Episode 101 - Why I'm Buying US Banks

I think there's an interesting opportunity in the very large Banks, and the way I think about it is. In the great financial crisis, the banks failed, the bond markets, basically failed, and the fed, and the federal government had to come in and bail out both. And this time around the banks and fine and the federal government had to come in to bail out the bond markets. Again. This is Steve Eisman on April

23rd repeating. Something that he said frequently that he thinks that US banks are a good opportunity right now. This is something that he's claimed for a while. This is notable because Steve Eisman is one of the You people that made major bets against the US Financial Market against these same Banks during the 2008 financial crisis. So I made a fortune doing that. It became very popular. He had movies made after them.

And now, this same guy is saying that he sees a big opportunity with US Banks. He thinks that the sentiment against these Banks is more negative than it needs to be, and because of, that they're being priced lower than they need to be. So, I actually agree with him.

I agree with them enough that I've been buying some of these Banks. I did a recent purchase of 22, shares of JP. Morgan that's about twenty one hundred dollars and I'm going to continue buying both JPMorgan and Bank of America over the next while. So especially if the price continues to decline, I'm going to be picking up more shares in these companies. I want to go over in this video, my bowl case.

The reason that I'm going to be dollar cost averaging and putting a little bit more emphasis on these US Banks. In other news. I want to talk about, I feel like this is the same story over and over again, week in and week out, the market has traded lower because there's new fares of the coronavirus and there's fears of Economy, closing back down stores, closing back down. That's the headline that we have

new cases. The cases are literally off the charts, in the US, the y-axis had to be adjusted upwards because we couldn't fit the new numbers on the scale right now. We had on June 26, 44,000 plus cases in the US. That's a really high number that is bigger than any day during the initial wave of cases. So I want to give some context to this. I think there's important details that are being left out of the reporting. I'll be going over that but I also On to talk a little bit

more about investor sentiment. How if you're new to investing, if you've been investing for less than five years. You should be hoping that people react negatively to this. You should be hoping that people react fearfully to this. That's something that we can take advantage of as investors. So I want to dive a little bit into that.

I think it will be an interesting topic to cover and then other fun things that were going to be talking about today are some emails that I think are interesting like one of them from Ashland that points out these articles saying how much

money Jeff Bezos makes every day or how much money. Makes every second and how that money is even stored what he does with it. How people say that? Jeff Bezos wastes his money. I'll be talking about that in responding to this email. Okay. Let's first. Jump in a JPMorgan Chase. This is a bank. I'm going to be focusing on. Let's go ahead and read a quick summary of it. This is a write-up for Morningstar.

They say, JPMorgan Chase is arguably the most dominant Bank in the United States, with the leading Investment Bank Commercial, Bank credit card, retail bank and asset wealth management. Franchises. JP Morgan is truly a force to be reckoned with the Binks combination of scale diversification and sound risk management. Seems like a simple path to competitive Advantage, but very few other firms have been able

to execute a similar strategy. Even the best manage banks are not immune to the occasional stumble. But JP Morgan has managed a seemingly put all the pieces together in a more cohesive and less error-prone way than pairs. This is the type of right up that you see a lot about JP Morgan that it's a dominant bank that it has sound risk management and that it is the best among its pairs.

It continues on say JP Morgan. Now benefits from an early unrivalled combination of scale scope within the United States. It has become the largest bank in the country by assets and deposits with payments depending on Metric. JP Morgan is generally the largest credit card issuer in the US the second largest u.s. Acquired by purchase volume. The company's Investment Bank is a leading Global generator of fees and JP Morgan's fic see trading desk remains, one of the

top Global players. It goes on talking about the scale of this company says the scale and multiple Revenue sources allow the bank to It's customers switching costs, generate more Revenue per risk-weighted assets than smaller Pairs, and also have a larger percentage of Revenue come from fees. We also see the scale leading to larger more, scalable Tech budgets, which should only increase in importance in the future.

This is morningstar's basic thoughts on JP Morgan is that it's the largest most dominant competitive Bank in the United States. That has sound risk management. It generates huge profits, and they believe it has a wide economic mode and they're not the only ones, the cfra currently gives it a buy rating. With 4 stars out of 5, they say JPMorgan remains Best in Class among large US Banks.

