It was, without question, an ugly end of the year. Goodbye 2018. First, there was the general market retreat. Second, there was and perhaps remain concern about the economy. Finally, banks are an economically sensitive sector of the market; add to that general liquidity issue in small bank and there you have it.
Let me point out as I have before, there are two stock markets. For most purposes, the stock market is composed of very large companies. Apple has a market capitalization of three quarters of a trillion dollars. JP Morgan Chase’s market cap is a measly 1/3 of a trillion. Pfizer at ~24%, Proctor & Gamble at a similar ~25%, and that gives you an idea. Most of the stock market is made up of very, very large companies.
Now let’s look at what is considered a mid-sized, regional bank. Fifth Third, based in Cincinnati, Ohio is “only” $17 billion in market cap. A billion here and a billion there, and pretty soon we’re talking about real money. Generally, if you think of a “family name” company, it’s probably a lot bigger than you think. McDonald’s is $138 billion in market cap. Domino’s Pizza is $10 billion. Not exactly mom & pops, right?
Small banks are actually smaller than small. Many of mine are under $100 million (million with an M, not a B) in market cap. We are talking orders of magnitude smaller. Even when Wall Street types talk about “small caps,” they are still NOT talking about little banks. The average stock in the Russell 2000 small cap index has a market cap of around $2 billion. And that’s the average!
Here’s the point: There are in a sense two different economies in the United States. There is one that moves money around Wall Street/big banks/international finance; and there is an almost completely different one that is local, state level, and mostly domestic. This is what most of us recognize as the “real” economy and indeed it operates more simply and fairly independent of Wall Street. Certainly the two interact: If your community has several large cap employers, they put a great deal of money into your local economy. However, much of the money that moves around inside these behemoths is elsewhere, in New York, LA, Europe. Much of it involves playing accounting gimmicks, paying for advertising, lobbying, executive salaries and perks, much of which have nothing to do with local economies.
I’ve been saying that the “ordinary” economy, the “real” economy, that’s the economy outside Wall Street, is finally in gear. We’re seeing real growth in this area. Outside of some perennially depressed areas such as those dependent on coal mining (West Virginia comes to mind) ordinary goods and services are moving. Every time you hear of General Motors laying people off, there are a ton of small automotive companies hiring. GM may be thinking about where they have to be with self-driving vehicles in 10 years, but right now cars are selling fairly well, as are trucks, etc.
Small businesses are demanding loans (or they want them a lot.) Can that change? Sure, but small businesses don’t pay attention to Wall Street, they pay attention to what their customers are saying. If they are swamped and their customers are demanding more, more, more; small businesses are going to expand. Simple. And small businesses deal with small and mid-size banks.
Now, on the technical side of the ledger, bank stocks have seen relative strength improve MORE than the overall market since the bottom in December. Could we pull back again? Sure, probably will at some point. But looking for growth that’s fairly safe AND leveraged to the “ordinary” economy means investors have to look at small and mid-size banks. There are more technical signs of this.
First, here’s a chart of the S&P to the NASDAQ “BANK” index of smaller banks:
The black is the bank index; the yellow line is the S&P.
There was one takeover that I’m aware of recently. Poage (PBSK) agreed to be purchased by City Holdings (CHCO), a West Virginia bank. I owned a little Poage and sold all into the announcement. Otherwise, I’m seeing notable action in other banks. Most are recovering nicely as the chart above would suggest. One mid-size that I will note is Hanmi (HAFC), the Korean-American bank in LA. They reported poor earnings just the other day (below estimates) yet the stock has moved up on heavy volume in the last two days. It’s up almost 7% since the announcement. Volume today (Friday) was almost 50% of normal and the stock was up over 4%. That is NOT the sign of a weak stock. All the big selling is done and large value investors are buying. It’s harder to see that kind of action in really small stocks. They are so much less liquid, you can only see the action over longer periods.
Tank Trinity (TRIN) for example, the New Mexican bank. There was a massive 500,000 share day in November on the buy side that drove the stock up over 20% that day. It continue slight higher over a few days, then fell into the funk affecting other banks late in the year. Now, it is pushing back toward that breakout price just south of $10.
A lot of stock are buy-able now. More later.
Scattered Showers and Quicksand 