It's big bank season -- Citigroup (NYSE:C) just reported, and we're hot on the heels of quarterly updates from JPMorgan Chase (NYSE:JPM), Goldman Sachs (NYSE:GS), and Wells Fargo (NYSE:WFC), to name a few. In this week's episode of Industry Focus: Financials, host Jason Moser and Motley Fool contributor Matt Frankel examine Citi's report, then tell listeners what to look for from the rest of the group.
Tune in and hear why Citi's still one to watch, despite its terrible trading revenue; some legal issues cropping up around the war on cash; why Wells Fargo can't seem to put the past behind them; big risks you need to watch with big banks; and more. Plus, on this week's Between Two Fools, Jason brings his daughters Ainslie and Hannah on the show to talk about Finance Park, entrepreneurship, stock picks, and more.
A full transcript follows the video.
This video was recorded on Jan. 14, 2018.
Jason Moser: Welcome to Industry Focus, the podcast that dives into a different sector of the stock market each day. It's Monday, January 14th. I'm your host, Jason Moser. Joining me today, in the actual studio -- no, folks, he's not on Skype -- Matt Frankel is in the house, certified financial planner. He's a pretty good-looking guy, too. Matt, hey, welcome! Glad to have you here!
Matt Frankel: Thank you! I almost didn't make it.
Moser: I almost didn't make it back! [laughs]
Frankel: I thought you were going to have to Skype in, and I'd be here.
Moser: That was going to be a funny reversal of fortune. The potential was certainly there, indeed. On today's show, we're going to talk about Wells Fargo's latest troubles. We'll talk about a funny tweet we saw over the weekend that brings up some legal questions concerning the war on cash. We'll do a little bit of something different today with One to Watch. We're going to have a few to watch. We're going to start talking about some of these banks and the earnings that are coming out soon. We'll give those all a good, quick look.
We're going to begin today with another installment of Between Two Fools. The first Between Two Fools for 2019 is actually between three Fools. Hannah and Ainslie Moser are eighth- and seventh-grade students at Robinson Secondary here in Fairfax, Virginia, and they're also my daughters. Recently, we sat down in the studio to talk money and investing and more from a younger perspective.
J. Moser: Hannah, you mentioned the Finance Park that we went to recently. That was a pretty amazing ordeal. I went as a chaperone; your mom and I both chaperoned your class there. What was the Finance Park about?
Hannah Moser: For those of you who don't know, Finance Park is almost a simulation. They bring you in. You've been talking about it in school for the past week. Basically, they bring you in and they say, "We're going to teach you how to be an adult while you're still a kid." That's the idea that they bring about their concern that kids aren't exactly ready to become adults, they aren't really told about most of the perks and the downfalls of being an adult. So, their goal is to try to teach you how to best manage that.
When we went, we didn't know exactly what to expect. Everyone had gone before us. Everyone said it was so boring, and it wasn't important. But the real thing is, kids get bored so easily, but I do know that we all actually absorb the information, and it will stick with us. It's just, at the time, it seems so dumb.
J. Moser: Yeah, for me, I was floored by it. And I'll be writing a little bit more about it later. I think you hit the nail on the head there, it's a simulation. Everybody goes in there, and every kid gets a tablet. You essentially have to go through these 24 different modules of learning how to be an adult and budgeting your money. You're given a scenario where, this is who you are, this is what you do for a living, and this is how much money you make. And some people, they're single, some people are married with children, some people are divorced with children. But this is what you get, and now you have to go figure out how to make it work. It was a good experience to show you, maybe being an adult isn't all it's cracked up to be. But we also tell you, it does come with its freedom, just requires more responsibility,
H. Moser: It does. It's important to go in there and learn about that. When they opened up the Finance Park, it's basically this giant indoor mall. The way they made that up is so impressive because they've had these companies come in and sponsor them. They use name brands like CVS and Chick-fil-A. They built a mini Chick-fil-A --
Moser: Geico Insurance, that was the store I had.
