Monday, November 30, 2020

THINK STRATEGICALLY: The Sense of Timing

By on October 21, 2020

Financial services stocks are worth another look

As we begin our review of financial services stocks, I must remind you that a “Sense of Timing” is as essential as when to buy a stock as is what to buy and why buy it.

To frame this analysis, I should tell you the only difference between a long foul ball and a home run is timing; it’s not power, it’s not strength, it’s not distance, it’s timing; so as we begin, bear in mind the Sense of Timing.

This past week, some of Wall Street’s biggest financial services companies reported their third-quarter (3Q) 2020 earnings. Notably, Goldman Sachs, JPMorgan Chase and Morgan Stanley delivered results that blew past expectations. Others such as Wells Fargo and Cit had a challenging quarter. We decided to take a more in-depth look at the sector and analyze their performance for the year to date.

  • JPMorgan Chase (JPM): has a year-to-date (YTD) return of minus-27.18 percent, even as it blew past analysts’ expectations. JPM is probably worth a more in-depth look. Price is low compared to sales, earnings or assets, it has a fortress-like balance sheet and historical fundamentals look strong.
  • Bank of America (BAC): has a YTD return of minus-31.18 percent. BAC may be excessively priced and, in our view, has questionable fundamentals. The numbers don’t tell the whole story.
  • Citigroup (C): has a YTD return of minus-45.94 percent, C is merited a more in-depth look. Price is low compared to sales, earnings or assets, and historical fundamentals continue to be healthy.
  • Morgan Stanley (MS): has a YTD return of 1.43 percent; MS is merited a more in-depth look. Price is low compared to sales, earnings or assets, and historical fundamentals continue to be healthy.
  • Wells Fargo (WFC): has a YTD return of minus-57.51 percent; WFC merits a more in-depth look. Price is low compared to sales, earnings or assets, and historical fundamentals look strong.
  • Goldman Sachs (GS): has a YTD return of minus-10.32 percent; GS is merited a more in-depth look. Price is low compared to sales, earnings or assets, and historical fundamentals continue to be healthy.
  • Berkshire Hathaway (BRK.B) has a YTD return of minus-6.44 percent, with a solid balance sheet, price is low compared to sales, earnings or assets, and historical fundamentals are solid.
  • Popular, Inc. (BPOP): has a YTD return of minus-33.63 percent, BPOP merits a more in-depth look. Price is low compared to sales, earnings or assets, and historical fundamentals look strong.
  • First Bancorp (FBP): has a YTD return of minus-43.06 percent; FBP is currently in the process of integrating the Banco Santander Puerto Rico acquisition; for this reason, its numbers don’t tell the full story.
  • OFG Bancorp: (OFG): has a YTD return of -40.41. OFG is currently in the process of integrating its Scotiabank Puerto Rico acquisition; for this reason, its numbers don’t tell the full story.

Week in Markets: From hope to hype, to hope, a volatile week full of news

The U.S. and global markets ended a highly volatile week with mixed results. Investors continue to be cautiously optimistic that a final deal on the stimulus package may be realized. Simultaneously, there has been progress in the push to strike a compromise on the Covid-19 stimulus. It appears that negotiations reached a roadblock over the week. As we have stated many times, we do not foresee a deal before the elections. Simultaneously, the differences between the House and the White House are now $300 million as well as in how the funds will be allocated. As House Speaker Nancy Pelosi approved $2.2 trillion and the White House offered $1.9 trillion, there seems to be a small difference not to support it. 

Another topic that impacts the markets is the Covid-19 vaccine news, as some promising trials have been halted due to health issues. On the flip side, Pfizer is seeking an emergency-use plan for the end of November; the whole world is vigilant and expecting a vaccine. 

The brightest spot is the continued positive economic signs:

  • U.S. Retail and Food Services Sales rose to 1.91 percent, compared to 0.57 percent last month; this is higher than the long term average of 0.37 percent.
  • The US Producer Price Index increased to 0.42 percent, compared to 0.34 percent last month; this range is higher than the long-term average of 0.13 percent. However, on the negative side, the U.S. Department of Labor reported that new unemployment claims rose to 898,000, up 6.27 percent from the 845,000 last week—quite an unexpected increase.

As we look ahead toward the drivers of 4Q2020, we expect the volatility to continue as long as open issues are impacting the market directly, whether the stimulus bill, the Covid-19 vaccines or increased concern over a possible second wave of infections.  However, the mainly positive economic news provides us with a sense that the economy is again on solid footing as we look ahead to 2021. We must all keep in mind that the economic recovery pace may slow down, making the prospect of achieving pre-pandemic levels an elusive target. These are why the Federal Reserve has pointed out that a stimulus bill is needed to allow the economy to recover with substantial financial and fiscal support. While you and I understand this issue, Washington does not.  

Table

Description automatically generated

Results for the week ending Oct. 16

  • The Dow Jones Industrial Average closed at 28,606.31, up 19.41 points, or 0.07 percent, for a YTD return of 0.24 percent.                
  • The Standard & Poor’s 500 closed at 3,483.81, up 6.68 points, or 0.19 percent, for a YTD return of 7.83 percent.
  • The Nasdaq Composite Index closed at 11,671.56, up 91.62 points, or 0.79 percent, for a YTD return of 30.08 percent.
  • The Birling Puerto Rico Stock Index closed at 1,650.43, down 28.22 points, or 1.68 percent, for a YTD return of minus-19.01 percent.
  • The US Treasury 10-year note closed at 0.76 percent, down 3.8 percent.
  • The US Treasury 2-year note closed at 0.14 percent, down 12.5 percent.

The Final Word: What are the main obstacles facing investments

Let’s discuss the obstacles facing the markets as we attempt to wrap up 4Q.

  • GDP: after a record-breaking gross domestic product (GDP) contraction, the U.S. economy began to show a V-shaped recovery and recovered close to 70 percent of all market losses. However, as the stimulus funding ran out, the strong bounce has slowed. 
  • Unemployment: The U.S. Unemployment Rate is at 7.9 percent, higher than the long-term average of 5.76 percent; several industries have been more impacted than others—Tourism, Leisure, Travel among others—and need support to navigate this exogenous shock period.
  • The New Economy: The pandemic has created two distinct economies—one for those fully able to provide services digitally, but constrains those who are unable to transform in terms of capacity and business model. The latter will be significantly affected. In a recent New York survey, more than 75,000 companies in the city have closed permanently. 
  • Corporate America: as its earnings fell a whopping 35 percent on average, we expect a substantial improvement for 4Q20 and a solid 2021. 
  • 4Q2020:  this quarter is full of notable challenges due to Covid-19, mixed with the flu season, and with the economy trying to recover lost ground, it remains to be seen how the year-end quarter is impacted. We are planning for the best and prepared for the worst.  
  • Global Economic Outlook: growth is projected at minus−4.4 percent in 2020, a less severe contraction than forecast in the June 2020 World Economic Outlook update. Global growth is projected at 5.2 percent in 2021

As the U.S. and global economies are amid diverse stages of a rebound, we expect the economies to fire on all cylinders to finish the year on solid ground. 

We must always have the faith in a better future and that our current challenges will make us wiser, tougher and more devoted to our convictions.

Francisco Rodriguez-Castro is president & CEO of Birling Capital LLC

You must be logged in to post a comment Login