Why Big Banks Could Be Going Much Higher
No surprises from the Federal Reserve... Is the Fed making a big mistake?... Keep an eye on this trend... Why big banks could be going much higher... Doc says this bank is a strong buy today...
Is the Fed out of touch?
Last week, the Federal Reserve voted to raise short-term interest rates another 0.25% as expected. The so-called "fed-funds rate" now sits at a range of 1%-1.25%.
In its official statement, the central bank said that it continues to expect to raise rates at least one more time this year. And it said it is moving forward with previously announced plans to unwind its massive $4.5 trillion bond portfolio.
In other words, nothing to see here.
However, there are signs the central bank could be behind the curve...
Price inflation remains below the Fed's official target of 2%, and appears to be rolling over... Various measures of economic strength like home sales, retail sales, industrial production, and even consumer sentiment have weakened as of late... and the promise of economic reforms out of Washington has faded.
To be fair, in her press conference on Wednesday, Fed Chair Janet Yellen admitted that inflation was weaker than she would like. But she insisted this was "transitory" and that the economy remains strong. As financial-news network CNBC reported at the time...
Fed Chair Janet Yellen is focused more on economic growth than she is inflation weakness, leading her to believe the central bank will keep raising interest rates.
The central bank head addressed perhaps the most vexing issue facing issue facing policymakers, mainly that Fed policies have yet to achieve the 2% inflation target its programs were supposed to generate... Yellen indicated she's not terribly concerned about the weakening inflation trend.
"Our decision to make another gradual reduction in the amount of policy accommodation reflects the progress the economy has made and is expected to make toward maximum employment and price stability assigned to us by law," the chair said during her post-FOMC meeting news conference... The recent lower reading on inflation have been driven significantly by what appears to be one-off reductions in certain categories of prices such as wireless telephone services and prescriptions drugs," she said.
In other words, Yellen believes inflation will resume its recent uptrend soon...
We're not so certain. Again, much of the recent pickup in economic activity was driven by expectation of reforms out of Washington. If these don't happen reasonably soon, we expect the economy will fall back into the slow, grinding trend of the past several years.
In that case, the Fed could be forced to halt its tightening cycle – or even begin easing once again. We'll be keeping a close eye on this trend.
Of course, none of this means the market can't go higher...
Meanwhile, another Federal Reserve move could be incredibly bullish for one sector in particular...
On Thursday, the Fed is scheduled to release the results of its annual "stress test" for U.S. banks. This test – which was put in place following the financial crisis – is designed to gauge banks' ability to survive another meltdown.
While the test isn't expected to uncover any major weaknesses this time around, it could be a boon for investors. As news service Reuters reported this morning...
According to [Wall Street] estimates, the Fed could allow banks to distribute nearly as much capital to shareholders over the next year as they generate in profits, a benchmark not hit since before the 2008 crisis.
Higher payouts "would be significant from a signaling standpoint" that regulators are easing up on capital requirements, said Steven Chubak, a bank analyst at Nomura Instinet. "That is a key part of the value case for a lot of these stocks."
Said another way, the Fed is expected to give the "all clear" and allow the biggest and best U.S. banks to return much more capital to investors going forward.
How much capital? According to Morgan Stanley analyst Betsy Graseck, the typical "big bank" could be allow to increase share buybacks by 27% and dividends by 8%. Altogether, she expects the combined "capital payout" ratio to be raised to 95% of annual earnings, up from just 84% last year.
If you already own U.S. banks, sit tight...
These results could be a significant tailwind. But if you don't yet have a position in the sector, our colleague Dr. David "Doc" Eifrig has a suggestion.
In the April issue of his Retirement Millionaire newsletter, Doc recommended one big bank that he says is head and shoulders above all the rest. From the issue...
To a casual observer, the names of the big Wall Street banks tend to run together. The JPMorgans, Goldman Sachs, Morgan Stanleys and so on sound like similar businesses in close competition. They seem pretty much the same.
To anyone watching closely, though, [one bank] dominates the finance industry.
Banks can be a lot of things. They can work with consumers, underwrite public stock offerings, trade for profits, or lend money. Most banks focus on a few key areas and dabble in others. But [this bank] is in the top two or three of nearly every category.
In addition, Doc noted that this bank is consistently among the most profitable in the world...
The main measure of a bank's profitability is return on equity (ROE). In a simplified sense, this measures how much profits the bank earns from the equity its shareholders have contributed to give the bank a capital base. [This bank] consistently beats the other big banks in posting a healthy ROE.
And most important, Doc explained that the bank isn't taking big risks to fuel this growth...
[Its] capital ratios fall in line with the industry and have been rising. The company has got a better credit rating from Standard and Poor's [than any of the other big banks.]
When you look at the cost of insuring [its] bonds, you'd pay less to do so than for any of the other banks. In other words, traders think it's the safest bank in the market.
In short, if you're looking to own the safest and most profitable of the big banks, Doc's recommendation is a no-brainer. Again, you can get all the details in the April issue of Retirement Millionaire. Click here to learn about a 100% risk-free subscription.
