The action in markets last week, and again today, can perhaps best be described in a single word …
Last Tuesday’s 1%-plus decline nearly across the board was the first such decline in the major averages in 110 trading sessions. So, to say we were overdue for a pullback is to state the obvious.
Yet since that sell-off, markets have basically traded only modestly lower. And that’s despite the major blow dealt to the Trump agenda in the form of the defeat of healthcare reform.
One sector that has seen more than its share of selling of late also happens to be the sector that’s led the Trump rally higher, and that sector is banks and financials.
Indeed, the gains in large-cap banks and financials, as well as those in regional banks, have been stellar.
Over the past six months, the SPDR S&P Bank ETF (KBE) is up 27.3% while the SPDR S&P Regional Bank ETF (KRE) is up 27.7%.
Those numbers dwarf the gains in the SPDR S&P 500 ETF (SPY) of just 9.1% during the past six months.
Yet if we look at the performance of these three funds over the past month, the story is markedly different.
Although the SPY is down, it’s only off 1.3%. Meanwhile, KBE is down 7.5% while KRE fell 8.1% during the past month.
And if we look at the performance over the past week, we can really see the disparity …
Over the past five trading sessions, SPY is down 1.3% while KBE slid nearly 4.9%. KRE is in even worse shape, dropping 5.3% in that time.
Now the market is asking itself an important question:
Is this marked underperformance of banks and financials going to continue, or is the selling just about over?
One leading advocate for the camp that argues that banks and financials are headed lower from here is famed bank analyst Dick Bove.
Bove is vice president of equity research at Rafferty Capital Markets. In a recent interview with CNBC, he offered the following assessment of the current bank stock action, and the sector’s future:
"There’s a reason why all these bank stocks are cratering. It’s because of the belief that none of the Trump programs will be put into effect.
"The understanding is growing that all of the reasons that people had for buying bank stocks in November are dissipating, they’re gone …
"If you’re not going to get tax cuts, if you’re not going to get fiscal stimulus, if day-to-day business is lousy right now, which it is … if the recognition of all of these factors suddenly dawned on the investor, they do what they’re doing right now — they pile out at the exits, they take their profits."
Sure, last week’s policy failure on healthcare reform was certainly a blow to the Trump agenda.
However, I think it may be a bit premature to write the obituary on the rest of the Trump agenda. Particularly when it comes to tax cuts and infrastructure spending.
On the flipside of the Bove coin is the sentiment laid out in a recent Wall Street Journal article titled, "Bank Stock Party Isn’t Over After Pullback."
The article cites positives such as higher interest rates and less regulation of the industry as key drivers of bank stocks going forward.
The Federal Reserve appears set to raise rates two or three more times this year. For now, most banks benefit more from increases in short-term rates than long-term ones since many loans are priced against short-term benchmarks.
As for regulation, the article says big regulatory reform, such as scaling back enforcement of the so-called Volcker rule (which bars proprietary trading by depository institutions) would help the biggest Wall Street banks.
And, it suggests that these banks also are good values here.
Per the WSJ:
For example, Bank of America (BAC) and Citigroup (C) continue to trade at discounts to book value. The rest of the pack isn’t demanding either in overall terms, with the KBW bank index, having hovered just around book value for the past several years, now fetching 1.2 times book value.
So, higher interest rates, deregulation and valuation is the argument here for a continuation of the bank stock rally following the current pause.
Both viewpoints could be turn out to be right.
In the shorter term, banks are likely to suffer more selling from the unwind of the Trump-agenda trade and the healthcare misfire last week.
In the medium and longer terms, the rising-rate environment, the president’s penchant for less bank regulation, an improving economy and those attractive valuations this latest sell-off is producing will be a good buying opportunity in banks …
Provided, of course, you are prepared to handle the short-term volatility.
Today we happen to have a way you can profit from those market-induced jitters. If not yours, then just about everyone else’s.
Take it away, Sean …
Mining for Money
Buy this Copper Crunch
By Sean Brodrick
Investors are getting a case of the jitters watching copper’s recent trading action. Since mid-February, copper has been in a big correction. And it’s handing you an opportunity.
