Featured StoryIf you weren't convinced before, hopefully you've seen the light now: Don't buy bank stocks.
Money Morning Global Investing Strategist Martin Hutchinson first warned it was time to bail on bank stocks on Aug. 17. He said the sector was headed for a "catastrophic decline."
"Margins are narrowing, government regulation is increasing, and the outlook for big deals is drying up," said Hutchinson. "In other words: The risks related to bank stocks are as present as they ever were - just the profitability is missing."
Hutchinson was right on with his call. Anyone who heeded his warning saved themselves from the losses U.S. banks have since sustained.
Share prices for many big U.S. banks tumbled in the period between the publication of Hutchinson's article and yesterday's (Wednesday's) market close. Bank of America Corp. (NYSE: BAC) lost 11.6%, Goldman Sachs Group Inc. (NYSE: GS) fell 9.3%, JPMorgan Chase & Co. (NYSE: JPM) 6.5%, and Morgan Stanley (NYSE: MS) 2.2%.
The Standard & Poor's Financials Sector Index now is down more than 18% for the year. Global bank stocks have hit their lowest valuation in 40 years.
And this industry's stock losses are just the beginning of the price pain.
Poor Earnings Reflect Banks' StruggleHutchinson pointed to key factors that would weigh on bank profits, like trading losses, decreased lending, and the overhang of dead mortgages.
This season's dismal bank earnings have supported Hutchinson's forecast.
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Bank Stocks Are Bad Investments – But Excellent Trading Opportunities
Long gone are the days when bank stocks were safe investments. Now, and for the foreseeable future, the only safe way to play banks and financials is by trading them.
Banks face so many issues, both in the near term and on a long-term secular basis, that putting shares away, even now when they look cheap, could be hazardous to your wealth and your mental state.
On the other hand, precisely because many of the headwinds banks face are obvious, closely following the developments affecting banks can lead to profitable trading opportunities. And, by familiarizing yourself with how bank stocks trade, you'll be in an excellent position to determine exactly when they've become good long-term holds.
As a trader, I'm always looking for sectors and stocks where developments affecting earnings and profitability are mainstream news. It means I don't have to mine mountains of arcane data to get the big picture. And right now, all the news coming out about banks makes them ripe for trading.
Here's what I look at and how I would trade bank stocks.
Banking on VolatilityThe first thing I see when I'm looking at banks is that most of them have been exceptionally volatile. Volatility is the lifeblood of trading. They've definitely got that going for them.
The most common measure of an individual stock's volatility is how it compares to the volatility of the market as a whole. Beta measures how volatile a stock is relative to the Standard & Poor's 500 Index. A beta of "1" means that the stock is as volatile as the market. A beta of "2" means the stock is twice as volatile as the market.
Here are some betas for bank stocks you should consider as good trading candidates: Bank of America Corp.'s (NYSE: BAC) beta is 2.76; Citigroup Inc.'s (NYSE: C) is 2.89; Wells Fargo & Co. (NYSE: WFC) 1.78; Morgan Stanley's (NYSE: MS) is 1.10; JPMorgan Chase & Co.'s (NYSE: JPM) is 1.43; and Goldman Sachs Group Inc.'s (NYSE: GS) is 1.26.
There are many very volatile European banks to trade, too. But these are even riskier. Personally, I don't like unanticipated volatility. I like to understand what is happening, what developments are ebbing and flowing to generate volatility.
With the banks, there's a fairly long list of negative headwinds, which is where their e mbedded volatility comes from.
Big Questions For Bank StocksU.S. banks, and even more-so their European counterparts, are facing some very big issues. Each hurdle is big in and of itself, and collectively they form a tremendous weight on the sector.
The biggest question marks are:
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Now's Not the Time to Buy Bank Stocks – Now's the Time to Short Them
I was asked this morning by host Stuart Varney on Fox Business whether I would buy bank stocks at these levels, because perhaps they've put in their lows this year now that the markets want to rally.
Well the answer to that question is: No - but I'd love to short them.
I lived through Japan in the 1990s, and watched the bust there firsthand. We're now on the seventh, eighth, even ninth versions of "we're really fixing it this time" in Europe and at this point, I simply don't believe this is going to end well.
The bailout funds are in the billions of euros. The scary truth is, European authorities are really only... Read More...