theme among most of the world’s central banks.

The central banks have been holding their key rates at or near historic lows for the last decade in an effort to spur global recovery. The reason is simple, the global economy took a long time to get back on its feet after the 2008 Global Financial Crisis and the footing was shaky.

The U.S. led the charge when it came to normalizing interest rates. After holding rates steady at 0%-to-0.25% for eight years the FOMC began hiking rates in 2015. After 9 incremental 0.25% adjustments, the rate topped out at 2.5%.

Since then, the FOMC made three “mid-cycle” adjustments in response to the trade war that put the benchmark at 1.75%. To put that in perspective, the high rate leading into the 2008 financial crisis was 5.25%. Since then, rates haven’t recovered half that ground leaving the FOMC without much ammo to fight future battles.

Other central banks were in the same boat or worse. The Bank of England was one of the last to cut rates to zero following the 2008 financial crisis, holding out until 2016, but in the end, did so. Since then, due to signs of economic recovery, they too have been hiking rates. The BoE’s top rate hit 0.75% in 2018 and was held at that rate into 2019. The Bank of Japan and European Central Bank were the worst off. Both of these institutions have held their rates at negative levels for several years.

The Best Medicine For Coronavirus? Fiscal Stimulus

The biggest risk to the world from the coronavirus is its impact on the economy. The virus is a threat to health, I’m not discounting its danger, but it’s little more than a cold in most cases. The problem is that everyone is going to get sick, sooner or later, and world governments are trying to slow the spread. This means disruptions to activity, hiccups in supply chains, business closures, loss of revenue, and a growing potential for a deep, worldwide financial recession.

The central bankers’ best means of fighting economic weakness is with monetary stimulus. Monetary stimulus means, in virtually all cases, lower interest rates. Lower interest rates make it easier for businesses to borrow money they need to get through periods of crisis. The trouble now is that the only central banks with ammo to fire used it up in a preemptive attack.

The FOMC made two emergency cuts, the BoE, Bank of Korea, Reserve Bank of Australia, and others at least one putting the world’s benchmark lending rates at 0%. If the economic fallout from the virus worsens there is little left for the central banks to do.

These Sectors Are Hurt The Worst

While all S&P 500 sectors are feeling pain from the coronavirus, there are several taking the direct force of the blow. The worst sectors are travel, leisure, and hospitality. The spreading virus has shut down travel and recreation on a global scale. The flights that are still allowed are virtually empty because no one wants to put themselves at risk. Likewise, casinos, resorts, and amusement parks are shutting down to prevent large crowds from gathering.

Most businesses have yet to quantify the amount of damages they will incur because the virus outcome is still an unknown quantity. Travel and leisure may be shut down for a month or they may be shut down for the rest of the year, we just don’t know and the potential for spillover into other sectors is huge. That said, a few companies have issued guidance that helps put the potential for loss in perspective.

Apple was the first major company to issue a guidance revision. The consumer tech giant is heavily dependent on China for its supply chain and said the epidemic would impact revenue as much as 10%, and that was before it spread globally. Since then, the company has had to close all stores outside of China which is another big blow to Q1 revenue.

Airliner United Airlines has come out with its own dire prediction. United Airlines executives see March revenue falling and that is just the beginning. Because of an expected downtick in traffic, they are cutting capacity by 50% for the next two months. They expect, assuming there is no flying ban, for capacity cuts to linger into the summer months. Basically, the economic impact will be severe and could last four to six months if not longer.

The Economic Impact Could Be Huge

With the world preparing to shut-down in an effort to stop the spread of the virus it is certain activity is slowing. The question is how much? Some industries are hurting, and badly, but others are not.

While shoppers shun public places, avoid large gatherings, and cancel plans for travel they are gearing up for an extended stay at home. This means increased spending on staples and health items that have retailers scrambling to fill shelves. Kroger and Amazon have both announced hiring plans to meet the demand and they are not the only ones.

Bloomberg did a study on the potential impact of the virus using four models. The worst-case scenario has a total impact on global economies at $2.7 trillion or roughly the annual output of the United Kingdom. This scenario is when the virus causes more than just localized disruptions, a point the world is on the verge of crossing.

Some sources estimate the impact has already caused world GDP to contract although the data is limited. The news we get from China is the most current there is and it isn’t promising. The PMI figures show a severe contraction in manufacturing and services activity that is scary if it becomes the global norm. GDP estimates vary widely but include the chance of 0% growth for China in the 1st quarter.

Contrary to China, data from the U.S. shows the economy not only expanding but accelerating in the first two months of the year. The Atlanta Fed’s GDPNow Tool is tracking at 2.9% for the first quarter and only fell 0.10% since peaking in late February. It is clear the U.S. economy was on solid footing before the virus, so the shock might not be as bad as feared for China. If the economic stimulus provided by the world’s central banks can sustain consumer spending the economy should rebound quickly.

