Featuring Lutts’ Logic:
On the Repeal of Mark-To-Market Accounting
Avoid Banks
Buy These for Dividends
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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.
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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-comer and climbing on board.
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Yours in pursuit of wisdom and wealth,
Timothy Lutts
Publisher
Cabot Wealth Advisory
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