In our view, even though we expect quarter to of 2020 to show the full brunt of covid-19 s impact on banking activity. We forecast, JP Morgan is well positioned to Rebound in the second half of 2020. So this is what most analyst firms are saying. That JP Morgan is well-positioned. Even in the face of the coronavirus, even in the face of a severe recession that their position to be able to take on these bad loans without lowering

their Book value. We mentioned Steve Eisman before and this is something that he's talked about a lot. He's asked about the systemic risk of u.s. Banks. Pretty much can the same thing happen again. Can we go through recession and these Banks just fail like they did in 2008. I don't see a systemic problem. And you know, the banking system isn't is in the best shape of the 30 years. I've been analyzing Banks, you know, is it going to be a recession next year? The year after?

I don't know. I mean, I think we are, we are he said, then in 2019 that he Systemic risks with the banks and that they're in the best shape that he's seen in the 30 years that he's been looking at Banks, but that was back in 2019. Nobody could have foreseen the full extent of the coronavirus. Let's go ahead and get his updated opinion on this. Maybe it changed.

Maybe he really didn't know that there's going to be something quite this bad and this unique, come along with the economy and that could reasonably change his opinion. So here we are April 13th of 2020, well, into the coronavirus, so he's, well aware of the coronavirus. We've been in it for months, and this is his opinion on banks.

The Did opinion on it. There's an interesting opportunity in the very large Banks and the way I think about it is. In the great financial crisis, the banks failed, the bond markets, basically failed, and the fed, and the federal government had to come in and bail out both. And this time around the banks and fine and the federal government had to come and bail

out the bond markets again. And so, the way I like to think about, if you wanted to put it in kind of a catchy phrase way the banks of 142 and the bond markets are 0 for 2, even in 2020 after knowing about the coronavirus, he Not worried about Banks and explains why he's not worried about them. The regulatory apparatus spent years working on the banks. Making sure this would never happen again. And led by fed former fed Governor Daniel.

Tarullo. The banks were forced to deliver 2D risk and to wield multiples more liquidity than they ever imagined. Now, they complained about it all the way, but they had to do it anyway, and so now that we have a second great. Crisis, the banks are fine. He says, he thinks our banks are fine. They even in the face of the coronavirus and the recession

coming up that the u.s. Banks are not going to have to be bailed out by the government again, and he goes on to say that because of that, he thinks they're one of the best cyclical, plays out there. The best cyclical play out. There are the very large Banks because in the great financial crisis, they destroyed Book value and had to raise Capital at the bottom and this time around they would have to raise Capital at all and they won't destroy any book value.

So he's pretty much saying that during the financial This. These Banks had a raise Capital to pay for loan losses at completely bottom of the barrel prices. They had to sell off their assets and destroy their Book value at the lowest prices possible. This is like being margin called on your portfolio and having to sell a good portion of it during the bottom of a recession, not a good situation to be in. So that's what the bank's went through during the financial crisis.

He does not think that they're going to have to do that again. You think that they have enough Capital that they won't have to raise any Capital during this recession, that they'll be able to cover the Losses and they won't destroy Book value. So, that's the biggest part of the BET hair is if banks have enough Capital, if they have enough reserves to be able to cover the losses of the loans that are going to fail.

If you think the failure is going to be so severe, that banks have to destroy Book value. Then you shouldn't be investing in them. If you think the banks will be able to make it through this, without destroying Book value. They should come out relatively strong through it. Now.

The FED is also looked into this because banks are vital to the US economy. If banks run out of money. If they Don't loan out anymore because they're reserving all their money to be able to pay for loan losses. What that does is it kind of chokes the US economy makes it so nobody can get a line of credit, which is not good for growth. And we need a lot of growth to get out of a recession. So the FED doesn't want that

situation to happen. So they do what's called a stress test where they put the bank's through different scenarios and they try to find out. If the bank can survive, what they found is that US banks are healthy enough to withstand the coronavirus crisis. They said that they might suffer tremendous losses. There might be hundreds of billions of dollars of loan losses, but the banks will still be able to come through it. So, that's what their conclusion is.

There's always a chance that's outside of the parameters that they put the recession is in the future. We don't know what's going to happen. But from what the FED did with its test, they found that the banks were positioned really well to handle these type of losses. Now, in addition to this, the FED really wants these Banks to be as conservative as possible. They don't want them to run into trouble and they want them to be able to support the economy with as much cash as possible.

So they're telling the banks. I want you to stop giving away money. We want you to stop, giving away money to shareholders. The basic ways, that companies give away, money to shareholders is through share BuyBacks. That's one of the indirect ways that give money to shareholders. The other more direct ways through. Dividends. Those are the two basic ways that companies pay out their shareholders.

