• Subscribe
  • Log In
  • Home
  • Daily Diary
  • Asset Class
    • U.S. Equity
    • Fixed Income
    • Global Equity
    • Commodities
    • Currencies
  • Sector
    • Basic Materials
    • Consumer Discretionary
    • Consumer Staples
    • Energy
    • Financial Services
    • Healthcare
    • Industrials
    • Real Estate
    • Technology
    • Telecom Services
    • Transportation
    • Utilities
  • Latest
    • Articles
    • Video
    • Columnist Conversations
    • Best Ideas
    • Stock of the Day
  • Street Notes
  • Authors
    • Bruce Kamich
    • Doug Kass
    • Jim "Rev Shark" DePorre
    • Helene Meisler
    • Jonathan Heller
    • - See All -
  • Options
  • RMPIA
  • Switch Product
    • Action Alerts PLUS
    • Quant Ratings
    • Real Money
    • Real Money Pro
    • Retirement
    • Stocks Under $10
    • TheStreet
    • Top Stocks
    • TheStreet Smarts
  1. Home
  2. / Investing
  3. / Financial Services

Kass: Why I'm Aggressively Buying Bank and Brokerage Stocks

For me, it's the time to be an opportunistic buyer
By DOUG KASS
Jul 07, 2022 | 11:30 AM EDT
Stocks quotes in this article: XLF, BAC, GS, BRK.B, MS, ^BKX

On Wednesday I listened to a downbeat discussion of bank and brokerage stocks on CNBC's Half Time.

The investors that own them on the show were dour and disappointed. None expected near term relief.

The trader who was shorting Financial Select Sector SPDR Fund   (XLF) today, against his bank of America  (BAC) and Goldman Sachs  (GS) longs, is also giving up on the group. He noted his unwillingness to be net long in the face of second-quarter reports and with an inverted yield curve and a recession ahead.

The hopelessness expressed by the panelists should not be surprising considering that the month of June was the KBW Nasdaq Bank Index's  second worst June on record (-13.3%), as well as its ninth worst month all time.

At the core of my optimism regarding financial stocks is my expectation of a mild and brief recession. And the outlook for traditional banking remains quite strong.

For me, it's the time to be an opportunistic buyer during the potential bottoming in the non traditional -- capital markets, trading, investment banking - financial industry fundamentals that I expect. Remember, in both banking and brokerage, the value is the customer base -- the industries' deposit/asset bases are "sticky."

Lower Stock Prices Are the Ally of the Rational Buyer

Once again, The Divine Ms M's (Real Money's Helene Meisler) quote applies... "price has a way of changing sentiment." Rather than leaving the consensus of negativity and taking advantage of a possible opportunity, most remain more comfortable in a herd.

I choose to be outside the herd for financial industry negativity and to join the more bullish ranks with Berkshire Hathaway's (BRK.B) Warren Buffett, who raised his bank holdings dramatically in the first quarter of 2022.

I couldn't, respectfully, disagree more with the above consensus and negative assessment on the space -- and I have been aggressively buying the recent weakness.

My advice? Beware of rear-view mirror analysis that invokes sour sentiment and lower stock prices:

1. I want to own brokerage stocks when the consensus has embraced the notion that capital markets activity (stock trading volume and investment banking) are weak and will weigh on profits. It is likely discounted and I see the possibility of an improving trend in the next few months.

2. I want to own bank stocks when the yield curve is inverted and fears of a deep recession represents the consensus. It may also be discounted.

3. Not reflected in the historically low valuations, the large money center banks have high and improving quality, predictable and sustainable than trading and investment banking -- profit streams which are now benefiting from rising net interest income and elevated and relatively sticky retail deposits:


4. As to yield curve inversion, long duration mortgages are no longer as dominant on bank books, short-term loans and investments are. Therefore, asset durations have been shortened, lessening the impact of an inverted curve.

5. With solid balance sheets and large technology expenditures, U.S. banks and brokerages have deepened their moats by expanding their franchises and market shares at the expense of non U.S. financial institutions and emerging fintech players that have materially disappointed their stakeholders.

6. Remember, some inflation is good for banks as nominal growth is more important than real inflation adjusted growth! Nominal buoys loan, asset and deposit levels.

7. As to the brokerage stocks, I am also optimistic. Though their earnings are more volatile than the traditional bank group, both Goldman Sachs  (GS) and Morgan Stanley  (MS) have demonstrated an ability to earn a decent return on their capital. GS is trading near book value. As to MS, I am buying a very large retail customer franchise at a low premium to tangible book value (TBV) -- and though market prices will vacillate, those retail investors are "sticky."

Earnings Reports Begin Next Week

I expect few negative or positive surprises in July's second-quarter earnings releases.

The recent lift in interest rates (NII) will be the strongest supporting feature of the second-quarter reports.

Capital market and mortgage related revenues/profits are already known to be weak -- and for obvious reasons: market price declines, slowdown in home turnover, weak investment banking.

