October 29, 2007
Rather Late Than Early Buying Financials
Citigroup Dividend, Falling Shares Make Bank Stocks Unbeatable, by Michael Patterson
“The only other time in the past two decades when banks’ dividend yields surged more was in 1990 and 1991, in the wake of the collapse of almost 1,000 U.S. savings and loans.
The dividend yield for Charlotte, North Carolina-based Bank of America, which is currently 5.33 percent, climbed to 7.55 percent on Oct. 26, 1990. Shares of the biggest U.S. bank by market value more than doubled over the next year, four times the S&P 500’s 26 percent gain. At Wells Fargo, the fourth- largest U.S. bank, the yield jumped to 5.5 percent on Sept. 28, 1990. The San Francisco-based lender soared 120 percent the following year, compared with a 26 percent advance in the S&P 500. Wells Fargo’s current indicated yield stands at 3.59 percent.
Financial stocks as a group jumped 44 percent in 1991 as the Federal Reserve cut the target interest rate for overnight loans between banks to 4 percent from 7 percent to pull the U.S. economy out of recession.”
And Citigroup was a split-adjusted $1.60 a share back in 1990….
I was early rather than late when I bought a ton of financials back in August, and I’m sitting on some pretty large losses now (especially in WM). I thought they were cheap then, and obviously think they’re a lot cheaper now. Bargains can become bigger bargains, alas. I’m not day trading these stocks, I plan to hold them for many years, and I’m not overly worried (though if dividends get slashed that would definitely disturb me). I’m sitting tight.
October 29th, 2007 at 5:47 pm
WM and others cannot pay out more than they earn, IMO. This was the first year in the last 12 that WM did not raise their dividend. How can WM and the like NOT cut their dividends given the across the board industry weakness and ongoing problems?
Does anyone really believe a guy like Mozilo anymore - that CFC will return to profitability next quarter ?
What kind of kool-aid are these guys partaking ?
October 29th, 2007 at 6:37 pm
I was wondering what your thoughts were on the financials. I’m in quite a few as well, incl WM. Wasn’t planning on selling anytime soon but was wondering if it might be an opportunity to add to them. The trader in me shudders at the thought but the prices of some of these look really attractive. What do you think?
October 29th, 2007 at 8:06 pm
Chairman, you’re going about this all wrong. The market tested Captain Kirk strategy is, first maintain an image of complete omniscience. Establish an after the fact 90%+ winning percentage. Then don’t even bother selling a tip sheet, sell your screens and expertise.
October 29th, 2007 at 9:53 pm
I’m in C right now for the long term and I bought it early as well! Just gotta ride it out/
October 30th, 2007 at 5:15 am
Be careful guys, these financial companies might not have the earnings they appear, nor the book value currently found in their statements… If loans continue to default, lenders will continue to tighten lending requirements, and thus without easy credit, the value of assets will deflate without new money. This deflation leads to more defaults as borrowers realize it is better to ditch overvalued assets at a loss, rather than pay the interest on the loans (i.e. mortgages). This is the standard negative reinforcement cycle that happens in any Boom/Bust model of markets, explained by George Soros as reflexivity.
October 30th, 2007 at 5:31 am
I think it’s still too early for allocating money into the financials. For 5% yield I would rather hold some Australian Dollars.
October 30th, 2007 at 6:48 am
Hey Maoxian,
Since you’re apparently Chinese and everything, what to you have to say about STP after they claimed to have achieved grid parity? Seems really hot to me. A new paradigm shift - in goes solars, out goes the oils.
October 30th, 2007 at 9:53 am
I think WM may be in worse shape than a lot of the major banks and brokerages because of its extreme exposure to the housing market and all of its problems.
October 30th, 2007 at 10:07 am
@eyal: Depends on how much money you have to lose and how comfortable you are losing it. ;-) Seriously, it depends on your ability to take risk and the time frame you’re looking at … if you’re able to look years ahead then you should be comfortable holding (and even adding).
@Charles: Reflexivity! I always think it’s reflexology. ;-)
@Brian: How about 7 or 8% yield with no currency risk!
@bionical: I am not Chinese (I’m a large hairy white man) and I know nothing about STP. Grid parity? What is that, a football play? Whenever I hear “paradign shift” I put a protective hand on my wallet. Hang onto your oils because I sat in traffic for 25 minutes this morning and didn’t see a single solar powered vehicle out there. ;-)
October 30th, 2007 at 11:03 am
holy cow, Mao, i suppose you’re not a trader either? Which trader doesn’t know STP?
October 30th, 2007 at 11:13 am
bionical: I’m not a trader, I only play one on the Internet. ;-) Seriously, yeah, I can call up STP’s chart just like the next nitwit but I don’t *know* anything about the company; I haven’t read their financial statements or done any research.
October 30th, 2007 at 11:32 am
the last time i bought WM it was $19 or so. i remember thinking that these guys are loaning on pretty good apt projects and earnings were like 3.19; projected to go at 3.56 or 3.81 - looked cheap & paid a decent divvy. last week, i was surprised to see WM at $27 with a very healthy yield. WM has their own MF appraisers with a ton of data, so they can be VERY productive - they are also have bonus pay. i dont believe they have been hiring outside firms, which kinda indicates that volume might be down?
October 30th, 2007 at 11:49 am
I think it is dumb to play value investing if you are a short term trader; it is great if your time frame is a year or longer. If you are a trader, momentum is the way to go.
October 30th, 2007 at 11:59 am
ucla: I agree; you’d be out of your mind trying to short-term trade based on valuation. Traders can’t live without charts, and investors should never look at them (charts, I mean, not traders ;-) ).
October 30th, 2007 at 12:26 pm
I read this once somewhere…
Remember that good trading is all about managing risk. If you are entering a position without knowing where you are getting out when you’re wrong, then you’re sunk before you begin.
October 30th, 2007 at 2:29 pm
Glenn: Very wise words from someone. ;-) What’s true for trading doesn’t always apply to long-term investing… they’re apples and oranges, night and day.
October 30th, 2007 at 2:52 pm
CM - Thanks.
Btw, on the oil thing. Over here in Bangkok traffic can be terrible as well, but most taxis, and now more and more private vehicles, have been converted to run on gas. Is there no such trend over there?
October 30th, 2007 at 3:11 pm
eyal: You mean natural gas? Yeah, there are some natgas taxis but I’m not sure how many out of the 70,000 cabs on the road. And I’d bet exactly none of the 3,000,000+ private cars in Beijing are run on natgas.
October 31st, 2007 at 5:50 am
I’m holding for another 10% drop in WM, BAC before I back-up-the-truck. Probably LYG, too.
October 31st, 2007 at 10:05 pm
C. Maoxian: I thought you are short USD anyway? My bet is on WM cutting dividends.