The bond market has been looking ahead, as we have seen with the rise in the yield on the 10-Year Treasury Bonds. But according to Cannon, "we would likely need to experience a more robust job market in the U.S., with employment stats encouraging the Federal Reserve to begin reversing its very accommodative position," in order for the yield curve to widen further.
"Looking underneath the positive data suggests that all is not healing in the job market," Cannon said, pointing out that the size of the labor force has been declining, as some people give up looking for work. According to KBW's research using Labor Department statistics, the labor force participation rate has fallen from over 66% in 2007 to less than 64% in 2012 and so far in 2013.
"At some point, an improved job market should increase participation, putting upward pressure on the unemployment level and delaying its reaching the benchmark 6.5% level," he said.
If the unemployment rate temporarily creeps back up, or if the rate of improvement slows, the Fed will feel a whole lot less pressure to let rates rise, meaning the banks will be waiting longer for a more normalized yield curve."For investors in financial stocks who are concerned that the job market is unlikely to spur near-term Fed action, a defensive posture is in order," Cannon wrote, adding that "defensive investors may want to choose stocks with low correlation to the 10-year bond yield, low betas and limited price appreciation year to date." Five credit card lenders and associated processors would fit that bill, according to KBW:
- Shares of Capital One Financial (COF - Get Report) closed at $55.19 Friday, declining 5% this year, with investors concerned over a relatively weak fourth quarter and subdued 2013 outlook, with declining credit card loan balances. But the stocks trades for 8.2 times the consensus 2014 earnings estimate of $6.71 among analysts polled by Thomson Reuters. That is by far the cheapest forward P/E for any of the 24 components of the KBW Bank Index. The company on Thursday announced it would raise its quarterly dividend to 30 cents a share from 5 cents.
- American Express (AXP - Get Report) closed at $66.09 Friday, returning 15% year-to-date. The shares trade for 12.4 times the consensus 2014 EPS estimate of $5.33. The relatively high P/E multiple in the current market environment reflects a very strong earnings track record. The company reported a 2012 return on average equity of 23.1%, declining from 27.7% in 2011, as its release of loan loss reserves declined. The company on Friday raised its quarterly dividend to 23 cents a share from 20 cents, and announced Federal Reserve approval for up to $4.2 billion in share buybacks through the first quarter of 2014.
- Shares of Discover Financial (DFS - Get Report) closed at $44.14 Friday, returning 15% this year. The shares trade for 9.4 times the consensus fiscal 2014 EPS estimate of $4.69. The company's return on average assets was 3.23% in fiscal 2012, and its return on average tangible common equity was 26.8%, according to Thomson Reuters Bank Insight. The company on Friday said it would raise its quarterly dividend to 20 cents a share from 14 cents, and also announced a $2.4 billion share buyback program.
- Visa (V - Get Report) closed at $158.55 Friday, returning 5% year-to-date, and trading for 18.7 times the consensus fiscal 2014 EPS estimate of $8.51. KBW analyst Sanjay Sakhrani rates Visa "outperform," with a price target of $186.00. After the company announced its fiscal first quarter results, Sakhrani on Feb. 7 said in a report that "volumes came in better than our expectations for the quarter," and were "trending positively" for the fiscal second quarter. Visa in February announced a new $1.75 billion share buyback program, increasing its stock repurchase authorization to nearly $3 billion.
- Shares of Mastercard (MA - Get Report) closed at $519.37, returning 6% year-to-date. The shares trade for 17.2 times the consensus 2014 EPS estimate of $30.22. Juneja also rates Mastercard "outperform," with a price target of $623.00. Chris McWilton, Mastercard's president for North American markets said at a conference last week that U.S. processing volumes were up 4% year-over-year in February, slowing from a 6% increase the previous month, with delayed income tax refunds being a factor in the slowing growth rate. Sakhrani on Wednesday said Mastercard's growth numbers "generally showed a deceleration in volumes and transactions, similar to other industry indicators."