Reader Rick O has pointed out in his comments that it is worthwhile taking a good look at the banks. In short, the fed actions can seem puzzling to consumers because banks aren't lending as much as we would like them to - especially when rates are so low! But therein lies the rub. Rates are so low that it is hard to justify the risks of lending! However, one of the key benefits of such low borrowing rates for banks (the short term rate the Fed actually controls) is that banks are able to repair balance their balance sheets by borrowing from the fed and buying (or lending) to high quality institutions at longer terms. Over time, they will earn the spread in the interest rates and be able to build up their equity. Remember that they can leverage this trade up in an almost unlimited way, so a 1 or 2% spread can become very significant.
If this sounds like it is risky, well, it can be depending on what bonds they buy. But the alternative is far worse. We NEED our banks to have stronger balance sheets and be able to support their key function in moving money to areas of growth.
Given the current environment, I continue to like dividend paying stocks. Government bond yields will continue to be low (Fed will make it so) which will make investors reach for yield. I recently reduced my high yield bond position and that is probably a mistake given the recent Fed move. It is a bit tough to get back in higher, but I will be looking for pull backs to do so.
The bank preferreds are good. PFF is my vehicle of choice there as are bank loans VVR is better than BKLN but I have both. Overall my portfolio yields about 3.5% which I think is pretty good given that 25% is in cash. About 2/3 of my yield is from MHN, PFF, VVR, HYG and the rest is from my stocks.
Overall, my equity exposure is around 16% - well below my target of 45% but I do have a fair amount of options which will gain exposure if we have a move up. Barring a military action, I think that the balance of market participants being short of their benchmarks and the Fed keeping the foot on the accelerator, I think we will have a positive quarter regardless of the election results. Taxes may have a disproportionate impact this year given the potential for significant changes.
1 comment:
Hi Mario, I'm a new follower to your blog, and look forward to your entries as I believe our investment philosophies have a lot in common. In response to comments to this post I think one financial name that could benefit from a housing recovery is Wells Fargo & Co. due to better credit performance from current mortgages, and growth in fees from loan balances and refinancing. Also, its mortgage business has generated record applications (Up 90% from a year ago), in addition to strong refinancing applications. I think WFC has the ability to succeed over peers through cost savings, and buybacks, and that an increase in home prices and loan growth will help push WFC higher. Its 2.50% dividend yield should not be overlooked as well.
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