The risk for most countries and the U.S. is not immune, it is not acting quickly enough. Delayed response or one not coordinated on a national scale will test the healthcare system and economic resilience of any nation. Prevention and slowing the spread is the key to ending the epidemic and paving the way for an economic rebound.

Low Rates Won’t Make Much Difference By Themselves

Lower interest rates won’t make much difference by themselves. Because most economic activity is driven by consumption and the consumers are home hiding from the virus, it’s them, the consumers, that need to be stimulated.

Low-interest rates will make it easier to borrow, many homeowners will get lower mortgage payments with a refi, but the positive impact will be small and long in coming. Low rates are good, they will help when the economy starts to rebound, but there are other fiscal weapons lawmakers can use with quicker results.

You can see proof of this in the charts. The FOMC lowered rates not once but twice and dramatically both times and was unable to stop the equity market from selling off. Even a $1 trillion spending package from Congress wasn’t enough to curb the selling.

How The Market Should Handle This Outbreak And Prepare For Future Outbreaks

This outbreak is the worst we’ve seen that I can remember but even so, we will get through it and with lessons learned. The first is that action needs to be taken quicker. No matter how innocuous a new sickness may seem it can’t be stopped after it’s let loose on the world.

Travel restrictions may have seemed like an overreaction two months ago but look where we are now. Cruise ships can’t operate, travel is severely curtailed, schools are closed, and I write this article with a kitchen stocked for a month-long stay at home.

Investors should prepare for future outbreaks like this by hoarding cash. Stocks are trading at their cheapest levels in over a decade and ripe for the taking but you can’t buy any if you don’t have cash.

Eventually, the virus will pass and the economy will get back on its feet. When that happens all these cheap stocks will become valuable again and make millionaires out of anyone brave enough to buy.

Black Hole In Global Banking Is Being Exposed

When we add the shadow/gray market banking risks into this equation and begin to understand the complexity of commodity-backed or Purchase Order backed financing that has become commonplace throughout the planet, we have to ask ourselves one question – “what would it take for these risks to become another crisis?”

DEUTSCHE BANK MASSIVE EXPOSURE COULD CRIPPLE EUROPE

A recent article we found on ZeroHedge highlights the risk exposure from Deutsche Bank and how that derivatives/banking risk could spill over into another global financial market crisis again.

The ZeroHedge article stated that Deutsche Bank has $49 trillion dollars in derivatives exposure, making it the single greatest danger to Europe and global financial institutions imaginable at this time.

FEDERAL RESERVE BANK DATA IS A WARNING SIGN

Ok, now take a look at these graphs from the Federal Reserve Bank of St. Louis to see the data that is currently being reported.

Net US Acquisitions of non-derivatives assets have been relatively tame over the past 6+ years.  We can see from this chart the continued acquisition of assets from 2002 through 2007-08 – just before the credit crisis event.  Then, we can see how dramatically the assets were dumped between 2007 and 2009.  We’re not seeing that type of setup or event play out currently in the US.

This next chart highlights the US financial derivatives net position and we can see the peak in 2008-09 and the dramatic deleveraging that has taken place over the past 8+ years.  This chart shows the US financial derivatives levels are less than 25% of the levels from the start of 2008. ($31B vs $125B).

This last chart highlights the fact that US investors and institutions have been deleveraging from derivatives recently – as shown by the net negative transactions data on this chart.  This suggests that investors are worried about the future and have been attempting to remove risk from their investments since the peak in early 2018.  Notice similar net transaction declines in 2014-15 and 2009-10.

We believe the dips in these assets are related to US Quantitative Easing actions and investor concerns regarding the elimination of easy money policies.  We will take a look at when and how these correlations to risk aversion and QE actually take place in Part II.

In the second part of this article, we’ll explore how the US economy, US Fed and global banking sector could be complicating this derivative risk exposure and how traders need to prepare for this event – if it takes place as we suspect.

CONCLUDING THOUGHTS:

In short, you should be starting to get a feel of where stocks are headed along with precious metals for the next 8-24 months. The next step is knowing when and what to buy and sell as these turning points take place, and this is the hard part. If you want someone to guide you through the next 12-24 months complete with detailed market analysis and trade alerts (entry, targets and exit price levels) join my ETF Trading Newsletter.

This bear market has been a long time coming, but finally, almost all the signs are showing that it’s about to start. As a technical analyst since 1997 having lost a fortune and made fortunes from bull and bear markets I have a good understanding of how to best attack the market during its various stages.