H. Moser: Yeah, they had a mini Geico with the logos and everything. It was helpful for us. But the one thing they didn't hit the nail right on the head, because they didn't talk at all about phones or phone bills.
J. Moser: Oh, OK.
H. Moser: Yeah, they didn't tell us anything about it. They didn't explain anything about it. And that's the thing, most kids in our generation, they all have phones, but they don't know what it takes to have one. They don't know that they have to pay a certain monthly bill for a certain amount of data for a certain plan for a certain company, and there are taxes, and a lot of different things that build into having a phone. They don't really realize that at such a young age, but they all so directly pertain to that subject. I was so surprised that they didn't even bring it up. It's one of those things that, that's the best way to reach these people, get to what they know.
J. Moser: Right. And a phone, you're right, everybody's got a phone. Understanding what goes on in having that phone -- and Ainslie, we were talking about that, it's not paying for the phone, but paying the phone company for the bill and however much data you're going to use. And then, if you think about all of the things that you use that phone for -- you're consuming information, you're buying your Starbucks, you're doing your banking. That's good feedback. I'm going to interview one of the good people there at Finance Park later on during the month, and I'll make sure to ask her that question because that's important feedback from a user.
Ainslie, I was so impressed with that field trip. I'm absolutely going to sign up to chaperone your field trip in the eighth grade when you go Finance Park.
While you haven't been to Finance Park yet, you are somewhat of an entrepreneur. I wanted to tap into that for a second. If people don't know this yet, really, you had a little slime business going, didn't you?
Ainslie Moser: [laughs] Well, yeah.
J. Moser: You had Cruncher Slime going, right?
H. Moser: I was not a fan.
J. Moser: Listen, I'm not the biggest fan of having all the detergent and the Elmer's glue around the house, but I thought it was interesting how committed you were to that. And you did a lot with it. You developed a logo, you had a presence on Instagram, you actually sold some slime. You're a businesswoman. And for me, that's fascinating to think about from a number of levels, not to mention the fact that you were doing it when you were, like, 10 and 11 years old.
I wanted to ask -- you're not doing it as much now. Obviously, you have other things that you're focused on more, school and horseback riding. But, when you were doing that, what's a lesson that you took away from trying out your own business? What was something that struck you?
A. Moser: It taught me that, for a while, it was something that, let's face it, there was a phase where a lot of people were interested in this stuff.
J. Moser: You're talking about trends, right? There was a big slime trend.
A. Moser: Yeah, trends. So, that, obviously, was doing better than a lot of other things. And then it sort of just went away. I feel like, that's something I needed to realize, that a lot of stocks were going to fade away. So, you have to pick something that you believe will go far.
J. Moser: Yeah, pick something you think is sustainable, something that'll be around for a while. That's a good point there. Slime, for a while, it was big business. Everybody you knew wanted it, and you were selling that stuff. And I was impressed. And you would take that money that you got for the slime and you would reinvest it back in that business. You would buy more stuff to make more slime, and you would sell more slime. That was a neat lesson. But, yeah, to your point, it does seem like that slime trend has started to fade away a little bit.
A. Moser: Oh, it's definitely faded.
H. Moser: It's gone.
J. Moser: [laughs] It definitely faded?
A. Moser: Oh, yeah. It began to be banned in schools. Teachers were not OK with it.
J. Moser: OK, so the slime trend is officially -- we've hit peak slime. We're on the downward side of the curve, then.
A. Moser: I feel like it somewhat depends on your age, because for certain kids, maybe in fifth and sixth grade, maybe they're like, "Ooh!" And I'm just barely past that. It's interesting to look at.
J. Moser: And you can look at it and laugh now. You can think it's goofy. But, I do want to make a point here, you took away an important lesson there. If you decide later on in life, when you're 21 or 30 or whatever, that you want to go try your hand at starting another business, you're going to have a lesson there to pull back on and remember that if you're going to go into business, you're going to be an entrepreneur. Get something that you feel like is going to be sustainable and has a big, long runway ahead. Don't ever forget that lesson. That's a big one. I'm glad that you told us about it.
