Big Bank Theory! Financials Lead Stocks Higher.
The 1st Quarter earnings parade began Friday with an unexpectedly great start. Banking giant JP Morgan reported record revenues AND net income. This put aside the residual fears from the disastrous 4th Quarter of 2018. In fact, JPM made it clear that the feared “inverted yield curve” had not materially hurt the bank’s results. (https://www.jpmorganchase.com/corporate/investor-relations/document/cb2cc7cf-57fa-4425-8f15-c6255a862742.pdf).
Fueling the robust results were sectors like credit card transactions volume and investment banking. With Initial Public Offering activity slated to heat up, banks are looking at a much better year than thought just 3 months ago.
Wells Fargo also turned in good numbers, exceeding estimates for earnings and beating the year ago quarter nicely. But, forward guidance was poor and the company is still without a permanent CEO. The stock declined on the day, despite the beat. (https://www.zacks.com/stock/news/379615/wells-fargo-wfc-beats-q1-earnings-and-revenue-estimates).
JP Morgan’s results lifted the entire sector EXCEPT Wells Fargo.
The Financial Sector is in gear with the rest of the stock market, providing new leadership. The Bank Index and Broker-Dealer Index (above) are literally on the verge of MAJOR upside reversals. With Financials now joining the Energy Sector, the markets are on track for NEW ALL TIME Highs in the very near future.
Emerging Opportunities in Financials
A number of financials are poised to rally and may make some interesting short-term trading opportunities. Even though the Bank and Broker-Dealer Indexes have not “officially” broken above their respective resistance lines, important individual stocks ARE on the move. The Slide Show below reveals the charts of 5 Major Financial players. The key takeaways are as follows:
- JPM, on the earnings report, broke out from a “Cup and Handle” to lead the group.
- Broker Dealers Morgan Stanley and Goldman Sachs also broke out from Cup and Handles to turn BULLISH.
- Citigroup followed JPM and broke out above resistance to turn its pattern BULLISH.
- Bank of America is poised to break out of an INVERSE “Head and Shoulders” pattern to turn BULLISH.
Financials, like Morgan, are benefitting from a strong consumer market. Consumers continue to take on more credit card debt despite record levels. For those banks with a strong presence in Investment Banking, a full slate of IPO’s has begun to be marketed to retail and institutional investors.
Capital Markets Heating Up With “Unicorn” IPO’s
The term “Unicorn” is meant to denote a company with a market value exceeding $1 Billion. LYFT was the first of NINE of these mega IPO’s planned for 2019. (https://money.usnews.com/investing/stock-market-news/slideshows/best-stocks-ipo-this-year?slide=11)
Unfortunately, LYFT’s IPO met poor market reception after trading began. Fourteen days after its first trade at $87.24, LYFT closed on Friday below $60, well below the IPO price of $72.
We noted several concerns regarding the “valuation” issues that are playing out in the stock’s poor trading. “LYFT IPO Raises Questions”. (https://markonomics101.com/2019/03/31/lyfts-ipo-raises-questions-chart-of-the-day-20/).
UBER’s and Pinterest’s dealers are currently soliciting investor interest. The disappointing LYFT IPO has lowered some of the more unrealistic pricing hopes. UBER, for example, was briefly hoped to fetch a market capitalization as much as $125 Billion. However, in light of the valuation concerns regarding LYFT, expectations have been lowered to $100 Billion.
Last week, UBER released its S-1 disclosure document, reporting 2018 revenues of $11.2 Billion. UBER, like LYFT, incurs outsized operating losses of roughly $3 Billion annually.
At $60 per share, LYFT is worth about $18 Billion. UBER, at 5 times the size of LYFT, would therefore, be valued at about $90 Billion, a bit less than the $100 Billion sought. The sheer size of the UBER offering, approximately $10 Billion ( 10% of the company), is going to be quite a test for the underwriting syndicate.
Other prospective “Unicorns” include Airbnb, valued at $30 Billion and WeWork, thought to be worth $40 Billion. The underwriting fees for these IPO’s, and others slated to come later in the year, should produce sizable fees for the Financial Sector.
Maintain Your Discipline
On Friday, Chevron announced a $33 Billion takeover offer for shale producer Anadarko Petroleum. Reportedly, Occidental Petroleum is willing to pay more. The stocks of many of the production companies have lagged behind the rise in crude oil prices. Thus, it appears that the Exploration and Production sector is fundamentally undervalued. We highlighted several companies, including Anadarko, in our recent article, “A Gusher Of Opportunities”. (https://markonomics101.com/2019/04/11/a-gusher-of-opportunities/).
Despite how incredibly BULLISH these set ups may appear, keep in mind that NOTHING is GUARANTEED. Well placed trading stops always make sense before you decide to take a bet on any issue. A good refresher course on trading limits can be found here. “The Importance Of Setting Trading Limits”. (https://markonomics101.com/2019/03/28/the-importance-of-setting-trading-limits/).
Risk appears subdued for the time being. But, ONLY for the time being.
Be Informed, Not Misled!