Revisiting the Banks (Again)

So yesterday the Chairman of the Federal Reserve said openly what others had been hinting at privately for the past month, namely that an end or at least a pause could occur soon in the Fed's seemingly relentless campaign to raise interest rates.

Guess what? What I've been saying for sometime about banks finally dawned on people today. Which is that if we are done with the rate raising thing, banks can make a lot of money the way the yield curve is currently structured. If so, then banks and other financial's are cheap and should be bought. We first talked about the banks back at the end of January after they had experienced a mini meltdown and again most recently here: http://lumencapital.blogspot.com/2006/04/shhhhdont-tell-anybody-about-banks.html.

Since that decline these names are on a roll and have just gone parabolic in the past couple of days. Citigroup (C) is up close to 10% since early January. In the same time frame, Wells Fargo (WFC) is up close to 11%, JP Morgan (JPM), a turnaround idea as well as a play on banking, is up over 15%. The Spyder ETF (XLF) is up around 9% (you usually sacrifice some of the upside in the individual names for less volatility with the ETFs).

Now for the really interesting part--these stocks are probably not done going up. In fact we should hope for some pullback here in order to add to positions. (Note: The following pertains to my clients only. If you are not a client of my firm please do not construe what is written here as investment advice for you as I do not know your own individual goals, risk tolerance or investment objectives.)


Why do I think this?

Finanicals are under owned by institutional investors and they still pay pretty decent dividends even at these prices. These institutions are buying back huge chunks of their own stock, have been for a couple of years, although most investors have paid scant attention to this. Numbers-Wall Street slang for earnings-are going to be revised higher over the course of this year so they will appear still cheap even at these higher prices.

But the most important reason to own these is the change in investor psychology. Look these names have been stealthily trending up for a couple of months. Today the Fed told you that it was OK to own these stocks and everybody wanted to be long these securities. In the world that is populated by hedge funds, momentum and day traders these names lit up trading screens today like tracers over Baghdad during the Gulf Wars. These folks want to be buyers on the day the whole world wants the same thing. That door was opened wide today and traders will likely reach for these names with any weakness going forward. For them the psychological trend has reversed from negative to positive.

I will keep what I own and hopefully buy some more at the appropriate time.

*Accounts of Lumen Capital Management may own individual securities or ETFs in the above mentioned sectors at this time. Please note that security positions can and do change from time to time. Purchases & sales of individual securities or ETFs as well as client portfolio holdings varies among the clients of our firm due to their individual goals and risk parameters. Nothing in this current post or in past or subsequent postings should be construed as advice or a recommendation to buy or sell any particular security. Please consult your investment advisor as to the suitability of above stated securities for your own investment portfolio.