Banks Lead Market Lower Amid Stream of Positive Economic Data

NEW YORK (TheStreet) --Large-cap banks led the broad market lower on Tuesday, as strong manufacturing data continued to flow and auto makers reported huge sales gains.

The Dow Jones Industrial Average was down 0.6%, while the S&P 500 shed 0.3 and the NASDAQ Composite gave up 0.2%. The KBW Bank Index (I:BKX) was down 1.1% to 66.88, with all 24 index components ending in the red.

PNC Financial Services Group of Pittsburgh  (PNC) was the loser among the big banks, with shares sliding 2.4% to close at $75.63.

In the midst of a two-year market rally, with the KBW Bank Index rising 30% this year, following a 30% gain during 2012, bank stock investors may be feeling nervous about the eventual tapering of the Federal Reserve's "QE3" bond purchases.  The purchases have been running at a net rate of $85 billion a month since September 2012, in an effort to hold-down long-term interest rates.  A strong set of manufacturing and auto sales numbers over the past two days could pave the way for a change in policy by the Federal Open Market committee following its next meeting on Dec. 17-18, or early in 2014.

The Institute for Supply Management (ISM) for New York on Tuesday said business activity in New York City during November grew at its "fastest pace in three years," according to a survey of area business. The Current Conditions Index for New York in November rose to 69.5 from 59.3 in October.

The New York manufacturing report followed the national ISM report on Monday, which included an increase in the manufacturing Purchasing Managers Index (PMI) for November to 57.3% from 56.4% in October. The PMI has increased each month since June, and the November reading was the highest during 2013. A reading above 50% indicates expansion.

Countering the media reports of disappointing Black Friday sales (keep in mind that news reports of holiday retail sales have had a strong tendency to be negative for the past several decades), most major auto manufacturers on Tuesday reported very strong year-over-year sales growth:

  • General Motors (GM) said its U.S. vehicle sales during November rose 14% from a year earlier to 212,060, for the company's "highest November sales in six years.
  • Ford Motor Co. (F) said it had its "best November since 2004," with sales rising 7% year-over-year to 147.021 vehicles.
  • Chrysler said its November sales were up 16% from a year earlier to 142,275 units, with a 30% increase in Jeep sales.
  • Toyota (TM) said its U.S. sales for November were up 10% year-over-year to 178,044.
  • Nissan reported record November U.S. sales of 106,528 vehicles, increasing nearly 11% from a year earlier.
  • Honda (HMC) ran counter to the industry trend, reporting a slight decline in November sales form a year earlier to 116,507 unites, although its year-to-date sales were up nearly 8%.

Some Bank Stocks Still Have Room to Run

Wells Fargo (WFC) and Citigroup (C) both "have over 25% upside potential," according to Guggenheim Securities analyst Marty Mosby.

Shares of Wells Fargo were down 1 to close at $43.69 Tuesday.  The shares trade for 1.9 time tangible book value, according to Thomson Reuters Bank Insight, and for 10.9 times the consensus 2014 earnings estimate of $4.01 a share.  The consensus 2015 EPS estimate is $4.22.

Citigroup was down 1% to close at $52.10.  Citi trades for 0.9 times tangible book value and for 9.6 times the consensus 2014 EPS estimate of $5.42.  The consensus 2015 EPS estimate is $5.96. 

"We believe WFC has pent-up earnings power from its prior acquisition of Wachovia that is slowly being released through measured efficiency gains and deployment of excess cash positions. Additionally, strong capital positions and dividend yields of approximately 3% support its existing stock price levels with continued strong operating earnings growth expected through 2014E," Mosby wrote in a client note on Tuesday.  Wells Fargo more than doubled in sized when it purchased Wachovia at the end of 2008.

For Citigroup, the story continues to be the wind-down of the runoff subsidiary Citi Holdings, and the potential release of excess loan loss reserves and deployment of excess capital.  Citi Holdings had $122 billion in assets as of Sept. 30, declining 29% from a year earlier and 59% from two years earlier, representing just 6% of Citigroup's total assets.  According to Mosby, if Citigroup's management team "can reduce the potential losses in Citi Holdings or foreshadow that improvement by substantially reducing allocated allowance then the stock price should begin to reflect upside potential of over 30%."

The following chart shows the year-to-date performance of Wells Fargo and Citigroup shares, with comparisons to the KBW Bank Index and S&P 500:

WFC Chartdata by YCharts

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-- Written by Philip van Doorn in Jupiter, Fla.

>Contact by Email.

Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.

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