Good morning contrarians! It is Monday, April 24.
State of Play
As of 0620 all is pretty quiet:
Stock futures are down a tiny bit, with major US indexes off just 0.2% from the break-even point;
Commodities aren’t doing much either, with WTI crude oil unchanged at $77.50/barrel and copper up 0.3%;
Bonds are seeing a few bids after selling off on Friday due to the better-than-expected Purchasing Manager Indexes. The 2-year yield is down 3 basis points to 4.16%. The 10-year is down 3bps to 3.54% (yields move inversely to prices).
Earnings
It’s a big week for earnings and a pretty big day to get us started.
Before the open at 0930 we’ll hear from Coca Cola (KO 0.00%↑), Sify Technologies (SIFY 0.00%↑), and Garret Motion (GTX 0.00%↑). Bank watchers will want to pay attention as well as Bank of Hawaii (BOH 0.00%↑), Bank of Marin (BMRC 0.00%↑), and Washington Trust Bancorp (WASH 0.00%↑) are all due to report.
On that topic, First Republic Bank (FRC 0.00%↑) reports after the close at 1600. So do Cleveland Cliffs (CLF 0.00%↑), Whirlpool (WHR 0.00%↑), and Ameriprise Financial (AMP 0.00%↑).
The (Likely) Narrative
It should all be about bank earnings today. First Republic, which has been (fairly or unfairly) labeled as the poster child of surviving problem banks, doesn’t report until after the close but we’ll get a mess of others this morning to keep everybody talking.
Over the weekend Moody’s downgraded several of these regional banks, including Bank of Hawaii which reports before the open. Therein lies…
The Opportunity
Ratings agencies are very rarely a canary in the coal mine and more often just covering their backs. Academic research has found that whatever reaction there is by the market, it mostly takes place ahead of the announcement. Indeed none of these bank stocks are really moving so far in the pre-market.
Downgrades or no, regional bank earnings have been decidedly mixed so far. This doesn’t really tell us anything either because earnings are more often mixed. It’s like an economist telling us the Fed could cut rates on the one hand or increase them on the other.
The fact is that the market reacted positively to the first week of bank earnings. The SPDR S&P Regional Bank ETF (KRE 0.00%↑) is up almost 2% over the last week. Insiders have been buying and no less an authority than Jamie Dimon said the worst is over already.
What this tells us is that any negative short-term reaction in regional bank stocks, be it to this downgrade story or to earnings, could be a buying opportunity.
Of course if you think the downgrades are a sign of more to come then you will want to get out of the way or fade this opportunity. One possible point of concern is the longer-term business case for these regional banks. Will they really be able to grow deposits after all of this? That will be necessary at some point.
Not investment advice (duh). There are likely to be (and almost certainly are) other factors to be considered when making an investment decision. Do your own research. Make your own decisions.
A Big Week for Earnings, Another Buying Opportunity for Regional Banks