The expectations for 2012 are still gloomy. Europe is still struggling with debt, Greece and Portugal are still estimated to shrink by 3.5%, and is looking for ways to avoid a major recession. And now the IMF says European recession will impact the world economy. It's also starting to look like China's forecast slow down is accelerating. China's GDP for 2012 had been estimated at about 8.5% for the year, fourth quarter GDP for 2011 is already at that level. Lingering and returning fears of global recession have the average investor spooked. Action on the U.S. exchanges has been weak since the first of the year.
The January FOMC meeting is important for alleviating fears in 2012, especially concerning Europe. Investors will continue to look for solid American companies for investment. These companies have proven records of sales, profits and an ability to weather global economic conditions. Paying a dividend will be the deciding factor as investors see this as a way to mitigate risk and increase cash flows and returns. Banks are not immune to this trend, the smaller regional banks like Fifth Third Bancorp (FITB) and U.S. Bancorp (USB) have been gaining attention and customers. Their revenues are growing due to increased traffic and deposits.
JP Morgan Chase (JPM) may have bottomed but the bull market hasn't started yet. JP Morgan is currently trading around $37, at the top of a range set last year. The stock has made a break above resistance buts it's not sustainable. The recent rise is also above the thirty day moving average but without any follow through. Fourth quarter earnings did little to impress investors. Earnings and profits for the quarter were both down on 23% lower revenue. The large bank has been facing increased competition from smaller, regional banks like U.S. Bancorp. Expectations for 2012 have so far not been met. JP Morgan is currently valued around 8 times earnings and yields about 2.7%
JP Morgan's sideways trend will continue. The recent bounce is extended and overbought. Without increased revenue and profits this stock will not advance. On the short term charts the stock is trading up to a growing resistance level. I expect to see JP Morgan fall off and trade between $27 and $37 for a while. This stock needs to consolidate before it can gain enough support to break out
Citigroup (C) actually looks like its forming a bearish triangle. This stock has been trading sideways ever since its massive decline in 2008 and 2009 and declined around 20% in 2011. Fourth quarter earnings, released last week were dismal. Full year and fourth quarter revenues were both down. T he bright spot is the 40% decline in credit losses. This bank is still battling fall out from the U.S. credit crisis. The company settled one charge in 2011 for $285 million. The charges alleged that Citigroup traders bet against investors when the housing market showed signs of weakness. My question is how much longer will bad investment and poor judgment affect Citigroup's bottom line.
The stock, which is currently trading around $29, is just above the 30 day moving average and looking weak. The long term charts and indicators are consistent with a continued bear market. The stock is currently valued at a forward looking rate of 7 times earnings and yields a pitiful .15%. Lack of revenue, earnings and yield will send Citigroup back down to its lows around $10, a 65% decline from the current level.
US Bancorp has been trending up while its larger competitors have barely been treading water. The regional banker is currently trading around $28 and is valued at 12 times earnings. Forward looking p/e of 10.8 is telling me the markets are expecting sales increases into the coming year. It would be nice if the board increased the dividend as well, the stock currently yields 1.7%, not quite as attractive as competitor Fifth Third Bancorp
Fourth quarter results, released January 18th, reported record net revenue and lower costs. U.S. Bancorp grew net revenue by 8% over the same quarter last year and 6% over the previous quarter this year. The gains were driven by increases in four business classes. Mortgage banking, deposit services, merchant processing and commercial products. These segments all grew by at least 5%, with the biggest increase, 21%, in mortgage services.
US Bancorp recently broke above a long term resistance level. The move is on mildly bullish and increasing momentum. The bull market, started in August of 2011, actually has some volume behind it. The volume levels aren't extraordinary except for the fact that volume is lacking in the general markets. US Bancorp has been retreating in the short term but is still above resistance and the 30 day moving average. I expect to see U.S. Bancorp continue to consolidate while investors move out of the riskier big banks and into the smaller regional banks. Once done the stock will move up $6-10 to its pre-recession level.
Fifth Third Bancorp is an undervalued stock with a decent dividend. The stocks p/e is currently around 11, institutional ownership is over 80% and the dividend yields 2.4%. The company recently disappointed the market with an earnings miss but still managed to increase full year EPS by over 80%. The decline in fourth quarter earnings reflected losses incurred in conjunction with sales of Visa class B shares in 2009. Net income was up 6% over the previous year and is expected to improve again in 2012. Deposits and Mortgage revenues are increasing, gains from these business segments will provide recurring and growing revenue. Fifth Thirds financial statements will improve in 2012.
Fifth Third has been trending sideways like the other banks, and is currently falling back from resistance at $14. Momentum and volume are bearish but not extreme enough for concern. The long term charts show a rising market with support. I don't expect to see the stock trade below $10 anymore. Fifth Third could easily finish the year off between $20 and $25.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
