Banking Ain't Easy But It's Necessary - February 3, 2016

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Bernie Sanders came within 0.5% of taking the Iowa Caucus on Monday after vowing to make life miserable for banks. Bankers are certainly culpable for the excess that created the Financial Crisis, but life for banks these days is already pretty miserable. The six largest US banks generated no growth in combined revenues last year, largely because of energy. Citigroup (C) recorded a +32% increase in non-performing corporate loans in 4Q 2015. Wells Fargo (WFC), America’s largest bank, reported a $100m sequential quarterly increase in net charges. And JPMorgan Chase (JPM) said it will have to increase reserves by $750m this year if oil stays at current prices.

Since 2009, US banks have paid out more than $200 billion in fines, and we’re only now starting to see penalties for dark pool violations. Iowa Caucus winners Hillary Clinton and Ted Cruz have both taken heat for their connection to Goldman Sachs (GS), but even Lloyd Blankfein & Co. settled a $5 billion claim for misleading mortgage investors this month. The US yield curve continues to flatten relentlessly, which should keep a lid on bank profitability. And now, with roughly ¼ of global GDP dealing with negative nominal interest rates, many banks are officially losing money on deposits.

Since the implementation of Abenomics in late 2012 shares in Japanese banks have responded well to increases in QE. However, since the Bank of Japan’s surprise decision to cut rates below zero on Thursday night, the TOPIX Bank Index has declined nearly -9%. This largely fits with what we’re seeing in other countries with negative policy rates. In Sweden, banks are being charged 35bps to park money with the central bank, but they aren’t passing that cost onto retail customers for fear of losing them. While Swedish deposit accounts pay virtually nothing, these days that’s still better than the stock market. Therefore, deposits at Swedish banks have been rising every month to new all-time highs. So essentially they’re burning cash, and hoping to squeeze customers with higher fees on other transactions.

Negative rates create other oddities that punish banks. Japanese asset management firms have stopped accepting new capital in money market funds because it’s too hard to achieve positive returns. This makes bank deposits that much more attractive, and banks will have to swallow the loss. Even governments seem a little perturbed by these developments. Swiss Cantons, where rates are -75bps, have requested that taxpayers wait as long as possible to square up with the government because they don’t want to get charged for having cash in their account.

As if these economic headwinds weren’t enough, public sentiment is still extremely negative towards banks. These companies were bailed out in 2008, no executives went to jail and people are still mad about it. There’s a perception that systemic risk has decreased since the crisis because US banks are better capitalized. That may be true, but banks are connected globally, and the European banking sector still looks like a disaster area – check out Deutsche Bank’s stock (DB). If Japanese banks stumble the global financial system could be looking for another bailout, and that will do little to improve sentiment.

The Cup & Handle Fund is up around +2.5% YTD, and +11.0% Y/Y. We made a few changes to the portfolio this week, nothing crazy. Realized profits on some call options that worked out very nicely, rebalanced some positions. Now we’re sitting on a good bit of cash and waiting to see how some technical patterns develop. The latest monthly letter went out on Monday, and I’d like to thank those of you who left feedback. It was a slightly different format than usual, one that we might stick with going forward. Too early to tell. If you’d like to start receiving these letters click here.

With that I give you this week's letter:

February 3, 2016

As always, if you have any questions or comments or just want to vent, please send me an email at

Until next time, tread lightly out there,

Michael Lingenheld

Managing Editor – Cup & Handle Macro

Posted to Cup & Handle Macro Research on Feb 02, 2016 — 2:02 PM
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