BG22052009
BANK ON IT?
While everybody else on the street is buying bank stocks – you should of course do the opposite and back up the truck on debt.
By Neil George
Ok – so Bank of America (NYSE: BAC) sold some stock. In fact – not just some stock – but lots of it. 13.5 billion dollars worth was dumped on the public this week.
Now, more likely you didn’t beg and plead with your broker to get you in on this deal. Nor did you likely try to get in on the 2 plus billion that US Bank (NYSE: USB) did last week.
And you will be seeing a plethora of these new stock sales in the coming days and weeks as banks try to cash in on the bit of a respite for the general stock market to try to cash out of the US government’s grips on their executive suites and board rooms.
It seems that some folks just aren’t as excited about inviting Uncle Sam onto their management teams. Look how well it went for executives at Chrysler, General Motors, AIG, Bank of America, Fannie Mae, Freddie Mac and plenty more companies that the West Wing decided needed their expertise at running their companies.
Now sure, I’d be one of many that would argue that these and plenty of other companies have needed management changes for quite some time.
This is even hitting the US Securities and Exchange Commission (SEC, www.sec.gov) which is trying to hold on to its existence as the West Wing is moving to create a new monster regulatory organization that could supersede both the SEC as well as the Federal Reserve Bank (Fed, www.federalreserve.gov).
The West Wing isn’t content that the SEC is indeed moving to allow shareholders of all folks to actually affect decisions as to who actually sits in the board rooms of public companies.
Like I mentioned in my Notebook the other day – the SEC is moving to allow shareholders of mega companies that have 1 percent ownership (3-5 percent for smaller companies) to actually put forward proxy votes – including board membership.
Now I don’t know about you – but it’s rare for most of us mere mortals to grab 1 percent of a company. So really will this actually do much for us as investors?
Not really.
Instead, what it does set up is the ability of pension funds – especially of those funds run by the big contributors to the West Wing – to run companies.
We’ve already seen us mere mortal investors get shoved to the curb by the West Wing in the reorganization of Chrysler. And the re-org of GM will be much, much worse – as shareholders and bondholders are being directed to give up their rights in favor of the UAW again.
And if they don’t – well then – there are some guys with earpieces in their ears and dark glasses over at the White House that will make them an offer that they can’t refuse.
So, if you were running a bank – wouldn’t you want to get as far and away from the government as possible?
TARP cash is being repaid. And as the preferred shares are being bought back – the warrants that were the equity kicker part of the deal are also being sold back.
Forget Black-Sholes to value these things – somebody actually got some lobbyists working and the current Treasurer agreed to let the banks off on the cheap for the warrants.
Perhaps because as I wrote the other week – the West Wing while poking its noses into corporations – it has yet to actually do its real job of filling all of the positions in the Treasury as well as plenty of other agencies and departments. So, the current Treasurer might have been overworked when he cut some of the prices for the warrants.
But the bottom line is that banks are getting common equity to replace the preferred stock. This has two major bits that should interest you. First, it changes the capital structure of banks – reducing leverage and improving the balance sheets.
Second, the TARP preferred shares were costing banks a 5 percent fixed dividend – which now goes away. A lower cost of capital frees up cash for other purposes.
Here’s my pitch – now is the time to buy bank bonds and bond-like preferred shares.
The TARP preferreds are gone – but the underlying FDIC (Federal Deposit Reserve Corporation, www.fdic.gov) credit wrappers on much of the bank debt out there isn’t going away.
So, if you’re a bigger bank, not a thrift like BankUnited of Coral Gables, Florida, then you get free underlying credit guarantees and no more poking around the executive suites.
For us as investors – we get the big cashflows that are still out there that is what we all continue to need. Stocks that pay you is always my mantra – and for the banks – this means some of my favored preferred such as the FirstBanks of Saint Louis (NYSE: FBS A) paying 8.15 percent and yielding over 12 percent. Or how about Regions Financial (NYSE: RF A) paying 8.875 percent yielding again around 12 percent.
On the mini-bond front – love him or not – Ken Lewis seems to be a survivor if by slim margins in his battles with the West Wing. Why not try his minibond trading on the NYSE under the symbol IKM. It’s a bond with a coupon of 5.875 percent yielding over 8 percent at a nice discount. Or another to look at is from Goldman Sachs trading again on the NYSE under the symbol JZS. It has a coupon of 5.8 percent – again at a big discount to yield over 8 percent.
Finally, a man that many at the track could bank on year in and year out – died at 76 years. My grandfather loved the ponies. While not owning stables – it didn’t keep him from his favorite pastime – betting on them.
He knew the horses and the jockeys and was always up for a trip to any near by or even not so near by tracks. And while he never did mention Bill Passmore – I’m sure that he saw him ride into the winnings at least now and again.
Bill was a jockey. And not just a jockey – but a winning jockey. His tally was over 3,500 races won generating winnings of over 23 million back in the days when millions meant something.
Neil George is editor By George and Stocks That Pay You.
The above is only opinion and does not represent and/or offer to buy or sell any security and/or any financial advice. The opinions contained may not be suitable for all investors who should consult their own financial adviser before making any investment or other decisions. I may own some of these same securities noted in accounts under my control or for my benefit.
Errors/Omissions: I always welcome being called on facts, figures and commentary from readers and look forward to your feedback. I can be reached by email at njgeorge@att.net or njgeorgejr@gmail.com or at 01-314-616-3325.
