Bank stocks led the market lower once again on Monday after being largely responsible for the sell-off of the last month.
There appears to be two sets of reasons as to why the bank stocks are doing so poorly. First, if one uses traditional stock analysis one can argue that the stocks are reflecting expected weaker fundamentals. However, the second set of reasons is perhaps more compelling. Consensus analysis of this industry is deeply flawed at both the analytical and managerial levels and, therefore, it is creating instability in these stocks which is simply not necessary.
In traditional stock analysis one would look at the state of an industry’s raw materials, its manufacturing process, the quality of the products being produced, and the sales patterns of the business. In banking, this would not result in encouraging assessments.
In banking, the raw material is money in the form of bank capital and bank deposits. Bank capital is under severe pressure because managements are giving away literally hundreds of billions of dollars in stock buybacks and what remains is being eroded by higher interest rates. Deposits are under pressure because they cost more and the lowest cost deposits are leaving the banks.