The Scariest Thing No One in This Market is Talking About
The economy has been growing, albeit slowly, over the past six years, and the biggest banks have managed to survive and even thrive in some cases.
But there's a canary in the coal mine that's giving me pause... one that no one is talking about.
Looking back at the recovery, I noticed an eerie phenomenon that could foretell the future for large banks.
According to the Federal Deposit Insurance Corporation (FDIC), more than 455 banks have collapsed since the Great Recession ended in June 2009.
Depending on how closely you follow the banking sector, that may or may not seem like an astronomical number. So let me put it into context for you: In the six years before the recession began, there were 21 bank failures, and during the recession, only 70 banks went under.
You'd think it would be the other way around, with the recession taking out all the weak banks and the recovery helping to keep closures at a minimum. At the very least, you'd expect a healthy recovery to spur new bank charters, but that hasn't been the case either. In fact, bank creation is actually at a record low.
In an ironic twist, thanks to all those small bank failures, the big banks are even larger than they were before "Too Big to Fail," and there are fewer banks to absorb the sector's risks.
So now we're on the cusp of another round of lean times and banks are even more unstable than they before the banking crisis.
More Than One Elephant In The Room
Looking at the numbers, banking is not a place you want to be...
From a general standpoint, economic expansions normally last just under five years, but we're already rounding the corner in our sixth year. Statistically speaking, a recession is more probable than another year of growth.
On top of that, 2016 is expected to be a weak year for the economy. We're up against stress in China, anemic oil prices , a strong U.S. dollar and an earnings recession. Only a month into the year, the International Monetary Fund, World Bank and Federal Reserve had all slashed their 2016 economic growth forecasts. Allianz Chief Economic Adviser Mohamed El-Erian suggested that many central banks are out of ammo and the world could be in for a very bumpy economic ride.
That's going to make things difficult for stocks across the board, including banks. Even worse (as if that's not bad enough), if the economy continues to erode, it's unlikely the Fed will continue to raise interest rates, which is a major part of how banks generate their large profit margins.
You see, when interest rates rise in a stable economic environment, banks can charge their customers a bigger "interest spread" on loans, credit cards and mortgages.
Just six months ago, everyone believed 2016 would be the year of interest rate hikes, but since global economic volatility and falling commodity prices have taken center stage, Fed watchers now expect rates to stay lower for longer -- not a good sign for banks' profit margins.
We're also seeing the yield curve in U.S. Treasuries flatten out, which spells trouble for both banks and the economy. A flattening yield curve means that interest rates between short-term U.S. bonds and long-term bonds are closer together. While there are many reasons why this happens, the two main reasons are that inflation risks are low (which means lower interest rates are likely to remain) and that investors are flocking to longer-term U.S. bonds for safety in fear of weakening economic conditions.
Beware Of The 'Too Big to Grow' Bank
In particular, I see trouble ahead for a bank whose complex business is highly dependent on the health of the global consumer and business, which does not seem promising in 2016.
This bank has admitted it's expecting a "difficult" year as patchy global growth, low commodity prices and a seemingly more dovish Fed come to the forefront.
As a result, it's in cost-cutting mode, doing everything it can to generate as much profit as possible with flat revenue growth. While survival mode can be a good way to save dollars, the likelihood of any organic earnings growth is almost nil.
Analysts are lowering their expectations and the technicals point to at least an 11% drop in shares over the next month or two.
I can't tell you the name of the bank in question here because I just released it to my Profit Amplifier subscribers, and that wouldn't be fair. I also told them how they can land a 39% profit by mid-April if this stock falls just 11%.
There is still time to get in on this trade, though, and take advantage of what is almost certainly going to be a rough road ahead for the banks.
If you're interested in getting trades like this and learning how I leverage stock moves into average annualized gains of 123%, check out this free presentation I put together .
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