Why It's Time to Sell Too-Big-to-Fail Banks

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I'm not buying any bank stocks here. I don't own any at present. And if I did, I'd either sell them or at least hedge them.

It's not that they're doing poorly. They're not. Bank stocks have been strong because they've been making record profits. It's been a good ride if you're a Too Big To Fail bank or a shareholder.

But, being the cautious trader I am, I'm inclined to take profits when I have them in hand. That's why I'm out of the banks. I've banked my gains and turned cautious.

Citigroup beat analysts' expectations and finished up yesterday-even though the Dow took a big tumble.

Wells Fargo and JPMorgan Chase didn't do badly last week, in terms of their earnings and profit numbers either, but investors were disappointed.

But here's why I'm cautious...

I've turned cautious on the group because I'm not seeing domestic or global GDP growth at levels that justify a continuing upward trajectory for big bank stocks.

Citigroup made a nice $3.8 billion profit in the first quarter by reducing costs, unloading troubled assets, and from "strong" loan demand. And they reaped nice rewards from their investment banking unit.

Okay, they're dumping 11,000 people in the months and quarters ahead. That's good, I guess. But what were they doing with so many excess employees on the heels of the financial crisis and their near-death experience in 2008?

Were they expecting to keep them busy when business skyrocketed? Are they letting them go now because they don't see the growth they were expecting?

I like that Citigroup's international footprint deposits rose 3% in the quarter, and I like that total loans rose 5%, But I don't like that revenue from fixed income, equities, "markets" and debt and equity underwriting rose 31%.

Any time a big bank is making big gains in "markets" it worries me. It also worries me that Citi's revenue growth slackened in the first quarter.

It worries me that Citi got hammered in the fourth quarter on mortgage woes.

Why does that worry me if it's in the past?....

Because Wells Fargo, which has been hiring lenders and support staff to bolster its mortgage business, said last week that their re-financing business slowed in the first quarter and origination volume fell 13% in the first quarter from the fourth quarter. So, maybe Citi's mortgage woes aren't behind them.

As the housing market has been firming up, Wells, which now originates one out of every four mortgages made, has been a beneficiary. But what if the housing market pauses? What if rates start rising? What if confidence starts eroding?

Can Wells continue its streak of eight consecutive quarters of record net income?

Then there was Jamie Dimon's outfit.

JPMorgan Chase saw a decline in deposits, and total revenues actually fell 3.6% from a year ago.

Still, they posted a record first-quarter profit of $6.5 billion.

But loan demand was weak. The bank saw revenue from consumer and community banking fall 6.1%.

So, how did they book another record?

They had gains from cost cutting and they're cutting another 17,000 jobs over the next two years. Sound familiar?

Chase got a nice push in net from backing out $1.2 billion from loan loss reserves. That's a big number to say won't be needed, because they see strength in mortgages and consumer credit card losses are looking less troublesome.

Another thing that worries me about the big banks was borne out by something Chase's CFO Marianne Lake said. She's concerned about "mounting competitive pricing for loans." Since there isn't a lot of across-the-board loan growth, and loan pricing could see margins impacted, I just have to wonder where this is all going.

China's GDP growth came in yesterday with a 7.7% advance. That is well below the 8% plus growth rate that analysts were expecting.

Is global growth slowing?

News flash... it hasn't exactly been robust lately - as in the past five years.

All these little factors add up to some fluttering of red flags for me. That's why I'm out of big bank stocks.

If I'm wrong and they all head higher, that's okay with me.

They're still facing headwinds, like Dodd-Frank rules and regulations that will eventually get written and implemented. That could have a potentially dramatic impact on certain revenue streams. Can you say the Volcker Rule?

If you still like the big banks, good for you. I'm not always right.

But if you want to sleep a bit better, why not buy some puts to protect your exposure to lofty prices and lock in your gains in a what-if world?

It can't hurt. It never hurts to ring the register.

About the Author

Shah Gilani is the Event Trading Specialist for Money Map Press. He provides specific trading recommendations in Capital Wave Forecast, where he predicts gigantic "waves" of money forming and shows you how to play them for the biggest gains. In Short-Side Fortunes, Shah shows the "little guy" how to make massive size gains – sometimes in a single day – by flipping large asset classes like stocks, bonds, commodities, ETFs and more. He also writes our most talked-about publication, Wall Street Insights & Indictments, where he reveals how Wall Street's high-stakes game is really played.

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