In our last article, "Get Ready For The Green Light, Part I," we discussed the one similarity between today and the 2008-2009 financial crisis:
People were afraid there was no solution to the enormous problems that our country and the world faced. Leading politicians and bureaucrats that created the problems were suddenly powerless, and the situation looked bleak. Banks were in a virtual free fall, and the unwinding of the "global ponzi" seemed inevitable. Every possible solution was ripped apart, as cynics ruled the day.
We then pointed out the significance of the US Treasury infusing unlimited amounts of money into the major banking institutions, thus ending the negative loop and starting a powerful 50% rally. In essence that policy, announced in March 2009, was the green light which unleashed a path to significant profits.
Finally, we explained that investors should be on the lookout today for a similar green light, and be prepared with their investment choices if sentiment changes. While we agree that the light is still yellow (for caution), we are starting to see signs of progress.
In Part I we covered Cyclicals and Automakers; today we will explain how we believe that two other major groups will outperform the general market.
The financial industry, specifically our large, systemically important banks and brokers, is the engine that powers the economy. When banks are vibrant, they loan money to businesses, individuals, and governments to expand activity. If banks suffer losses, they must retrench and rebuild reserves/capital. The banks are the mechanisms through which the Fed channels the money that is created. By design, the banks must be healthy and growing in order for the money to flow properly.
As in 2009, our large banks are trading at substantial discounts relative to historical metrics. The fact that they trade below tangible book value indicates the market perceives much more negative news ahead, and with it a worsening economy. Citigroup (C) and Bank of America (BAC) trade at nearly 50% discounts, while JPMorgan (JPM), Wells Fargo (WFC), and Goldman Sachs (GS) have taken only minor haircuts.
In good times, with a growing economy, these institutions will trade a multiple to traditional book (vs. discounted tangible book).
If the green light is lit, the banks will be one of the first sectors to be impacted. In 2009, the swing from extremely negative sentiment to muted optimism produced more than 100% returns for those that caught the signal. This time should be no different. Today banks are healthier and stronger as they have undergone serious balance sheet repair, tightened lending standards, and written off a large percentage of their bad loans. Banks are priced for a depression, so any hint of real future growth will produce a strong, sustained rally. We strongly encourage investors to get familiar with the fundamentals of the following five large financial institutions (below). When the green light signal flashes, those that do will be armed with the understanding of perspective.
JP Morgan: $30.12; 52-week range 28.53 - 48.36; market cap $117B
Citigroup: $25.61; 52-week range 23.19 - 51.50; market cap $75B
Goldman Sachs: $94.55; 52-week range 91.40 - 175.34; market cap $48B
Bank of America: $6.12; 52-week range 6.00 - 15.31; market cap $62B
Wells Fargo: $24.12; 52-week range 22.58 - 34.25; market cap $127B
Precious Metals and Mining Stocks
As we stated in Part I, we believe the central banks will continue to print, and politicians will continue to spend, so long commodities, long stocks, and short bonds are generally the right selections. Specifically we like precious metals and the large cap miners to comfortably invest in this trend. The choice of which metal or mining stock is better at any given time is relative to the price at the particular point of entry. However, the direction of the group as an asset class will be obvious as the world continues to print more and more money.
Currently, the sector is correcting, as signals are mixed on exactly how accommodative the establishment will be going forward. The yellow caution light is flashing today, but keep your eyes open for the switch back to green. We believe the next leg of this multi-year bull market in precious metals and mining stocks will be breathtaking in both length and speed. The world is at an inflection point, as it has become obvious that growth requires more and more money to paper over the problems.
We encourage investors to follow the relationships between the three major metals and four major mining concerns listed below. As we mentioned, it is not yet time to pull the trigger. However, when the light turns green, the bull market will resume. And with it will be substantial opportunity to make good money.
Newmont Mining (NEM) $62.95; 52-week range 50.05 - 71.25; market cap $31B
Barrick Gold (ABX) $46.65; 52-week range 42.50 - 55.95; market cap $47B
Goldcorp (GG) $45.64; 52-week range 39.04 - 56.31; market cap $37B
BHP Billiton (BHP) $66.44; 52-week range 65.82 - 104.59; market cap $177B
Gold bullion $1,625 or GLD $158.06
Silver bullion $29.97 or SLV $28.91
Platinum bullion $1,523 or PPLT $150.32
In closing, we repeat, we believe the market is filled with cynicism and doubt. And while we understand and agree much of it is warranted, we also believe that the establishment will eventually get it right. When they do, it will likely be driven by an event that is noticeable to those that are looking, in essence turning the light from yellow to green. Some may choose to anticipate it, others may wait for the moment, but all should start focusing on what to buy when that light turns green.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.