The Big Banks Are Slightly Less 'Hated' Today

The Fed thinks the banks are in good shape... Share buybacks are back... The big banks are slightly less 'hated' today... A taste of our upcoming '2020 in review' series... Great calls from Mike Barrett and Austin Root...

The big banks can start to reward shareholders again...

So says the Federal Reserve.

As Stansberry NewsWire analyst Nick Koziol reported this morning, the central bank announced late Friday that it has cleared the 33 largest U.S. banks to be able to buy back their own stock again...

The big banks – like Bank of America (BAC) and Wells Fargo (WFC) – haven't been able to do this since June. A first round of Congressionally-mandated "stress testing" of their balance sheets evidently wasn't satisfying enough to the Fed, which regulates the system.

But after a second round of tests that just finished, the Fed now thinks these banks are in good shape and have built up enough reserves (about $100 billion) to absorb potential loan losses, even in what it deems the worst-case scenarios (like 12.5% unemployment in the U.S.).

So as a result, the Fed removed the "no buyback" rule starting with the first quarter of 2021. From Nick...

Fed Vice Chair Richard Clarida even said that banks had been "a source of strength" throughout 2020. He added that the stress test results confirm that banks can continue lending to households and businesses "even during a sharply adverse future turn in the economy."

On buybacks and dividends, the Fed limited the size of buybacks and dividends to an amount relative to net income over the past year. If a bank did not have any net income over the past year, it would not be allowed to reward shareholders, the Fed said.

Regular Digest readers know that stock buybacks are one of the big ways – other than increasing dividends, which is still limited for the banks – that companies can reward shareholders. When a company buys back its own shares, it decreases the number of outstanding shares in the market, in turn increasing their value...

And the major banks are wasting no time buying back shares...

Soon after the Fed's announcement late Friday, four of the biggest banks in the U.S. announced they'll buy back stock likely in a just a few weeks. As Nick wrote today...

• JPMorgan Chase (JPM) authorized a $30 billion buyback program while maintaining its $0.90 quarterly dividend.
• Morgan Stanley (MS) announced a $10 billion buyback plan.
• Goldman Sachs (GS) said it would resume share repurchases at some point in the first quarter of 2021.
• Citibank (C) said it would restart buybacks between the first and third quarter of 2021.

These announcements have shares of bank stocks moving higher this morning, on a day when broader markets are down big. Investors are rushing into the stocks on the news of new buybacks.

Goldman Sachs was up more than 7%... Morgan Stanley gained 6%... and JPMorgan and Citibank rose 5% and 4%, respectively, through mid-afternoon today.

What does this all mean?

In a phone call this morning, NewsWire editor C. Scott Garliss said it indicates that the Fed thinks the "economy and financial system are in a good spot"... even as reported COVID-19 cases in the U.S. continue to hit new highs... and even as the mainstream headlines told us this morning that a new strain of the virus in the U.K. was causing the markets to sell off on the open today.

The major U.S. indexes rebounded throughout the day, in part bolstered by the big banks.

In reality, Scott doesn't believe virus developments were the correct attribution for the market action. Instead, he believes that year-end profit taking and the stimulus agreement that Congress voted on today was a "catalyst" to send the markets higher – and now, that's no longer in place.

All that said...

We won't blame anyone who hasn't wanted to touch the banks with a 10-foot investing pole this year...

Fortunately, our colleague and True Wealth editor Steve Sjuggerud isn't in that group. His subscribers know he made a bullish call on a certain segment of the banking sector several months ago, when absolutely no one wanted to touch it.

As we wrote in the July 20 Digest...

While a lot of stocks have recovered significantly from their March lows, banks have not. That reflects the concern for prolonged economic impact from the COVID-19 pandemic... or at least that the recovery won't be as strong as a lot of people envisioned a few months ago.

This was just after the Fed said the major banks didn't have enough cash on hand to cover potential losses, said they couldn't buy back their shares, and instituted caps on how much they could raise dividends. Smaller banks hadn't recovered from March's crash, either...

But as longtime readers know, this is exactly where Steve often sees opportunity... In addition to telling the world about the "Melt Up," he loves to make money with assets that are cheap, hated, and in an uptrend. As he wrote in the August issue of True Wealth...

It wouldn't be my investment mantra if I didn't repeat it often...

Cheap, hated, and in an uptrend. That's what we want. It's what we're always after when we put money to work.

If you can check these three boxes, you're on to something good. It's not the easiest combination to find, though...

Usually, when prices are moving higher, valuations aren't so low... and sentiment isn't so bad. It does happen, though. And when it does, you're positioned to make the biggest profits – if you can act on it.

Steve and his research team pointed to a handful of bank stocks that were very cheap and very hated. These weren't the big banks, but like them, Steve wrote...

No one's paying attention to them... but prices are on the rise.

Steve's recommended play is up roughly 34% since August. It doesn't benefit directly from the Fed's loosening of restrictions on big banks, but the news in general speaks to the idea that the entire banking sector is less "hated" today, at least by the central bank.

As Brett Eversole, the lead analyst on Steve's research team, told us in a private note today...