This pullback has implications for all kinds of markets beyond metals. Investors call this metal "Doctor Copper," because it has a Ph.D. in economics. When copper prices go higher, the global economy heats up. When copper prices go lower … well, you can see why people get worried.
Don’t worry. Be happy. And buy this danged pullback.
Let me show you the Big Picture in copper …
Longer term, copper broke out of a multi-year downtrend. So, some pullback is to be expected. And it’s a buying opportunity for copper and the companies that produce it.
Let me give you three copper-plated bulls for this year.
Lack of Big, Rich Deposits. Copper mines must be big to make any economic sense. They require a LOT of investment. Too bad that most of the big deposits have already been found. In fact, only six big new projects to build mines or expand existing operations will be completed by 2020.
Tightening the squeeze, the grade of copper ore coming out of the ground is half what it was in 2008. That means miners get half as much copper with every ton of dirt.
And the long bear market didn’t help. That forced copper companies to mine their richest grades. Now, that ore is gone — used up.
Watch China. Asia, especially China, accounts for 62% of the world’s copper usage. Sorry, Uncle Sam, but you use only 14%.
So, it’s bullish that imports of copper into China rose 1.9% in the first two months of 2017, to 2.7 million metric tons. In fact, Chinese copper demand looks poised to rise all year.
China is mainly used for copper wire. And a lot of that goes into infrastructure. China plans to spend $720 billion on infrastructure projects over the next three years.
Labor Troubles Squeeze Supply. So far in 2017, we have seen production stoppages at major mines like and BHP Billiton’s (BHP) Escondida mine and Freeport-McMoRan’s (FCX) Grasberg mine. Escondida alone produces 5% of the world’s copper.
Just in Chile alone, a whole gallery of copper companies face tough labor negotiations: Antofgasta with its Zaldivar Mine, Glencore with its Altonorte Mine, Anglo American and Glencore (again!) with their Collahuasi joint project, Teck Resources in its Quebrada Blanca Mine, and Lundin at its Candelaria Mine. And that means more production could be lost to strikes.
We’ve already seen 200,000 metric tons of copper production lost to strikes so far this year. Annualized, that would be 10% of global production.
Prices are made on the margin. So this all points to prices getting squeezed higher.
So why have copper prices — and miners — been under pressure lately?
Some investors fear that Donald Trump won’t be able to follow through on his plans to rebuild America’s infrastructure. A plan that requires a lot of copper.
But as I’ve shown you, the U.S. is a small piece of the global copper demand picture. China is much more important.
I think we should see a rally coming in the iPath Bloomberg Copper ETN (NYSE: JJC), which tracks copper prices.
The JJC has been in correction along with miners. But if supply gets crunched the way I think it will, this fund could follow copper prices much higher.
The Dow closed lower for the eighth day in a row, something it hasn’t done since 2011. It was down triple-digits to start Monday’s session, but pared its early near-1.2% loss to a 0.2% loss by day’s end.
• Dollar at four-month low: The U.S. Dollar Index slid after Friday’s healthcare bill failure and after Budget Director Mick Mulvaney indicated that repealing and replacing the "Affordable Care Act" is no longer a priority for the administration’s first 100 days.
• Healthcare was the day’s best-performing sector: The Health Care SPDR (XLV) gained almost 0.3%, followed closely by Materials (XLB). Technology (XLK) was flat and the remaining S&P sectors ended the day in the red.
• Who will win the rights to stream Thursday Night Football? Spring training is wrapping up here in Florida, and baseball season starts in earnest next month. But football is on everyone’s minds at Twitter, which won the rights to broadcast select games last year. Facebook, Amazon and Google’s YouTube are also looking to pay the NFL for this premium content, and the bidding has already begun in earnest.
• Big Brexit milestone ahead: Theresa May said she will trigger Article 50 on March 29, which means Brexit will be completed by that date in 2019.
Good luck and happy investing,
Uncommon Wisdom Daily