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Published: April 22, 2009
I received an email from a
subscriber last week, asking, "What do you think about the
banking sector after the M2M has been approved? Should I get
some like BAC, WFC, UBS? "
M2M, for the record, stands for mark-to-market, the accounting
practice of valuing an institution's assets at the price the
market would pay today. Critics of the practice say
mark-to-market accounting is partly responsible for the past
year's market crash, and argue that institutions should be
allowed to value their assets at prices they believe can be
realized in a "rational market." In fact, Representative Steve
Cohen, D-Tenn., has introduced a bill that directs the U.S.
Securities and Exchange Commission to suspend the application of
mark-to-market accounting. On the other hand, Lloyd C.
Blankfein, chairman and CEO of Goldman Sachs (GS), strongly
endorses mark-to-market accounting and comprehensive
transparency of financial company risk. (Goldman Sachs stock,
by the way, looks pretty healthy.)
My correspondent, therefore, was asking whether stocks in the
banking sector might be a good investment based on the
expectation that repeal of mark-to-mark accounting requirements
would lead to fatter balance sheets and thus higher stock
prices.
It's a logical question, and I have a logical answer.
My first point is that my correspondent is not the first person
to entertain this train of thought. Thousands of professional
investors have done it before him. They've already come to
their conclusions, and they've placed their bets accordingly.
Therefore the charts of the stocks that might be affected by the
change reflect their conclusions. This is a key point; the
charts know all. In fact, the charts reflect the conclusions of
professionals on other factors that might influence these
stocks, too. These include the future trend of interest rates,
the future of the housing market, even the possibility of
increased government regulation.
And what do the charts say? First, that the three stocks
mentioned--Bank of America (BAC), Wells Fargo (WFC) and UBS (UBS)--have
all had nice bounces in the past month. On average, they're up
118% since the early March bottom. They had an especially nice
move last Thursday after Wells Fargo surprised analysts by
projecting a record $3 billion profit for the first quarter.
This bounce, of course, coincides with the bounce of the broad
market, which is up about 25% since the bottom.
But that doesn't mean these stocks are in long-term uptrends.
In fact, this bounce mainly gets them back up to the upper range
of their downtrending channels. And those downtrending channels
are very important because they're the result of a long-term
trend. In fact, even after this big bounce, these three stocks
are down, on average, 85% from their old highs.
Now, I tend to think that the big downtrend in financial stocks
is over ... of course, I could be wrong. But the strength in
recent weeks has been very broad. And the selling pressures
have been very weak. Furthermore, internal measurements are
very positive, telling us the next bull market is getting its
act together.Still, that
doesn't mean these three stocks (and other big beaten-down
financials) have begun new uptrends. History tells us, plain
and simple, that a stock--or a group of stocks--that has
experienced a huge damaging move will take a long time to build
a base--perhaps years--before a new uptrend begins. So the odds
are against these stocks climbing much higher in the weeks and
months ahead.
Certainly, there will be
movement. Institutional ownership of these stocks is
widespread, and we think many institutions will be using this
bounce to trim their positions in these stocks as they move into
sectors with better growth characteristics. Traders will
happily jump in and out of these stocks in their short-term
gyrations. But I think your prospects are far better in other
sectors, and I discuss a few below.
One of the reasons
for holding falling financial stocks like BAC, WFC and UBS so
long was their dividends. And I understand--regular dividends
often cushion the blow from falling prices. But just last month,
Wells Fargo chopped its quarterly dividend from 34 cents to five
cents. Bank of America's quarterly dividend has been slashed
from 64 cents to a penny. And UBS has suspended its dividend
entirely!
Bottom line: you can't even justify holding these stocks for
their dividends any more!
So what do you do if you want regular income? What do you do if
you're retired and looking for a new source of quarterly checks?
Where do you go to find investments that are safe and pay
regular, dependable dividends?
I suggest you look
at Dick Davis Income Digest, our monthly publication
that's chock full of investing ideas culled from the experts at
the best investment newsletters. Every issue brings you dozens
of ideas (some new, some follow-ups) on the best
income-producing investments that are available to individual
investors.
Interestingly, most of these investments are not as well known
as Bank of America and Wells Fargo, and that doesn't surprise me
a bit. I learned long ago that the popular, well known
investments are not the best ones; if everyone knows about them,
they're often priced too high. Contrarily, if most investors
don't know about an investment, it may be priced too low. And
that's terrific; it means that as more people learn about the
investment, they'll bid its price up!
But it takes a sharp-eyed analyst to uncover these investments
in their early days, and that's why Dick Davis Income Digest
is such a great value--because it's full of expert advice culled
from the best minds on Wall Street.
For example, the latest issue of Dick Davis Income Digest
featured a company called Magellan Midstream Holdings (MGG), the
general partner (GP) of Magellan Partners (MMP), one of the
nation's largest midstream energy companies. Its holdings
encompass more than 80 petroleum terminals and 10,000 miles of
pipeline. And its dividend is a hefty 7.9%. Nathan Slaughter, of
Half-Priced Stocks, wrote, "As long as the country needs
gasoline and other refined products, the cash generated by these
assets is virtually untouchable. But here's the best part. As
the general partner, MGG owns valuable incentive distribution
rights that give it an ever-growing slice of the pie. So every
time the limited partner raises dividends, the effect on MGG is
amplified. Since the general partnership shares went public in
February 2006, quarterly distributions have spiked 82%."
I look at this investment and note that not only is the dividend
high, but the chart is trending higher, telling me investors
(some of whom have sold their Bank of America or UBS shares) are
discovering this and other up-and-comers and climbing on board.
Yours in pursuit of wisdom and wealth,
--Timothy Lutts
Publisher
Cabot Wealth Advisory
P.S. So, if you're looking for dividends, you could buy
the stock mentioned above. Better yet, you could take a no-risk
trial subscription to Dick Davis Income Digest and get
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can structure your own portfolio to bring in a steady flow of
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Click here to get started today!
About Timothy
Lutts
Timothy Lutts
heads Cabot Heritage Corporation, one of America's most
respected independent investment advisory services, publishing
10 newsletters--including Dick Davis Income Digest--to more than
160,000 subscribers around the world. Under his leadership,
Cabot advisories have been honored numerous times by Timer
Digest, Hulbert Financial Digest and MarketWatch as the top
investment newsletters in the industry. In 2007, Cabot was the
only publisher with two investment advisories, Cabot Market
Letter and Cabot China & Emerging Markets Report, ranked among
the top 10 investment newsletters by Hulbert. |