Now the banks have already stopped their share buyback programs, but the FED made it official that they cannot do. Share BuyBacks right now. Share BuyBacks, make up a much bigger amount of spend. Then the dividends do. So, the Dividends are currently Lie on the table, but with the share buyback program cut from every major bank, that's one of the biggest things that supports the price of these shares that supports the price going up all the time.

If we look at a chart of JPMorgan, they went through the coronavirus. Obviously, there's a big sell-off, but now they don't even have the support of share BuyBacks. I think this will cause continual downward pressure on these Banks. They're not buying their own stock and a lot of people are very scared about the fate of the economy. And so there's a lot of downward pressure on these Banks if we

compared to the S&P. 500, the S&P 500 has almost recovered, its down seven percent, year-to-date. That's pretty good. JP. Morgan is still down year-to-date 34% And I think that this could continue to happen. I think the shares could continue to go down because they don't have the support of share BuyBacks. And investors are pretty timid right now. So, share BuyBacks are completely done for banks.

In the meantime. There's going to be no share BuyBacks from banks that something that was supporting the stock price. Now that's gone. It also says that dividends have some restrictions Options, it says Banks which will announce their dividend plans for next quarter. As soon as Monday. They won't be able to make payouts that are greater than their average quarterly profit from the four most recent quarters based on that restriction.

Most of the banks are going to continue to be able to pay the dividend. They were before. They might choose to lower it but they're not going to be required to based off that restriction. I don't see any banks being able to raise their dividends. I don't think they're gonna be able to raise them. But most of them could continue to pay the dividend.

They were before it highlights Wells, Fargo as being the only Bank. Over that restriction, it says that only Wells Fargo has a dividend payout that would breach the new threshold set by the Fed. So that's somewhat to be expected. Now as far as these Banks, I own JPMorgan Chase and Bank of America. You have to know if you're buying these Banks. Right now. There is a high probability that they will cut their dividends that they will reduce their dividend payments.

The reason why is they might choose to do that, to be very conservative? They might want to keep as much cash as possible going through this recession if that's the case. I'm not going to be selling these. As companies I'm investing in them because I anticipate that they'll be paying out a lot of money over the next 10 to 20 years in dividends, if they temporarily halt their payments for a year.

Just as we make it through this recession, just to be sure just to be absolutely certain that they don't have to destroy their company and destroy their Book value. I'm completely fine with that. I anticipate that JPMorgan Chase or Bank of America if they do temporarily suspend their dividend payments, they'll reinstate it as soon as they can as soon as they have a clear out look. So. I think that I'm Investing For future dividend payments. These are two companies that

over the next 10 to 20 years. They will be paying a lot of money in dividends. That's my thought on it. If I have to sacrifice one year of dividends to be able to buy in a company at a very good price that I know is going to pay dividends in the future. That's something I'm willing to do. So we'll see where this goes. I'm going to keep up with these Banks. Right now, Jay P. Morgan is a four thousand dollar

position of my portfolio. It's probably going to become my largest position over the next few months, especially if the share price keeps. Falling. I'm going to be buying more of this company if people become very fearful, there's a lot of fair. If people are reacting in there selling out of the market, if the coronavirus continues to go crazy and wreak havoc on the economy. I'm going to be buying more of this company, as the price comes down.

I think there's a lot of downward pressure on banks right now. Not only did their share buyback program stop, which is something that really does buoy the stock. But we also have the fears of the coronavirus. We have the fears of banks in general. We have a lot going on right now, so, Want to take advantage of that as much as possible. If this price continues to go down right now, it's trading at 92 dollars.

If it continues to go down. I'm going to be buying more of it. So this will probably become my biggest position here really soon. Even with that said, I have to let people know if you're looking at buying a company like this and you see research like this, you got to do your own research to be able to stick with stocks for a long time and realize that I'm heavily Diversified. So I want a lot of companies, JP Morgan is one of my Holdings. It's one of the bigger bets but

it's not my only holding. I'm really well. Diversified so keep that in mind as you make purchases of companies like this. Now having said that I do see a lot of potential with this company. It has a current market cap. The size of it is two hundred, eighty two billion dollars, which is a big company, but two hundred eighty two billion dollars during normal times in 2019, JP Morgan made 36 billion dollars in net income. 36

billion in net income. That's a company that is under 300 billion dollars in market cap. Try to find another company. It has that type of net income for its current market cap size. It's very difficult to find. So, during normal times. This is a highly profitable company. They're invested in a lot of tech. They're moving forward with that. The price of it has gone down

quite a bit. And I think as this company makes its way through this recession, if they can do it without destroying Book value and they get to a situation where they start re-implementing, their share buyback programs. If they start raising their dividends again, I could see this company both having a lot of share price appreciation and Pay dividends at the same time. So that's what I'm hoping for now. Having said that I can't see the future.

