BANK STOCKS HAVE PULLED BACK anywhere in the 10%-20% range during the last month with the KBW Bank index (BKX) down 15% since establishing its 2010 high on April 23.
The sell-off, which followed a 36% rise (year-to-date April 23) in the BKX, has been driven by multiple factors starting with the sovereign debt crisis in Europe which has to some extent tainted the global economic recovery story and more recently impacted by the ongoing negotiations surrounding the financial-regulatory (FinReg) reform where we have seen the passage of a few amendments that could chip away at the normalized earnings potential of U.S. regional banks. Current reality is, bank stock investors will sell first and ask questions later because investors cannot model what they don't know. The European Crisis, FinReg/Congress have added significant risk to the economic recovery thesis. Add to these the concerns around the adverse impact from the Gulf oil slick and softness in recent jobs and housing data and you get profit taking en mass.
While we still expect a slow and steady U.S. economic recovery as the most likely scenario, valuations after the sell off now look more appealing and likely are pricing-in concerns related to Europe and FinReg. Our view is that Congress resolves FinReg somewhere down the middle.
Based on our view that the U.S. economy will prove to be resilient, we would use the ongoing pullback to build positions in names where longer-term risk/reward has become compelling following the recent sell-off. The MK Bank Coverage Universe is currently trading at a median of 8.8 times our normalized EPS estimate and 1.3 times year-end 2010 tangible book value (TBV) per share. Based on our view that longer term the group should trade closer to 10 times-12 times earnings and 1.5 times-2.0 times TBV, we see considerable upside in banks where we believe credit issues have peaked and are on their way to returning to sustainable profitability. .... We also like BB&T (BBT), which we believe, in addition to having above-average earnings power, is well positioned to not only capitalize on future growth opportunities but also in terms of being able to weather a slower-growth economic outcome.
The late sell off in BBT piqued my curiosity, so I looked for other influences. The Barron's article is definitely a positive. Therein is mentioned ^BKX as an indicator; compared ^BKX in the BBT Yahoo graph and BBT is stronger than ^BKX and several other banks (C,RF,STI,BAC) mentioned on this board.
TD and BBT are essentially overlapping on the trading graph for today, and both finished a little bit ahead of ^DJI.
The only news I find is the lick on the oils today, which could be enough to rejuvenate fear and panic, for the afternoon anyway.