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Loan-loss-provision and commercial-loan-loss jitters are hammering stocks. (0:15) Altria announces new stock buyback. (3:35) A winning January bodes well for the S&P in 2024. (5:25)
The following is an abridged podcast:
Our top story so far
Pressure on regional banks continues today on worries sparked about the need for increased loan-loss provisions and commercial property losses.
The SPDR S&P Regional Banking ETF (KRE) and the Invesco KBW Regional Banking ETF (KBWR) fell more than 5% in previous session after the shock of New York Community Bancorp (NYCB) forecast a surprise loss. And both are down more than 5% today.
The tension about bank stability rose overnight as Japan’s Aozora (OTCPK:AOZOY) (OTC:AOZOF) also forecast a surprise loss due to increased loan-loss provisions. Aozora took its yearly net income forecast down to an expected loss due to increased loan-loss provisions for U.S. commercial property. The bank also suspended its dividend. It hasn’t had a loss since 2009.
Aozora stock fell more than 20% in Tokyo. NYCB, which fell more than 40% on Wednesday, is down another 13.5%.
NYBC increased its reserve build to meet liquidity requirements for banks with more than $100 billion in assets, a threshold it reached when it acquired Signature Bank amid the turmoil of spring last year.
A major concern is NYCB’s loan book, with its exposure to office and rent-controlled apartments.
RBC and Jefferies cut the stock from top to middle ratings. Jefferies said they “expect the path to improved profitability will take years while credit risk remains an overhang.”
Deutsche Bank strategist Jim Reid says “history cautions that the lags from a hiking cycle are long and variable and often have a substantial sting in their tail.”
“Often these come from an unforeseen event. Clearly in this cycle, the Regional Bank shock was dealt with aggressively by the Fed last year, but (recent events) brought a reminder of the ongoing risks with (commercial real estate) always looking high on that list.”
With “a large refi wave coming in the next couple of years, (commercial real estate) will likely continue to create a lot of headlines.”
Treasury yields are feeling the effects of the regional bank selloff, with investors buying bonds in anticipation of some loan-loss turbulence. The 10-year Treasury yield (US10Y) is below 3.9%, despite some strong manufacturing data.
Equities are higher for now in very choppy trading, with the major averages up more than +0.5%.
The January ISM manufacturing index came in higher than expected, which bolstered hopes for a soft landing. The index rose to 49.1, a point away from expansion and the highest level since October 2022.
Kieran Clancy, economist at Pantheon Macro, says “The biggest improvement in January is in new orders … and history suggests that the production and employment indexes will follow new orders higher in due course.”
“In short, the manufacturing sector appears to be past the worst, but we see few signs of a raging rebound looming in the data; a gradual further uptrend in activity is a more reasonable bet.”
Other indicators were more dovish. Weekly jobless claims rose unexpectedly. And Q4 productivity came in much stronger than expected, with unit labor costs posting a lower rise than forecast.
Wells Fargo says: “Unit labor costs, which can be thought of as the productivity-adjusted cost of labor, rose 2.3% over the past year in another indication that labor cost growth is nearing the realm consistent with the Fed’s 2% inflation target.”
Among active stocks
Altria Group (MO) delivered a largely in-line Q4 earnings report and announced a new $1 billion buyback plan. Revenue was down 2.2% during the quarter to $5.98 billion.
The decline wes primarily driven by lower net revenues in the smokeable products segment, partially offset by higher net revenues in the oral tobacco products segment. Smokeable revenue decreased 3.3%, primarily driven by lower shipment volume and higher promotional investments, partially offset by higher pricing.
Honeywell International (HON) guided for yearly sales that were less than what Wall Street was predicting. The company said it expects sales to grow 4-6% to a range of $38.1 billion to $38.9 billion in 2024 That’s compared with the consensus of $39 billion. It also guided for adjusted earnings of $9.80 to $10.10 a share, compared with the expectations for $9.97 a share.
Merck (MRK) recorded another quarterly beat in Q4 as its blockbuster cancer therapy Keytruda generated better-than-expected results, while some of its other key treatments underperformed. The drugmaker said Keytruda generated $6.6 billion in sales with ~21% YoY growth in Q4 amid strong global demand and strong uptake in early-stage cancer .
In other news of note
Plug Power (PLUG) said it completed the first fill of a Plug tanker with liquid green hydrogen produced at its Georgia production plant, one week following the official commencement of operations.
Shares rallied, coming off a 19% gain in the previous session on an upgrade from Roth MKM.
The company said the Plug cryogenic trailer was filled with liquid hydrogen – enough to fuel 3,216 forklifts per day – for use at Walmart, Amazon and Home Depot sites.
The Georgia plant currently operates eight 5-MW electrolyzers – making it the largest proton exchange membrane electrolyzer deployment in the U.S. – and can produce as much as 15 tons/day of liquid green hydrogen for customers in the eastern U.S.
And in the Wall Street Research Corner
January bodes well for stocks through 2024.
Sam Stovall, U.S. equity strategist at CFRA, says whenever the benchmark index advances in the opening month the market, on average, ends the year up about 16%.
Stovall posted on X that “Since WWII, whenever the SP500 rose in price in its opening month, the market was up an avg 16.0% for the entire year, (UP) in price 85% of the time. What’s more, for the 9 election years with (positive) January returns, the SP500 gained an avg 15.6% & (went up) in price 100% of the time.”
He adds that data since 1990 shows that sectors with positive returns in an up January rise about 21% for the year vs. 15% for the broader market. That bodes well for top January winners Communication Services (XLC), Info Tech (XLK), Financials (XLF) and Healthcare (XLV).
Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.
