2012 Starts Out As Year of the Banks (JPM, BAC, FAS, WFC, CIT)

January 10, 2012 by Jon C. Ogg

Has J.P. Morgan Chase & Co. (NYSE: JPM) managed to help further turn banks around in 2012?  The sector which had no friends in 2011 is now actually the top bill in the DJIA as Bank of America Corporation (NYSE: BAC) is trading around $6.55 and that is now up 18% since the final trading day of 2011.  The triple-leveraged Direxion Daily Financial Bull 3X Shares (NYSE: FAS) has actually underperformed BofA at the start of the year despite being up 14% if you include the 5% gain to $74.00 today. 

Wells Fargo & Co. (NYSE: WFC) is up the least of the too big to fail banks because it has been considered the most stable of late as far as how its operations will hold up in the future compared to J.P. Morgan or BofA.  Wells Fargo stock is up “only” 7% so far since the close of 2011.  Still, we would not put much credence on that research note hoping for a CIT Group Inc. (NYSE: CIT) buyout by Wells Fargo even if CIT is up about 6% so far year to date.

News driving the banks is not so much that we named this one an undervalued DJIA component after our own metrics called for a 12% gain to 13,678 in the DJIA as the peak this year.  Today’s continued gains are simple and threefold.

First and most recently is that top CEO Jamie Dimon of J.P. Morgan Chase & Co. (NYSE: JPM) was discussing with CNBC’s Maria Bartoromo in an exclusive interview how banking will survive and that he hopes for fewer strings holding them back.  Whether or not that happens is something that is likely a 2013 story.

The ultimate boost is that it appears that all of the money center banks are going to pass the new stress tests.  That does not mean that they will have the ability to unilaterally boost dividends and buyback stock, but they might be able to get through the tests today without having to raise new capital.

The other issue helping to drive banking stocks is that the DOJ has been reportedly reaching out to many banks over a master settlement regarding mortgages.  That does not mean that other agencies and other judges will not keep up the fight (nor that they will not try to interrupt a settlement).  Still, one more effort to put the mortgage crisis behind us is a help. Some additional outliers are as follows: 

  • Large proposed pre-packaged foreclosure sales to funds and buyers as rental properties;
  • Huge discounts to book value;
  • Possibility of interest rate help after 2012;
  • Continued improvements in consumer credit metrics.
  • Maybe the big help for BofA is that Jim Cramer keeps calling it a “SELL” on his shows.

To try to have a sector wrap in a nutshell still feels misplaced after how dismal 2011 was.  BofA was the worst performing DJIA stock by far.  That makes it little surprise that it would be the best performing stock in the first week of trading.  Still, the company has not issued any real news and it is up nearly 18% from the end of the year during only the sixth trading session of this year.  That is an impressive move regardless of how painful 2011 was.

JON C. OGG