OK, we have to wrap things up here, girls. What I wanted to do really quickly, because you guys own stocks, and I think that's really cool, I always talk about the stocks that you own. But, I want you to take a minute, tell me one stock that you don't have in your portfolio today that you would like to own, and maybe one reason why you'd like to own it. Ainslie, I'm going to start with you, because I think I know what you're going to say.
J. Moser: Why would you want to own Alphabet?
A. Moser: I mean, let's face it, who doesn't ever use Google? Who doesn't use YouTube? Face it, we don't know all those answers on our own, and we don't want to go to a dictionary. And sometimes, at this point, Wikipedia, we're not using it as much. I don't know why, but we're not. So, Alphabet is doing super well.
J. Moser: Alphabet's a good one.
A. Moser: I think it's going to continue to do super well.
J. Moser: I think you're probably right. Alphabet is Google and Alphabet is YouTube and Alphabet is a lot of other stuff. You think about what they do with Google and search, you think about what YouTube is doing as far as video streaming, I agree with you. That's a sustainable business that's not going to go away anytime soon. And not to brag, Ainslie, but I personally already own shares of Alphabet.
H. Moser: Personally, just maybe.
A. Moser: Well, maybe you could tell me how it's doing.
J. Moser: [laughs] Maybe we'll work on getting you those shares in 2019. They're like $1,000 a pop, so we have to save up a little money, but we'll keep that on your watchlist.
Hannah, what's one that you don't own that you would like to own in the coming year?
H. Moser: For sure, I agree with Ainslie about Alphabet. It's one of those things, everyone will google something rather than go on Bing or something like that, because Google is so recognizable. Its platform is so out there. Everyone knows what Google is. Wikipedia feeds into Google. You'll google something, and the first little bar that pops up will be a paragraph from Wikipedia.
J. Moser: It usually is.
H. Moser: People don't click into the page, they read that little bit, and then they think they have enough information.
J. Moser: I do that.
H. Moser: Exactly! So do I! Everyone does it! And, obviously, YouTube, that's one of those things, because there's such a wide variety of things that you can get interested in on YouTube. There's the gaming and the DIYs or the vlogging.
J. Moser: I always go to YouTube for watercolor lessons.
H. Moser: I don't think that's exactly what the teenagers are doing right now.
J. Moser: [laughs] You're not going to be teenagers forever. So, am I hearing you correctly, you agree with Ainslie, the one you want to own is Alphabet?
H. Moser: Yeah.
J. Moser: You sound like you have one other one.
H. Moser: I can't think of any actual name brands. I can just think of certain things that I know are important to certain people.
J. Moser: Well, I think Alphabet's a good one. That's a really good one to want to own. I would agree. Maybe we should make 2019 the year we try to make sure you girls get a share of Alphabet in your portfolio.
A. Moser: A girl can only dream.
J. Moser: A girl can only dream. We'll leave it at that. Hannah and Ainslie, thanks so much for taking the time today!
H. Moser: But of course!
Moser: Alright, Matt, man, I feel like this is an easier conversation to have here, being in person. I know our time is limited, but I feel like I want to sit here and talk this stuff all day long, you know?
Frankel: Definitely. It's great to be in the studio.
Moser: We need to get you back in here sooner rather than later. It sounds like travels have been tough for everybody. I was flying back in from Atlanta today and made my flight on the number, but was amazed that there was no rescheduling or anything, the flight went on time, given the amount of snow that we had up here. But you came in a few days early, didn't you?
Frankel: Yeah, I had to come in the day before because everything on Sunday coming into D.C. was cancelled. So, had to leave a birthday party, I was out with my daughters, and run to the airport, go home and pack. I made it 10 minutes before my flight.
