There have been more than a few signals that bank stocks are set for a rough 2023.

Yet despite the layoffs and bonus reductions, SPDR S&P Bank ETF (KBE) has not threatened the low we saw back in July.

But I saw a couple of headlines the other day that just serves as a reminder of the pessimism running rampant throughout the banking world…

With earnings coming Friday, this tells you all you need to know about the tenor of that report.

It’s no secret that their investment banking business has not been doing well.

They’re talking about more layoffs coming in the financial area as these banks are going to start cutting back on profit margins. This is a clear sign that the CFO is burning the candle on both ends.

I get it – during periods of high interest rates, you’d expect profit margins to grow.

But these banks’ bread and butter is investment banking. With the economy and marketplace slowing down, forthcoming IPOs are few and far between. Without that lifeblood, they have to start cutting costs.

Normally, the CEO is out in front talking about the long-term vision for the company. After all, that’s what makes the company more valuable.

But you can’t burn through money on that vision during a recession – you have to survive.

As a result, they’re pulling back on the visions and the CFOs are focusing on maintaining the financial stability of the company as we head into a recession.

So, yes, we got a positive jobs report last week. But if you read between the lines, the vibe on Wall Street is pretty clear.

For starters, that jobs number is misleading. It’s not a measurement of full-time employment or people getting jobs that match their qualifications.

No – that number includes all of the college kids picking up shifts while they’re home on break. It includes people picking up additional part-time jobs to make ends meet in this inflationary landscape.

It is not an indicator that the worker is sitting pretty.

Then, I kept reading and saw this headline…

So, while this isn’t on a jobs level, it is on an expectation level.

Another 22% downside…

Now, the thing I like about this is that Michael Wilson – Morgan Stanley’s head analyst – is actually one of those analysts who’s been ahead of the curve here throughout these market whips.

He’s been dead on with his calls – market bottoms, tops, and swings.

Well, he’s been talking about how we’ll really need something to come along as a catalyst to send us to the true market bottom.

I’m here to tell you that you’re looking down the barrel of that catalyst right now with the CPI Thursday morning and earnings announcements that start coming in on Friday.

If the CPI comes in higher than expected, it could send the banking sector plummeting.

I truly do think this is going to be where the rubber meets the road, and you’re going to start hearing from a lot more from CFOs than CEOs.

Like it or not, that is the reality of recessionary conditions.

The sooner you embrace that, the better set up you’ll be to come out on the other side sitting pretty.

Thankfully, there is a distinct trail of breadcrumbs leading from the banking sector that is proving we’re on the right track.

I’m looking to buy puts on KBE, as well as SPDR S&P Regional Banking ETF (KRE) and Financial Select Sector SPDR Fund (XLF).

If you want to take it to a more granular level, short positions on Bank of America Corp (BAC) aren’t a bad idea.

 


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