It's basically the Federal Reserve saying that the doomsday economic scenario isn't happening. They paused buybacks to make sure bank balance sheets stayed healthy. Now that the economy is recovered, they don't think that's necessary anymore.

These big banks will do well if the economic recovery continues. They might be able to slightly boost earnings if they can buy back stock. But their long-term prospects are more linked to us moving past the pandemic and things getting back to normal. We're moving closer to that reality every day. And this news tells us that the Fed agrees.

Moving on, we want to give you an early heads-up about our plans for next week...

Next Monday, we'll kick off a special weeklong "2020 in review" series here in the Digest.

Of course, this year has been especially crazy, so there's plenty to reflect on – from March's crash and bottom... to new stock market highs again... and all that came with the COVID-19 pandemic.

So like this unusual year, this won't be a "normal" year in review. Instead of simply sharing our favorite essays, we'll republish Digest content that we produced during key "turning points" of the economy and markets in 2020...

The idea is to encapsulate these most unexpected past 12 months in our world and the markets... and importantly, show how our editors saw it and guided subscribers along the way.

So again, get ready for that series starting next week, as our team enjoys some much deserved time off for the holidays.

Here's a taste of what to expect...

Take this essay from Extreme Value analyst Mike Barrett – which we published on the first trading day of 2020. We called our January 2 Digest, "Three Warning Signs of the Next Great Depression."

In it, Mike showed the parallels between the period just before the Great Depression of the 1930s and today, like overproduction of commodities, a weaker global economy than imagined, and a false sense of security...

And while Mike didn't quite predict the onset of a pandemic, he did use related terms to describe the current market environment. He issued the following warning...

Don't underestimate the potential for economic "contagion," or for the problems of economies to spread like a contagious disease.

And Mike said his most important takeaway from the essay was this...

No one knows when the next economic crisis will erupt of course. But if it happens while the three conditions just detailed are present – a global economy susceptible to contagion, persistent commodity overproduction, and a false sense of security – there's a good chance recession will last far longer, and be much more painful, than most can imagine.

Just like ahead of the Great Depression.

Which raises the question: What should you do about it?

Mike went on to suggest that investors consider raising cash or investing in precious metals... whether it's in gold coins or gold stocks. More from his essay...

I could care less what the share prices of these gold stocks do on a daily basis. I own them for one reason, they'll soar in price if gold takes off, as I believe it would during a major economic crisis.

That turned out to be a wise call, of course... Today, gold trades for nearly $1,880 per ounce. That's almost 25% higher than its price of about $1,530 per ounce at the start of 2020.

Along the way during gold's rise this year, we were reminded of the sage words from Gold Stock Analyst editor John Doody... who is still calling for gold to ultimately hit $3,000 or above.

Here's another great call...

That same month, in the January 19 edition of our Digest Masters Series, our Director of Research Austin Root published an essay titled, "Start Building a True 'All Weather' Portfolio Today... Before the Storm Arrives."

Readers who took his guidance or follow him in our Stansberry Portfolio Solutions products were likely very pleased come February and March. As Austin wrote in January...

Will you make sure to bring your "umbrella"?

As we kick off 2020, I hope you do. Because I fear many investors will not...

In their eyes, the sky is too clear and sunny now to worry about rain. "Why lug around something I probably won't need?" they reason.

It's time to debunk such a carefree notion. I want to make sure that you pack your umbrella for the storm ahead... and maybe even help convince some of your friends and family to pack theirs, too.

Let's be clear – I don't expect a major correction right around the corner. But the storm clouds are gathering. They'll get here sooner or later. And the time to prepare is now.

Austin went through the reasons why...

He pointed out that "asset prices have gorged on huge amounts of monetary stimulus from the Federal Reserve." Low interest rates have forced savers and investors seeking yield into riskier assets, like stocks.

And this was before the Fed cut its benchmark rate to zero in March...

Austin also showed that Corporate America was more "levered than ever" and referenced corporations' behavior compared to the banks that we mentioned earlier. From his essay...

While banks have prudently increased their capital reserves, every other major part of the economy has levered up materially. And rather than reinvesting in growing their businesses, corporations spent much of this new debt on share buybacks. Yet again, stocks have already enjoyed the benefit of this spending.

He went on to point out that consumers were also more indebted than ever...

Home-related debts have not yet reached new highs. But all other major categories – such as auto, credit card, and student debts – have ballooned more than enough to make up for it.

And even investors were trading on more margin than ever before, to the tune of $600 billion. As Austin said...

There is entirely too much debt sloshing around the system. This won't end well.

In March, when the COVID-19 panic hit the economy and markets, many folks who were playing the debt game started selling in a "liquidation event." The Fed stepped in to rescue the credit market... And the government decided to literally send checks in the mail to American consumers.

The point I'm trying to make is that the time to prepare for a crisis is before it happens. That's what Austin was urging back in January. He closed his January 19 essay with this message...

I believe now is the time to start pulling back a little bit on the investment throttle.

