2022 Financials Outlook

2021 Tailwinds

The big banks have benefited from a confluence of a rising interest rate environment, post-pandemic economic rebound, financially strong balance sheets, a robust housing market, and the easy passage of annual stress tests. Earnings season kicks off in January for all the major financials. The most recent earnings reports from the core financials such as Bank of America (BAC), JPMorgan Chase (JPM), and Goldman Sachs (GS) all reported very strong quarters with stock prices breaking out to all-time highs prior to the Q4 overall market turbulence. The biggest banks, by assets, posted profit and revenue that beat expectations. These results came on the heels of booming Wall Street deals and the release of funds previously earmarked for pandemic-related defaults. The big bank cohort is in a sweet spot of a post-pandemic consumer, with rising rates and balance sheets to support expanded share buybacks and dividend increases. These stocks are inexpensive and stand to capitalize on all these tailwinds heading into 2022.

Resilient Consumer

The pandemic has been going on for two-plus years, and the big banks have navigated the coronavirus volatility over this stretch. Throughout the rolling pandemic, the consumer has been resilient, and the potential worst-case financial downsides did not materialize (i.e., massive loan defaults). In addition, the consumer has been strong in retail, housing, autos and the overall holiday spending was robust.

Bank of America CEO Brian Moynihan stated that whether it was a return to loan growth, credit-card signups, or economic indicators like unemployment levels, the company was back in expansion mode. "The pre-pandemic, organic growth machine has kicked back in," "You see that this quarter, and it's evident across all our lines of business." Loan balances at BAC increased 9% on an annualized basis from the second quarter, driven by strength in commercial loans, the company said. Continue reading "2022 Financials Outlook"

Big Banks - Rising Rates And Earnings Synergy

Stellar Earnings

The big bank cohort reported stellar earnings across the board and set the stage for earnings season while sparking a broad rally across the indices. The big banks have benefited from a confluence of impending rising rates, post-pandemic economic rebound, financially strong balance sheets, a robust housing market, and the easy passage of annual stress tests. The most recent earnings reports confirm this secular thesis as Bank of America (BAC), JPMorgan Chase (JPM), and Goldman Sachs (GS) all reported very strong quarters, with stock prices nearing all-time highs. The big bank cohort is in a sweet spot of a post-pandemic consumer, rising rates and balance sheets to support expanded share buybacks and dividend increases. These stocks are inexpensive and stand to capitalize on all these tailwinds over the long term.

A Healthy Consumer

The big banks are already transitioning beyond the pandemic based on the results and commentary from the collective companies’ top executives during their respective Q3 earnings. The six biggest banks by assets posted profit and revenue that beat expectations. These results came on the heels of booming Wall Street deals and the release of funds previously earmarked for pandemic-related defaults.

Bank of America CEO Brian Moynihan stated that whether it was a return to loan growth, credit-card signups, or economic indicators like unemployment levels, the company was back in expansion mode. “The pre-pandemic, organic growth machine has kicked back in,” “You see that this quarter, and it’s evident across all our lines of business.” The company said that loan balances at BAC increased 9% on an annualized basis from the second quarter, driven by strength in commercial loans. Continue reading "Big Banks - Rising Rates And Earnings Synergy"

Market Swoon - Deploying Capital

Market Swoon

Inflation, interest rates, employment, Fed taper, pandemic backdrop, Washington wrangling, supply chain disruptions, slowing growth, and the seasonally weak period for stocks are all aggregating and resulting in the current market swoon. The month of September saw a 4.8% market drawdown, breaking a seven-month winning streak. The initial portion of October was met with heavy losses as well. Many individual stocks have reached correction territory, technically a 10% drop, while the Nasdaq is also closing in on that 10% correction level. Many high-quality names are selling at deep discounts of 10%-30% off their 52-week highs. The outlook for equities remains positive after the weak September as the economy continues to move past the pandemic. During these correction/near correction periods in the market, putting cash to work in high-quality long equity is a great way to capitalize on the market weakness for long-term investors. Absent of any systemic risk, there’s a lot of appealing entry points for many large-cap names. Don’t’ be too bearish or remiss and ignore this potential buying opportunity.

Deploying Capital

For any portfolio structure, having cash on hand is essential. This cash position provides investors with flexibility and agility when faced with market corrections. Cash enables investors to be opportunistic and capitalize on stocks that have sold off and become de-risked. Initiating new positions or dollar-cost averaging in these weak periods are great long-term drivers of portfolio appreciation. Many household names such as Starbucks (SBUX), UnitedHealth (UNH), Apple (AAPL), Amazon (AMZN), Micron (MU), Adobe (ADBE), Qualcomm (QCOM), 3M (MMM), Facebook (FB), Johnson and Johnson (JNJ), Mastercard (MA), Nike (NKE), PayPal (PYPL) and FedEx (FDX) are off 10%-30% from their 52-week highs. Even the broad market indices such as Dow Jones (DIA), S&P 500 (SPY), Nasdaq (QQQ), and the Russell 2000 (IWM) are significantly off their 52-week highs. All of these are examples of potentially buying opportunities via deploying some of the cash on hand. Continue reading "Market Swoon - Deploying Capital"

Ominous Inflationary Signs Evident

Inflation Revving Up

Earnings season is getting underway, and thus far Costco (COST), Federal Express (FDX), and Nike (NKE) have warned that inflation is real and is bound to hit consumers as the holidays approach. Costco, Federal Express, and Nike are seeing rising shipping costs and supply chain disruptions that persist and should continue through the upcoming holiday season. In particular, the cost to ship containers overseas has skyrocketed over the past few months. These rising inflation expectations and the realization of these inflationary pressured could cause the Federal Reserve to change policy course sooner rather than later. It’s going to be a tug-a-war between inflation, employment, Washington wrangling, and the delta variant backdrop. CPI reports will become more significant as these readings are used to identify periods of inflation. The recent CPI readings result in a much stronger influence on the Federal Reserve’s monetary policies hence the recent taper guidance.

Real World Inflationary Commentary

Supply chain disruptions, specifically in the shipping channels, have led to rising freight costs that have escalated shipping costs dramatically. The cost to ship containers overseas has soared in recent months. A standard 40-foot container from Shanghai to New York costs about $2,000 a year and a half ago pre-pandemic. Now, it runs some $16,000, per Bank of America.

Costco CFO Richard Galanti called freight costs “permanent inflationary items” and said those increases combine with things that are “somewhat permanent” to drive up pressure. They include freight and higher labor costs, rising demand for transportation and products, shortages in computer chips, oils, and chemicals, and higher commodity prices. Continue reading "Ominous Inflationary Signs Evident"

How To Trade Apple's Earnings Today

After the close of business today Apple, Inc. (NASDAQ:AAPL) will report its fourth quarter earnings. I thought it would be interesting to go back and look at the last three years to see how you would have done if you just used this simple trade strategy.

The premise is simple, when both the weekly and monthly Trade Triangles are in sync, i.e. when they are both in the same direction, you would take a position on the close in the direction the Trade Triangles were indicating. You would then exit this position the following day on the close.

So here's what is needed to make a trade in Apple before today's earnings report is released. The position is taken the day Apple, Inc. (NASDAQ:AAPL) releases its earnings report, i.e. today.

(1) Both the weekly and monthly Trade Triangles are in sync.

(2) Take a position on the close in the direction the Trade Triangles are indicating.

(3) Exit the position the following day on the close.

These are simple, straightforward instructions. As an old mentor of mine used to say, "They don't pay you any more for making it complicated."

So how has this worked in the past? Continue reading "How To Trade Apple's Earnings Today"