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On Monday, Bank of America (BAC — Rated A) retracted its share repurchase plan and dividend increase. The reason: Accounting errors in some structured notes in its Merrill Lynch (acquired 2009) subsidiary. And the financial media was ablaze!
The error forces BAC to re-submit its financials to the Fed within 30 days to reassess capital adequacy. But my research suggests the error won’t result in extreme actions by the Fed.
From a broader perspective, though, the BAC story comes at a time when the new Fed leadership needs to manage a task loaded with challenges.
Let’s face it …
The toughest issue facing financial services firms is the level and path of interest rates. But some of the Weiss Ratings highest-rated banks are handling it quite well.
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| The toughest issue facing banks is the level and path of interest rates. |
For example, Wells Fargo (WFC — Rated A+) and Fifth Third (FITB — Rated A+) beat the S&P 500 over the past year. And if you follow the Weiss Ratings results, you’ll discover other banks with the earnings growth and financial stability worthy of the highest Rating. Two you might consider for potential investments are: PNC (PNC — Rated A+) and US Bancorp (USB — Rated A+).
Larger ones like BAC, as well as JPMorgan Chase (JPM — Rated A), Goldman Sachs (GS — Rated B), and Morgan Stanley (MS — Rated B-) should also benefit as the economy improves. But the focus, for these call-outs, as well as for the rest of the financial sector, will be squarely on the level and path of interest rates for the rest of the year.
I think temporary weaknesses in shares — like we’re seeing with BAC — should be viewed as buying opportunities. The new Fed leadership will be bound to continue the tapering operations begun before its tenure. Therefore, we’ll eventually have higher interest rates.
So how can you profit as economic growth expectations peter out for 2014, and as some signs of inflation scare the investing public?
I’m still legging into tech, but I’d view a breakdown in financials (especially the banks) as a buying opportunity. Though I feel that a forced rate increase by the Fed remains a distinct possibility, and that it may be driven not by demand for leverage but by a resurgence of inflation, I want to be cautious while investing in financials.
My favorites are not just the A+ Weiss Rated stocks listed above, but also the “up and comers” in the “B Rating” range, where fundamental promise and media-driven disdain coexist. I think we can also see this in larger investment banks like GS and MS.
There are some high-rated, small-caps in this sector. For now, though, I don’t think speculation is a safe strategy.
What we need to see is an uptick in demand for borrowing, and for other financing sources (like IPOs, etc.), before the rates really start to take off. However, I think that some evidence of resurgence in the global economy and a sustained increase in price levels may force the Fed’s hand over the coming nine to 12 months. I’m preparing for it by investing only in highly-rated stocks, or those I expect to attain even higher Ratings in the near future, like BAC.
Best,
Don Lucek
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Great insight!