When Rates Rise, It’s Time to Bounce on Banks
In the day, we sweat it out on Wall Street, in a runaway bull-market dream.
At night, President Trump tweets about mansions of glory and interest-rate-cutting machines.
In his latest series of tweets, Trump is stepping out over the line.
“The Fed interest rate is way too high, added to ridiculous quantitative tightening. They don’t have a clue,” Trump tweeted. It was just the latest in his growing battle with the Federal Reserve and Chairman Jerome Powell.
Wall Street now believes that it’s a matter of when, not if, the Fed will cut interest rates. The Federal Open Market Committee meets again next week, with futures markets pricing in a 25% chance of an interest rate cut in June. In July, that chance soars to 70%, with a 98% chance there’s a rate cut this year.
The financial media loves it, churning out headlines such as:
- Wall Street is clamoring for rate cuts. Banks not so much.
- How to Lock In a Decent Yield Before the Federal Reserve Cuts Interest Rates.
- Wall Street Asks When, Not if, the Fed Will Cut Interest Rates.
- It’s game over for the Fed as the central bank’s credibility crumbles.
If the interest rate cuts come, we gotta buy stocks while we’re young.
’Cause baby, this bull market was born to run!
My apologies to the Boss.
Wall Street loves the easy money that comes with low interest rates. But there’s one sector you will want to approach with caution: financial/banking.
According to analysts at Jefferies, a gradual rate cut would shave bank profits by about 4%, while a rate “shock” could trim profits by 10% on average.
What’s even more disconcerting is that the financial sector isn’t already pricing in these rate cuts. The Financial Select Sector SPDR Fund (NYSE: XLF) is up more than 5% since the beginning of June and has added nearly 15% this year.
This year’s parade of high-priced unicorn IPOs has certainly helped the banking/financial sector, but they won’t be enough to offset the damage from a series of interest-rate cuts. Buyer beware.
The Good: The Tesla Two-Step
With the SEC Twitter gag on CEO Elon Musk, it’s been pretty smooth cruising for Tesla Inc. (Nasdaq: TSLA) stock recently.
It’s been so quiet, in fact, you’d be hard-pressed to know that there’s an annual shareholder meeting for Tesla tomorrow. Luckily, we have a research note from analysts at Baird to help us out.
Ahead of the meeting, Baird issued a bullish note, maintaining its $340 price target for TSLA — about a 60% upside for the shares. “Positive updates in recent weeks, including leaked emails and reports of strong deliveries, appear to have improved sentiment on demand, which we view positively,” Baird said.
Sentiment has indeed been good, and TSLA is up more than 17% in June. But there’s no gag rule at shareholder meetings. Let’s wait and see what Elon has to say when the muzzle comes off.
The Bad: Carne A-Pseudo
Has the Beyond Meat Inc. (Nasdaq: BYND) hype grown too quickly? JPMorgan Chase thinks so. And it should know … it was one of the underwriters for BYND’s initial public offering (IPO).
JPMorgan downgraded the stock today to neutral from overweight but kept its price target at $120. That price target is nearly 30% below Monday’s close.
“This downgrade is purely a valuation call,” JPMorgan said. “As we wrote last week, ‘At some point, the extraordinary revenue and profit potential embedded in BYND … will be priced in’ — we think this day has arrived.”
With shares up nearly 600% from its IPO, it was just a matter of time before someone cut the beef. It’s just surprising that it was underwriter JPMorgan.
What do you think about Beyond Meat? Email us at GreatStuffToday@banyanhill.com and let us know!
The Ugly: What Exactly Is Fashtech?
Online fashion retailer Revolve Group LLC (NYSE: RVLV) is proving to be quite an interesting stock after last week’s IPO. The stock is up more than 90% based on strong earnings growth and a significant online buzz.
But Andrew Left, founder of Citron Research, may have cursed the retailer in its first week of public trading. “Revolve has done what I call ‘fashtech’: the merging of fashion and technology,” Left said.
