Bank stocks are slumping.
Wells Fargo (WFC), the largest U.S. bank, has fallen 11% this year. JPMorgan Chase (JPM), the second largest, has fallen 14%. Bank of America (BAC), the third largest, has plunged 21%.
And those are just the household names…
The Standard & Poor’s 500 Financials Index, which tracks 87 large U.S. financial stocks, has dropped 12% this year. For comparison, the S&P 500 has dropped 8%.
On Monday, Bloomberg Business reported that financial stocks are off to their worst start in years.
The Standard & Poor’s 500 Financials Index has tumbled 11 percent in 2016, putting it on track for its worst month in more than four years…
More than $360 billion of market value has been wiped out of financial companies in January, more than all but one month since data began in 1990.
• The performance of banks says a lot about the health of an economy…
Banks make money by loaning money to businesses and real estate buyers. The more good loans a bank makes, the more interest paid to the bank.
But when an economy is doing badly, demand for loans falls. Also, when an economy is doing badly, some borrowers don’t pay loans back in full. This increases the cost of bad loans…which is one of a bank’s biggest expenses. This eats away profits from the bottom line.
When the economy slows, people cut back on extra expenses like vacations. People shop less. There are fewer dollars around at the end of each month, so less money ends up in the bank…giving the bank less money to loan out.
Since banks “touch” almost every aspect of the economy, bad performance by banks is often an early sign that the economy is turning down.
• While bank stocks are down big, bank profits are still solid…
JPMorgan Chase’s profits jumped 10% from the prior year...Bank of America’s rose 9%...and Wells Fargo’s were flat. You’d expect to see much worse results in an industry where stocks are breaking down. This likely means investors are expecting bank profits to shrink soon. Markets tend to “price-in” things before they happen.
Bloomberg Business reports:
Commercial and industrial loans have flat lined in recent weeks after steadily climbing throughout 2015…Growth in such loans offers investors an idea of potential interest income, as C&I loans typically produce more revenue for banks than parking funds in cash or Treasuries.
Bloomberg Business also explained that banks are bracing for losses on oil loans.
Bigger-picture uncertainties are weighing on the group, not least of which is how wounds at energy companies will bleed into this sector. Bank of America, Citigroup Inc., JPMorgan and Wells Fargo have set aside more than $2.5 billion to cover souring energy loans and will add to that if oil prices remain low.
• If you’ve been reading the Dispatch, you know the oil industry is in crisis mode…
The price of oil has plunged 70% since June 2014. Yesterday, oil closed at $32.
Energy consulting company Wood Mackenzie estimates $1.5 trillion worth of oil projects in North America can’t make money even at $50 oil. With oil at $32 today, the value of money-losing projects has likely climbed above $2 trillion.
Many oil companies are struggling to pay back loans. Credit rating agency Fitch expects 11% of U.S. energy bonds to default this year. That would be the highest default rate for the energy sector since 1999.
This is bad news for banks that have loaned money to oil companies.
• Moving along, if you’ve been reading Crisis Investing, you know the “opening up” of Cuba is a huge investment opportunity…
Nick Giambruno, editor of Crisis Investing, expects to make a lot of money investing in Cuba. Nick specializes in buying high-quality assets made cheap by crisis. According to Nick, a crisis is the only time you can be sure to get assets at bargain prices.
Cuba has been in a slow-motion crisis for decades. In short, its Communist government has wrecked the economy. And the United States’ ban on trade with Cuba killed any chance at economic growth.
However, after decades of isolating Cuba, the U.S. government recently changed its policy. It reopened an embassy in Cuba in August. And last week, the U.S. took another promising step toward Cuba.
Here’s the New York Times:
The Obama administration announced Tuesday that it was removing major impediments to contact between the United States and Cuba by lifting restrictions on American financing of exports to the island nation and relaxing limits on the shipping of an array of products, from tractors to art supplies.
The revised rules that will take effect on Wednesday will allow United States banks to provide direct financing for the export of any product other than agricultural commodities, still walled off under the trade embargo.
Nick notes that American companies are pushing to do business in Cuba. He says the “cat’s out of the bag,” and Cuba will soon open up.
Cuba has over 2,000 miles of pristine coastline and the potential to be a top tourist destination. When the embargo ends, the U.S. government estimates 12 million Americans will visit Cuba within the first year.
There’s no denying it. If Cuba ever opens up, there’s potential to make a fortune. Doug Casey has long been interested in the investment potential of Cuba, and I couldn’t agree more that there is huge opportunity there.
You can learn how Nick is playing the “opening up” of Cuba by taking a risk-free trial of Crisis Investing. It’s an investment Americans can easily buy with a standard brokerage account…and it yields 9.3%.
• Our friend Tom Dyson just came back from a trip to Cuba…
If you don’t know Tom, he's founder of Palm Beach Research Group, a publishing company dedicated to helping readers get a little bit richer every day. Since he launched The Palm Beach Letter in 2011, it has built a reputation as one of the world’s most respected investment advisories. You can check it out here.
Tom was in Cuba looking for investment opportunities. Here’s his take…
There are billions of dollars just waiting to flood into Cuba the moment their economy opens. There’s a whole industry poised to invest in Cuba: Cuban people living in Florida and other parts of America...the big hotel chains...the big real estate companies.
Tom says it’s not easy for Americans to invest in Cuba yet…but the potential is huge.
It’s a beautiful island with amazing beaches. Cuba could also be a huge cruise ship destination. It could end up looking like Cancun.
Chart of the Day
Gold has climbed to a three-month high.
Yesterday, the price of gold closed at $1,125 an ounce, its highest level since November. Gold is also up 6.1% since the start of the year. U.S. stocks are down 8% in the same period.
Today’s chart shows that gold is “carving out a bottom”…
On Monday, we explained why “carved-out bottoms” are important. An asset carves out a bottom when it stops falling…forms a bottom for a period of time…then starts climbing higher. A stock that’s carving out a bottom should hold above a certain price for a period of time. This is a key signal that buyers are stepping in at this price, giving it a floor.
Buying an asset that has carved out a bottom is much less risky than buying an asset that’s trending down.
As you likely know, gold has been in a downtrend since 2011. However, since November, gold has stopped going down. It has held above $1,050. This is a clue that gold prices are heading higher.
Casey readers know we own gold because it preserves wealth over the long-term. We try not to get caught up in its daily price movements.
However, gold is at a potential “turning point” today. If you’ve been meaning to buy gold, now’s a good time.
Delray Beach, Florida
January 28, 2016
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