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Fed cut? Perhaps the bank stocks know.



September 14, 2007 – Comments (2)

This is a slightly edited repost of my blog for the Strategy Lab Open.  Players were asked to comment about the prospects of a Fed rate cut next week and I thought this post might be of interest here as well. 

With all the conflicting economic news, I honestly don’t know what the Fed is going to do next week.  High oil prices, a weak dollar and rising gold prices are sending inflationary signals, which would argue against a rate cut.  The jobs reports over the last two weeks are somewhat in conflict.  Last week’s report was much weaker than expected, but today’s unemployment claims report was better than expected, although still not great.  Mortgage rates are down slightly from last week.  A Yahoo poll had 59% believing the Fed will cut….. 

No doubt the Fed doesn’t want to be seen as bailing out investors burned by the credit markets, but now they could use the weak job numbers and risk of recession as the rationale for a cut. 

Meanwhile, the talking heads are reporting that a cut is a foregone conclusion and the only question is whether it’ll be 25 or 50 bps.  But are bank stocks telling a different story?  I’ve got Bank of America and Wells Fargo as outperforms in CAPS and they may hold a clue to the market’s expectations.  When the Fed cut the discount rate on Aug 17th, both banks shot up with BAC closing at 51.11 then reaching a high of 51.22 on the 24th adjusted for a dividend.  WFC closed the 17th at 37.24 and reached a high of 37.37 on the 21st.  Today, BAC and WFC have drifted down from those highs to 49.86 and 35.81 respectively.  Similarly, the BKX closed Aug 17th at 110.17 and closed today at 104.29.  While the banks fell over that time span, the S&P 500 was up from 1446 to 1484. 

If the market was counting on a rate cut, the banks should trade higher leading up to the Fed meeting.  So far, they’ve jumped on the discount rate cut and then pulled back.  As it stands now, there hasn’t been a run-up, so perhaps the market isn’t as sure there’ll be a rate cut as the talking heads are reporting. 

Disclosure:  At time of writing I own shares of WFC.

2 Comments – Post Your Own

#1) On September 14, 2007 at 1:42 PM, glenvar (62.09) wrote:

I would guess that bank stocks are trading lower, and in my opinion will continue to suffer for awhile, because of poor underwriting.  Banks became lax in that area in a rush to put on loans and collect fees before their competitors.

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#2) On September 14, 2007 at 6:50 PM, FourthAxis (< 20) wrote:

Nah, you're looking at the same rate cut (for most purposes).  Have you seen the XLF in the last couple of days.  That cut is baked in now.  They might pop some more, but I'm looking for a "sell on the news" effect.

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