I bank at one of the larger
banking institutions in this country and have kept my account
there for a number of years. My loyalty has been tested lately,
though, on more than one occasion. I won't go into all the
details, except to say that my latest encounter was the doubling
of the interest rate on my credit card for no apparent reason.
My problems, though, are minor compared to bank customers who
have over-borrowed and cannot keep up with the required payments
on their credit cards, loans, or mortgages. And therein lies the
crux of the entire problem. For the past 25 years, consumers
have been borrowing too much so they can enjoy the good life.
State and local governments have been borrowing too much so they
can provide more and more services. And now the U.S. Government
is running huge deficits to help prop up a troubled banking
system and a sinking economy.
Banks have received large sums of money to help them through
their financial crisis. We all have been reading for the last
several months about bank executives receiving large salaries
and bonuses partially funded by the bailout money from you and
me. It seems to me that bailout money ought to be restricted to
help banks stay solvent and to provide much needed capital to
make loans to you, me and businesses of all sizes.
I realized long ago that banks loan out tons of money when the
economy is robust, but then become fearful and make loans hard
to get when the economy is tanking. I believe that this
phenomenon exacerbates the economic cycle. Loaning more money
when we really, really need it during economic downturns would
make more sense and would help the U.S. economy avoid the up and
down cycles that are harmful to so many. What's the solution?
When times are good, banks and the rest of us should save for a
rainy day.
While I'm on a roll ..."Too big to fail" scares me. What is too
big, and how is too big going to be determined? Will there be
two banks that are too big, or will there be 100 banks that are
too big? And what is going to be done about these banks besides
pumping trillions of our tax dollars into "big" banks when they
run into a problem or two? My solution? Go back to the good old
days when banks did banking, brokerage firms offered brokerage
services, mutual fund companies ran mutual funds, and insurance
companies offered insurance.
Now we have financial institutions, like my bank, that offer all
of the above and more. "Jack of all trades and master of none"
comes to mind. Maybe we should break up our so-called financial
institutions by restricting the services that they can offer. Oh
no, did I say break up banks? My dad would roll over in his
grave if he heard me offer that suggestion. But, as a customer,
I would like to be dealing with an expert rather than a
jack-of-all-trades. As an investor, I would prefer investing in
a few stodgy old banks that pay hefty dividends on a regular
basis, rather than financial institutions with questionable
investments.
One final thought on how banks and financial institutions should
be regulated in the future to prevent another crippling
financial crisis. We have a lot of regulations already in place
that would have helped keep us from getting into this current
mess. If the Securities and Exchange Commission (SEC), for
example, had diligently done its job, Bernie Madoff would not
have gotten away with bilking hundreds of investors out of
billions of dollars.
We even have banking guidelines that suggest that banks avoid
investing in risky investments. Evidently, regulators found the
word "risky" is rather vague and didn't know how to apply such a
rule. OK, let's add an amendment or two to prohibit banks from
specifically investing in derivatives, credit default swaps and
all similar gambling strategies that might be created in the
future. And it goes without saying that all regulatory
authorities should be well staffed and well funded to ensure
that all regulations are fully enforced. Enough said!
Have all banks run amok? Not quite. I've gone out on a limb
lately and recommended a couple of banks in the newsletter I
edit, Cabot Benjamin Graham Value Letter.
Hudson City Bancorp (HCBK) owns and operates 127 savings bank
branches in northern New Jersey and New York City. The bank
specializes in writing jumbo mortgages in the more affluent
counties of New York and New Jersey. High loan standards and the
avoidance of the sub-prime market have led to Hudson City's
strong balance sheet and low mortgage defaults.
Hudson City is taking advantage of the current favorable
interest rate environment and the lack of competition in writing
jumbo mortgages. However, the company's banking area includes
residents who work in NYC's hard-hit financial district. We
expect earnings per share growth of 13.3% during the next
12-month period, which we believe will be sustained in future
years. The dividend has been increased every quarter for the
past six quarters and now provides an attractive 4.6% yield.
