Rumors that have swirled on a regular basis that the Fed policy of quantitative easing was going to end sometime this year have been greatly exaggerated. Every time someone from the Fed opens their mouth to anyone who will listen, the media jumps all over it and adds confusion to an already puzzling fiscal policy environment.
The bottom line is that the only mouth that speaks that has any clout is that of Ben Bernanke. If Bernanke says the policies will remain in force, then you can bet that the policies will remain in force. By continuing these policies, I believe that the financial sector as a whole will thrive, and shareholders could benefit.
Owning shares of four of the best banks around could return strong gains, as I noted in this article:
I believe that given the current scenario that investors face, the financial sector could literally explode this year to the upside. My personal favorites are Bank of America (NYSE:BAC), Citigroup (NYSE:C), JPMorgan Chase (NYSE:JPM) and Wells Fargo (NYSE:WFC).
Banks borrow low and lend higher. Add that to the fees that they charge, and the banking sector remains strong as long as the Fed policy remains in force, at least.
In the latest monetary report to Congress, Bernanke reiterated that all of the QE policies will be with us for quite some time:
With unemployment well above normal levels and inflation subdued, progress toward the Federal Reserve's mandated objectives of maximum employment and price stability has required a highly accommodative monetary policy ... The December postmeeting statement indicated that the current exceptionally low range for the federal funds rate "will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee's 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored ... Last September the FOMC announced that it would purchase agency mortgage-backed securities at a pace of $40 billion per month, and in December the Committee stated that, in addition, beginning in January it would purchase longer-term Treasury securities at an initial pace of $45 billion per month.4 These additional purchases of longer-term Treasury securities replace the purchases we were conducting under our now-completed maturity extension program, which lengthened the maturity of our securities portfolio without increasing its size. The FOMC has indicated that it will continue purchases until it observes a substantial improvement in the outlook for the labor market in a context of price stability.......As I noted, inflation is currently subdued, and inflation expectations appear well anchored; neither the FOMC nor private forecasters are projecting the development of significant inflation pressures.
I suggest that readers refer to the link provided for Bernanke's complete testimony, but the snippets I have placed here gives me an indication that Bernanke -- and the Fed -- remains committed to keeping all of the policies in place for the foreseeable future.
It might be less confusing if I put my own "regular Joe" spin on all this. Let me encapsulate the entire policy into some basic points in an attempt to take some of the confusion out of this mess.
- Monthly purchases of longer-term Treasuries and mortgage-backed securities in the amount of $85 billion each and every month will continue, indefinitely.
- The unemployment rate target of the Fed has been stated and restated, and is at 6.5%.
- The inflation rate target is 2.5% or greater, as stated repeatedly by the Fed and has not changed.
- The zero interest rate policy pertaining to short-term rates is still virtually at zero, and will continue until any of the above targets are met.
- One Fed objective is to keep long-term interest rates low, so mortgage rates are more affordable for both refinancing and first mortgages.
- Another Fed objective is to maintain historically low short-term interest rates down so that banks and other financial institutions can obtain cheap money to lend to businesses and individuals.
- By maintaining these policies, the Fed hopes to spur both economic growth as well as job growth. If the goals are reached, the Fed believes that a stronger economy will then be able to "take care of itself."
One could argue forever that these policies will or will not work. There is evidence to support the fact that the interest rates are being held down -- perhaps artificially -- but mortgage rates are at historic lows and banks have had access to "free" or cheap money.
Other Financial Stocks Could Benefit As Well
It is not just the bank stocks that could benefit, but several other stocks that I really like right now and wrote about in this article. KKR Financial (KFN) and BlackRock Kelso Capital (NASDAQ:BKCC) have been performing very well since I first suggested them in this article, back in early November of last year. I wrote a follow-up article not long after that, and I urge everyone to take a look back at both of those. As I noted, the fundamentals of each show strength and we added to our positions in the Team Alpha portfolio:
- KFN has a current yield of 7.40%.
- KFN has a current payout ratio of just 46%.
- KFN also has a very low price to book value with just a 10% premium.
- KFN also has roughly 60% institutional ownership of all outstanding shares.
- BKCC has a current yield of 9.90%.
- BKCC has a current payout ratio of 122% which is quite reasonable for a BDC (business development company) since they are IRS mandated to pay out at least 90% of all income as regular dividends to shareholders. Much like a REIT does.
- BKCC has a low price to book value with just an 11% premium.
- BKCC has 50% of outstanding shares held by institutions.
With the continuing policy by the Fed intact, these "lending" companies could benefit quite nicely just by the fact that banks have tightened up their own lending practices. Both of these companies will lend at higher interest rates and/or equity positions in the businesses they agree to lend to. Many of the businesses they lend to cannot get funding from the banks simply because the banks have tightened up their lending to businesses seeking to expand. That is where companies like BKCC and KFN can profit.
I believe that in an economic recovery, and a Fed policy of easy money and low interest rates, the financial sector will continue to lead the stock markets to higher levels.
The Fed remains consistent in the policies it has enacted, and I see no signs of anything changing either in the near or intermediate term. One needs to decide for themselves if any of the stocks noted here belong in your portfolios. While I believe the stocks offer a combination of capital appreciation as well as strong dividends (as is the case with KFN and BKCC), please do your own research prior to making any investment decisions.