If you are in a commodity business, you can't please investors if the commodity is going against you. That's what we are learning, not just in the oil patch but in the banking patch, too.
In a very odd way these two sectors are turning out to be surprisingly alike. As one after another oil company announces cutbacks in spending, we keep hearing the same thing, that production isn't going to shrink, it is going to rise. However, it doesn't seem to matter to investors in the end, because it's a double whammy. We were getting greater, ever-rising production growth, courtesy to better technology and terrific prices on the oil itself. These became supercharged growth stocks.
With oil coming down there's less money to be made per well now, so we don't even care that they are still raising production. We don't even know how to value them. Do we price them off where oil might be going? If that's the case, then near term they need to be sold. With the exception of a handful of majors, we can't price them off dividends. They are inconsequential in some cases and perhaps not even viable in others. At one point we were valuing most of these as potential take-out targets. Now, though, who would want to buy an oil company when you don't know when crude is going to stop going down in price? Anyway, why not buy one in bankruptcy? Many could be headed that way. So we have no takeovers, no growth and no dividend protection.
Now let's consider the banks. Interest rates are to banks as crude is to oil companies. If rates are low and going lower, which is the current consensus, then we would no longer want to own a bank than we would want to own an oil company with plummeting crude.
It seems that no matter how the banks portray their earnings growth, it's not good enough. And so far, at least for this quarter, it's as lackluster as the production growth that we are seeing from the oil companies.
Remember, the net interest margin -- what they make on your cash -- is pretty the same as what these oil companies make per individual barrel of oil, and it is shrinking in aggregate just like it is for the oil and gas companies.
Now, banks aren't pure commodities. They do have other business lines -- fee income, investment banking and the like. But almost all of those either haven't come in that strongly, especially the very important fixed-income markets, or seem so lackluster that they can only be regarded as disappointing. We aren't having dramatic loan growth to make up in volume for what they might have made per loan if rates were high.
Meanwhile, many banks had led us to believe that they had turned the corner on litigation and regulation coming into 2015. And while it is down for some, notably Bank of America (BAC), it is still rankling and in the case of JP Morgan (JPM) it is just downright preposterous that it could be so bad, augmented by complaints from the CEO about regulators. I understand the pique, but the regulators didn't create the problems and as much as you may not like them, you can't afford to antagonize them.
Like the oil companies, these aren't growth companies. Like with the oil companies, we can't expect any mergers as the government would surely frown on any more consolidation. They are severely constrained on buying back stock and raising their dividends, because they are still so heavily regulated post the Great Recession. So, again, how do we value them?
Right now they, like the oil companies, are in no man's land, being shot at from all sides. If you own them, or are thinking of buying them, then you must go against the consensus and believe rates and crude are going to rise in price. Let me make this clear: it is the only reason to buy them. And if you think rates and oil are headed down, then don't even be tempted, because even though they have all come down a lot, they can't rally without higher Treasury yields and higher crude prices.