A Troubling Trend in the Banking Sector
Think twice before jumping into cybersecurity stocks... A new subprime warning... A troubling trend in the banking sector... The 'canaries' are starting to fall...
By now, you've likely heard about this weekend's big cyberattack...
This so-called "ransomware" – dubbed WannaCry – has infected more than 300,000 computers around the world. It essentially locks up the data on the infected computer and demands a payment of around $300 (in the digital currency bitcoin) to restore it.
The details of the attack are beyond the scope of the Digest. But it's worth noting that it's just the latest of several high-profile cyberattacks over the past few years. And as is often the case following these events, cybersecurity stocks – such as Symantec (SYMC), FireEye (FEYE), and Palo Alto Networks (PANW) – are surging higher.
We don't expect these threats to go away anytime soon...
Rather, they're likely to become much more frequent in the years ahead. And the best cybersecurity firms are likely to do well over the long term.
As a side note, our colleague Ben Morris recommended a basket of these stocks to his DailyWealth Trader subscribers last November. Folks who took his advice are up as much as 10% so far.
But if you're considering buying into these stocks today, we recommend patience. As our colleague Scott Garliss reminded readers in the Stansberry Newswire last night, this week's "excitement" is unlikely to last...
The ransomware attacks over the weekend put the spotlight on cybersecurity companies. But keep in mind that no new products have been developed... and no new contracts awarded.
These stocks probably still have a couple of good days ahead of them, but will quickly settle back to levels from last week. Don't get sucked in. This short-term trade has already taken place.
This hasn't happened since the financial crisis...
Regular Digest readers know we've been warning of stress in the consumer-credit markets...
Whether it's rising defaults in student loans and auto loans... plunging auto sales... or surging losses at credit-card lenders like Capital One Financial (COF), a number of signs point to trouble ahead.
Today, we'll share another. And it's a big one...
According to the Federal Deposit Insurance Corporation ("FDIC") only five U.S. banks failed last year...
It was the smallest number of failures in a year since three banks failed in 2007. And it followed just seven total failures in 2015.
But suddenly, this trend has reversed... This year so far, five banks have already gone under.
Unfortunately, the pace of failures isn't the biggest concern. Instead, it's the size of the banks going under...
According to FDIC data, most of the banks that have failed in recent years were small. The five that failed last year had combined assets of just $277 million. The seven in 2015 had a total of $826 million. In other words, these were tiny – and likely marginal – businesses.
But this year's failures have already been much bigger...
On April 29, First NBC Bank in New Orleans became the fourth bank to close this year. It had $4.7 billion in assets.
For perspective, that is more than 20 times larger than the combined assets of every bank that failed last year. In fact, it's the largest bank failure since the 2008-2009 financial crisis.
Lest you think it a fluke, it was joined by Guaranty Bank of Milwaukee, with $1 billion in assets, earlier this month.
All told, five banks with combined assets of more than $6.2 billion have failed so far this year. This, too, is larger than any full year since 2012... And 2017 isn't even halfway over.
What's behind this trend?
A glance at Guaranty Bank's website offers some clues. From the company's "Who We Are" page (courtesy of the Problem Bank List website, emphasis added)...
Founded in 1923, we started as a small savings and loan business in Milwaukee, Wisconsin. Today we have more than 120 retail branches in five states.
We have a unique business model with the majority of branches in grocery stores. Our branch locations give customers access to the bank in the places where they shop, work and live, making banking easier for them.
We go where other banks don't. Some of our customers may have been turned down at other banks, forcing them to rely on check cashing and payday loan stores or pawn shops.
We offer unique products and services designed to help a customer understand how to manage a checking account, build or rebuild their credit score. We help customers get on track.
We are a community partner. We work with community groups and other organizations to educate their members about basic financial matters.
According to several media reports, First NBC Bank of New Orleans, which was established in 2006 following Hurricane Katrina, was also known for its "aggressive" lending practices.
In other words, much like Capital One Financial in credit cards, or the subprime auto lenders we've discussed, these banks can be considered "canaries in the coal mine."
Firms that take on the most credit risk are always the first to suffer when the cycle turns.
Again, this doesn't mean we expect a crisis tomorrow...
The credit cycle moves slowly, and as Porter has explained, there's simply no way to know when the "tipping point" will arrive.
In meantime, we could easily see a "Melt Up" – the final speculative boom in stocks that our colleague Steve Sjuggerud has predicted – before it does.
But make no mistake... a crisis is coming. And most investors will be completely blindsided – again – when it arrives. Stick with us and we'll do our best to make sure you aren't one of them.