Moser: We're glad you're here safely. I wanted to kick the show off here this week, talk a little bit, Chris Hill sent me this article late last week. I got to reading it. It's an interesting piece on Wells Fargo and their most recent troubles. The article is titled "The Embarrassment That is Wells Fargo." It comes from the Charlotte Observer. It talks more about a settlement they had to make here with the state of California in regard to insurance policies that they opened for customers without their consent, and then went ahead and charged them for it. There's a skepticism, I think, when it comes to insurance for a lot of people already, just very initial leap. But then, to do something like that...I don't even know where to begin. It's amazing to me that it only cost them $5 million to bury this thing because it sounds pretty bad.
Frankel: I think if it had extended beyond California, it would have been a little costlier. This is just the latest in a series of things, I think there was a $500 million settlement just a couple of days before. Was that the auto insurance? I can't even keep track of these things.
Moser: That was auto loan and mortgage charges. It was a lot of it, you're right. That's the point. It seems like this never ends.
Frankel: Right. We thought the fake accounts scandal was enough. I was actually a Wells Fargo auto loan customer, and they tried to charge me for insurance that I didn't need.
Moser: Oh, really?
Frankel: They sent me a letter saying that they didn't have verification that I had insurance on their auto loan, and that they were going to charge me for their own policy unless I verified my insurance, which I'd had with no lapse for six years. A lot of people didn't actually send in the paperwork like I did, and they got charged for bogus policies. It's just one thing after another.
Moser: That seems like it really puts the onus on the customer. You're in what ultimately is a customer service business there. That's one area where they have obviously fallen very flat. I don't think we have anything with Wells Fargo anymore. We don't have any accounts. I think we once had a mortgage with them, maybe. But I don't think I would want to be a Wells Fargo customer.
Now, with that said, I am a Bank of America customer, and that's not because I think Bank of America is the most awesome bank out there, either. It's just that we've had these accounts forever. They had pretty good online banking when all that started years ago. And now, the cost of switching is just a nightmare. I wouldn't want to get in there and fiddle with it. So, we have our checking account and a couple of savings accounts that run through Bank of America and whatnot.
It seems to me with Wells Fargo...I can't imagine that headline getting any worse. I'm sure it probably will. But even if it does, I don't know that I would expect anything material to happen to this company or its fundamentals.
Frankel: Tim Sloan is doing his best to change the public's perception, and so far, it's just not working. And it's also important to point out that these are old issues that are being settled now right. This is nothing new. We didn't find out that they have insurance issues in California. Having said that, this is bringing all these old problems that are two or three years back and fresh in people's minds. It makes it really, really hard to turn the tide.
Moser: It really does. I guess I'll wrap it up with this question for you. I wonder, do you think they can really take back control of the narrative with Tim Sloan still at the helm? Is 2019 the year where Tim Sloan has to move on?
Frankel: I don't know if he definitely has to move on, but it's definitely put-up-or-shut-up time. The bank's last quarter looked a whole lot better than the one before it. If that continues, and we can put some of these issues behind them -- these are all settled now, so hopefully now we can finally move on a little bit. If 2019's results justify it, they might keep him around. If not, then it might be time for new leadership.
Moser: That old saying goes, winning takes care of everything. We tend to look at our companies that we invest in here with a bit more of a...we definitely like to look at the culture of the business and leadership and things like that. And everybody has to figure out their own line and where they don't want to invest. I just wonder if Tim Sloan really is the guy to get it going. But you're right, if the fundamentals come in and the business is earning money, and they're exceeding expectations, he's punched his ticket, he's good to go, and he can stay as long as he likes.
Frankel: The biggest issue is that investors are worried that this is going to cost them customers. If that turns out not to be the case, then we'll go from there.
Moser: Yeah. To be continued, I suppose.