New 52-week highs (as of 6/16/17): AbbVie (ABBV), American Financial (AFG), Aflac (AFL), Boeing (BA), iShares Select Dividend Fund (DVY), Fidelity Select Medical Equipment and Systems Fund (FSMEX), Global X MSCI Greece Fund (GREK), Johnson & Johnson (JNJ), Mid-America Apartment Communities (MAA), 3M (MMM), Altria (MO), Annaly Capital Management (NLY), Paysafe (PAYS.L), Travelers (TRV), Two Harbors Investment (TWO), U.S. Concrete (USCR), Invesco High Income Trust II (VLT), and Wabtec (WAB).
Oh boy, the mailbag overflowed this weekend. Today, we have more feedback on last week's big oil webinar... several responses to Porter's "big picture" Friday Digest request... and loads of commentary on subscriber "Paulette R. Caswell, PhD." As always, send your notes to feedback@stansberryresearch.com. We can't respond to every e-mail, but we read them all.
"Thanks to your Commodity Supercycles webinar, I believe I fully understand the enormity of opportunity which lies just over the horizon in oil/gas related investments. VERY well done on the webinar. Thank you for opening my eyes." – Paid-up subscriber Carl Johnston
"Hi Porter, a few years ago I sent my first query/comment to your publication. I remember you prefaced your response by saying that in your view I had no knowledge history, economics, or business. I still chuckle at that, as I almost certainly do have a great deal of knowledge in all those areas.
"Perhaps not so good a judge of character (and also lacking some humility), but a great analyst. I devour your Stansberry Digests, especially the Friday editions. Your analysis has helped me understand what is happening in today's crazy world economy, so that I might develop my own investing script. My favorite Digest was one about a month ago in which you explained why companies such as Amazon could exist without profit, how the perverse low interest rates favored companies such as John Deere that could use low interest loans to further their businesses.
"I do have a question, which perhaps you dealt with in your Wednesday presentation (unfortunately I was not able to attend). Why, after all these years of taking the contrarian view on peak oil, have you suddenly switched camps? Perhaps I'm misreading your position, but $500 oil certainly sounds like the economy crunching energy prices the peak oil people are predicting. Or is it that you expect inflation, in general, or in commodities in particular, to increase to the point where $500 a barrel is affordable in relative terms?" – Paid-up subscriber David D.
Porter comment: David, no, a higher price of oil has nothing to do with Peak Oil. Instead, we're assuming annualized growth through 2028 in the price of oil that's in line with previous long cycles, from trough to peak. ($40 to $500 represents 26% annual compound growth for 11 years.) Growth in the price will be paced by tremendous growth in consumption from the emerging markets.
I expect we'll see $20 oil long before we see $100 oil or $500 oil. It's the low prices I expect over the next 18-36 months that will set the stage for the next big oil rally, just as the low prices of the 1960s set the stage for the '70s rally, and just as the low prices of the early '80s set the stage for the '90-'91 rally, and just as the low prices of the late '90s set the stage for the big rally of '06-'08.
It's just market cycles. There's nothing new in the oil business. And there won't be for a very, very long time.
"Dear Mr. Stansberry, you have a way, a gift actually, to take a complicated 'big picture' and bring it to easy to understand terms. I, for one, and I'm sure many others agree, are very thankful for this..." – Paid-up subscriber Pierre B.
"[Regarding] the big picture... you have made a substantial impact on my portfolio from: 1. Gold stocks a year ago... 2. China... 3. Oil (jury still out but I'm betting you're right)." – Paid-up subscriber Earl F.
"Hi Porter and Company, I love the work you guys are doing on both the auto industry and the oil industry. I know much more personally about the oil industry and can verify that almost everything you say is right on track. I will say that I am sorely disappointed that I only have a lowly M.D. and so my C.V. is only one page, but one of my qualifications is not narcissism, so I don't have so much to write about." – Paid-up subscriber Gary Wofford, M.D.
"As the saying goes – if you need to tell everyone you're wealthy, you're not wealthy. And so it is with intelligence... if you need to tell everyone you're a 'highly educated individual with a PhD', you're almost certainly not actually that intelligent at all! I knew of someone who went to 7 universities, but it wasn't because he was clever, it was because he was so obnoxious he kept getting kicked out... so the fact the deluded doc from your prior Digest studied at 9 universities holds absolutely no weight with me at all I'm afraid!
"As a fellow female subscriber I was absolutely disgusted with the deluded doc's hint at sexism. I couldn't care less whether the Stansberry editors were male, female, or mixed 50/50 – IT'S ABOUT THE QUALITY OF WORK A PERSON CAN DO, NOT WHAT THEY HAVE BETWEEN THEIR LEGS. And the same is true with P.J's work – if you don't like it, don't read it! So perhaps the deluded doc should swap some of her immense brainpower for some sense of humour and humility cells... if she does actually have any brainpower that is, because even I know you can't cancel your subscription in writing via email, and I'm clearly not the 'highly intelligent individual with the PhD' that she is ;)" – Paid-up subscriber Julia F.
