QE3 Won't Keep Financial Stocks Bullish for Long
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Remember when “another bombshell” was dropped on us about 100 days ago now by JPMorgan (NYSE: JPM)? A huge credit derivative loss thought to be am amazing $2 billion mushroomed into about $6 billion. But do investors really care about this? It is a minor re-occurrence of something bigger in 2008 when the government stepped in bailing out most of the major banks. Memories seem to be short when good things are happening.
JPMorgan had better than expected earnings and this makes investors happy despite what they may have done in the recent past. Mortgage loan applications were up over a year ago; and losses were much lower than expected. Another bailout-baby, Bank of America (NYSE: BAC) reported net income of over $2 billion with a basis point improvement of 46 points. The expectations of more monetary easing from central banks pushed asset prices higher over the past few weeks, but now those hopes have turned into reality. It’s no surprise to see BAC bounce higher than any other of the big banks, the mortgage put-back claims jumped by 41% during the second quarter.
Investors tend to have short memories when it comes to the bad, when the good is here. They tend to look toward the future. Investors like that each of the banks have done well on earnings and also on the stress tests. Things are sitting well for big banks right now.
The expectations of more monetary easing from central banks pushed asset prices higher over the past few weeks, but now those hopes have turned into reality and the financial markets are going to reap. The QE3 of $40 billion in Mortgage backed securities every month—indefinitely, will start a bullish run in the markets and the financial sector should benefits greatly. The Financial Select Sector SPDR is at its highest level all year and is usually a thermometer for the largest banks.
Be careful though!
Something that investors may need to consider in this season of QE3 Jubilee is the repercussions to bank stocks. The artificial (0% - ¼%) interest rate the Feds will keep going to 2015 is going to eventually have a negative affect upon banks. There is a term called “net interest income” that is the difference a bank earns by extending loans and funding those loans with deposits. These are expected to fall sharply in the coming quarters. Interest-based earnings will be cut tremendously in the coming quarters. Wells Fargo (NYSE: WFC) even warned of a fall in its net interest income in its forecasts.
“Wells Fargo chief financial officer Timothy Sloan warned of the problem in a presentation at the Barclays Global Financial Services conference, highlighting that the bank's portfolio of bond securities carrying pre-crisis yields faces maturities that will push interest earnings lower. Wells Fargo now expects interest margins to fall 17 basis points and resemble year-ago levels in the third quarter.”
2013 may bring an interest drain on big banks and will continue to be a problem as long as the Feds keep rates so low.
Even though QE3 will lift stocks in the short run, 2013 may bring repercussions that are not favorable to the financial industry—in particular the big banks. So I would advise investors to consider the longer term affects of what QE3 may mean for the financial sector before jumping in with both feet.
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johnmylant has no positions in the stocks mentioned above. The Motley Fool owns shares of Bank of America, JPMorgan Chase & Co., and Wells Fargo & Company and has the following options: short OCT 2012 $33.00 puts on Wells Fargo & Company and short OCT 2012 $36.00 calls on Wells Fargo & Company. Motley Fool newsletter services recommend Wells Fargo & Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.