Pivoting over to a little bit of a funnier story this week. It was something that started on Twitter the other day. Jay Glazer, a football analyst, I think Fox Sports, he sent a tweet out. It was an interesting tweet. A few people actually DM-ed me on Twitter with this tweet saying, "Did you see this?" He tweeted this out on January 11th. He said, "This is a first. I'm at the airport buying $18 worth of stuff at store. I pull out a $20. Clerk says, 'Oh, I'm sorry we don't accept cash here, it's against our policy.' Huh? Isn't the policy to make money? I'm so baffled. How the [bleep] is there a policy against taking cash?"
Everybody thought it was great because they're tweeting me like, #WarOnCash! and all that stuff that we've talked about with those companies that we love so much. I did reply to him, even, saying, "Jay, I need to tell you a little story about the war on cash."
But, this brings up to me a question. A golfing buddy of mine down in Georgia who's also a lawyer brought this up, as well, when we were having dinner the other night. There are some legalities here, there are some legal questions that come with a company saying, "We're not going to accept cash anymore." When you look at the language on the actual cash itself, it pretty much implies that you have to take it, right?
Frankel: Right. It says it's legal tender for all debts, public and private. So, yeah, there is some legal gray area there. There are some businesses -- we were talking about right before we taped -- that already don't accept cash. When I flew up here, for example, if you buy snacks on the plane, they insist that you use a credit card and refuse to take cash. I kind of get it. They don't want their flight attendants walking around with bundles of cash in their pocket. But there's definitely some gray area there, and I could see this leading to some legal debate in the courts.
Moser: Probably a Lionel Hutz out there that's just waiting to get this lawsuit started, I'd imagine. I've spoken with small business owners. I've worked in jobs where I've had to do cash draws at the bank before, too, years ago. Those were never fun. Managing cash comes with its share of risks and responsibilities. People who maybe don't have exposure to that every day don't recognize it. In a lot of cases, these companies have the ability to go cashless, and it's better for them because they don't have to manage that part of that business anymore. For most, it's worth the cost of paying Square or PayPal or whoever a little bit of extra money to have them helping them out with that. But, yeah, I reckon we'll see where that goes. Generally speaking, though, I think consumer behavior is telling us what we need to know.
Frankel: I don't think this will be the last time we hear of somebody being frustrated that someone's not accepting cash. It was a matter of time.
Moser: I get it. I know people that just love to pay with cash. They're going to have a tougher time doing it. That's OK. Most people seem to not want to deal with cash as much. Consumers pretty much dictate the way these things play out at the end.
Frankel: Traveling, especially. I traveled up here. What's the one thing you do before you travel? You stop and get some cash. So, I could see where it'd be really frustrating, if I stopped at the ATM on the way to the airport, and then they wouldn't take my cash when I got to the airport.
Moser: Yep, yep. OK, let's talk about what we're going to be watching this week. Every week, we have One to Watch for our listeners, and we give them stock ideas that are on our radar. But with earnings season getting under way here, we thought really, we should have five ones to watch this week, talking about all of these banks that have earnings coming out.
Citigroup earnings just came out today, on Monday. We have JPMorgan and Wells Fargo earnings tomorrow on Tuesday. On Wednesday, we have Goldman Sachs and Bank of America reporting. So, we thought it would be a good idea to get all of these companies on investors' radars. Maybe pick one or two of these banks that you really have your eye on, and some of the things you might be looking for.
Frankel: Sure. First, a couple of the trends I saw on Citigroup's earnings that could kind of set the tone. Citigroup's trading revenue was terrible. The bank had already lowered its expectations for the year, and it failed to even meet those lower expectations. Generally, that would cause the stock to tank afterwards. That was Goldman's original downward catalyst last quarter. But, Citi posted some pretty good metrics otherwise. They beat earnings. Their efficiency was better than expected. They cut costs by 4% year over year, which in the banking business is pretty good, especially when you're growing revenue. So, the picture looked pretty good. Citi might be one to watch in the coming quarter. They're not looking quite as bad as they were a few years ago.
