Big money moves markets, but not always permanently. With active and evolving political economics there is almost always change — often more political than economic. How to discern stock by stock impact prospects?
The sorting key is comparisons. But they must be of like features, ultimately winding up in their impact on coming market prices for specific investment issues.
We find volume trade orders by institutional investors have high credibility, are current, and provide good comparability when viewed through the active screen of derivative securities markets. The specific reasoning behind trade orders does not have to be evident when substantial costs are undertaken to protect market-makers in their implementation when Billion-dollar portfolios are to be adjusted.
It turns out that the limits of coming price change expectations provide dynamic measures of specific stock changes in reward~risk balances, which in turn offer active investment guidance to portfolio management. Guidance which is usually ignored by passive-investing buy&holders.
Today’s examples are Wells Fargo & Company (NYSE:WFC) and M&T Bank Corporation (MTB).
Description of the Subject Company
“Wells Fargo & Company, a diversified financial services company, provides banking, investment, mortgage, and consumer and commercial finance products and services in the United States and internationally. It operates through four segments: Consumer Banking and Lending; Commercial Banking; Corporate and Investment Banking; and Wealth and Investment Management. Wells Fargo & Company was founded in 1852 and is headquartered in San Francisco, California.”
Source: Yahoo Finance
Description of Investment Alternative
“M&T Bank Corporation operates as a bank holding company that provides commercial and retail banking services: Business Banking, Commercial Banking, Commercial Real Estate, Discretionary Portfolio services, Residential Mortgage Banking, Retail Banking services. The company also provides trust and wealth management and investment management services. It offers its services through banking offices, business banking centers, telephone and internet banking, and automated teller machines. As of December 31, 2021, the company operates 688 domestic banking offices in New York State, Maryland, New Jersey, Pennsylvania, Delaware, Connecticut, Virginia, West Virginia, and the District of Columbia; and a full-service commercial banking office in Ontario, Canada. M&T Bank Corporation was founded in 1856 and is headquartered in Buffalo, New York.”
Source: Yahoo Finance
The competitive environment
Money center banks are typically the century-old successors of both political and economic evolutions. Most have been quick to embrace developing technologies. There has been no scarcity of competitive intellect making the industry both very profitable and demanding.
The investing industry has been keenly aware of the basic developments in banking. Hundreds of new competitors have arisen and died in the march of technological progress. Figure 1 shows how the Institutional Investing community currently appraises the Reward opportunities and Risk exposures of over a dozen current competitors.
(used with permission)
The tradeoffs here are between near-term upside price gains (green horizontal scale) seen worth protecting against by Market-makers with short positions in each of the stocks, and the prior actual price drawdowns experienced during holdings of those stocks (red vertical scale). Both scales are of percent change from zero to 25%.
The intersection of those coordinates by the numbered positions is identified by the stock symbols in the blue field to the right.
The dotted diagonal line marks the points of equal upside price change forecasts derived from Market-Maker [MM] hedging actions and the actual worst-case price drawdowns from positions that could have been taken following prior MM forecasts like today’s.
Our principal interest is in WFC at location  and its principal competitive nemesis, MTB at location . A “market index” norm of reward~risk tradeoffs is offered by SPDR S&P500 index ETF at .
Those forecasts are implied by the self-protective behaviors of MMs who must usually put firm capital at temporary risk to balance buyer and seller interests in helping big-money portfolio managers make volume adjustments to multi-billion-dollar portfolios. The protective actions taken with real-money bets define daily the extent of likely expected price changes for thousands of stocks and ETFs.
Overall it points out that bank stocks currently have less capital gain prospect for the risks they open than does the market-average ETF.
This map is a good starting point, but it can only cover some of the investment characteristics that often should influence an investor’s choice of where to put his/her capital to work. The table in Figure 2 covers the above considerations and several others.
Comparing Alternative Investments
(used with permission)
Column headers for Figure 2 define elements for each row stock whose symbol appears at the left in column [A]. The elements are derived or calculated separately for each stock, based on the specifics of its situation and current-day MM price-range forecasts. Data in red numerals are negative, usually undesirable to “long” holding positions. Table cells with pink background “fills” signify conditions typically unacceptable to “buy” recommendations. Yellow fills are of data for the stock of principal interest and of all issues at the ranking column, [R].
Readers familiar with our analysis methods may wish to skip to the next section viewing price range forecast trends for WFC and MTB.
