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Why Were Big-Bank Stocks the Dow's Big Winners Today?

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For the last couple of months, the Dow Jones Industrials (DJINDICES: ^DJI  ) have proven vulnerable even to good economic news, as fears about the Federal Reserve pulling the plug on monetary stimulus have outweighed the positive impact of an improving economy. Yet, even though this morning's employment report initially caused some of those fears to reawaken, stock investors eventually decided that the benefits of an improving picture for workers outweighed the negative impact of the Fed's departure. Although bond rates soared and gold plunged, the Dow added 147 points, and the broader market posted similar gains of about 1%.

When you look at the stocks that gained the most today, financial stocks come to the forefront. The top two gainers were American Express (NYSE: AXP  ) and JPMorgan Chase (NYSE: JPM  ) , with gains of about 2.3% each. Bank of America (NYSE: BAC  ) wasn't much further back with a 1.8% jump.

The big banks all stand to profit from improving economic conditions. For AmEx, the biggest driver of success is consumer spending, and with more people returning to work, prospects for further growth from the card company should improve, with fewer unemployed cardholders missing payments or dropping their cards. In particular, a surge in part-time jobs could help AmEx's Bluebird prepaid-card program, which is the company's attempt to reach out to underbanked customers who could use a low-cost, convenient prepaid option to cut their fees and get better access to their money.

Meanwhile, for banks, investors have been worried about the impact of rising rates on their mortgage-banking segments. Higher rates have already led to a reduction in refinancing transactions, and with JPMorgan and Bank of America getting a substantial amount of income from mortgage fees, today's big move up in rates might be seen as a negative. But offsetting that is the fact that, once rates move up, it doesn't matter as much to the mortgage market how much they rise; as long as short-term interest rates remain low, it's a potential profit enhancer for the banks, because they'll be able to charge more for business loans and other lending tied to higher long-term rates, while getting cheap funding from deposits paying little or no interest.

Still, one concern on the radar is the implementation of the Fed's version of Basel III regulations, which will impose new rules on the entire banking industry. In addition, the Fed is likely to go even further than Basel III did with respect to the largest banks, including JPMorgan and B of A, requiring excess capital-to-assets ratios, and minimum amounts of equity and long-term debt to facilitate wrapping up banks in the event of failure.

Banks are incredibly complicated companies, and investors have certainly gotten blindsided by financials before. But if financial stocks can avoid getting hammered too much by regulatory moves, then fundamentals in the economy appear to be moving in their favor, and that could help send stock prices up further.

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  • Report this Comment On July 06, 2013, at 1:07 AM, garifolle wrote:

    Completely disagree with you explanation for the jump in the financials.

    The employment report, even if OK, were not THAT good.

    You did not look at the global picture.

    While you were celebrating July 4rth,

    in Europe, Dragui made announcements that were extremely reassuring for the banks and credit cards.

    So yesterday, since the TSX was open, I loaded up with ZUB, the American financials Canadian ETF, that was already reacting positively, before the employment reports.

    Well rewarded.

    Unfortunately the enthousiasm did not last very long in Europe, let's hope it will in the US.

  • Report this Comment On July 06, 2013, at 7:05 AM, rsinj wrote:

    garifolle, it's all about perception. Maybe the employment report was not that good, however, rates are going up - that is for certain.

    If rates go up, banks/financials have a bigger spread in their borrowing/lending rates. This ultimately means higher profits for banks and financials - that is why they have all been very strong over the past 4 to 6 weeks.

    However, we need to keep in mind that the market looks forward. Once the higher interest rates (at least what's envisioned for the next 6 to 12 months) are baked in to the stocks, we need to figure at what point they are fully valued or overvalued, again, looking forward.

    Possibly for the big national/global banks/financials the happenings in Europe have some impact. However, from my vantage point, I have been seeing most all banks, even smaller regionals and community banks, moving higher over this same time period the past 4 to 6 weeks.

    For me, this means that it's time to begin trimming some of those gains which have been significant.

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