Trading Desk: Let Other Traders Go To Extremes

This was a make-or-break day for just about everyone in the market. The bears needed the banks to promote their narrative of a complete and catastrophic credit crunch underway. All the bulls needed is something a little less extreme . . . a little more realistic.

That’s not a bet the bears were set up to win, and they didn’t actually win it. The biggest banks in the country . . . the biggest banks in the world . . . struck what I’d call a cautiously confident tone. They’re wary. They admit to threats but they don’t admit defeat.

If you’re too big to fail, they’re saying, you aren’t failing. And that means there’s no Lehman Brothers style systemic collapse underway. Ask yourself: who has a better sense of blood in the water than the CEOs who actually dictate which of their rival institutions are safe trading partners and which need to be shunned into Lehman-scale oblivion?

JPM, WFC and Citi aren’t doing any shunning and they aren’t feeling any extreme strain. They aren’t pounding the panic button demanding a bailout before it’s too late.

These three banks add up to about 14% of the entire U.S. financial sector by market weight. They’re a big deal. When BAC chimes in, that’s another 4% and then you’ve got Warren Buffett sitting on a mountain of bank stock within Berkshire Hathaway for another 13% of the sector.

Buffett isn’t balking. He lived through the 2008 crash and saw it as a profound buying opportunity, a chance to lock in unimaginable (i.e., reasonable) yields on companies that were literally in the cash machine business but really had little strategic growth vision.

In short, they were the perfect Buffett buys at the right deep discount price. Anyway, as long as BAC holds the line, we’re looking at over 30% of the financial sector . . . and the biggest institutions in the mix . . . saying there’s no existential crisis at work as far as they can see.

If a big bank crisis doesn’t actually affect the big banks, who hears it but the people the bears want to make nervous? Don’t get me wrong, these are challenging times for bankers lower on the food chain who made bad choices in the zero-rate era. There’s going to be blood.

But there’s always going to be a bigger fish to feast on those wounded competitors. Consolidation is coming. Jamie Dimon is licking his lips. The bottom of the food chain is going to suffer. The banks that reported today are going to get bigger and stronger.

And that’s the way the world works. It’s not the end of the world unless you’re one of the bankers in trouble. It definitely isn’t the end of the world for investors.

We had to be open to that possibility after SVB imploded. We needed to see how far the rot went, gauge the contagion. Now we know it didn’t go to the top. That’s a big, big revelation.

What do you do when you were braced for the end of the world and it doesn’t happen? You have to live your life. You get back to work. You focus on incremental wins and losses, seizing opportunities and resolving challenges.

You shift out of crisis all-or-nothing mode. Suddenly there aren’t just two diametrically opposed outcomes: survival or extermination, feast or famine, “risk on” or “risk off.” That’s a stupid way to live, promoted by shrill media outlets looking to keep viewers on the edge of their seats as long as they can.

We spend most of our time in the real world somewhere in between the extremes. That’s basic statistics. Extremes are unstable. Sooner or later, every phenomenon reverts to the mean, to something like “average.”

This is why we sell stocks that get too hot to handle and buy those that have gotten so cold that probability dictates that they’ll go up at least enough to be worth our attention. It’s the heart of my options trading framework: buy puts when there’s too much greed and buy calls when there’s too much fear.

Warren Buffett knows about that last part. And people like him who can’t find anything cheap enough to buy need to manufacture a little extra fear in order to get people like us to sell them our stock at a discount.

They want us to fold so they can take the pot. I am not saying things are perfect in the banking world. I wouldn’t go near most of those stocks with a 10-foot pole, but that’s because I find them boring, not because they’re teetering on the brink of oblivion.

Most of the banks on the scene today were around before the Lehman crash. They’ll be around for years, even decades to come. They just won’t go anywhere exciting enough to justify these moments of existential angst.

Buffett locked in yields of 6-10% for life on his bank stocks. That’s a whole lot more interesting than the 3-4% we’d get today. Does this mean the banks are dying? Of course not! In that scenario, the yields would be a lot higher because everyone would be fleeing the stocks.

But you don’t need to be in a death spiral as a company to be dead money as a stock. A lot of stocks are more or less dead money, believe it or not. They’re not a strong sell but there’s no reason to buy aggressively.

I like a few banks. I hate a few others. To learn the names of the ones I recommend, you’ll just have to subscribe to my portfolios. The ones I hate aren’t really worth talking about. There are literally hundreds of them.

Are any of them worth trading at the right price? Of course. Real life on Wall Street is rarely forever. You don’t go 100% “risk on” and stay there for the long haul and you only go 100% “risk off” when it’s time to quit . . . if ever.

It’s a negotiation. A world of fine distinctions, percentage points twisting from minute to minute but rarely adding up to more than selling a few shares on the good days and buying a few back on the bad ones.

Believe it or not, that’s how the bankers see the world right now. There’s little drama, no matter how much we try to manufacture it because we’re humans who love suspense. Drama rarely comes. When it does, it’s like a storm that passes and leaves calm air behind it.

Show me a storm on Wall Street that lasted forever. I’ll wait. Meanwhile, I’ll be buying this earnings season. We just got an “all clear” signal that the tornado isn’t imminent.

Storms come. It’s been such a stormy era that the VIX hasn’t dropped to “normal” since COVID took hold almost exactly three years ago. But those storms have turned both ways, if you’ll let me stretch the metaphor.

Early 2020 was as close as it actually gets to the end of the world. Literally. Humanity could have been wiped out. Society, in that scenario, would have ended and all stocks would be worthless.

But once the Fed made an extreme move to counter, the bulls ran hard until the end of 2021. And then 2022 represented the necessary correction to that giddy bull run.

Guess where the S&P 500 has gone in that three-year whipsaw cycle? Up. The market as a whole shouldered every shock and cheerfully absorbed every stimulus . . . and gained an average of 13% compounded across the COVID era.

That’s a little better than average according to the statistics. Storms create wealth as well as destroy it. You just have to keep your eyes open and take the pragmatic view.