This Day On The Street
Continue to site
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

Bad News Is Catching Up to Banks

This article originally appeared Aug. 30, 2013, on Real Money. To read more content like this, + see inside Jim Cramer's multi-million dollar portfolio for FREE Click Here NOW.

There has been a huge torrent of negative news about the financial sector and the money-center banks specifically.

The sector has led the rally this year, and while there has been a small correction since July's peaks, the benchmark Financial Select Sector ETF (XLF) has still risen more than 22% year to date.

But the news flow has been overwhelmingly negative, and I believe that the weight of it will be enough to burst the financials' bubble and send the overall market into a real correction, i.e., more than 10%, or below 1530 on the S&P 500.

To wit:
  • The legal nightmare is nowhere near complete for these banks, especially JPMorgan (JPM - Get Report).
  • The very lucrative rates business is dying.
  • And finally, from an excellent piece this week by Real Money contributor Roger Arnold, commercial and industrial lending appears to have peaked. I have found C&I loan growth to be a great indicator of the true health of the economy. Arnold predicts a slowing in C&I lending, and he notes that much of post-crisis C&I lending has been a domestic variant of the "carry trade" and not raw capital lent to create new commerce or industry.

    So we're sitting at a point where the financials' historic leadership position is important. "Follow the financials" is an old Wall Street bromide, and it has been a good investing strategy thus far in 2013. However, the financial stocks' run has occurred while underlying fundamentals -- best measured via net interest margin -- have weakened across the industry.

    How has that happened? Earnings have held up as greater revenue has offset weaker net interest margins. Why? Mortgages have been driving the bus for these banks, and lest we forget, mortgage origination can be a very profitable business. The rapid decline in mortgage application activity, especially refinancing, will hurt prospective earnings for the big boys.

    Readers of my newsletter, The Portfolio Guru Post, know how much I value the weekly data from the Mortgage Bankers Association. Yesterday's data were even more confirmation that the growth in housing finance is grinding to a halt. The refi "boom" was -- sorry, Mr. Bernanke -- an artificial creation of QE Infinity in the first place, and corrections can be painfully abrupt. This hurts not only the housing sector but employment and the overall economy.

    So, that's your appropriately aggressive pre-holiday call: Banks will suffer as rising interest rates hit loan demand, the refi boom collapses and legal costs mount

    Today is the type of day to put on a bearish play -- sleepy, pre-holiday trading as markets rise on volume that is practically nonexistent. Historically speaking, September has been a tough month for the markets, and waiting for a blowup is never as lucrative as anticipating it. Short XLF, anyone?

    At the time of publication, Collins and his firm had no positions in securities mentioned.

    Check Out Our Best Services for Investors

    Action Alerts PLUS

    Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

    Product Features:
    • $2.5+ million portfolio
    • Large-cap and dividend focus
    • Intraday trade alerts from Cramer
    Quant Ratings

    Access the tool that DOMINATES the Russell 2000 and the S&P 500.

    Product Features:
    • Buy, hold, or sell recommendations for over 4,300 stocks
    • Unlimited research reports on your favorite stocks
    • A custom stock screener
    Stocks Under $10

    David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

    Product Features:
    • Model portfolio
    • Stocks trading below $10
    • Intraday trade alerts
    14-Days Free
    Only $9.95
    14-Days Free
    Dividend Stock Advisor

    David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

    Product Features:
    • Diversified model portfolio of dividend stocks
    • Updates with exact steps to take - BUY, HOLD, SELL
    Trifecta Stocks

    Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

    Product Features:
    • Model Portfolio
    • Intra Day Trade alerts
    • Access to Quant Ratings
    Real Money

    More than 30 investing pros with skin in the game give you actionable insight and investment ideas.

    Product Features:
    • Access to Jim Cramer's daily blog
    • Intraday commentary and news
    • Real-time trading forums
    Only $49.95
    14-Days Free
    14-Days Free


    Chart of I:DJI
    DOW 17,660.71 +9.45 0.05%
    S&P 500 2,050.63 -0.49 -0.02%
    NASDAQ 4,717.0940 -8.5450 -0.18%

    Our Tweets

    Free Reports

    Top Rated Stocks Top Rated Funds Top Rated ETFs