US Banks: Could investors have seen the earnings risks earlier?

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While the Swiss Franc steroid infusion by its central bank will garner most headlines today it is likely investors in US banks will be nursing some wounds too. JP Morgan disappointed yesterday but there’s more pain today….

Both Citigroup and Bank of America have missed expectations today and Wells Fargo wasn’t great yesterday either. Unfortunately, investors will be taking some pain but users of ActivateAlpha’s RiskTraQ tool will be less surprised by events. As regular readers will know we have referenced in the past ActivateAlpha’s unique graphics which track the increased/decreased risks both at a stock level……and a sector level.

The risk profile of a sector is assessed using a ranking algorithm based on 20 common risk variables observed by fund managers(but rarely monitored in aggregate!!). In the graphic below a shift to the left across the x-axis over the past 3 months shows the US bank sector as increasingly risky while performance was starting to sag (y-axis). The colour of the bubbles reflect earnings revisions – a big bad RED in the bank sector’s case. In fact, the banks sector was the second worst ranked sector(Composite Score) in the US universe. However, the more important point is the CHANGE or shift in risk profile. See the RiskTraQ profile below over the past 3 months….

By most definitions risk is defined by price volatility. In WealthiFi’s view of the world measurement of risk involves way more variables than just price. In a nutshell, low price volatility presents as low risk until it doesn’t! Look no further than the euro/swiss exchange rate over the past 12 months for a false indicator of future volatility/risk.

** Please note the author of this article has a commercial interest in ActivateAlpha Ltd.



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