Morning Notes — Early Signs of Cyclical/Value Leadership

As previewed, Financials (banks) outperformed on Friday and thus far today after the upside in July payrolls drove bond yields and expectations for improved Net Interest Income (NII).  Financials are our preferred value sector, particularly regional banks that trade at ~1.3x Tangible Book Value vs. a long term average of ~2x.  Regional banks are not as active on stock buybacks as their large cap counterparts, but our favorites already show consistent loan growth with management during Q2 earnings calls noting increased interest in drawing on credit lines rather than using cash.  This was also seen in the Fed’s Q2 loan survey. In past cycles, customers have first used cash before drawing on credit, with high current cash balances pushing out our loan growth expectations.  We’ll pay extra attention to anecdotal evidence of increased loan growth.  A short-term opportunity for improved loan growth, intermediate term opportunity for improved NII and long-term opportunity for share capture, keeps regional banks at the top of the list.  Apparel retailers and some Industrial companies stand out within cyclically-sensitive groups.