To be clear, you still want to be invested in stocks. In particular, you want to lean on world-class businesses with enduring franchises and attractive returns on investment.

But this is not the time to solely own those stocks.

Downshift your risk a bit. Think about trimming some of your most aggressive investments. Tilt your allocation toward safer, sturdier assets. Own some gold. Begin to raise some cash and cash-like securities (like short-term U.S. Treasury bills).

In short, keep owning those blue-chip "forever" stocks... But from here, don't go anywhere without bringing along that umbrella.

Wise words...

And Austin is having an amazing year with our American Moonshots portfolio product in particular. Stansberry Research Publisher Brett Aitken pointed out Austin's incredible performance as part of an internal memo to our staff last Thursday...

American Moonshots [is] crushing its benchmark... and every other benchmark for that matter. As of today, [it] is showing a 98% portfolio return since January 31, 2020. His benchmark for this portfolio – the S&P 600 Small Cap Fund – is showing just 15% returns over the same period. The S&P 500 is showing 17%. And the Russell 2000 Fund is showing 23%.

Kudos to Austin, Mike, and all of our editors for their work every single day, no matter what the markets or economy are doing. We hope you've been able to benefit from their advice in the past... And of course, we hope you'll be able to do so long into the future as well.

Ron Paul: The Feds Will Keep Manipulating Gold

In Part 1 of an exclusive interview with our colleague Daniela Cambone, longtime U.S. Congressman Dr. Ron Paul discusses the possibility of a "Bretton Woods reset" backed by cryptocurrencies.

The former presidential candidate also shares insights into a personal conversation he had with former Federal Reserve Chair Ben Bernanke about gold... and why he feels the government will continue to manipulate gold prices...

Click here to watch this video right now. For more free video content, subscribe to our Stansberry Research YouTube channel... and don't forget to follow us on Facebook, Instagram, LinkedIn, and Twitter.

New 52-week highs (as of 12/18/20): Asana (ASAN), ProShares Ultra Nasdaq Biotechnology Fund (BIB), BlackLine (BL), Curaleaf (CURLF), Expeditors International of Washington (EXPD), Gravity (GRVY), Green Thumb Industries (GTBIF), Renaissance IPO Fund (IPO), Jushi (JUSHF), LCI Industries (LCII), MongoDB (MDB), Match Group (MTCH), Novo Nordisk (NVO), Palo Alto Networks (PANW), First Trust Cloud Computing Fund (SKYY), Scotts Miracle-Gro (SMG), Square (SQ), Constellation Brands (STZ), The Trade Desk (TTD), Take-Two Interactive Software (TTWO), Vanguard Short-Term Inflation-Protected Securities Index Fund (VTIP), Vestas Wind Systems (VWDRY), and Zendesk (ZEN).

In today's mailbag, feedback on Dan Ferris' Friday Digest. Do you have a comment or question? As always, send your notes to feedback@stansberryresearch.com.

"Dan, if we use the widely quoted statistic that since the Fed was formed the purchasing power of a dollar has fallen 97% to .03 cents. Then the current real inflation-adjusted index value of the S&P 500 is only about 100. The other 3300 in the index's value is nothing but inflation.

"Since the Fed is responsible for all that inflation, I would not have any remorse about your statement that the Federal Reserve is a group of financial arsonists masquerading as a company of crackerjack firefighters." – Paid-up subscriber Kendrick M.

"Good evening Mr. Ferris, the tidbit regarding Enrique Abeyta's observation is interesting, for sure. I am not so sure that his point doesn't highlight the fact that when the FOMC speaks, people buy stocks – or certain somebodies buy stocks. I suspect there are professional traders involved with some insight that average joes just don't have (plus we're not paying attention to the FOMC).

"As for inflation? In terms of gold, which on 12/17/1997 was about $288/oz., and was about $1,880/oz. on Friday, 12/18/2020, I would say that there has certainly been inflation. That's about a 553% increase in gold per ounce, but put another way, represents a decline in the dollar's purchasing power to about only 18% of what it could buy in 1997. If you use silver, you get a lower level of inflation (335%) and a smaller deterioration of the dollar's purchasing power (able to buy only 30% of what it could in 1997).

"Sure, that's a limited view using only the two metals which have historically served as money when the s&^# hits the fan (or there was a rational basis for sound money). But, I suspect the prices for autos, refrigerators, lawn mowers, etc. have also increased overall. To the extent that production/technological efficiencies/improvements and ample supplies have helped keep prices lower for these other goods, it might tend to make it appear inflation is lower than it really is. Mixing real world supply and demand for hard goods with messy monetary policy makes getting the real bottom line on inflation difficult, and it probably helps the Fed 'experts' look better at their jobs than they really are.

"Anyhow, regardless of the FOMC dates you mention, the long-term inflationary effect is real and robs real people of their savings... Thanks so much for your always informative Friday Digests!" – Paid-up subscriber Jeff H.

"Dan, the Fed causes market crashes, then reverses course and is touted for fixing a problem they created in the first place." – Paid-up subscriber M.P.

All the best,

Corey McLaughlin
Naples, Florida
December 21, 2020