It's time to jump on the bandwagon and buy the banks.
I know they're up a lot recently, but they still have room to run.
Consider this fact: The Financial Select Sector SPDR
exchange-traded fund (XLF) has led the major sectors higher in the
last 3 to 6 months. But over the last 12 months, it's still down
One of the easiest ways to make money is to invest in real
companies where fear has been misplaced. I say "real" because some
companies are truly doomed for legitimate business reasons: the
tech stocks in 2000, subprime lenders in 2008, and solar stocks
today. There was a time when the market imagined something similar
might happen with the banks, but the recent stress-test results and
dividend increases now indicate that those worries were nothing but
And I speak from experience, as I was one of those people who
envisioned their demise. I had, after all, done a lot of research
on the degree of messiness in their mortgage portfolios, and had
discerned some real tomfoolery in their accounting practices. I was
probably about half-right in my worries.
But you can only focus on stuff like that for so long before you
realize that you're living in the past. This is 2012, and banks
have been deleveraging for more than three years. We'll never know
the full extent of the corruption and fraud that occurred during
and after the subprime crash--but we do know that it's over, and
it's time to move on.
Lots of money can be made because the banks are underowned. Many
trade below book value and are now increasing dividends. The speed
with which JP Morgan and U.S. Bancorp raised their payouts after
March's stress-test results speaks volumes. Others will follow.
Those are "value" considerations: Banks are too cheap based on the
status quo. But there is also a "growth" consideration: Banks stand
to benefit from improving demand and business activity.
In a little-noticed detail of the Federal Reserve's last Z.1 Flow
, U.S. commercial lenders (Table F.110) reported that non-mortgage
bank loans grew at a $245.6 billion annualized pace in the fourth
quarter. Not only was that a record, but it also increased by more
than 150 percent since middle of the year.
In other words, at the same time everyone was sweating bullets
about Greece, U.S. banks had already begun growing their balance
sheets. That's bullish.
The same report showed that net mortgages (Table F.217) contracted
at a $209.9 billion pace,
versus a $303.7 billion decline in the third quarter and $384.1
billion between March and June. In fact, it was the smallest
reduction since the first quarter of 2009!
Also consider these facts straight from the Fed's last loan officer
. Again, remember all of these things happened at the same time
that panic was sweeping Europe:
- Banks are easing lending standards to win business.
- Business-loan demand was the strongest since 2005.
- Banks are lowering borrowing costs and extending
- Terms on commercial real-estate (CRE) loans are loosening for
the first in five years.
- Most banks expect fewer defaults on CRE loans.
These are the ingredients of a real bull market, and there are
countless ways to play it.
I own the Direxion Daily Financial Bull 3x Index Fund (FAS), which
is triple leveraged to the XLF.
(A version of this article appeared in optionMONSTER's
What's the Trade?
newsletter of March 14.)