We don't know what's going to happen, but we'll find out soon. Okay, so shifting gears a little bit to something. I still think is heavily related, especially if you're investing in Banks, is the coronavirus we've heard about this for so long, but I think there's some important information that's being left out. First of all, we have the fear. We have Florida, shutting back down. Says it Florida. Thought it had dodged, the coronavirus.

Now, it faces a surge. We have similar news for other states. The surgeon covid-19. Cases tests, Austin's reopening. So Texas is seeing the same thing. Basically, the numbers were all going down. We started to reopen back up the economy. People went out and they did their normal business, just like normal and the coronavirus spread like crazy. So we can see the numbers over the u.s. They're really high right now, but there's some other information that I think is

interesting. One of them is these antibody tests that we're doing show that there might be a lot more people with the coronavirus or that have had the coronavirus that weren't officially tested. It. So the government estimates, 20 million Americans were infected significantly higher than the official count. That's ten times higher. So if there really was 20 million people in the u.s. Infected that means that the fatality rate is 10 times lower than what it's reported right

now. So that would be good and bad news. It mean the fatality rate is lower that a lot more people have the coronavirus but that it spreads more than we think. So we have information like that and we also have better data on who is vulnerable to the Coronavirus. This report shows that the vulnerability, the amount of lethality.

This virus has is heavily correlated to your age, 80 percent of the deaths Linked In the coronavirus in Europe, where people over 75 years old, 80 percent of the deaths in Europe, where people over the age of 75 that is heavily weighted towards elderly people. If you look at this, I can actually break it down into these different crafts. 15 to 44 year olds. That's a pretty large age demographic that red line. Is the amount of deaths from it? That's the fatality rate. It's very low.

It's almost zero. If you go to 45 to 64, it immediately bumps up quite a bit. You can see the starting of it is quite a bit higher and then it has another bump. That's 45 to 64 years old. That's about right there. The whole working demographic from 15 to 64 years old is, basically people in the workforce, but look at it from their people that are elderly or retired. You have people over the age of 65. If it already starts very high and then you see a significant bump in fatality rate.

So it's much higher, 65 to 74 and then 75 to 80 for if you're in this age group, you're very vulnerable to the coronavirus, not something you want to get if you're 85, Plus, it is extremely lethal. So you look at this breakdown and it does give us some information.

It shows us that people that are mostly young and otherwise, good health, 15 to 44. They have a very low fatality rate from the coronavirus as you get Order it's far more deadly in this age demographic data is important because a lot of the new cases seem to be people that are younger than previous. It used to be affecting a lot of elderly people. Now, it seems like most the new infections are younger people

from The New York Times? It says, in Arizona where drive up sites are overwhelmed by people seeking coronavirus test, people ages 22:44 account for nearly half of all cases in Florida, which breaks records for new cases. Nearly every day. The median age of cases, testing

positive for the virus. The virus have dropped to 35 down from 65 in March. So, the median age of people getting the coronavirus in Florida has dropped from 65 to 35. If we go back and look at the graphs again, and compare 35 year, olds with 65 year, olds. Obviously, the 65 year old age group is far more lethal. So this is both good news and bad news. Having the median age go down. Means that likely there's going to be a lower fatality rate, but obviously having it spread out

of control like this. Not ideal.

Okay. Let's get to some emails. Joseph at Joseph Carlson show.com is the email address. The first one, says hi Joseph. My name is Ashlyn and I've started listening to your show during the pandemic. Congratulations on your 100th video. I've watched at least half of them at this point. I am a college student studying computer science who has been using this down, time to learn more about investing in finance.

I've been reading a lot of books, listening to podcasts and following the news, but there's one thing I just do not understand most of my friends at College in many Twitter users trash. It's Jeff Bezos has being super duper wealthy and not using his wealth to fix problems, like, Flint, Michigan, or improve his employees working conditions, but wouldn't most Basil's wealth be tied up in Amazon? Stock. And if so, how can he actually make thousands of dollars per second.

