US Banks to Rumble

I’ve been recommending US bank stocks for over a year now – after all, they are powerhouses of future potential. Though bank stocks have risen slightly in the past year (about 15%) there is still far more room to move. And, things are about to get hotter.

Last week, the US Federal Reserve approved buybacks and dividend increases for many of the major banks. JP Morgan, for example, is repurchasing approx. $15 billion worth of shares, having already repurchased $7 billion last year. Wells Fargo jumped its intended share buyback program from $1 billion to $6 billion. What is the significance?

Share buybacks reduce the number of shares outstanding, increasing the amount of earnings per share. For example, if you buy 100 shares today, and the company buys back 30% of its shares, you effectively own 130 shares’ worth of former value. Put another way, if there are $0.50 of earning per share now, a 30% share repurchase would give you $0.65 of earnings per share. Buybacks compound the value of your purchase.

Most banks will be buying back their shares as a mix of common and Trust Preferred Securites (TruPs), the latter of which is really a kind of debt. The common share repurchases will affect earnings per share directly, while the TruP repurchases will effectively decrease debt load and interest payments – all good things.

Stunningly (and wonderfully), despite announcing these huge stock buybacks, bank stocks have traded flat for a week! Why, you may ask?

First off, people still have an intense mistrust of US banks. Stated more bluntly, most people either fear or despise banks, and wouldn't go near them as an investment. For the rational, thoughtful investor, this is a good thing. Bank stocks are likely to remain underpriced for some time.

People also worry that the world economy is unstable, and that the banks will be spending too much money on their stock repurchases instead of holding the money for emergencies. Make no mistake… no bank wants a repeat of 2008 any time soon. Banks are repurchasing their stocks because said stocks are grossly underpriced, and because they can. The banks are sitting on hordes of cash.

Stock symbol XLF (US bank index fund), provides a great way to buy US Bank stocks with a small amount of cash. For the risk tolerant, UYG (the 2X movement stock index fund) is also available.

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"Superior risk management positioned JPMorgan to capitalize on the crisis."

Barbara Rehm, editor, American Banker

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Disclosure

Do not buy stocks, or take this or any other financial advice without doing your own analysis; including, but not limited to: reviewing business models, financial statements, management style and philosophy, recent developments, market macroeconomic analysis, and chart analysis. If you do not know how to do these things, you shouldn't be buying stocks in the first place. Seek the advice of professionals, as appropriate.

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Buffett States the Obvious

Warren Buffett...perhaps the only person in the world who can make huge headlines by stating the obvious.

Today's headline on CNBC.com: "Berkshire Will Not Exercise Goldman Stocks Immediately." The story explains that Buffett will not exercise his Goldman Sachs warrants - even though he would make a profit by doing so - because....(wait for it) he thinks the stock is worth more than it is trading at!

Pardon me, but isn't that why most people buy stocks in the first place - because they believe they are worth more than they are paying for them? Am I missing something? The article goes on to say Buffett believes that over time, the stock market will go up. During the credit crisis in 2008, Buffett made headlines by saying that the economy will "eventually recover."

It's hard to say why Buffett makes headlines with these statements. Is it that trading has become so prevalent that no one believes in investing anymore? Or, is it because pessimism has grown to such an extent that any positive statement, no matter how obvious, is embraced with open arms?

Whatever the reason, Buffett continues to be a source of sensibility - and the obvious.

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"Well, I just don't know. I don't know whether Cotton's going to go up."

Warren Buffett, 2011

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For additional information, see Berkshire Will Not Exercise Goldman Stocks Immediately

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Japan Finds the Downside to Nuclear Energy

About 5 years ago, I toured the Hamaoka nuclear power plant in Japan. Like all things Japanese, the mood and theme surprised me. Nuclear energy, I learned, is really fun!

First was the powerful “green energy” spin. Part of the tour included watching a show of robotic animation characters (similar to “Bear Country Jamboree” at Disneyland), singing and dancing about the joys of safe and green nuclear energy. There were nuclear games and activities for kids. There were clam-digging tours out back of the reactor. Clams and other shellfish thrive in the heated waters expelled by the nuclear reactor, so local residents dig for clams there. Paradise!

The Hamaoka Nuclear Power Plant's IMAX theatre is, at the time of writing this article, playing "IMAX Under the Sea," and advertising the upcoming Walt Disney flick, "Mars Needs Moms."

Yet, there were always reminders about the negative side of nuclear energy. Worker exposure to radiation makes the news regularly. My friend Mamoru, a nuclear safety inspector, was on NHK news one night explaining how a small crack in the retainer at one of the plants was nothing serious. Then there was the time I had to write diplomatic letters to the Kazakhstani government, asking them to allow human blood samples from radioactive fallout victims to be shipped to Japan via courier for study.

Yes, nuclear energy is a big source of power in Japan, and has thus far been relatively safe. We shall see if it stays that way. If you live on the West Coast of the United States, buy iodine just in case.

As for stock picks as a result of the disaster…Sekisui house (a Japanese homebuilder and Division of Sekisui Chemical) seems like a smart buy. Sekisui builds semi-prefabricated homes, and forms a large part of the new home market. Importantly, Sekisui has seismic test platforms in their factory, and they shake the living hell out of each new home design to make sure they stay together. No doubt, many people will be replacing their traditional homes (or destroyed homes) with Sekisui branded homes.

For obvious reasons, Tokyo Electric Power Company (TEPCO - the nuclear plant owner) is a “sell” until further notice.

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For further information, see:

Sekisui Earthquake Resistant Housing

Nuclear Power Plant safety measures

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