Shrewd Man, That Buffett

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  • Crucial sector reports — and passes nicely  
  • What dragged down the US stock market
  • Plus, a combination to drive US shares back up into all-time highs…

Mr Warren Buffett might be a happy man at the moment — at least when he looks at his portfolio.

In Profit Watch recently, I’ve made a point of highlighting Buffett’s buying of the US big banks in the third quarter of 2018.

I suggested we could do okay following his lead, and accumulate good, long-term stakes on general market weakness and pessimism.

We know Buffett generally buys for the long term — so the swoon in US stocks from October to December probably didn’t faze him.

Now those big US banks are releasing their latest quarterly results. These are a fine way to take the pulse of the US economy.

And what do we see?

Today’s missive digs in to find out…and explore the implications…

The Wall Street Journal has some of the answers.

The US banks have raised their lending rates alongside the Fed hikes recently.

Borrowers are paying more.

But the banks haven’t passed these rises on to their depositors, either. 

So their income has gone up, thanks to this widening spread.

It’s a basic equation.

They’re earning more on their assets — their loans.

The cost of funds — their deposits — has remained low.

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That’s a nice mix for a bank anywhere.

JPMorgan Chase is regarded as the top US bank.

Its return on equity in the last quarter was a healthy 12% — despite lower trading revenues and a weak mortgage market.

It appears a healthy US consumer and the economy in general drove the result.

Citigroup saw the same weakness around its trading desks and investment banking.

But lending was up — and the bank swung back into profit from a year ago. 

The stock is up 20% from the 24 December low.

In 2018, Bank of America made the largest profit in its history.

It’s up 25% from December.

Even Goldman Sachs had a bounce — and the Malaysian government is threatening to chase it for US$7 billion it lost as part of the 1MDB scandal.

Now, these results are noticeable for two key reasons…

Rising banks to offset weak tech sector?

One is that it shows that the US economy is ticking over.

Banks wouldn’t be posting these nice numbers if people weren’t borrowing and paying back their loans on time.

It’s an affirmation on that front.

But the big banks are important for the US market as well — if it’s going to push back into all-time new highs.

You see, the recent selloff in the tech sector is what dragged the market down.

These are huge companies.

Apple’s market cap, for example, has dropped nearly US$300 billion recently.

The stock has fallen from a high of US$233 in October 2018 to US$154.

Amazon has dropped nearly US$180 billion in market cap, too.

These are large figures.

There’s no guarantee either stock will go back to its former peak, either — not anytime soon, anyway.

That could keep a lid on the overall market. Facebook has been battered recently, too.

That’s where the banks could come in.

JPMorgan Chase has a market cap of US$340 billion. Bank of America has a market cap of US$279 billion. The figure for Wells Fargo is US$230 billion.

So they’re much smaller than the big tech stocks but not insubstantial either.

All three companies trade on a price to earnings (P/E) ratio of around 12.

That’s pretty modest.

Essentially, the market is not really prepared to price these stocks for much growth.

However, should this change — and the multiple expands for the US banking sector — it could help lift the US market back into all-time highs.

The banks could rise in market cap to offset the decline we’ve seen in tech.

And if US tech lifts up again alongside the banks, then we have a recipe for the market to really break out.

Now, take all this with a grain of salt. It’s a potential scenario only.

Indeed, the complete opposite could happen, and we could see multiples contract — and take the level of the market down.

Today’s Profit Watch is merely an observation of the potential for the US banking sector to lift the US market higher than it is now.

It’s not guaranteed, but we can presume Mr Buffett is thinking along similar lines.

It’s more likely than not, in my view, over the long term.

While he waits to see what happens, Buffett grabs the dividends these guys pay out along the way.

Shrewd man, that Buffett.

All the best,

Callum Newman Signature

Callum Newman,
Editor, Profit Watch

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