But these trying times are when serious, long-term investors pounce. Investors like Warren Buffett and others have been quietly purchasing the shares of the better-run banks, because if one looks out one-to-three years, the picture looks far better. Currently their respective dividend yields are superior than a 10-year U.S. Treasury Note, and they offer the prospects of growth and potential dividend increases.
Understand though, the news will probably get worse before it gets better. The final numbers are not in yet, but the fourth quarter should be close to the end of write-downs and write-offs. The boards of directors of major financial institutions are demanding that CEOs clean it up as best as possible for the fourth quarter so 2008 can begin with a clean slate. It may not quite work out that easily, as real estate looks to be still in the doldrums for at least the first half of 2008. But truly examine the risk-reward profile, and these aforementioned banks are better buys than sells.
Currently at $42, Bank of America could be a $70 stock again come 2009 or 2010. The current $2.56 dividend could be up to $2.90 or more, and at $42, a yield of more than 6% would have been locked-in as well. These large banks will also dominate the future of the mortgage business like never before. Many smaller players are gone or have been merged into other questionable companies, leaving the landscape ripe for a Wells Fargo or a Bank of America to capture future market share. Americans will buy and sell houses again. It may not be like the go-go early 2000s, but the market will still be vibrant and lucrative for the stronger survivors.
I have not discussed at length in this series the brokerage firms, just some anecdotal information, nor other players in the credit mess. I believe the first line of opportunity lies with the major banks discussed above.
I hope this lengthy explanation has been helpful in understanding this complex and confusing time in the financial markets. I thank Sara Maddox for asking the question and persisting with me to really explain it. I hope I did justice...
Georges Yared is the CIO of Yared Investment Research and the author of Stop Losing Money Today.
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Reader Comments (Page 1 of 1)
11-27-2007 @ 5:23PM
william lindblad said...
Lengthy comment, but worth reading. George, I agree, the big institutions will weather the storm. However, there is another old adage about the flies in the ointment and there is at least two that you overlooked. One being the systematic lay offs and downsizing of U.S. companies over the last ten years. The majority that was effected lost financial ground and ergo - used credit to fill the gap. This is the nice, stable conventional mortgage group. By now, we are all well aware of the mess that greed and foolishness can create as this is evident in current affairs. But that is the crowd that you are talking about. I am not. I am talking about the un-expected - the one that many are concerned about. The good stable conventional market is starting to go belly up and it is quite evident in statistics, but you have to read the correct ones. Consequently, I would not be too quick on the big banks and I would remind you that the CEO of Wells Fargo made a statement that sounded pretty dire. Keep in mind also, that he has access to his books - we don't.
Detroit has 1.1 mil. in population and around 21,000 housing units on the market.
Cleveland has 450.000 pop. and around 15,000 units on the market.
These are both well known depressed areas.
San Antonio has 1.1 mil and about 9,000 units and is considered in good shape. (for comparison)
With this in mind what do you call a 530,000 pop. with 38,000?
The clue here is all about foreclosure law and most states are 1 year or more - but not all.
11-27-2007 @ 6:18PM
DOUGLAS FOOTH said...
George, Your observations are right on. However; you cover mostly the commercial banks. How about Washington Mutual? Their stock is down from 45 to 17 and change. They are a major player in the residential mortgage area.
11-28-2007 @ 6:53AM
PaulChristenson said...
Freddie Mac's Stock Sale...
If sales of securities, the dividend cut and other actions aren't sufficient to keep the company's capital levels above government-mandated minimums, Freddie Mac said it may consider other measures such as limiting its growth, reducing the size of its mortgage investment holdings or issuing new stock.
Gee anyone excited about buying Freddie MAC stock...Only if you need a tax loss...
11-28-2007 @ 3:14PM
gregory kjb saillian said...
Let's get back to investing, instead of trading. Anyone remember what it was like in 1980-2? How about 1987, or 1989-1992, not to mention 2001. When I was taught the fundamentals of economy, we were taught that a recession was to occur cyclically for a healthy economy. Anyone out there? When was the last recession? We are looong overdue, so expect the severity to be quite a bit prolonged. Anyone remember the Savings and Loans debaucle? This was so predictable I told many people this would happen almost 2 years ago. I'm not crying,"the end of the world. But let's get real, if news of major layoffs hit the street, and more real estate gets dumped on the market by the day, and bankruptcies climb and people can't get credit for the preverbial 7 years, we will be into stagflation in no time, and by the end of next year how many basis points will be left for the Fed to cut? How about increased debt, and a lack of liquidity and credit rating drops? Forget Financials for now(there will be a bankruptcy in this sector, and everyone in it will pay), buy into Gold, "money-making companies", and some double-digit bonds, municipals next year.
Don't get overleveraged outside of the U.S., if the U.S. tips into recession, the world economy feels it, especially China and India.
To all my fellow 25 year+ investors, have a Merry Christmas, maybe we will chat over a drink in Times Square for New Year's Eve. Happy investing in '08.
Gregory KJB Saillian