For some reason. I see this metric everywhere with a quick Google search. I see that Bezos has a worth of about a hundred sixty five billion. Yahoo! Finance says Bezos owns fifty five and a half million shares of Amazon at 2700 dollars. Here. That means he has around 150 billion in Amazon. Chairs. Amazon does not pay a dividend. He apparently makes his salary about 80,000 a year with the rest of his income. Be from bonuses as a CEO of Amazon.

The article, says Bezos annual income is 78 million. Where is that money coming from? If not Amazon dividends or his average salary? Well Ashland, this is an interesting question. You point out, that most your friends at college and many Twitter users trash, Jeff Bezos for being super wealthy and not using his wealth. To fix problems, like, Flint, Michigan or improve employees. Working conditions. I've seen this a lot and I would

say, it doesn't even stop there. I've seen people that when Jeff Bezos donates to something, they complain that he doesn't donate enough. And if he doesn't donate, they complain that he didn't donate. And every single cause going on every single thing that's important to them. Jeff Bezos should be doing something to fix the thing. That's important to them. He should be fixing all of life's issues. Jeff Bezos, should fix every

single problem. We In the u.s. I think that's the expectation people have, is that he's super wealthy. He has 150 billion dollars. So he should be the guy that every single problem is funneled to him and we should look to him to solve all of them. That's kind of the impression. I'm getting. I mean, it's silly and it's really lazy just to have any problem and blame on Jeff Bezos. I think it's a really lazy way of looking at things but that's kind of a trend.

I'm seeing right now, but I look at this. It's obvious if you learn about Finance you learn about how his money's actually Restored. He simply has a big stake in Amazon. That is where most of his net worth. Is it son? Realized when he sells Amazon stock? He's realizing those gains. He's cashing out. Then he can actually do something with the money, but he has the huge majority of it in Amazon stock.

And if he sold all of that, he would no longer own Amazon, he would not be able to run it. It would be run by other people. So that's the situation. He said he wants to run the company that he started. He created Amazon, and I think that To be able to do that. I don't think we should look at him to solve every single life issue. Either. He started a company. He's good at being the CEO of the company. He's obviously really good at growing it.

There's not many people on this planet that can grow a company like Jeff Bezos. He's a great Capital allocator. He used money and he created more wealth with it. More Capital. He created more opportunities, more jobs. He grew a company that's difficult to do, not a lot of people can do it. The extent that Jeff Bezos has. So I think that we should leave them to do what he's good at which is growing a company. Offering jobs being able to create wealth.

That's something that very few people. Do try to think of a lot of people that can do exactly what Jeff Bezos has, and the amount of people doing. That is very slim. So, I think it's the thing that you're pointing out, Twitter users complaining about them College, friends. There's always somebody to complain about and aim your problems at. I think that Jeff Bezos has fit right in that slot because he's super wealthy. I don't think that there's much

more to it than that. I think if Amazon had some issues in the Price, went down a whole bunch and his net worth went down. People wouldn't see these big numbers and it would probably fizzle out from there.

So that's kind of my thoughts on it. Stanley says hi Joseph. Me and my two brothers, 18 to 20 years old in the UK have recently gotten to investing in the past few months and I've been keeping up to date with your videos. We find very helpful. We have inherited about 30,000 euros each which we plan to cost average into a long-term dividend growth portfolio. Starting off mainly with ETFs and bonds. We've noticed that there seems has to be more promising.

American companies in terms of dividends. However, we're wondering whether or not it would be a good idea to invest in American companies with the current rate exchange between the dollar and Euro, which could mean we lose a bit of money over the long term. Well Stanley, my basic thoughts on this are to not worry about the exchange rate that much. I think that you could first look at companies where you're not going to have those issues. I would first focus on your own

home court. I would look in Europe, look for companies in the UK. And try to find ones, you think are good, but I would not forego investing in companies in America because of the exchange rate. If there's companies you really want to own in the US that you think are going to double in size. You think they're going to do really well. I would not worry about the exchange rate. I would start buying shares in these companies so I would not let it this way. Do that much.

I think it's good to have a little bit of home court bias to focus on companies around you that you're familiar with. But I would also not worried at all about investing in companies and other countries. If you think they're going to do really well. Well in the future, okay. Well, I'm going to go ahead and end this episode there. Thanks everybody for listening. I will see you guys next time.