Chris Vermeulen 
www.TheTechnicalTraders.com

This Is What You Need To Know About Digital-Only Banking

Digital-Only Banking Is A Growing Industry

Digital-only banking is a growing wave of consumer-oriented banking institutions focused on serving their clientele exclusively through online means. Imagine, a bank you never have to visit, lines you never have to wait in, and no hassles with onerous paperwork and cumbersome cash.

In many cases, all it takes to open an account with a digital-only bank is an application and few verification documents. Documents include simple items like scans of ID cards and copies of bills whose account holder and address match the one on the account. A few of the benefits include, but are not limited to;

  • Easy sign-up
  • Quick balance check features through mobile platforms
  • Photo-bill payments, snap a pic and the app pays your bill from your account.
  • Access accounts exclusively through app, reset pins, order cards, etc.
  • Easy expense management, through different hashtags like #expenses, #utilities and other spendings.
  • Real-time data analytics

One of the aspects digital-only banks are focusing on is real-time data analytics. This will allow banking apps to warn users when purchases or spending habits are outside their budget or notify them when geo-targeted deals are available. In fact, it is the convenience and customer experience that are driving so many Millennials to the digital-only banking sector. When they get there the speed of transactions and cost-effective fee structures make them want to stay.

On the business end, the new-age of digital-only banks are more agile than their brick-and-mortar counterparts. They are virtually 100% cloud-based business leveraging the expertise of cutting edge digital networks rather than relying on stand-alone and often obsolete on-premise technology. Along with this, many of the leading digital-only banks are partnering with block-chain technology like Ripple, Ethereum, and Bitcoin payment services.

Cloud-based infrastructure and lower operating costs (no physical presence means less cost) lead to a combined benefit for the bankers and the clientele. Banks can charge lower fees, one of their attractions, and make more money per client. The downside, for clients and banks, is that services are limited to simple banking like checking/debit and savings accounts.

There Is Cause For Concern

While digital-only banking offers many benefits to consumers and bankers there are still some risks and causes for concern. The leading risks are threefold; security, customer satisfaction, and scalability.

Security at digital-only banks is the primary concern and there are risks for both bankers and clients. The bankers have to be wary of hacking, fraud, malpractice, and regulatory concerns. Clients need to be wary of all the same concerns, and the bankers too.

Financial fraud is the #1 Internet crime worldwide and one very easy to perpetrate. Prospective users of digital-only banks are urged to use extreme caution when choosing an institution. Don’t take the word of a website that it is regulated or trustworthy, always check with local banking authorities to be sure your digital bank is legit.

Customer satisfaction is also a concern and doubly so because it is tied to one of digital-banking’s biggest attraction’s; no physical locations. Without a physical location, there is nowhere for the customer to turn for help other than the apps, maybe a phone call, and that is a turn-off for many people. In addition, digital-only banks have a harder time making connections with clients so that is a top priority. The problem is that there is little a digital bank can do other than what’s already been done.

The final hurdle and the one that may keep digital banking at a small scale is scalability. The digital-only banking sector is hampered by its limited product offering and this, in turn, is hurting customer growth and retention.

How Many Digital-Only Banks Are There

There are more than enough digital banks on the market to serve the needs of consumers. A quick search of the Internet will turn up at least two dozen top-rated financial institutions with no link to the traditional brick-and-mortar banking system.

Digital-Only Banking, On The Rise But Still Just A Niche Market

Digital-only banking is convenient, it is cheaper, and it is gaining traction among global consumers. Digital-banking is also shackled by a number of factors that will keep it a niche market, at least for now. Over time, the leading digital-banking institutions will overcome the problems of security and customer satisfaction and that will lead to better scalability. Until then, traders, investors, and clients of digital banks need to be prepared for volatility and churn as the market matures.

There are several directions the digital banks can take to help expand their numbers of clients. One direction is cryptocurrency. Digital banks are already partnering with prominent block-chain technologies to power their function, it is only natural for these institutions to list the tokens that underlie the block-chains as well. In that light, it is also natural for the digital banks to expand their services in other directions including loans and other financial products.

This Is The Future Of Digital-Only Banking

Regardless of the path to growth, digital banks are going to have to work hard to cement their place in the financial landscape. They need to find a way to secure their place in the financial landscape or else run the risk of obsolescence, ironic as that is.

The outcome, for the consumer, is likely to a blend of digital and traditional banking. The two will work hand in hand to provide financial products, access to markets, and account services across the spectrum of fiat and cryptocurrency.

Imagine, shifting some money from a traditional bank to a digital bank for use on a trip. The digital bank can exchange your money into any currency you need, for access on your ATM card. The ATM card is accepted everywhere in the world because it is backed by block-chain and local currency. How easy is that?