2023-10-09 11:00:00 ET
Summary
- Regional banks may face problematic earnings due to the shape of the yield curve and high cost of deposits.
- Earnings results for regional banks are expected to be poor in the third quarter, potentially leading to year-end tax loss selling.
- The divergence between earnings multiples and interest rates could have long-term implications for stock valuations.
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CashFlow Hunter discusses regional banks' potentially problematic earnings and whether the Fed will be lowering interest rates aggressively next year. This is an abridged version of our recent conversation, Why CashFlow Hunter Remains Short 3M And Long Iris Energy .
Transcript
Rena Sherbill: In terms of catalyst hedge investing , how you're looking at the markets, how you're looking at sectors, what would you say to investors you feel like is a catalyst that you're looking at or thinking about?
CashFlow Hunter: I think the regional banks are going to – those stocks potentially could have a problematic couple of months. Number one, I think earnings are going to be kind of lousy.
RS : Why?
CH : Well, the shape of the rate curve , although it's less inverted than it was, is still pretty ugly. And they're going to -- and the cost of deposits is going to be pretty bad for them. So whereas they're not on this death march that a lot of banks were at, post-Silicon Valley ( OTCPK:SIVBQ ) where they were bleeding depositors and they had this big massive holes in their balance sheet, they seemed to have survived that run on the bank panic.
But their earnings profiles, at least from a net interest margin basis are going to be pretty bad and then you really start -- I think you're going to start potentially having some losses in their commercial real estate lending portfolios. So you have that.
So I think third quarter for the regional banks, they'll be reporting in, I guess it's going to be in about a month, generally the third week of October.
And I think that the earnings results are going to be pretty bad and while the stocks are off their lows, the ( KRE ), which is the regional banking ETF, was down around $35 from $60. At the low point, it's back up to the low-40s.
I think that if the KRE, which is just representative of a basket of regional banks, if it's still down at these levels, come Thanksgiving, you're going to start having some year-end tax loss selling, sort of across the regional banking space. I mean, why wouldn't you?
So, I think that’s just a broader macro trade of a combination of bad earnings , bad earnings outlooks for the regional banks and then year-end tax loss selling. We saw some pretty violent year-end tax loss selling pain in the tech space last year, in December. So that's a macro type trade.
And then one other thing I think a lot of people are seemingly ignoring, if you look at a long, long timelines of interest rates versus the S&P or NASDAQ, that earnings yield or earnings multiple versus interest rates generally was pretty correlated.
And we've had this massive divergence, pretty much since about March where S&P and NASDAQ particularly have -- their valuations have gone up a lot as interest rates have gone up. And that's a pretty big divergence from where the normal relationship is.
And I think that's something, look, that can persist for a while, but generally earnings are discounted, backed by some sort of interest rate and the higher interest rates go, typically you don't have earnings multiples go.
So I think that's something that people are clearly anticipating , interest rates coming back down fairly quickly. And this is actually something I've written about for both my subscribers and general Seeking Alpha, more for my subscribers. But that most rhetoric coming out of the Fed is higher interest rates for longer, not necessarily that interest rates are going to go much higher, but that they're not going to be coming down any time soon.
So, if the bet that you're owning stocks is because the Fed is going to be lowering interest rates aggressively next year, I think that's probably a, or potentially a -- not necessarily is going to materialize for you,
RS: [Not] the right bet?
CH : Yeah.
RS : CashFlow Hunter really appreciate it. Always appreciate our conversations. And I think anyone who would agree with me that this is some pretty sharp thinking and savvy investing.
You have a 14-day trial for Catalyst Hedge Investing. Anyone looking to become a subscriber or learn more about what you're talking about with subscribers, really easy way to get some edification there.
CH : And they get access to me too whereas I don’t respond to just general messages anymore.
RS : Yeah. No, that's right. You don't have to just read or listen, you can actually engage. So, yeah, that's probably the number one selling point for sure. Always appreciate you, CashFlow Hunter. Thanks for taking the time.
CH : Thanks so much Rena.
For further details see:
Interest Rates And Regional Banks' Potentially Problematic Earnings With CashFlow Hunter