Are the big banks, department stores, and the fintechs FANG? I have spent hours this week analyzing the failure of the banks to generate any sort of rally in the face of the Fed blessing four rate hikes instead of three. It's a total conundrum because had we known there would be four rate hikes even a couple of quarters ago the banks would be among the best performers.
What's happening here?
Let me give you the conventional wisdom first. The yield curve is flat so banks don't make as much lending as we thought they would. I wouldn't mind this analysis except lending rates aren't as consistently priced off the 10-year as they used to be. There's more variability there than people realize.
Second, mortgage loans have tailed off because of the rise in rates. I get that, always a possibility. But a bank like Citigroup (C) , which is the worst performer of the majors, doesn't have a lot of mortgage business as a percentage of its entire enterprise.
Third, we are waiting for CCAR before the traditional third-quarter romp. I have been keying off this theory as a reason to hang on to the banks. The charitable trust owns Citigroup, JP Morgan (JPM) and Goldman Sachs (GS) and I expect all to be beneficiaries of CCAR.
Plus, for me, the net interest margin, what they make on your deposits, is huge here as CDs haven't kept up with the short rates at all. That's risk-free money, the best kind. The book values for the banks are very high as a percentage of the stock prices and the P/E multiples are lower than any sector in the entire market save the autos.
So what else can it be?
As I wrack my brain I come up with one plausible -- and existential --answer. There are plenty of younger portfolio managers who think the banks are like Sears (SHLD) and JC Penney (JCP) : they are old-line brick and mortar stores that are about to lose their relevance to all sorts of new technologies from bitcoin to blockchain to Paypal (PYPL) and Square SQ. Meanwhile, SOFI is taking millennials right out of college and turning them into 360 degree clients. At the same time the big cap growth in the sector belongs to the giant but boring fintechs, chiefly Mastercard (MC) , Visa (V) and American Express (AXP) .
Now the latter three, to me, are simply the big cap places to hide to be equal weighted in a very important sector of the S&P so you can avoid owning the traditional because they are a play, still, on paper going to plastic, globally as well as small business growth.
But the others? They are about obviating the banks altogether. Of these my favorite is Paypal because not only is it the mobile bank but it is also the millennial social bank courtesy of its emoji filled Venmo cash sharing economy division. Paypal's Dan Schulman, the charismatic leader of the online banking company that cooperates with pretty much everyone and has gone global in a big way, represents the Amazon of banking. Not only are there no brick and mortar costs, but it is the international bank to the unbanked, about two billion people without bank access right now. At one point Citigroup seemed to be taking on that role but it has pulled back and it is no longer a tech leader. Bank of America (BAC) has the best omnichannel so to speak but it pales compared to PayPal.
Square (SQ) is ingenious small business lending and it has come on strong as a tech leader but it is expensive as an abettor to small business growth as anyone in the market can tell you.
Then there are the existential threats: blockchain, which would, some think, possibly end the banks' hegemony over stock clearing and cryptocurrencies which are the populist insurgents of the movement.
All of these challenges resonate particularly with the younger portfolio manager crowd. Suffice it to say they are winning right now. They, to me, are the true reasons for the underperformance and until the banks regain some earnings momentum that's visible and powerful these forces aren't going to be reversed and represent a true threat to the ultimate valuation of the group.
