The big banks are all reporting their fourth-quarter earnings this week.
Make no mistake: Although it's only January, this will be one of the most significant events of the year...
You see, in the big picture, how the banks fare and what their future prospects are could single-handily determine the trajectory and breadth of the recovery we've been hoping for.
Even more, their "financials" could have major implications for your money.
Depending on what happens, it may be time to take profits if you own their stocks. It may even be a good time to selectively short the financials - and make a killing doing so.
Today, I'm going to share with you how I think the whole thing will play out.
Then, I'm going to give you a special bonus:
An opportunity to make a nifty profit off of the big bank earnings reports - including one of the fattest dividend payments you'll see in your lifetime...
Big Bank Earnings: What's in Store?
Almost all of Wall Street's big banks - JPMorgan Chase & Co. (NYSE: JPM), Wells Fargo & Co. (NYSE: WFC), Bank of America Corp. (NYSE: BAC), and Citigroup Inc. (NYSE: C) - are trading at or very close to their post-crisis highs, with Goldman Sachs Group Inc. (NYSE: GS) being the only exception.
The "financials" have been front and center this whole rally.
The question now is, will their earnings - most of them have been posting record or near-record numbers - continue to grow, or will the Volcker Rule and approaching Basel rules and the new QM (qualified mortgage) rules dampen their earnings power?
As I said, when it comes to the economy, a lot rides on America's banks. Far too much, in my opinion. These guys haven't lost a beat since the financial crisis. They're still here, and bigger and more frightening than ever. It's sickening, but it is what it is.
You know exactly what I'm talking about...
Big banks are all about themselves. They'll make as much money as they can by going where the fattest profits are commensurate with risk. No, wait a minute, forget that risk thing, it's not really on their radar. As I was saying, the big banks go where they can win.
They can manipulate certain markets at certain times, so they go there. They can manipulate regulators, so they go there. They can manipulate Congress, so they go there. They can manipulate the economy, so they go there.
The question I have is, since they're already "there," as in everywhere, what boundaries are left for them to push? I mean, where are they going to go next to make their outsized earnings?
Don't worry about them. Wherever they have to go, they'll find their way there.
And, regardless, I'm not worried about the banks. I'm worried about the economy. Specifically, the juice necessary to grow the economy.
That's where the banks come in. So, here's what I'm looking at in terms of big bank earnings reports:
I want to see through all of them to see where they're making their money and whether revenue trends in their most lucrative areas are rising, steady, or falling?
Personally I like "falling." Why? Because if banks aren't making as much at trading, eventually - and sooner rather than later - they may actually ramp up consumer loans and small business loans and make more credit available to more people.
That would be good for the economy.
I'm not talking about sloppy lending. I'm talking about making more loans at less cost to folks with decent credit to buy homes and apartments and furnish them and start businesses and employ people and get this economy back on the entrepreneurial track the middle class has been shoved off of.
That can't happen without banks bending over backwards to make money and credit available.
We'll know by the end of the week exactly how this will play out, and I'll get back to you with my next move.
In the meantime, here's my recommendation:
It's a mortgage real estate investment trust (REIT) that I like a lot. A play I've also given to my Capital Wave Forecast subscribers. I don't think they'll mind if I share the recommendation with you here.
Keep in mind, recommendations made to my Capital Wave subscribers are made as part of an overall portfolio of positions we hold and trade in and out of.
But, on its own I still really like this pick. It's Annaly Capital Management Inc. (NYSE: NLY).
I like this mortgage REIT for several reasons. First and foremost it's been hit hard as interest rates have risen. It's a "bottom-feeding" play for us. Meaning it's trading down at its 52-week lows and we're playing it for a bounce.
At today's price of $10.32, the dividend yield on NLY is presently 12%. You heard me: 12%. The price earnings multiple is very low; 2.99 according to Yahoo! Finance.
But here's the thing:
I don't think rates are going to spike into the atmosphere. In fact, if fourth-quarter GDP numbers are a negative surprise and jobs growth as measured by last Friday's pathetic count continues to be weak, and if the big banks earnings this week are disappointing, I expect the Fed will be in no hurry to taper. And if they taper some, it wouldn't surprise me if they stick to Treasury purchases but not their mortgage-backed security purchases.
And that should bode very well for NLY's stock price.
I see two ways of playing this:
1) Buy NLY and think about adding to your position 10% lower, and then using another 10% lower move as an exit point; or
2) Jump in for some hoped-for appreciation... or even just a nice 12% return! If the stock goes nowhere over the next 12 months, just get out. If it drops 10% from here, don't add to your position. That's the kind of play I like to share with my Capital Wave members. A fat dividend payer with appreciation potential and a 10% downside. Let me know how you do with this pick.
And let's see how the banks do this week. Our NLY position might react to big bank earnings, and we might look to take a position or two on some of those banks.
More Big Bank Earnings News: Here's How JPMorgan's Legal Fees Affected Q4 Earnings
About the Author
Shah Gilani boasts a financial pedigree unlike any other. He ran his first hedge fund in 1982 from his seat on the floor of the Chicago Board of Options Exchange. When options on the Standard & Poor's 100 began trading on March 11, 1983, Shah worked in "the pit" as a market maker.
The work he did laid the foundation for what would later become the VIX - to this day one of the most widely used indicators worldwide. After leaving Chicago to run the futures and options division of the British banking giant Lloyd's TSB, Shah moved up to Roosevelt & Cross Inc., an old-line New York boutique firm. There he originated and ran a packaged fixed-income trading desk, and established that company's "listed" and OTC trading desks.
Shah founded a second hedge fund in 1999, which he ran until 2003.
Shah's vast network of contacts includes the biggest players on Wall Street and in international finance. These contacts give him the real story - when others only get what the investment banks want them to see.
Today, as editor of Hyperdrive Portfolio, Shah presents his legion of subscribers with massive profit opportunities that result from paradigm shifts in the way we work, play, and live.
Shah is a frequent guest on CNBC, Forbes, and MarketWatch, and you can catch him every week on Fox Business's Varney & Co.