Fashtech? We would expect that kind of Mean Girls-esque comment from one of Revolve’s many social media influencers, but not from a hedge fund manager. “After Amazon, it’s Revolve,” Left continued. “I thought it was only her, ’till I spoke to her friends.”
First, that’s confirmation bias. Second, Revolve is not a tech company. It’s an online retailer. Just because a company uses technology doesn’t mean it’s a tech company. By that definition, Campbell Soup Co. (NYSE: CPB) is a tech company because it uses tech to sell and manufacture its products.
Maybe I’m on to something. Is souptech the next big thing?
Oil service stocks are at their lowest prices since 2009.
But now isn’t the time to buy.
The entire sector is plummeting right now. I would love to get back into oil service stocks. But don’t expect to see one in the portfolio until we see some sort of rebound in the sector … I’m waiting and watching that sector very closely because what often happens — especially with the drilling companies and the service stocks — is that when they rebound, it’s a rocket ride. — Matt Badiali, editor of Real Wealth Strategist.
After posting its weakest May return since the 2008 collapse, oil prices are hurting. Even our resident natural resources expert and Indiana Jones stunt double Matt Badiali says so.
But Matt has his eye on a different kind of oil that’s entering a boom market, one that’s already seen Real Wealth Strategist subscribers gain 87% in about six months. So, put down the crude speculation and get with the times, man! [Note: Link to RWE pot promo]
Biopharma Is All Going to Pot
Cannabis is the next big thing in biopharmaceuticals.
Sure, we’re all pulling for the day when cannabis is legal in the U.S., if only so our Canopy Growth Corp. (NYSE: CGC) and Aurora Cannabis Inc. (NYSE: ACB) investments pay off. But legalization is a finite game. Once it’s legal, these companies will quickly hit max valuation.
But biotech and health care will continue to grow by leaps and bounds. These companies can distill the finer points of cannabis down and tailor them to fix what ails you.
For instance, legalization will make pot readily available for your glaucoma, chronic pain or seizures. But what good is it if your pain is gone, but all you can do is watch Judge Judy and munch on Doritos all day?
Biopharmaceutical companies will take that same pot and engineer it to specifically target your health issues … leaving you pain free, a productive member of society and out of Judge Judy’s hair. (Seriously, we can’t emphasize the benefits of that last point enough.)
The investment angle for this boom in medical pot derivatives comes from one of the top marijuana and biopharmaceutical companies on the Nasdaq: Arena Pharmaceuticals Inc. (Nasdaq: ARNA).
Arena has a well-developed pipeline of drugs, including Etrasimod for ulcerative colitis, Crohn’s disease and atopic dermatitis. But the big drug that launched the company into “pot fame” was Olorinab.
Olorinab (why are drug names so bizarre?) is a cannabidiol (CBD) derivative that specifically targets pain from inflammatory bowel disease (IBD) and irritable bowel syndrome (IBS) — both symptoms of Crohn’s.
Grand View Research forecasts the Crohn’s therapeutics market will reach $4.7 billion in the U.S. by 2025. Worldwide, that market is expected to hit $13.52 billion by 2026. That’s a lot of irritable bowels.
With its CBD-based Olorinab, Arena is poised to capture considerable market share in Crohn’s treatment. Why? Because CBD-based treatments don’t have nearly as many nasty side effects as the current treatments on the market. Furthermore, there’s a consumer sentiment bias toward CBD medications as being more natural.
Whether that last point is true or not is debatable, but perception matters. And Arena has that cornered with Olorinab.
For those more financially minded investors: ARNA is also valued nicely on Wall Street. The company has a price-to-earnings ratio of just 4.48, compared to 18.9 for the S&P 500 Index and 17.8 for the industry average.
The bottom line: If you’re looking to get in on the ground floor of real cannabis returns, buy Arena Pharmaceuticals.
Until next time, good trading!