Don’t Get Sucked In By A One-Day Rally

In the midst of a euphoric rally Friday – with a rebound in energy names, and, more germane to PYMNTS, bank stocks – take a step back.

Hard to not be tempted when JPMorgan is up 7 percent intraday, with news of an outsized bet on the name by none other than Jamie Dimon, or Deutsche Bank up 10 percent on the heels of news that the company would be buying up some of its unsecured debt to the tune of $5.4 billion.

But these are company-specific actions. They are one-off deals and transactions and purchases that speak to just how desperately investors want to believe that something is worth cheering.

What do these recent headlines have to do with the fundamentals underlying the banking sector as a whole? Not all that much, though it must be said that Dimon’s JPMorgan buy of course implies that he thinks brighter days are ahead.

One bit of news that came right into the teeth of this rally: Bank of America analyst Ken Bruce downgraded a whole host of names in the sector tied to credit, with a nod to a real risk to, and uncertain, earnings climate facing banks in the United States. Among the companies taken down a peg, from buy to neutral: Capital One, Visa, MasterCard and Discover Financial (though admittedly there are other names he holds at buy, among them Ally Financial). “The combination,” he said of weakening outlooks for the U.S. economy and also higher stock market volatility, “drives poor earnings visibility and likely constrained valuation, which we think can’t be ignored.” Neutral ratings generally are taken as sell signals on Wall Street, even though analysts might actually, as Bruce posited in the note, see some positive returns.

Though details of Bruce’s note were not currently available to PYMNTS, we’ll hazard a guess that the same concerns that have bedeviled the sector at large are at least on the radar screen – low interest rates, in tandem with a Federal Reserve that may be in no rush to pull the trigger again. With rates low, and bonds squeezing them lower as investors flee stocks for some other havens, the longer term net interest margin becomes a bit more suspect, and so do multiples, at least on earnings. Price to book values aside, there’s no real backstop to predict just where stocks may wind up, but if cash can’t be generated robustly, earnings suffer (and, well, so will lending).

Nice to see a rally, but take a step back.