HCBK is undervalued at 11.6 times forward EPS. The bank's unique
niche in the banking sector and its conservative lending
practices make HCBK an attractive long-term holding. We expect
HCBK shares to advance to our Minimum Sell Price within two to
three years.
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Wells Fargo (WFC) provides
banking, insurance, investment, mortgage, and consumer
finance services throughout North America. Wells Fargo,
founded in 1929, has been conservatively operated and
therefore has experienced lower loan losses than most major
banks.
The acquisition of Wachovia at the end of 2008 will more
than double Wells Fargo's loan portfolio to $850 billion.
The purchase, however, added a greater percentage of
delinquent loans and mortgages than the company's recent
experience. Wells Fargo has raised additional capital to
meet new Federal requirements, but will need to raise
additional capital soon.
We expect loan losses to diminish substantially before the
end of 2009. We believe the banking industry faces
challenges that will linger for several more years. Wells
Fargo, though, is in good position to take market share from
other banks, because Wells Fargo is generating strong cash
flow and is improving its balance sheet. In addition, the
acquisition of Wachovia at a fire-sale price presents a huge
opportunity for the company to cut costs and streamline
operations during the integration process.
WFC's EPS were only $0.83 in 2008 but will increase to about
$2.00 in 2009. At 11.5 times our $2.00 estimate, WFC shares
are a bargain. The dividend, which was reduced recently, now
yields 0.9%, but dividend payments could be increased as
early as 2010. Warren Buffett is a major investor and
Whitney Tilson, co-founder of the Value Investing Congress,
recommends purchase.
Sincerely,
-- J. Royden Ward
Editor
Cabot Benjamin Graham Value Letter
Editor's Note: You can read more about Hudson City Bancorp
and Wells Fargo and get continuing coverage in Cabot
Benjamin Graham Value Letter. There you'll not only find
buy and sell advice for the companies above, you'll get
dozens of other excellent value stock recommendations from
J. Royden Ward each and every month. Roy applies the
strategy of the father of value investing, Benjamin Graham,
to find the market's best-undervalued stocks. This year he's
already uncovered several stocks that were sold for
double-digit profits! Don't miss out on his next
recommendations ...
click here now to get started today!
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Additional Investing Ideas
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This Undervalued Telecom is Quickly
Becoming the Latin American AT&T
While most
telecom companies have struggled in the
downturn, this emerging-market wireless
service provider has managed to increase
profits by +19% in the first quarter. It
is also the sole provider of 3G in many
South American countries and should
benefit as customers upgrade from
inexpensive prepaid plans and sign up
for mobile broadband and other premium
services. Best of all, the shares could
jump in excess of +50% as they return to
Nathan Slaughter's -- editor of
Half-Priced Stocks -- estimated fair
value. |
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World Cup Could
Score Big Gains for South Africa
From Brazil to
China to Russia, emerging markets have been fertile
investment grounds, recovering nicely from March lows.
However, It's not just BRIC countries posting stellar gains;
South Africa is up +50% since its March lows and that's just
the beginning. Next summer, South Africa will host the
world's most visible sporting event, the World Cup. The
government has already started the spending spree,
constructing stadiums to hold spectators and rail systems to
commute them. The inflow of cash to South Africa's economy
will ensure that it's an investment hot spot in coming
years. |
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How California Could Ruin the Recovery
A crisis is
underway in Sacramento. The state of California has a $24
billion budget gap. With no solution on the horizon,
lawmakers have until July 1 to resolve the issue. If the
state can't meet its debt obligations in time, it faces the
prospect of a possible multi-notch downgrade. Add this to
the fact that California has the worst credit rating in the
country, and you have the makings for a possible full-blown
meltdown. |
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Visit this link to read additional articles from today's
leading market experts!
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 Paul Tracy
Co-Editor
TopStockAnalysts Digest
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P.S.
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