This summer, I showed you why it's important for every investor to be aware of what's happening on "Too Big to Fail" bank earnings calls.
You don't have listen yourself or read the transcripts (like I do), but investors would ignore the goings-on at their own peril.
I pay very close attention to what the bankers are saying on their calls every quarter.
In the "battlefield" of markets and the economy, the big banks are like the joint chiefs of staff, and the regional banks are the field generals.
Between the two, we can get a pretty good picture of what's going on in the financial world and the economy.
Now, let me be clear: I am not about trading the bigger banks. The banks I own, some of my favorite, most profitable investments, in fact, are the smallest community banks.
But like I said, the bigger banks and their earnings reporting are an invaluable source of information.
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The Biggest Banks Are Pretty Optimistic
The view from the very highest level of the economy is... pretty solid, it must be said.
Citigroup Inc. (NYSE: C) CEO Michael Corbat told analysts that, "The macro environment is as positive as we've seen in many years. 2017 was the first year since the crisis in which growth exceeded expectations. Tax reform could change the sentiment among those making investment decisions from optimism to confidence and become the boost the U.S. economy needs to drive growth higher. The U.S. consumer should also benefit as higher take-home pay could drive either increased discretionary spending or the acceleration of payment of existing debt, each a potential positive outcome from the reduction in tax rates."
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Over at JPMorgan Chase & Co. (NYSE: JPM), Chief Finance Officer Marianne Lake fielded most of the questions.
That's unfortunate, because CEO Jamie Dimon has been prone to going off on tangents that are both entertaining and informative.
Lake commented on the tax cuts, telling investors that "on the potential impact to our businesses, the modernization of the U.S. tax code is a significant step forward for the country and a big win for the economy. And we include an estimated 20 to 30 basis points of growth in the U.S. this year and next. However, clients are still digesting the tax bill, and much like this rate cycle, we haven't seen this movie before. We'll have to watch it play out. There will be pluses and minuses by clients and pluses and minuses across the products. So overall, stepping back, tax reform is a positive. And for our clients, there's more certainty, more clarity, and that should give them confidence to act."
There you have it: the outlook of two of the biggest banks in America.
Between the two of them, they hold about 15% of all the deposits currently in the American banking system. They lend to everyone form the biggest companies in the world to Main Street entrepreneurs. They see what is going on in the markets, the auto industry, housing, commercial real estate, and every imaginable corner of the economy.
So for them to be upbeat is a positive sign for economic growth in 2018.
But there is a potential drawback to that enthusiasm. Here's what I mean...
These Calls Were Warm and Fuzzy... and Fuzzy on Specifics
Ms. Lake indicated that JPMorgan thinks we will see four interest rate hikes next year, courtesy of the U.S. Federal Reserve System, of course. I think that may be too much too soon for the markets to digest.
So far, the markets haven't blinked in the face of the Fed's rate hikes primarily because the starting point was so low.
But I think four hikes this year could spark some concerns among stock and bond investors alike, and the old "don't fight the Fed" rule could come back into play if the Fed moves too quickly.
Both banks talked about the long-term benefits of the tax cuts; both indicated it would be a big bump for the bottom line going forward. On the other hand, both JPMorgan and Citi took hits related to the write-down of tax-related assets,
Where the big boys differed - greatly - was on ways they plan to spend those increased profits.
Citigroup executives were a little short on specifics, but they did talk a lot about their buyback and dividend plans for 2018 (Hint: Think "increase.").
Unfortunately, using the tax savings to buy back stock is exactly what I don't think we want to see.
JPMorgan executives seemed to "get it" far more than the folks at Citi.
They talked about rewarding employees, investing in new technologies, and "expanding their global footprint."
Interestingly, when he did appear on the call, Jamie Dimon shed just a little light on what that "footprint" might be, noting that JPMorgan's improved finances might go toward improving communities.
He said on the call, "What are we going to do special to help the United States of America as a result of tax change? And we think we should. We think it's very good other companies have done it. We think it's time that all of America shared broadly. And we're going to have things that we think are good for some employees. But think of also sustainable growth for communities around the world. And so we're going to give you, in the next couple of weeks, some very thoughtful things that we're going to do."
A little short on specifics, a little nebulous, but it sounded nice enough. We'll have to wait and see. I'm not holding my breath, though.
Both banks were positive on credit conditions - a critical economic early warning system.
The Most Sensitive Financial Indicator Is Flashing Green
Credit is good, and it looks like it will stay good in 2018.
That's very encouraging, bullish news because if bad things are about to happen in the economy, it shows up first in loan delinquencies and defaults in the banking system.
Essentially, there are no warning signs at all right now.
Bankers are magically resisting their natural, overwhelming urge to do something stupid to add a few basis points to their returns, and consumers and companies alike are paying their bills with all due sobriety and punctuality.
From the lofty heights of the world's biggest banks, at least, conditions across the market look pretty good as we go into 2018.
I think it's pretty clear from these calls that the vaunted tax cuts will spur growth, or they have a chance to, at least... so long as companies use the windfall to hire and reward employees, and make capital investments, rather than simply buy back stock.
The key takeaway: Valuations are sky high. That's a risk. The geopolitical situation is unstable and troubling, with no signs of easing up. That's a risk. In fact, I think it's the biggest risk right now.
Short of a bolt from the blue (or, maybe to put it another way, short of a Hwasong-15 ballistic missile from the blue), financially and economically, I just don't see any ominous, economy-crushing, stock-tanking dangers on the horizon. Invest and buy accordingly.
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About the Author
Tim Melvin is an unlikely investment expert by any measure. Raised in the "projects" of Baltimore by a single mother, he never attended college and started out as a door-to-door vacuum salesman. But he knew the real money was in the stock market, so he set sights on investing - and by sheer force of determination, he eventually became a financial advisor to millionaires. Today, after 30 years of managing money for some of the wealthiest people in the world, he draws on his experience to help investors find "unreasonably good" bargain stocks, multiply profits, and build their nest eggs. Tim tirelessly works to find overlooked "hidden gems" in the stock market, drawing on the research of legendary investors like Benjamin Graham, Walter Schloss, and Marty Whitman. He has written and lectured extensively on the markets, with work appearing on Benzinga, Real Money, Daily Speculations, and more. He has published several books in the "Little Book of" Investment Series and a "Junior Chamber Course" geared towards young adults that teaches Graham's principles and techniques to a new generation of investors. Today, he serves as the Special Situations Strategist at Money Morning and the editor of Peak Yield Investor.