9/20/2012 5:25 PM ET|
Why bank shares could rise by 20%
The latest Fed action could give a bigger boost to financial stocks and funds than to the overall economy.
Bank stocks have led the U.S. market this year. There's reason to believe they have further to run.
The KBW Bank Index (BKX.X), which tracks global money centers like Citigroup (C) and JPMorgan Chase (JPM), as well as regional banks like Fifth Third Bancorp (FITB), is up 29% this year, versus 16% for Standard & Poor's 500 Index ($INX).
Much of the outperformance has occurred since June on steps by eurozone leaders to address a government debt crisis. The head of the European Central Bank committed in July to "whatever it takes" to save the euro. This month, a key German court backed the creation of a permanent bank rescue fund, and the European Commission took early steps toward forming a banking union.
This boosted U.S. banks in two ways. First, fears eased that they will be dragged into a European banking crisis, raising investor confidence in the sector.
Second, the 10-year Treasury yield, which sunk below 1.5% in July in a sign of investor gloom, recently topped 1.8%. The one-year yield is little changed over the same period. In Wall Street parlance, "the yield curve has steepened." That's good for banks, because short-term yields are representative of rates banks pay to depositors, while long-term ones are linked to rates they charge to borrowers.
In a Monday report, technical analysts at Bank of America (BAC) pointed out another reason for bank shareholders to cheer: The Federal Reserve's announcement Friday of a new round of "quantitative easing", bond-buying designed to drive down yields and spur economic activity.
The effectiveness of such easing on the economy is open to debate, but B of A points out that it has worked a treat for bank shares. Following similar programs announced in mid-March 2009 and early November 2010, bank shares went on to rally more than 20%.
This time around, the bond-buying will focus on mortgage securities, which could reduce mortgage rates and give those homeowners who haven't already refinanced reason to do so. That could raise profits for mortgage lenders. On the other hand, lowering yields on mortgage securities would mean that banks that hold them earn less investment income.
There are some other potential worries for banks. Chief among them, recent central bank actions are merely short-term efforts aimed at what could prove a long slog of slow economic growth, bringing meager profit growth for banks. That could make banks more of a short-term trade than a long-term holding.
That noted, most big U.S. banks trade at a fraction of the book value of their assets and have been writing off many of those assets whose values are questionable. That makes them look cheap relative to other stock market sectors. The financial and energy sectors are the least expensive in the S&P 500, trading at 12 times projected 2012 earnings. The index trades at 14 times earnings.
Financials, some of which had to cut their dividends during the 2008 global financial crisis, are also leading other sectors this year in the number of dividend increases.
Investors can place a broad bet on banks using PowerShares KBW Bank Portfolio (KBWB), an exchange-traded fund that tracks the aforementioned KBW index. It costs 0.35% of assets a year.
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The only way to fix this is:
1) Break up the "Too Big To Fail" Big Banks into smaller pieces, so the taxpayers don't have to bail them out again.
2) Ban derivatives, the weapons of mass destruction. Or at least, make them apply Generally Accepted Accounting Principles (GAAP) so people know the real value instead of the myth that bankers propagate.
3) Re-institute Glass-Steagall Act, which separates investment banking (securities) from commercial banks which accept depositors money and where the depositors money is guaranteed by the Federal Depositors Insurance Corporation (FDIC). QE3 involves the purchase of Mortgage Backed Securities from banks, which are securities packaged by the banks comprised of sub-prime loans.
Banks are playing with wall street and the government like toys.
Invest in your own piggy bank at home. They give you zero percent interest on your money then buy bonds with it for 4-11 percent interest and you get a few free atm withdrawals each month while the bank gets richer on your deposit. If we went back to stuffing the mattresses they would be forced to raise checking and savings interest to entice you to bring your money back to them.
You have got to be kidding!
Any investor worth their salt knows when articles like this appear it's the perfect time to short these stocks.
Do you really think people are that mindless a bunch of sheep to fall for this drivel?
Never mind, I forgot which journalistic enterprise (there's a stretch), we are dealing with here.
Why stocks could gain 20%? Are you on LSD? How about this, why can the American economy collaspe because of the National Debt?
Stock market cheerleaders, Obama desperates? How can anyone deny the debt and how close we are to total collapse? I know just wat til election is over then let it collapse................
"Most U.S. banks trade at a fraction of the book value of their assets and have been writing off many of those assets whose values are questionable. That makes them look cheap relative to other stock market sectors." Wow, so in other words, bank stocks look cheaper but in reality are hiding toxic assets using cheap bookkeeping tricks until they can write them down or auction them off or sell them.
No freakin' thanks. Do not touch bank stocks. As interest rates rise, small businesses will stop borrowing money to expand. More foreclosures coming on the market could crash these stocks further. If we don't address the fiscal cliff, there will be huge government cuts that cause more people to lose homes in January and even more toxic assets sitting on the banks' books. $16 trillion debt will be cut slowly not fast so the banks will be bleeding toxic assets for many years to come. Stay away.
A 20% rise? This would be the ramp just at the edge of the cliff so these banker fools can careen off the edge in style before failing and falling like rocks. Bank of America will terminate the cash flow from 16,000 of it's depositors and bank service users (employees). Check out what happened to National City in the same scenario... FDIC ended up giving PNC $7.5 Billion to take the carcass that was once a $160 Bilion bank and 8th largest lender in the world-- off their hands.
Banks have been dead since 1999.
"Much of the outperformance has occurred since June on steps by eurozone leaders to address a government debt crisis."
You realize that this refers to the creation of debt instruments. Banks are outperforming themselves making debt instruments and contracts that never settle, they get bailed or bought by the Fed as more debt. Banks-- as institutions of relevance to the United States of America are insolvent. They lend to ineligible home-buyers and repossess the same after several months. The Fed buys the mortgage but the bank hides the extraneous costs like legal, repossession and unearned lending changes off of the books. The FDIC's Universal Bank Productivity Report (UBPR) is no longer accessible to the public. The Bauer Financial Index gives the banks mentioned in this article a lukewarm performance rating. Most Americans give them a ZERO rating. The obvious purpose of "going Global" was to mask the bad business practices of banks. Entrepreneurs can't walk into a bank and get a small business loan unless they are willing to put up more than they are asking for in collateral. Notably, a recent article here in MSNBC pointed a finger at banks for causing 800,000 foreclosures that could have been remedies.
CLOSE THE BANKS. End the Federal Reserve. Get rid of Wall Street. Let's invest 100% in JOB RECOVERY right now and ZERO in garbage institutions like banks that are the epicenter of all of our suppression compression recession depression woes. No Republicans this Fall, the Fall of bad Banks comes right after elections. You can BANK on it.
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