• 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. / Stocks

Doug Kass: How Did Bank Stock Investors Get So Clueless?

Banks stocks are still a 'full-on Monet.'
By DOUG KASS
Apr 14, 2022 | 01:01 PM EDT
Stocks quotes in this article: JPM, C, BAC, WFC

Travelling with the herd is often harmful to your investment well being. 
 
Banks stocks have been among the worst-performing sectors in the last six months. Yet, the vast consensus view was that, in a rising interest rate environment, seen in the last three months, bank stocks would be among the leading market performers.
 
Wrong!
 
The share price of the largest and most popular money center bank extant, JPMorgan Chase  ( JPM) , has fallen from $170 to $127.
 
Citigroup ( C) shares, a favored "value play" among the banks, has dropped from $79 to $50.
 
Among the better-performing large money banks, even Bank of America ( BAC) ($50 to $39) and Wells Fargo ( WFC) ($60 to $48) have performed poorly.
 
I attribute the mistaken and almost universal optimism towards bank stocks as a singular reflection of the superficiality of investors today (the near universal mantra that "rates rise and so will bank stocks") and the mindless and wrong-footed logic and poor (company-specific and industry) analysis.
 
Bank stock investors have missed eight important headwinds to bank stock performance and banking industry profitability.
 
Indeed, bank stocks remain "full on Monet" from the movie Clueless: "It's like a painting, see. From far away it's okay, but up close it's a big ol' mess."

Why Did Bank Investors Get It So Wrong?

1. What has been lost on bank-stock investors is that over history, while bank earnings do well with rising interest rates (as net interest income climbs), it is normally bad for bank stocks and the U.S. economy -- as rising rates, especially when that rise is as extreme as since February, presage economic weakness and a reversal of the favorable banking trends (read: reduced credit demand, slowing economic growth).

2. Bank investors failed to recognize that banking is increasingly a competitive business that is being commoditized. The threat of non-bank financials and inflation is keen -- both of which have served to raise technology costs and general expenses at a time when many of the business lines' profitability is contracting under the constant pressure of competition.

3. Bank investors failed to understand how a rise in interest rates would adversely impact the marks to market on "securities held for sale" and, in turn, capital ratios -- which will likely limit company buybacks . (See quote at the beginning of this column on JPMorgan's reduced Tier 1 capital ratio in the quarter.)

4. Bank investors failed to remember that the world has grown more flat economically and that, like in a game of dominos, lending around the world can be treacherous and victims of outlier events (read: Russia).

5. Bank investors failed to understand how quickly investment banking revenues/profits can evaporate.

6. Bank investors failed to calculate the impact of a quick cyclical turn in investment management fees (lower bond and stock prices) and in reduced capital market activity.

7. Bank investors failed to recognize that the credit cycle can turn quickly.

8. Bank investors failed to identify that some bank managements (like Citigroup) can become victims of empire building and expanding geographical presence, at the expense of profitability and capital positions.

 
Here are several recent columns that I have written which have outlined my consistent concerns regarding bank stocks. 
 
From Wednesday: Bank Talk

From Tuesday: Bank Stocks Are Still 'A Full-On Monet' 

From January: Why JPMorgan's EPS Release Is Bad for All Equities

But I had soured on the outlook for bank stocks even before the JPMorgan earnings release in January:

The Period of Bank Outperformance May Now Be Coming to an End

(This commentary originally appeared on Real Money Pro on April 14. 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 had no position in the securities mentioned.

TAGS: Earnings | Economic Data | Economy | Investing | Markets | Stocks | Trading | Banking | Financial Services | Analyst Actions

More from Stocks

Rule of the Week: Don't Fight the Fed

James "Rev Shark" DePorre
Jan 30, 2023 4:33 PM EST

We've got a mix of earnings, a rate decision and nervous investors.

3 High-Yield Dividend Tech Stocks for Income Investors

Bob Ciura
Jan 30, 2023 2:35 PM EST

Now could be a very good time to capitalize on sustainable income streams from a sector where dividend income is scarce.

Checking on AMD's Stock Charts Ahead of Tuesday's Earnings

Bruce Kamich
Jan 30, 2023 2:10 PM EST

Here's what to avoid for now.

Is This Mid-Cap Oil Stock Ready to Capture Its 'Big Winner' Potential?

Bruce Kamich
Jan 30, 2023 1:29 PM EST

Here's our technical strategy for trading oil producer Denbury.

Don't Fight the Fed? What About When the Fed Is Fighting Its Own Past?

Peter Tchir
Jan 30, 2023 1:00 PM EST

The biggest risk to markets in the coming weeks is the realization that the Fed has already gone far too far, and the economy is rolling over.

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

  • 12:27 PM EST REAL MONEY

    LIVE EVENT: Chris Versace and "Sarge" Guilfoyle Share Their Stock Market Insights

    This Monday, Jan. 30, at 12 p.m., our very own exp...
  • 11:48 AM EST REAL MONEY

    Watch Doug Kass on the Daily Rundown!

    In today's Action Alerts PLUS Daily Rundown, Doug ...
  • 11:03 AM EST JAMES "REV SHARK" DEPORRE

    This Weekend On Real Money

    It's time to start using this power to build great...
  • 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