By now, it is no secret that the financial sector will almost certainly underperform the broader marketplace on Monday. Everyone knows the basics. Last week, the family trading operation run by Bill Hwang known as Archegos Capital Management had blown up. The cause? Credit Suisse (CS) , one of the apparently more highly impacted banks/broker-dealers warned its own investors that a "significant loss" would be taken on a number of positions after "a significant U.S. based hedge fund had defaulted on margin calls made last week." Beyond Credit Suisse, Nomura Holdings (NMR) acknowledged a potentially significant loss that arisen from transactions made with a U.S. client. The firm estimates the loss at a ballpark $2 billion. Shares of Credit Suisse gave up roughly 10% in Zurich, and the ADRs have kept falling in the U.S. Shares of Nomura fell about 16% in Tokyo.
The fire sale took place in five major names, probably among some others less impacted. Those five names would be U.S. media and entertainment names ViacomCBS (VIAC) and Discovery (DISCA) , as well as Chinese tech names Baidu (BIDU) , Tencent Music (TME) and Vipshop (VIPS) . Just a side-note here. If you follow me closely, you will see in the disclosure below that at the time of this writing, I was long both DISCA and VIAC, but that this morning, those names were not in my disclosure for Market Recon. Explanation? I am a trader and I had been trading those two names at the time I was asked to write this piece.
Aside from Credit Suisse and Nomura, both Goldman Sachs (GS) and Morgan Stanley (MS) had been large sellers of the names mentioned on Friday as well. Archegos Capital is said to have sold more than $20 billion worth of stock due to this margin call, and Goldman Sachs is said to have moved more than $10 billion of that total. Deutsche Bank (DB) is also a name mentioned as having been active on Friday. As far as I can tell, none of these three have warned investors of material impacts directly due to this situation.
Scuttlebutt has it that Morgan Stanley had shopped 45 million shares of VIAC at some point, and there is also word that Wells Fargo (WFC) has been shopping merchandise as well. Banks that have not yet been named as being involved, at least not to my knowledge. would be JP Morgan (JPM) , Citigroup (C) , and Credit Suisse rival UBS Group (UBS) . Nor have we heard anything about Bank of America (BAC) (Merrill Lynch) being involved. That does not mean that BAC has been quiet. Analyst Alastair Ryan reduced his forecast for Credit Suisse for 2021, while downgrading that stock to "neutral." Ryan has some concern that the share repurchase program at Credit Suisse could be in jeopardy.
Add on this dip? Well, I think most regular readers know the bank stocks that I am in. JP Morgan is my "best in class" large money center. I also like that we still do not see them as yet involved in this story. The drawback? If you have been in this name with me since I went back in, we are up a cool 55%. I think we need more of a discount to add at this time. We're up a lot less, in Weld Fargo, just about 12%. What I liked about WFC on the way in could be summed up in two words... Charles Scharf. That and the fact that nobody else liked them at the time. That was a dead giveaway. These names will continue to do well should yield spreads continue to rise. If they don't, we still have potential dividend increases come the end of June, and about $77 billion across the industry in reserves that were set aside for loan losses that are starting to look more and more like they'll be unnecessary. That, my friends, is unbooked profit.
Past the big names, the regionals and super-regionals will do best in a rising rates environment as they do not have all the ancillary business that the larger banks can rely upon to drive revenue, and sometimes get them in a jam. My pick here is US Bancorp (USB) , which has returned 20% since I whined back a couple of months ago that the stock was a dog. PNC Financial (PNC) would in my opinion also be an nice pick. Will I add to USB today? At the 21 day EMA ($53.38) if we see it. Me and hopefully all of my swing trader friends.