Bank of America and Wells Fargo: Here’s How I’m Trading This Bank Mess

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Investors want to know.

How well rooted is this particular bank problem? Will depositors gravitate towards the perceived safety, whether or not this is the reality of large, US money-centre banks?

How will the net interest margin, which was already becoming a problem, behave going forward?

The US Treasury yield curve remains badly inverted, despite the sudden strength and safety (again, supposedly) of US paper.

The spread between US 10-year and 2-year notes progressed on Friday:

But the yield spread between the 10-year note and the 3-month T-bill is back to the deep negative lows of mid-January:

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This could mean some tough sledding ahead for traditional bankers as well, who may be less reliant on trading or investment banking to turn a profit. This will drive businesses into fee-driven services such as wealth management.

The arrival of any impending economic downturn, of course, puts all bets off, as financials struggle (along with everyone else) to slow down.

what does it all mean

On that matter, economists at Goldman Sachs (GS) expect this entire evolutionary cycle – excessive stimulus to high inflation to an asset/investment bubble to an aggressive U-turn in monetary policy, tighter lending to end in a recession. To generate spread inversion in standards – – To tie the FOMC in place. From a note to clients written by Goldman Sachs chief economist Jan Hatzius over the weekend, “In light of recent stresses in the banking system, we no longer expect the FOMC to hold its March 22 meeting with considerable uncertainty about the path forward.” Will increase rate with. Beyond March.”

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Fed funds futures are highly volatile and are still being priced. On Monday morning, I now see a 60/40 probability profile for a 25 basis point rate hike on March 22, so that the fed funds rate drops from 4.75% to 5%, then, that’s it. That’s the final rate, at least for now, having come down to 5.75% from 5.5% last week. These futures markets are now pricing in a rate cut till the September 20 meeting.

business of this mess

One important thing to remember is that you don’t need to trade financials right now unless you are already deep in the action.

As regular readers are well aware, I’ve been at two money-center banks known for their traditional home banking businesses. I haven’t touched regionals in a while, that seem smarter than they used to be. I didn’t really like what I liked.

Readers also know that I sold 50% of my long exposures in Wells Fargo (WFC) and Bank of America (BAC) last week because the banks were not doing well. In short, they smell bad. I thought pricing in for the coming and the expected difficulties in generating net interest margin.

I was asked on Friday last week whether I would be ready to buy back the stake I had sold in those two banks. I didn’t take that action on Friday, I’m glad I removed half my risk, and sad I didn’t sell more.

Given that I still have some risk appetite and given that both these stocks are coming off key support, they will continue to be my focus. Even if I add back some shares, to successfully remove capital (trade) around an adverse event, I don’t see myself building these positions back to full strength. .

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The support level for Bank of America is near $29. The spot was tested and held back in both October and July. I’ll sell a quarter of what I sold last week for $29 or so.

My panic point for BAC is 27.25 because that would be where I am down 8% on the balance of my position (I made 8% last week) and would leave me with an overall breakeven trade.

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Wells Fargo (WFC) found support at $38 in January and around $36.50 in October. I’m willing to add a quarter of what I sold last week at $38 and another quarter at $36.50 if it gets there. I made 7% on my out last week.

$37 is where I can break even, but I think I’ll have to give $36.50 a chance if it gets there. Should that level be cracked, I’m history at $36, and I’ll take a small loss.

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