Figure 2’s purpose is to attempt universally comparable answers, stock by stock, of a) How BIG the price gain payoff may be, b) how LIKELY the payoff will be a profitable experience, c) how soon it may happen, and d) what price drawdown RISK may be encountered during its holding period.
The price-range forecast limits of columns [B] and [C] get defined by MM hedging actions to protect firm capital required to be put at risk of price changes from volume trade orders placed by big-$ “institutional” clients.
[E] measures potential upside risks for MM short positions created to fill such orders, and reward potentials for the buy-side positions so created. Prior forecasts like the present provide a history of relevant price draw-down risks for buyers. The most severe ones actually encountered are in [F]during holding periods in effort to reach [E] gains. Those are where buyers are most likely to accept losses.
[H] tells what proportion of the [L] sample of prior like forecasts have earned gains by either having price reach its [B] target or be above its [D] entry cost at the end of a 3-month max-patience holding period limit. [ I ] gives the net gains-losses of those [L] experiences.
[N] suggests how credible [E] may be compared to [ I ]and it is here where T is in the greatest trouble with Institutional Investors. Its long history of below-average price-gain performance despite positional and political advantage tends to damage credibility.
Further Reward~Risk tradeoffs involve using the [H] odds for gains with the 100 – H loss odds as weights for N-conditioned [E] and for [F]for a combined-return score [Q]. The typical position holding period [J] on [Q] provides a figure of merit [fom] ranking measure [R] useful in portfolio position preferencing. Figure 2 is row-ranked on [R] among candidate securities after WFC at top, with MTB in next rank.
Along with the candidate-specific stocks these selection considerations are provided as perspective. The averages of some 3300 stocks for which MM price-range forecasts are available today, as are 20 of the best-ranked (by fom) of those forecasts. The forecast for S&P500 Index ETF (NYSEARCA:SPY) as an equity market proxy is more-than usually involved with uncertainty because of the war between Russia and Ukraine and its potential for serious broadening.
Recent Trends in MM Price-Range Forecasts for WFC
(used with permission)
This picture is not a “technical chart” of past prices for WFC. Instead, it is the past 6 months of daily price range forecasts of market actions yet to come in the next few months. The only past information there is the closing stock price on the day of each forecast. It is the heavy dot in each vertical price range forecast line.
That data splits the price ranges’ opposite forecasts into upside and downside prospects. Their trends over time provide additional insights into coming potentials, and helps keep perspective on what may be ahead.
The small picture at the bottom of Figure 3 is a frequency distribution of the Range Index’s appearance daily during the past 5 years of daily forecasts. The Range Index [RI] tells how much the downside of the forecast range occupies of that percentage of the entire range each day, and its frequency suggests what may seem “normal” for that stock, in the expectations of its evaluators’ eyes.
Here the present level is near its average, most frequent presence, encouraging the acceptance that we are looking at a realistic evaluation for WFC.
The yellow horizontal row position for WFC in Figure 2 emphasizes the stock’s limited payoff capabilities. These coming price expectations by well-informed professionals makes T a bad choice for wealth growth in anticipation. Many other stocks likely will provide multiples of the near-term likely payoff coming from WFC. In contrast their expectations for MTB are reviewed in Figure 4. Compose
MTB Profitability Prospects
(used with permission)
The Range Index balance of upside-to-downside price change prospects are similar for both stocks, earning attention in that the upside is twice that of likely price draw-down. But the potential for more sizable gain is higher for MTB as shown in Figure 2’s Win Odds of column [I]. It has profit in 8+positions out of 10, compared to WFC’s 6 of 60.
Among these alternative investments explicitly compared, Wells Fargo & Company and appears to be a less desirable buy preference now to M&T Bank Corporation for investors seeking near-term capital gain or most forms of wealth building by equity investment. This comparison is for a short-term holding, not one of multi-months or years, but is of significant size which should not be overlooked.
Additional disclosure: Peter Way and generations of the Way Family are long-term providers of perspective information, earlier helping professional investors and now individual investors, discriminate between wealth-building opportunities in individual stocks and ETFs. We do not manage money for others outside of the family but do provide pro bono consulting for a limited number of not-for-profit organizations.
We firmly believe investors need to maintain skin in their game by actively initiating commitment choices of capital and time investments in their personal portfolios. So our information presents for D-I-Y investor guidance what the arguably best-informed professional investors are thinking. Their insights, revealed through their own self-protective hedging actions, tell what they believe is most likely to happen to the prices of specific issues in coming weeks and months. Evidences of how such prior forecasts have worked out are routinely provided at our SA blog under my name.