Maybe, just maybe, this market's coloration is starting to switch. Maybe we are going into Bob Dylan mode. Maybe the slow one now will later be fast and the order is rapidly fading because the "Times They are a Changing."
That's really the only way to analyze the incredible nine-day run in the financial stocks, as the banks lead this market out of its abyss.
What else can you say about Dow Jones stock Goldman Sachs (GS) which exploded 15 points on a sharply better-than-expected quarter. How else can you fathom the 7% run in the stock of Bank of America (BAC) on some truly superior results?
These moves, coming on top of the huge reversal in the stocks of both JP Morgan (JPM) and Citigroup (C) after some initial negativity, are stunning.
I don't want to pin everything on the earnings. These stocks got outrageously oversold in the great bear market of 2018, with the likes of Citigroup's stock trading at $49 at the end of last year down from $74 in September. Now the stock's at $62, up from $56 since it just reported. JP Morgan's stock fell from $118 to $91. Now it is back to $103.
Bank of America dropped from $31 at the end of September to $22 at the end of the year. The two points it gained today come on top of the four points it put from the bottom, taking the stock to $28.
Best for last: the stock of Goldman Sachs was at $232 in November and it crashed to $156. Even after today's electrifying move the stock's only at $195.
What's going on here? I think investors are starting to realize that these companies are making the most money they ever have and doing so with less risk and fewer people as technology has replaced many expensive employees. Bank of America has 26 million active banking users. It had 1.5 billion logins to its consumer banking app in the fourth quarter and 27% of ALL consumers sales are through digital. Bank of America's Erica voice digital assistant has captured 5 million users in one year, something I didn't think was possible when we brought the executive in charge of the initiative on "Mad Money" last year.
That's nothing short of extraordinary especially when you think that the bank makes so much money off of digital customers than brick and mortar customers and they are happy with it. At first I thought that perhaps Bank of America had become the millennials' bank. But it's bigger than that. Everyone with an iPhone is a candidate to be a customer or is one. This company is a growth company masquerading as a staid bank.
Goldman Sachs? What can I say here. A combination of a Malaysian scandal of potential unfathomable proportions and a trading slowdown had reduced the stock of this most extraordinary firm to the cheapest level in history, selling at a multiple to earnings below copper companies and steel mills. As an alumnus of the firm I have been in disbelief about how the mighty, or at least the mighty stock, has fallen.
But today, after the conference call, I now feel as if the scandal is fathomable as it was addressed as thoroughly as possible for the first time and the trading slowdown is no longer as relevant as a determinant of the bank's worth, as 61% of its revenues are now fee-based, up from 48% in 2013, and produces $22.3 billion in revenues versus $16.6 billion then.
Ok, I can hear you say it, that's great Jim, thanks for nothing, tell me what's going to happen from here.
I getcha and I wouldn't be talking about these stocks if they were done going higher, if they are about to slip back after these quarters.
I think these moves are just the beginning. Why?
First, I just told you where these stocks came from and even after these moves they are well below their highs. They fell because Federal Reserve Chairman Jay Powell talked about the need to put through three rate hikes this year on top of one last year. Now that game plan seems dead in the water. Wait, you say, didn't banks need higher rates to make more money off your deposits? Isn't that net interest margin all that matters?
We have learned now that the answer is NO. The Fed was about to put us into what's known as an inverted yield curve which would be deadly for the banks. They would be paying you more for your deposits than you would pay them for their loans. And the pristine loan book, one with the fewest bad loans in a decade? They would spike horribly in a Fed-induced slowdown.
Second, these banks are now priced at absurd levels versus the billions and billions of dollars they are making in recurring revenues that are sticky and occur when they turn the lights on as well as all the advisory fees that come from investment banking, which requires few people and can make fortunes. We know that there is a gigantic amount of merger and acquisition business occurring and that's so lucrative for all of these companies.
Finally, in the case of Goldman Sachs, you have to be assured that the Malaysian scandal can and will be put behind them without much liability or even reputational risk as business in Asia showed no fall-off whatsoever other than in Malaysia. There are many gauges of valuation for banks; suffice it to say that my favorite is tangible book which is how much money a bank is worth if it just closed. Goldman's at $196, right about to where the stock went to today. That's absurd. They are making a ton of money off that book value and they aren't getting much credit for it whatsoever.
It's been ages since I have seen a moment like this where the banks are making far more money than people seem to realize. I will say that when you get this kind of move, like we had coming out of the 1990 savings and loan crisis, many people sold these stocks after what seemed like big moves only to realize not long after that new buyers had finally flocked in after the group's months and months of underperformance and took the stocks much higher than anyone thought possible.
That could be the case with this group right now.
This prospective revaluation could be so important for the stock market because the financials make up 20% of the S&P 500. They haven't been a leadership group in ages. They can be responsible for remarkable moves when they do so, especially if they continue to buy back stocks, raise dividends and grow far faster than they have at any times since the Great Recession.
So it's not too late to buy them. There will be plenty of people who say "finally I am back to even -- time to go." I am urging people to think the other way. When the non-initiated see these kinds of moves they want in, and I think that's just what's going to happen next in a once moribund but now exciting group.
