Bank of America (BAC)

This is his largest holding. This has a lot of interesting attributes right now. Using a weekly chart, the last 2 weeks are the most significant 2 weeks in the last 8 years, both from a volume perspective and from a price perspective. Secondly, if this were over 2 weeks and there has been no retracement whatsoever, it tells you how much buying there is. The sector has been heavily regulated and the new president is likely to deregulate it.

The election is creating tailwinds for the banks. A steeper yield curve is extremely good for banks. Yields moving off zero are extremely good for banks. If you think of banks as toll businesses in a growing economy, collecting fees, it is fantastic for US banks. US Banks all pay high taxes and those tax bills make cut in half. IT will have much less risk than elsewhere ein the market. (Analysts’ target: $19.70)

BAC-N vs. WFC-N. There will be a bit of a push back on regulations by the industry. The big banks will only benefit from all that. Both banks will rebound. Warren Buffet is not a seller of his WFC-N. Short term BAC-N would be his favourite and WFC-N would be his favourite next year if there is no other negative news item.

He would wait for this and all the other US banks that have taken off to calm down a bit. Look for somewhere around $18-$19. The RSI is close to 80 at this point. This is pretty cheap, trading at .83 Price to Book.

He is positive on the US banking sector. He owns JPM-N. He likes how management is getting BAC-N geared toward retail banking. Banking regulation in the US should get more favourable. The bump up in rates could help the banks. 1.5% dividend.

If you don’t own this, he doesn’t have a problem with you buying a small position here. This is beautifully positioned for a more positively shaped yield curve and valuation. They will probably start paying some dividends. He just thinks it has been a little too far and too fast. There will be a chance to get this cheaper once the initial fever cools off a little.

This will benefit in a higher interest rate and more robust growth environment. All of the US banks had a nice rally after the election.

It is coming into a pretty significant wall of resistance at about $18. It has hit many times and failed. Now it looks like it is trying to break out. Watch it. It might pull back. If it does not pull down below that $18 level for a couple of days it may be okay. Consensus is that the stock is overvalued, however.

Higher rates will push this higher. Higher rates will be stimulative and will create job opportunities in the financial services sector in the US. The banks are well capitalized and the dividends are safe. You might want to start with the regionals, and if you see a freeing regulatory environment, then definitely buy some of the money centred banks like this.

US banks have a different seasonality than Canadian banks. Historically the best time to own this bank is from around the end of January right through until May of each year. At this time of year, it does okay, but doesn’t outperform the market. Currently the stock is in a long-term slight upward trend, but his preference is to stick with securities which have strong seasonality right now. He would prefer a Canadian bank over an American bank right now.

He likes banks in general in a rising interest rate environment. It is mid on volatility relative to other banks. PE is 12 times and the yield is 1.8%. US Banks are cheaper than Canadian banks. He does not think mortgages will be a big issue in the US, unlike Canada.

(Market Call Minute.) Not his favourite. Would prefer J.P. Morgan (JPM-N).

If you want to play financials globally, you want to start looking at US financials. This has been in the penalty box for many years. US banks are really like utilities now. This is trading at 10X earnings, while power utilities are trading at 17-18 times earnings. As they start to raise their dividend, they can pay 4% yield. In 2 or 3 years it will look like a utility, but will be at about a 50% valuation discount. Dividend yield of 1.81%.

There are a lot of arguments that as interest rates rise, bank profits increase because margins increase. Looking back at historical evidence, there is actually no evidence whatsoever that earnings or margins increase as interest rates rise. You can make a case that as the Federal Reserve Board raises interest rates, the yield curve actually flattens. Banks are under extreme pressure in other areas that will more than offset those kinds of opportunities. Delinquencies are growing in the automotive sector.

His main bank exposure is Wells Fargo (WFC-N). If you look at the forward PE ratio on US banks, relative to Canadian banks, there was a time when they were very much cheaper. Looking at last Friday’s close on the PE going forward, he feels they are both roughly the same. That would be a disincentive for him to look any further at US banks. (See Top Picks.)