New 52-week highs (as of 5/15/17): Alibaba (BABA), iShares MSCI BRIC Fund (BKF), Morgan Stanley China A Share Fund (CAF), First Trust Nasdaq Cybersecurity Fund (CIBR), Chipotle Mexican Grill (CMG), 3D Systems (DDD), WisdomTree Emerging Markets High Dividend Fund (DEM), Digital Realty Trust (DLR), iShares MSCI Italy Capped Fund (EWI), iShares MSCI Singapore Capped Fund (EWS), iShares MSCI South Korea Capped Fund (EWY), Barclays ETN+ FI Enhanced Europe 50 Fund (FEEU), First Trust Emerging Markets Small Cap AlphaDEX Fund (FEMS), Alphabet (GOOGL), PureFunds ISE Mobile Payments Fund (IPAY), iShares U.S. Home Construction Fund (ITB), KraneShares CSI China Internet Fund (KWEB), McDonald's (MCD), Naspers (NPSNY), Nvidia (NVDA), PowerShares S&P 500 BuyWrite Fund (PBP), ProShares Ultra Technology Fund (ROM), Shopify (SHOP), iShares MSCI India Small-Cap Fund (SMIN), ProShares Ultra S&P 500 Fund (SSO), Tencent Holdings (TCEHY, 0700.HK), Weight Watchers (WTW), and short position in Avis Budget (CAR).
More great feedback on Porter's Friday Digest. Send your questions, comments, and concerns to feedback@stansberryresearch.com. As always, we can't respond to every e-mail, but we read them all.
"Hi Porter, wanted to let you know that Friday's Digest was even more enlightening. I especially liked the last section 'What's Next.' The chain of collapsing credit and various businesses caused the light bulb to flash bright and clear. Thank you." – Paid-up subscriber Ken Wight
"Terrific [Friday Digest]... Great job explaining the rental car business model in such a way that I can understand the weaknesses. I've got it and I appreciate the article. Two businesses come to mind that don't make their money the way most people think...
"First business is movie theatres. I once came in contact with a lady whose family ran a major movie theater company. What she explained to me was that most people think ticket sales go directly to the theater. In actuality, the vast majority of the box office revenue goes directly to the Hollywood studio that produced a film. The movie theater knows their business, they sell popcorn, candy and sodas which is where all of their revenue and profitability comes from. They are not in the movie business at all, they are in the concessions business.
"The second business is similar... In a previous job I dealt with regionally owned gasoline stations. The stations would be branded with a major national oil/gasoline company but of course were owned by a smaller regional ownership group. Unfortunately for them most of the gasoline purchases came via pay at the pump... And when that happened almost all of the revenue save for a tiny transaction fee went to the major oil company. The ownership group really only made money when patrons went in the convenience store and purchased snacks, beer, cigarettes, drinks, ETC. Similar to the movie theater business the gas the gas stations sell doesn't really make them money, the minimart is where they make their money. Thanks for the great work you guys do... not only am I getting a great education but I truly enjoy reading your materials!" – Paid-up subscriber Justin S.
"Here in Utah there is a huge furniture company called RC Willey, (which was recently purchased by Warren Buffett, its probably everywhere now, but it started here) the running joke around here for years has been that it is actually a lending institution that sells furniture, the rumor has been that it creates more loans than the banks in Utah, the guy that started it wrote a book (I haven't read it) called 'How to build a business that Warren Buffet would buy.'" – Paid-up subscriber Brian T.
"Porter, I have to applaud you, you are right most investors like me will not always see the "real" business of a company. Your 'cause-and-effect' explanation of the current and future state of the car rental business was very thorough and easy to understand. This was almost as good as your explanation of thermodynamics. I want to thank you for this valuable education." – Paid-up subscriber Sergio N.
"I don't know what Joe's problem is – I fully understood your first explanation. I have wondered for years how the big car rental companies could be making any money. It seems I never get a rental with more than 10K miles on it. Always thought the margins were too thin to be a good investment. Thanks for the research and head's up on the impending crash." – Paid-up subscriber Tim Taylor
"Crystal clear. I just need to maintain a prudent position size regarding this thesis. I want to be 'all in', but the I know the Stansberry staff would take me into a padded room and ask me WTF are you thinking! Diversification, steady eddy wins the day!" – Paid-up subscriber Mike O.
"MCD's revenues peaked in 2013. Sales from company owned restaurants was 67% of $28 billion total revenue. In 2016, this dropped to 62% of the $24 billion. Do not understand your generalization that MCD is not in the restaurant business." – Paid-up subscriber Tom C.
Porter comment: Well, there's no such thing as teaching, there's only learning...
Regards,
Justin Brill
Baltimore, Maryland
May 16, 2017