Banks Will Correct MoreThe biggest factor for a retrenchment of banks and other financials is interest rates.
Last week, we had the Bank of Canada indicate rates likely to go higher (which sent the Loonie to new high).
Then Europe raised interest rates this week.
The U.S. Fed funds rate not likely to move immediately. But look at bond yields. The U.S. 2-yr, 10-yr and 30-yr were all below 5% two weeks ago. Today 2-yr was 5.0%, 10-yr was 5.1% and 30-yr was 5.2%.
Interest rates worldwide going up to reflect growth and unusually low risk factors in bond factors. The U.S. rates going up to finance deficit as China, Japan, Middle East money trying to find a little alternative to low yielding treasuries in a sinking currency.
Yields on bank stocks likely going to 3.5% average, from 3.0% average last month. This is to reflect the higher interest rates and returns necessary.
For CM, a 3.5% yield, CM's shares would trade at $88 ($3.08 dividend).
The falling stock market and rising rates will also hurt the banks' profitability. 2007 another record breaker year. In 2008 with higher rates and likely higher loan losses I would think the bank's earnings will be flat (which still isn't too bad). For 2007 and 2008 EPS of $7.80 a share price of $88 would be a P/E of 11.3X. That's a little on the low side, but ROE this year around 26% and if flat in 2008 the ROE would be 22%. These are record breaking ROEs and the long-term average for the banks are the high-teens. Wouldn't be surprised if 2009 also flat.
I can see CM drifting down to $88 in the coming weeks. Maybe it should only go down to $93, but stocks always ovvershoot. At $88 I would definitely buy it as the bad news would be priced in.