Credit costs will be rising somewhat (quarter over quarter) but still very low loss rates and reserve builds. Some loan loss normalization is expected over the next 12 months.

Bottom Line

Lower stock prices are the friend of the rational buyer while higher prices are the enemy!

In many ways the negative consensus view -- partially in response to weak sector stock prices and the currently low RSI readings, low stock prices relative to tangible book, etc. -- is at the polar opposite of the enthusiasm expressed for energy stocks in early June discussed in an earlier post -- when the RSI was dramatically elevated and right before the floor fell out for oil stocks.

More importantly, macro clarity -- a mild and brief recession (my baseline expectation) -- could provide an ideal environment for bank and brokerage stocks.

My advice is to be opportunistic and to avoid the rear-view mirror, the consensus and the downbeat emotions that are the natural byproduct of lower prices.

Banks and brokerage stocks are not a trade, in my view.

Rather, I am embracing the weakness in financial stocks -- with an eye on a multi-year investment that could take the group much higher when fears of a deep recession recede.

(Morgan Stanley is a holding in the Action Alerts PLUS member club. Want to be alerted before AAP buys or sells MS? Learn more now.)

(This commentary originally appeared on Real Money Pro on July 7. Click here to learn about this dynamic market information service for active traders and to receive Doug Kass's Daily Diary and columns from Paul Price, Bret Jensen and others.)

Get an email alert each time I write an article for Real Money. Click the "+Follow" next to my byline to this article.

At the time of publication, Doug Kass was Long MS, GS, BAC, C, WFC, JPM, PNC.

TAGS: Economy | Federal Reserve | Interest Rates | Investing | Markets | Stocks | Technical Analysis | Trading | Banking | Financial Services | Brokerages

More from Financial Services

The Charts Just Don't Give Much Affirmation on Affirm Ahead of Earnings

Bruce Kamich
Feb 3, 2023 1:54 PM EST

Here's the picture we see from this payment company.

Is Redfin's Stock Ready to Make a Sustained Recovery?

Bruce Kamich
Feb 3, 2023 9:04 AM EST

RDFN will need more compelling base building.

ADP Shares Could Rebound, but There's a Bigger Picture

Bruce Kamich
Feb 1, 2023 9:51 AM EST

Here's what the charts of Automatic Data Processing are telling us now.

What's Next for Block's Stock?

Bruce Kamich
Jan 31, 2023 10:55 AM EST

Watch for a possible rally.

That SoFi Technologies Improved So Quickly Is No Surprise: Here's What I'd Do

Stephen Guilfoyle
Jan 30, 2023 11:15 AM EST

Here's the most important thing we've heard from SOFI, maybe ever.

Real Money's message boards are strictly for the open exchange of investment ideas among registered users. Any discussions or subjects off that topic or that do not promote this goal will be removed at the discretion of the site's moderators. Abusive, insensitive or threatening comments will not be tolerated and will be deleted. Thank you for your cooperation. If you have questions, please contact us here.

Email

CANCEL
SUBMIT

Email sent

Thank you, your email to has been sent successfully.

DONE

Oops!

We're sorry. There was a problem trying to send your email to .
Please contact customer support to let us know.

DONE

Please Join or Log In to Email Our Authors.

Email Real Money's Wall Street Pros for further analysis and insight

Already a Subscriber? Login

Columnist Conversation

  • 02:58 PM EST REAL MONEY

    Sarge Guilfoyle Breaks Down the Jobs Report, Fed Policy and Stocks!

    Watch it here!
  • 11:35 AM EST JAMES "REV SHARK" DEPORRE

    This Weekend on Real Money

    Trading an Irrational Market
  • 02:10 PM EST REAL MONEY

    Fed Rate Decision

    Fed Lifts Benchmark Rate by 25 Basis Points, Sees ...
  • See More

COLUMNIST TWEETS

  • A Twitter List by realmoney
About Privacy Terms of Use

© 1996-2023 TheStreet, Inc., 225 Liberty Street, 27th Floor, New York, NY 10281

Need Help? Contact Customer Service

Except as otherwise indicated, quotes are delayed. Quotes delayed at least 20 minutes for all exchanges. Market Data & Company fundamental data provided by FactSet. Earnings and ratings provided by Zacks. Mutual fund data provided by Valueline. ETF data provided by Lipper. Powered and implemented by FactSet Digital Solutions Group.

TheStreet Ratings updates stock ratings daily. However, if no rating change occurs, the data on this page does not update. The data does update after 90 days if no rating change occurs within that time period.

FactSet calculates the Market Cap for the basic symbol to include common shares only. Year-to-date mutual fund returns are calculated on a monthly basis by Value Line and posted mid-month.

Compare Brokers

Please Join or Log In to manage and receive alerts.

Follow Real Money's Wall Street Pros to receive real-time investing alerts

Already a Subscriber? Login