 |
Did you see the 2012 movie “Trouble with the Curve”? If you’re a baseball enthusiast, a Clint Eastwood/Amy Adams fan, or just someone who likes a touching family drama, I highly recommend it.
The title refers to a baseball prospect who some scouts rank highly … but who Eastwood’s character (correctly) figures out can’t hit curve balls effectively. The prospect turns out to be a bust.
When it comes to the stock market, though, that title might apply better to banks. Investors have dog-piled into banks in the month of August amid increasing chatter of potential Federal Reserve rate hikes. The Financial Select Sector SPDR Fund (XLF) gained around 3.8%, while the interest rate-sensitive Utilities Select Sector SPDR Fund (XLU) dropped 5.8%.
The oft-repeated mantra on CNBC is that rate hikes are supposedly good for bank profits.
But there’s just one problem: It’s not whether rates rise or fall that truly matters for banks’ core lending and investing profitability. It’s HOW they move.
 |
| Don’t be fooled by the banks. |
Banks like a steep yield curve. That’s because they make money by borrowing cheap funds from depositors or bond buyers at low short-term rates, then turn around and invest or lend that money at higher long-term rates. The wider the spread — or difference between the two — the better it is for banks.
You get a steep curve when all rates rise, but long-term rates rise faster and further than short-term rates. Or when all rates fall, short-term rates drop faster and further than long-term ones. Yet that isn’t what’s happening at all.
Take a look at this updated version of a chart I first shared with you last December. It shows the difference between 2-year yields and 10-year yields, a common measure of the steepness of the yield curve.
You can clearly see that the curve isn’t steepening at all. It’s flattening — and flattening massively. The 2-10 spread just sank to 0.75%, or 75 basis points, this week. That’s the lowest since way back to November 2007. The spreads between 2s and 30s, and 5s and 30s, have likewise collapsed to multi-year lows.
There’s a lot going on in the next few weeks. We have a G-20 summit, central bank policy meetings in Europe, the U.K., the U.S., and Japan, corporate earnings updates, and more. The markets could be in for one heck of a roller-coaster ride as a result.
But when I look at what’s happening, I can’t help but ask: Why would you want to own banks here?
I’d rather you stick with the kinds of stocks and other investments I recommend in my Safe Money Report. They’re tailor-made for this kind of turbulent environment, and they don’t come with the kinds of built-in curve risk that most financials do. Just give my staff a call at 800-291-8545 or click here to get on board.
Until next time,
Mike Larson
Mike Larson graduated from Boston University with a B.S. degree in Journalism and a B.A. degree in English in 1998, and went to work for Bankrate.com. There, he learned the mortgage and interest rates markets inside and out. Mike then joined Weiss Research in 2001. He is the editor of Safe Money Report. He is often quoted by the Washington Post, Reuters, Dow Jones Newswires, Orlando Sentinel, Palm Beach Post and Sun-Sentinel, and he has appeared on CNN, Bloomberg Television and CNBC.
{ 11 comments }
I don’t know why the banks don’t want to release my credit card i need a support right now
OK Janet the numbers are out now go put a sock in it so we can invest without you running off at the mouth. The numbers stink your credibility is in shreds so lets move on.
The U.S. economy created 151,000 jobs in August, while consensus forecasts were calling for at least 180,000 jobs to have been created. Markets were eying the data closely to see if the economic indicator would be enough to push the Federal Reserve into raising interest rates
Could it be that the Fed’s desire to raise rates, has to do with American desire to compete with the IMF’s coming Special Drawing Rights bonds, which will be redeemable in Yuan, instead of Dollars? When they raised rates a trifle in December, the demand became so great it drove the price up to where, as I understand it, the effective rate dropped about a third, to below the former rate. The Dollar is STILL the dominant currency in the world.
Not for long. Things are about to change on a level no one has seen before. Be afraid, be very afraid.
Have the 1% been allowed to rig LIBOR again recently ?
Hey Mike, One of your colleagues at Weiss recommended BCS recently, and I’m up 15% in a month.
Contrast to that is your recommendation of SRS – down 20+%
Banks don’t look as bad as shorting real estate !
Mike,
Excellent explanation of the importance of the yield curve and it also explains why Europe and Japan currently have negative interest rates. Otherwise banks would LOSE money every time they made a long term loan!
Are you saying that you have not heard of fractional reserve lending? Banks don’t just make money from the difference between the interest rate of borrowing and lending. That is the perpetual lie we get from the press.
Vendors are frustrated by those of us who want all the expert advice for free. Note that the last time I bought a report on the internet, my CC was charged each month for their service. I did not choose to purchase the service only the report As they would not cancel the bogus subscription, I had to cancel my CC and have it re-issued with a different number.
The Too Big To Fail Banks are leveraged more now than in 2008.
JP Morgan: $70.4 TRILLION
Citigroup: $63.5 TRILLION
Bank of America: $55.7 TRILLION
Goldman Sachs: $53.5 TRILLION
Morgan Stanley: $46.7 TRILLION
Deutschbank: $80 TRILLION
All These Zombie Banks have been Insolvent Since 2008 and kept alive through Central Bank QE Programs.
The problem with the Housing Bubble of 2008 was not just the price collapse of millions of homes. But the Leveraged Derivatives counter-party risk involved with the Mortgage Backed Securities.
A Bank with a Tier 1 Capitalization of 10% is consider excellent. This grading does not include their Derivative Exposure. For Example: JP Morgan manages 2.1 Trillion in assets. The Tier 1 Cap. Of 10% would be 210 Billion. The 210 Billion cushion would only cover 0.3% of total exposure. If JP Morgan’s Tier 1 Cap. was 100% the cushion would only cover 3.0% of total exposure. The Dodd/Frank Law does not address this problem. I’m hedging against the Too Big To Fail Banks.
Sounds like you have a lot of investors in the crowd. A question which of you investors would pay $1500 for one share of Priceline stock? Hands up now don’t be shy. Here in Thailand you can buy shares of really great companies for less than $10 a share. Yes that is why the SET the local stock market is booming and the American markets are going sideways and my next bet is down. The local currency the baht gets stronger day by day. Thailand is rolling in foreign money. The markets of the future are in Asia.