Doug Kass: How Did Bank Stock Investors Get So Clueless?

Travelling with the herd is often harmful to your investment well being. 


Banks stocks have been among the worst-performing sectors in the last six months. Yet, the vast consensus view was that, in a rising interest rate environment, seen in the last three months, bank stocks would be among the leading market performers.




The share price of the largest and most popular money center bank extant, JPMorgan Chase  ( JPM) , has fallen from $170 to $127.


Citigroup ( C) shares, a favored “value play” among the banks, has dropped from $79 to $50.


Among the better-performing large money banks, even Bank of America ( BAC) ($50 to $39) and Wells Fargo ( WFC) ($60 to $48) have performed poorly.


I attribute the mistaken and almost universal optimism towards bank stocks as a singular reflection of the superficiality of investors today (the near universal mantra that “rates rise and so will bank stocks”) and the mindless and wrong-footed logic and poor (company-specific and industry) analysis.


Bank stock investors have missed eight important headwinds to bank stock performance and banking industry profitability.


Indeed, bank stocks remain “full on Monet” from the movie Clueless: “It’s like a painting, see. From far away it’s okay, but up close it’s a big ol’ mess.”

Why Did Bank Investors Get It So Wrong?

1. What has been lost on bank-stock investors is that over history, while bank earnings do well with rising interest rates (as net interest income climbs), it is normally bad for bank stocks and the U.S. economy — as rising rates, especially when that rise is as extreme as since February, presage economic weakness and a reversal of the favorable banking trends (read: reduced credit demand, slowing economic growth).

2. Bank investors failed to recognize that banking is increasingly a competitive business that is being commoditized. The threat of non-bank financials and inflation is keen — both of which have served to raise technology costs and general…


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