Can you have a robust stock market without a robust banking system?
You better start asking that because from the looks of the stocks of the banks, many of which reported excellent quarters, this group is in real trouble.
One after another we have seen a cascade of points, a shedding that's quite extraordinary given that the banks have oodles of cash and are much stronger than they were going into the Great Recession. They were the epicenter of the collapse back then, now they are simply the conduits of the federal government's monetary and fiscal policy, and that's a decent business to be in. Moreover, in an era where the consumer's liquid and the deposit base is insanely large, it's not a stretch to say that these companies can get through this period pretty much with flying colors.
But ever since Jamie Dimon rather offhandedly said "a rational plan to get back to work is a good thing to do, but it won't be May, we're talking about about June, July, August, something like that," these stocks have been on a relentless decline. It's almost as if there is this force of light, which is to open right now and there is this force of darkness, those who won't let us go to work, mostly a group of New Yorkers who don't understand the pain of the rest of the country, the pain that comes from not being able to work. It's almost as if Jamie Dimon is saying that his clients and everyone else, take heed, it's not time for you to go put dinner on the table.
When I listened to Jamie say it I said to myself that's rational, makes sense. Others looked at it as if he is taking issue with the president who wants to put food on the table.
However, there's a third group that has now come to the fore: the group that says the system is about to go kerflooie, people are going to stop paying bills and when five million more people join the rolls of the unemployed this morning that's an awful lot of debtors that aren't going to pay the bills.
You see I think we are a changed society since the Great Recession. We are much more anti-bank and much more pro-debtor. If Jamie says America might not reopen until late summer then I think the bountiful reserves he took aren't that bountiful at all. I understood that the banks volunteered to get rid of their buybacks, but if we are going to be AWOL as a country for three more months I can't imagine that people will pay mortgages or rents or credit card bills. I can't imagine retailers paying their interest. It's kind of like a three month bank holiday except the holiday is on the banks and their shareholders, because I have to believe that the government will say we don't want you to pay your dividend. We need you to have enough capital if everyone walks away from bills between now and August. How can companies involved in travel, leisure, entertainment, restaurants and retail that are basically closed be expected to pay?
Now some banks are better prepared than others. Morgan Stanley (MS) has a pretty transparent book and to me, once it is merged with E*Trade (ETFC) , you have a very asset light financial with a huge embedded fee base. Doesn't matter, though, it trades like the others with a much riskier book of business. When I look at Wells Fargo (WFC) in particular I just don't like what I see, a lot of loans that I think will not be paid for the next three months. Why else does this stock yield 7.5%?
Now there's a silver lining. If people go back to work soon they will be expected to pay their bills. But now that the retailers ex Costco (COST) , Walmart (WMT) , and Amazon (AMZN) , plus Lowe's (LOW) and Home Depot (HD) , have been obliterated and the airlines have been crushed, it's the banks' time to be the proxy for the economy's weakness. We want companies now with dividends that can be raised not cut. We want companies with no debt, not debt laden entities. And, most of all we want to own stocks of companies that get paid for their services and don't get stiffed and get away with it for the next three months. That's the banks. No wonder they've been hit so hard.
(Costco and Amazon are holdings in Jim Cramer's Action Alerts PLUS member club. Want to be alerted before Jim Cramer buys or sells these stocks? Learn more now.)
