Financials: Greetings from Yellowstone. Every year we make an extended visit to our cabin just outside Yellowstone park and I love writing from here.
Everything is in a holding pattern right now as we wait for NVDA to pop or sink the market tomorrow after the close. Nvidia sure has become the proxy stock. I guess for good reason.
The two areas that continue to work well are financials and utilities. You could make a strong argument that big cap tech is performing well and there are other areas too.
For utilities, my two holdings have long been AEP and NGG, both continue to rip. Typically at the upper end of this range, they tend to get toppy and pull back. Utilities tend to trade a lot like energy, commodities, etc. Through it all, I continue to hold the stocks, collect the healthy dividends and not pay too much attention to price action. I will say I start getting the itch to trim up here because of that upper end range action that strikes, sending prices lower. But, I'm not timing these two names.
But let's chat more about financials. I keep getting close to trimming all the while the top names have been ripping like none other. I'm no longer pounding the table on them like I was 18 mos. ago an the returns have been spectacular. I've even considered trimming after this run, but there's an issue here with discussion.
My pre-early-retirement life was spent working for a financial, albeit in the I.T. side of the industry. That said, you can't be a financial institution executive and escape the needed knowledge and understanding of where our bread is buttered and it all comes down to interest margin. I was pounding the table on the best of breed financials due to a return of rising rates and what should follow.
In fact, the financials all ripped and my holdings are: GS, JPM, C, BAC, BX and MS. I think there's even another one I'm forgetting. So, with all of them making new highs, mostly, it stands to reason that trimming would be a good idea ... as it is for any issue that has seen a massive move.
Where it gets interesting is with the point on the curve we are at with the mega financials into how they make money via lending money. The GS and JPMs of the world, among the others, also have big trade and investment desks as well. But with rates obviously peaked and we're at the top of the highest point on the roller coaster waiting for the scream-inducing descent that is to come, an interesting situation should play out. Interest margin should continue to widen as rates come down.
For FIs built upon deposits (liability) and lending (asset), margins remain healthy and should get much better as rates start to tick lower. When deposit rates are on the decline, they immediately result in less dividend expense. As soon as deposit rates are lowered by 10 or 25 bps, the impact on dividend expense is immediate. But not so with lending rates. As deposit rates come down, it creates a wider "margin" between what the bank is paying out in dividends and returning from lending. Loans booked at higher rates don't tick down unless they are variable. As new loans are booked, the average rate will drop but this takes a long time to reduce. All the while deposit rates continue to decline, causing greater margin spread between deposits and loans.
All that said, we should be entering a period of greater profitability with the financials ... and for some time. Reduced lending rates will also help small and mid cap stocks, which could further fuel the rally. But beyond small/mid caps, I'm going to be holding my financials despite their huge gains to see how this rate environment plays out. They all continue to rip and I'm not seeing anything that threatens that environment ... other than how far they've come.
Should be an interesting situation to monitor over the balance of they year.
Hope you are all doing well.
Tj |