"Porter, what an appropriate and perfect response to the so-called Doctor Caswell. I say so-called, as my long experience with PhD's in science does give me some insight into the often warped minds of academia (I'm assuming she's still stuck in academia). While I'm just a lowly B.S. and M.S. degree holder, I fully recognize what those degrees really mean: Bull Crap, More Crap and then there's Dr. Caswell, Piled Higher and Deeper. It's those like the good doctor that have kept me working hard all these years on inventing a 'glass navel', so as to allow those good folks to actually see better when their heads are so far up their arses. If I sound like PJ, that's good. I then have humility and a sense of humor on my side. Keep up the good work" – Paid-up subscriber Charles Katherman.
"Until I read the comments from Dr. Caswell, I thought everyone realized that Obama's Nobel Peace Prize was the equivalent of a participation trophy. I wish I knew of a school offering a degree in common sense that I could recommend to her." – Paid-up subscriber J. Cromwell
"Porter, you nailed it with Dr. Caswell. Zero humility and also very little connection to reality. Of course there are very differing opinions on Obama's terms as President, but qualifying them by saying he won a Nobel Peace Prize is downright laughable. You know who else won one? Jimmy Carter. How many people think he was a great President? I have yet to meet one.
"It's also pretty absurd to introduce yourself as 'highly-educated' simply because you have a PhD (let alone to include both in a self-introduction...). Maybe you have to be above average, but I have met plenty of 'highly-educated' PhD-recipients who turned out not to be that smart. I have also met some brilliant people with PhD's. It is not in my opinion an absolute measure of someone. I 'only' have a Master of Science in Chemical Engineering from UCLA, so I can only bow in lowliness to her doctorate and pray she find me worthy of making eye contact with her should we ever meet." – Paid-up subscriber Aaron Miller.
"Let me see if I have this straight: Dr. Caswell defines herself as a 'highly educated individual with a Ph.D.' and backs that up with a 10,000 word, 22-page CV, (Ooooooh! I am soooooo impressed.) I am sorry, but anyone who describes herself in that manner is – as I once heard it said – an effete intellectual snob. The fact that she feels compelled to insult PJ O'Rourke as an 'obvious sociopath with a very limited education' only underscores her ivory tower pretensions. All I know is that Mr. O'Rourke is the funniest political commentator in America today. If you want proof, please pick up a copy of Parliament of Whores and read the preface to what O'Rourke describes as the 'Devil's Civic Text.' I guarantee that you will gleefully continue on to read the entire book. In the 3-1/2 page preface, PJ distills politics down to its hilarious essence.
"I should note, that Dr. Caswell, herself, is quite the comic. I laughed uncontrollably when she noted solemnly that President Obama 'was awarded a Nobel Prize for Peace.' (Lordy, I couldn't even type that last phrase without cracking up again.) So, well done, Porter. Your response was both pointed and deliciously devastating. I disagree with you on only one point: While a sense of humor cannot be taught, I believe that humility, indeed, can be. In fact, it is my humble belief that humility and its partner, gratitude, are the inevitable by-product of a proper education." – Paid-up subscriber John Dzialo
"It may be appropriate to remind Ms. P.R. Caswell, PhD, that all those credentials and $1.95 (+tax) will get her a cup of coffee most anywhere. Unfortunately, I doubt she will ever be able to buy a sense of humor. She does, however, demonstrate extremely well how out-of-touch folks like her often can be. She equates academic accomplishments with 'being right' when, truthfully, it is just her opinion. About the only response I would have for her would be 'Wow! Lady, lighten up!'. As for P.J., 'Keep up the good work!' P.S. I finally followed your rec's wholeheartedly (20% of my portfolio) with China and am really pleased. I am really looking forward to the future now that some of that 'learning' is starting to sink in!" – Paid-up Stansberry Alliance member Glenn Gates.
"A 22-page academic resume!!? Who is going to read that? Junior high school and high schools were included? She must have done poorly in elementary and kindergarten as she omitted them. Don't most people include only ONE line per academic degree on their resumes and move on to more important stuff?" – Paid-up subscriber Tom Wagner.
"Come on Porter. You can't scam a scammer. Dr. Caswell, esteemed PhD, is none other than PJ himself. Really, PJ doesn't need this Caswellian hyperbole to boost his readership. I like him just the way he is. Good try though. I love you guys because you always think out of the box... about everything. Long time happy subscriber." – Paid-up subscriber Frank Romanelli.
Porter comment: Frank, I know you're kidding... But the thing is, nobody could make up 22 pages of a C.V. She even listed her high school coursework and her junior high diploma. Totally nuts.
"C'mon Porter, 'fess up! That letter was as much from 'DR. Caswell' as the letter you published a few years ago from 'the President of General Motors' was from Akerson. I think you made the whole thing up to showcase your calm and reasonable response to a self-righteous spittle-flinging tirade (not the first time either – Oh, the punctuation!). It's obvious you use the Friday Digest to hone your ambition – to be Bill Bonner when you grow up. Keep up the good work – and P.J. too." – Paid-up subscriber Ed Kobialka.
Porter comment: Ed... nobody could have possibly faked this C.V... It's like A Beautiful Mind – completely crazy.
Regards,
Justin Brill
Baltimore, Maryland
June 19, 2017