Bank Stocks Are Looking Green


All around the investment world, whispers and rumors mingle together to create speculation on how the global market will perform when or if the Federal Reserve decides to raise interest rates on the US dollar.  The dollar has enjoyed almost zero inflation since 2008 as the government seeks to limit financial red tape to facilitate more spending, more lending, and more economic recovery.  As the US economy stabilizes and grows steadily, with 2.4% GDP growth in 2014 representing the largest increase since the recession, the Federal Reserve now stares down at the world's most powerful reserve currency with the expectations that inflationary spending may be necessary by autumn.  This speculation has sent the stock market rising and falling fairly consistently throughout the past three months without any gain in the Dow Jones Industrial overall.  While industry stocks will suffer from inflationary monetary policy, you can be certain that one industry will not: the banks who control the nation's money supply.

Growth Of A Market, Or Not

Goldman Sachs released a report in March dictating that growth stocks outperformed all expectations in the first quarter of 2015 but that the brakes appear to be ready to go for the second quarter of the year.  That trend has played out so far going into May, posing a conundrum to investors: would you prefer to invest in stocks at their high point, or would you prefer to short stocks that have fantastic momentum?  Neither option represents a particularly appealing course, nor a course without significant risk.  Standard growth stocks -- Apple, P+G, Disney -- appear to be under-valued by current mutual funds due to higher trading value than income.  Proctor and Gamble, for instance, are currently trading at no less than twenty-five times their current earnings despite having no net growth in 2014.  That makes growth stocks an unappealing prospect in the near future and makes investors in sore need of an alternative.

Taking It To The Bank

Why do bank stocks represent an ace in the hole where growth stocks appear sluggish?  For starters, the bond market at the moment is positively terrible.  The global bond market has lost about half a trillion dollars (that's trillion, with a capital T) in the past month alone as nations seek to get loans for next to nothing, with no chance for bonds to hold their value without a massive worldwide recession.  The European Central Bank is even mulling over the thought of ending its bond-buying platform, despite the fact that it's effectively printing money.  Inflation represents good news for bank stocks on two fronts: it destabilizes bonds and creates a demand for the only product that banks actually sell.  What's more, good news for banks offers a welcome respite from many months of sluggish performances.  The SPDR KBE exchange-traded fund (KBE, trading for $34.88 on the New York Stock Exchange Arca) has enjoyed the best gains that the fund has seen in the past two years.  Banks have only made back about half the cash they lost during the global recession while nearly every other industry managed to be back in the black by 2014.  At the end of a long road, it appears that banks are now set to reap the collective good fortune of their customers.  Look no further than the NASDAQ Bank Index, riding a 52-week high.

Growers and Underperformers

What bank stocks appear best poised to ride out the wave of higher value?  JP Morgan Chase (JMP, trading for $66 even on the New York Stock Exchange) and Wells Fargo (WFC, trading for $56.22 on the New York Stock Exchange) represent the two horses at the head of the race.  Both mega-banks made it to the top of the list of earnings per share growth in the first quarter and both have dividend yields in the vicinity of 2.5%.  They can be the best value bank stocks in your portfolio, or they can complement solid risers like Citigroup (C, trading for $54.56 on the New York Stock Exchange) or Morgan Stanley (MS, trading for $38.08 on the New York Stock Exchange), both of whom enjoy share prices that are less than their overall book value.  The latter two bank stocks, as such, represent a dynamite opportunity for buying low and selling high.  A cautionary tale that a rising tide does not life all boats: some banks may not gain as much as their competitors even if the good times appear to be ahead.  Bank of America, for instance (BAC, trading for $16.50 on the New York Stock Exchange) has a poorer efficiency ratio and less revenue as a percentage of assets than its competing financial institutions.  With a recommended sell value of $16 per share on Bank of America, they appear to be one bank that could be left out in the cold while the rest of the titans loosen their belts.

Long Term Or Value Now?

All signs point toward a bull bank market.  The 50% retracement value of bank exchange-traded figures over the past 24 months indicates that the muddled middle of poor or null performance is solidly in the rear-view mirror.  With resistance to previous gains defined by a single high, there's little criticism to be had of the overall banking climate.  The Fed's decision to raise interest rates serves to create further demand for cash on two fronts: first, it drives customers to borrow from banks immediately in order to amass liquidity before inflation reduces the value of cash.  Second, it allows banks to offer better interest rates for their own services to attract more capital.  Bank stocks represent a very solid choice for investing in the long run but comparatively less opportunity for rapid profit given the difficulty of any one bank expanding its market share and total difficulty to a large degree.  Fast gains shouldn't be the goal here, but rather enhancing your portfolio with the goal of allowing bank stocks to ripen for a year or two or even more.

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