Binary has to stop. It is too Pre-Trump in thinking. It is a loser's game.
I'm talking about the ridiculous notion that the banks are either today's stars or today's goats and there is nothing in between.
It is true that if I were running a hedge fund I would be thinking, "hmm can I short Bank of America (BAC) at $23 and buy it back at $21.5?" Why not short a stock like KeyCorp (KEY) or First Horizon (FHN) ? They are up way too big vs. the fundamentals. I don't know if the CEOs would even disagree about the speed of the moves up, even as it is a very rare CEO who calls his or her company overvalued.
What I am talking about is that for the rest of 2017 all we are going to hear about is if the Fed is going to hike three or four times. I do not have a lot of companies I follow for which I know I can raise estimates without much thought.
The banks are the ones that fit that pattern.
Let's say that Bank of America "disappoints." The question is how we value B of A. For years and years, it was valued by what its net interest margin was. When it was clear that the Fed was "never" going to raise rates, we switched our prism to book value, betting that these scrubbed-clean companies wouldn't trade too much below book value.
Now that whole thinking is off the table. If we are going to judge a bank by NIM, then we need to recognize that whatever number is reported today by, say, Bank of America, it won't be as good as we will have if the Fed keeps raising rates.
Which brings me to the point of the session. If you decide today that Bank of America has missed the numbers and you want to sell, it's not that simple.
Maybe it will miss this quarter. But if the Fed raises rates next time it can and Trump is able to force the regulators to go back to the old days when banks have more autonomy over capital, you might end up dumping a high-yielding stock that sells at 10x earnings.
To me, that means, wait a second, stop viewing any of these banks the way you did before Trump. Instead, think of them as potential growth and income stocks. If that's what you do, would you really sell on a couple of pennies miss?
That's the old days.
Embrace the new.
It is far more lucrative.