Saturday, June 11, 2016

How to Lose 5% in 36 Hours by Investing in Cheap Bank Stocks Ahead of the Next Fed Rate Hike

June 9, 2016
Kiplinger: 4 Cheap Bank Stocks to Buy Ahead of a Fed Rate Hike

For bank stocks, the future is all about the Federal Reserve.

1. CFG, $23.59, now $22.46, 4.8% loss.
2. COF, $73.83, now $70.04, 5.1% loss.
3. HBAN, $10.58, now $9.95, 6.0% loss.
4. SNV, $32.20, now $30.92, 4.0% loss.

Capital One Financial (COF) is near and dear to my heart. Not only do I have a savings account with them, but I followed them in the past. I stumbled onto Yahoo's message board in 2004, and for whatever reason, felt the need to offer bearish counterarguments to the resident bull's stream of reasons to be optimistic.

I shall offer an excerpt of one of those exchanges here.

April 4, 2007
Capital One Financial Corporation Message Board: Reply to What's Up???

"Employment is good..."

For what it is worth, since 1960 there have been only 2 periods when unemployment was officially lower.

1966 to 1969
1998 to 2000

Perhaps good employment isn't necessarily good for stocks. Neither of those periods were great times to buy stocks. For what it is worth, I'd prefer to buy stocks when employment stinks. At least then I'd know I was closer to the bottom than the top.

The same could be said of profit margins. They are doing very well these days. However, in a capitalist economy one would expect competition to erode the more profitable areas. Make too much money and other companies flood on in. Hey, that's just the way it is supposed to work. Is it not?

As you may recall, I've been watching COF since the summer of 2004. I was neither long nor short then, and I'm neither long nor short now. Being neither long nor short, in hindsight, wasn't such a bad plan.

I rode gold and silver from 2004 to 2006 so I wasn't exactly hurting. I'm now sitting in treasuries and crossing my fingers that the housing market does indeed hold up. I'm skeptical though. I heard an ad on the radio the other day trying to sell me a "vacation mortgage", no payments for 12 months. Go figure.

I doubt many care how much exposure Capital One has to subprime mortgages. They are a credit card company. Credit cards are unsecured, right? Maybe I'm missing something but what may look great right now might not look so good in a year or two.

So where are we now?

1. The unemployment rate is 4.7% compared to the 4.5% in April of 2007. That's very similar.

2. Profit margins are very good, just like they were in 2007.

3. Sitting on the sidelines watching COF has been very kind to me over the years. Had I invested in COF on April 4, 2007, my money would have grown at just 1% per year since then, counting dividends and splits.

4. Like 2007, I still no longer hold gold and silver. I could have done better by continuing to hold but I'm not complaining. That's especially true since my former precious metals dealer is currently seeking bankruptcy protection.

5. COF is still a credit card company. As in 2007, what might look good right now might not look so good in a year or two.

Neither long nor short. Just watching with a modest tingle of déjà vu.

And lastly, a 5% loss might not seem like much but investors in 5-year Treasury notes have to wait nearly the full 5 years to see a 5% gain. They also have to hope there is no inflation over the period if they want that gain to be real. That said, they're sleeping better than some this weekend. I have no doubts about that.

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