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The KBW Bank Index includes 24 of the nation’s largest banks — “Too Big to Fail” institutions such as Citigroup (C), Bank of America (BAC), and JPMorgan Chase (JPM) … “superregionals” like U.S. Bancorp (USB) and PNC Financial Services (PNC) … and custody and trust banks, including Bank of New York Mellon (BK) and State Street Corp (STT).
In other words, it covers a broad swath of the financial world. And it’s been trading like death! From its high of 55.88 in February, it cratered to 45.11 on Tuesday — a decline of 19 percent in just five months.
Individual banks have done even worse.
Bank of America just plunged to its lowest level in 26 months after reporting a whopping $9.1 billion loss for the second quarter, for instance. Meanwhile, Goldman Sachs (GS) slumped to a level unseen since April 2009 after it reported a 38 percent collapse in profit and an $800 million shortfall in revenue versus expectations.
Why am I so focused on this market action? Why should you care? Let me explain …
Banks Are a Canary In
the Market Coal Mine!
I like Apple’s (AAPL) products, and own an iPhone myself. I have a LinkedIn (LNKD) profile, and I run Google (GOOG) searches all the time. But does the strong performance of these specific stocks tell me a lot about the health of the broad economy? I don’t believe so.
Banks, on the other hand, are at the heart of virtually every transaction on the planet. They process our credit card payments, fund our mortgages, finance our car purchases, and put up the capital for businesses to build warehouses and factories. They execute our stock trades, manage our money, and facilitate virtually every equity or bond sale for corporate America.
In short, bank earnings tell us a lot about the health of the underlying consumer and corporate sectors. And bank stocks can provide an important signal about where the broad market is heading.
Just look at what happened in Phase I of the credit crisis. The BKX topped out in February 2007, as you can see in this chart below.
But the broader Dow Jones Industrial Average rallied for a few more months before topping out in October.
Ultimately, the BKX shed a stunning 85 percent of its value. The Dow lost more than 54 percent, or almost 8,000 points! Or in simple terms, anyone who ignored the message of the BKX paid a very stiff price.
And despite a slight bounce in bank stocks this week, clearly the trend is lower.
My Prescription:
Caution!
This week, we saw a lot of euphoria over the prospects for a debt ceiling deal. Earnings from the likes of IBM and Apple only added to the positive vibe. But again, if you listen to what key financial companies are saying, you hear a much more worrisome outlook.
So my prescription remains the same: Exercise extreme caution in this market! Take profits off the table if you have them, lower your risk exposure, and consider inverse ETFs to protect you from adverse moves in stocks, riskier bonds, and overvalued currencies.
There’s a message coming from the markets. Are you listening?
Until next time,
Mike
P.S. Last week Bernanke gave the world a peek at what he has up his sleeve: A third round of quantitative easing that, depending on his own recession fears, could be horrible news on the economy, further driving bank stocks into the gutter.
And that’s why it’s so urgent that you see our video right away. I think it could save you, or make you, a king’s ransom in the weeks and months ahead.
{ 5 comments… read them below or add one }
The sky is always falling at Weiss Research but the market keeps going up. I don’t think we are going to see this massive sell off that you expect unless the U.S. fails to increase the debt ceiling. Banks are in the dumps because of debt fears but they have been slowly working off their bad assets from the debt crisis. Once those fears are alleviated even in the short term bank stocks should start to recover. As a matter of fact they are so beaten down they just might be a good buy. Inverse etf’s should only be used as a short term trading vehicle when there’s an established down trend. Right now the market is range bound and appears to be headed higher. If it hits the top of the range then it might be a good idea to buy an inverse etf for a short term trade to the bottom of the range but a tight stop should be set in case the market continues to move higher.
Hi Mike
I very much enjoy you facts and commentary. The necessary leadership to guide hope in national direction will not come from global self serving gutless politicians. Because there is no political leadership over money, power and control it will be up to the big players to decide when there is an sustainable loss of confidence. Would you trust your financial future to this?
i am glad everyone has crystal bals that are working
Gday from Australia !! and a big HELLO to you Mike……I look forward to reading your news print I even forward all your letters on to my son’s
King Ralph I think you are being a little harsh ! on Mike and the boys from Weiss.I have been reading there material for many years and when I first started to read there print I was a little skeptical like you but if you had followed them as long as I have you will find that there writtings have been 99% right..One example they recommend to buy GOLD and SILVER years ago and you know what I took there advise and I brought silver at $6 an oz, need I say anymore I have a very large amount of silver and GOLD I have made a lot more money from these 2 investments..So should I trust the BANKSTER’S I don’t think so King be Kool !!!!!……..
King Ralph, I remember you saying the same thing in July of ’08. Don’t choke again on that koolaid.