But, playing off of that, trading revenue is definitely an area to watch, especially with the banks that really depend on it like Goldman Sachs, Morgan Stanley, Bank of America has some trading revenue. Trading is definitely one thing to watch.
Another thing I'm watching is buybacks. You're not going to hear too much about new dividends or buybacks being announced just because, for the financials, that happens mid-year when the stress test results come out. But, we all know that stocks tanked during the fourth quarter. A lot of these banks had $10 billion or more in available buyback capital. Wells Fargo especially had a massive buyback authorization. I want to say it was over $20 billion for the year.
Moser: That's a good point. I'd be curious to see how opportunistic these teams are.
Frankel: Right? I would love to have seen Goldman buy back a ton of its stock below book value, or Wells Fargo when the court of public opinion turned against it. So, that's one thing I'm watching, definitely.
Goldman I especially have my eye on because they're going through their Malaysian crisis right now. They had a bond fund that went bad. Malaysia is trying to get $7.5 billion out of them, which is really what's holding their stock down, the uncertainty having to do with that. Not only is Malaysia trying to get money out of them, but there could be a ton of regulatory risk right here at home.
Moser: Oh, you have to believe.
Frankel: So, Goldman could be facing some pretty stiff penalties. I don't think they're going to throw the book at them, but you never know. The uncertainty is what's bothering everybody right now. So, that's one I'm keeping an eye on. They obviously can't say too much for an ongoing investigation, but definitely one to keep an eye on.
Moser: Yeah, I think that's the biggest challenge with these big banks, is that in many cases, they can be black boxes. It's difficult to fully understand their reach and the things that they have hiding on the balance sheet here and there.
Frankel: That's true of any highly regulated business like that.
Moser: That's a good point. I'm glad you said it. It's something that's not really specific to one company. It's more sector-specific, and they all have to deal with it. It's worth knowing. I guess there are some banks out there that behave better than others. But, yeah, it's a risk you have to worry about for the entire sector.
I always feel like the smaller banks are more understandable. That's why I tend to steer toward looking at them more. I feel like you can understand a little bit more of what they're doing. But those small banks are still trying to get big, so, at some point or another...
Frankel: Especially the ones without a big trading operation or trading revenues. Really tough to understand or predict, especially. There are so many different dynamics that go into fixed income trading. We could dedicate a series of shows just to that, if we wanted to.
Moser: Maybe we will.
Frankel: We tried to fit trading revenue into an episode last year. I gave an overview, but there's only so much you can do.
Moser: Yeah, I guess so.
Frankel: It's really hard to predict because it has to do with market volatility. And, because it's so regulated, they can't tell you what's going on in the meantime.
Moser: That's a good point.
Frankel: That's why you generally always get a surprise when it comes to trading revenue, whether it's a good surprise or a bad surprise.
Moser: Well, I guess we'll find out more the rest of this week, and more as earnings season starts picking up steam, here. I'm excited about that. I always enjoy earnings season. It gives us plenty of stuff to talk about on these shows.
I was thrilled that you were able to get in town here, and I was able to get back, and we were able to tape an episode together in the studio at the same time, Matt. Thank you so much for being here!
Frankel: Absolutely! I hope we get to do another few this year. Now that the baby's getting a little bit older, I can travel a little bit more than I used to.
Moser: A little bit of that time will free up. We'll make that happen. That sounds great!
As always, people on the program may have an interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. This show is produced by Austin Morgan. For Matt Frankel, and for Hannah and Ainslie Moser, I'm Jason Moser. Thanks for listening! And we'll see you next week!
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Jason Moser owns shares of Alphabet (C shares), PayPal Holdings, Square, Starbucks, and Twitter. Matthew Frankel, CFP owns shares of Bank of America and Square. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), PayPal Holdings, Square, Starbucks, and Twitter. The Motley Fool has the following options: short January 2019 $82 calls on PayPal Holdings and short January 2019 $80 calls on Square. The Motley Fool recommends CVS Health. The Motley Fool has a disclosure policy.