Stocks were down midday Wednesday but, let’s face it, the market is holding up extremely well so far in the face of the government shutdown and looming debt-ceiling fight. That said, market watchers are increasingly concerned about recent weakness in the financial sector.
Using the Financial Select Sector SPDR (XLF) as a proxy, financials have underperformed the S&P 500 for the past 1- and 3-months, after outperforming in the prior 6-months, and 1- and 2-year timeframes.
In a related development, technical analyst J.C. Parets of All-Star Charts has expressed concern about a potential topping pattern in JPMorgan while blogger ChessNWine identified a bearish pattern in Goldman Sachs “with potentially devastating ramifications to financials.”
Make what you will of the chart-watchers, but there’s plenty for bank investors to be worried about these days starting with the newly toughed-up SEC enforcement and heavy-handed regulation overall. In addition, the recent rise in bond yields has put a chill into the housing market, especially refinancing activity, which has been a source of strength for many big banks in recent years.
“Banks are telling us…they have to move people, facilities and systems into other areas entirely because they’re not going to have the volumes” in mortgages, says Chris Whalen, managing director at Carrington Holding Company, a specialty finance company which focuses on residential real estate.
Indeed, the nation’s biggest mortgage lenders -- Wells Fargo (WFC), Bank of America (BAC), Citigroup (C) and JPMorgan Chase (JPM) -- are expected to lay off over 22,000 workers in their mortgage units in coming months, according to Fox Business.
“The party is over” for refinancing activity while a weak job market and flat consumer incomes are preventing a pickup in purchase activity, Whalen says. “Structural reasons, apart from rates [mean] you’re going to see a real tail-off in demand” for mortgages.
In addition, Whalen notes the new Basel III regulations put additional impediments for banks when it comes to mortgage origination and servicing. And that’s in addition to new restrictions from the Dodd-Frank legislation and Consumer Financial Protection Bureau.
“The entire regulatory structure is antithetical to mortgage lending,” he says.
The silver lining here for investors is this should not come as a surprise to anyone paying attention. As The WSJ reports, bank analysts are “scrambling to ratchet down earnings estimates” ahead of forthcoming reports for the third quarter.
So bank stocks may rally if results are “not as bad as feared” -- but that’s very different than reporting results that are actually good.
“The sharp drop in mortgage volumes is going to upset the carefully scripted ballet that has kept large bank earnings within an acceptable range for the Sell Side analyst and media communities,” Whalen writes in his preview of third-quarter results.