Interest Rates, Psychology and School days

We had a release of the Fed minutes this week and the meetings are getting a bit livelier. Some members think we need to raise, some want more evidence and some just aren’t that sure what to do. Much ado was made of the release. Fed member Dennis Lockhart thinks we are getting close telling the WSJ that ““Most of the fundamentals underpinning growth of consumption are pretty solid. Early indications of third-quarter GDP growth suggest a rebound. I don’t believe momentum has stalled.” NY Fed William Dudley agreed saying “I think we’re getting closer to the day where we’re going to have to snug up interest rates a little bit. And that’s good news.” Maybe they will, maybe they won’t. We have seen confident announcements about looming hikes before that were crushed by a strong of weak data releases.

Even if they do raise rates in September it will not signal a string of increases. The most important passage in the Fed minutes is one that has been there for several months now. It reads “The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run.” Rates are lower. They will be lower for some time to come. That means small banks will still struggle as net interest margins are compressed and will be tempted to sell. It means RE cap rates will remain low and property values of the REITs we own should hold up pretty well for now. It means that senior loan funds managed by affiliates of leading private equity firms purchased at a discount are going to continue to be a pretty solid choice for income investors.

The real risk each fed minutes comes from the psychology of market participants. As the minutes noted “Several expressed concern that an extended period of low interest rates risked intensifying incentives for investors to reach for yield and could lead to the misallocation of capital and mispricing of risk, with possible adverse consequences for financial stability.” Rates have been so low for so long that nay change at all could send traders into a panic as the major reason for high stock prices has have been that low rates justify higher valuations and besides there is no other valid option so you have to buy stocks. Anything that challenges those perceptions could see some adverse consequences indeed. I am not predicting it but I am damn sure hoping for it!

I have been plowing through 13 filings all week and I can say that the bank specialists and activists are still finding community bank stocks to buy right now. My buy list had 28 names on it last week and there are a couple dozen or so more super cheap stocks on the Banking on Profits tiny bank bonus list and the Community Bank Investor focus list. The smaller banks are cheap and there is a lot of upside from the current stock quotes to their takeover value. The ones that do not get taken over are going to have to find a way to grow the bank and increase their return on assets and that will lift stock prices over time for those banks that can pull it off. Grow or sell remains the theme for small banks.

Jeremy Nobile of Crain’s Cleveland Business had a nice piece on bank M&A this week. He wrote that “Whether as acquisition targets or buyers themselves, M&A activity should be most active in that community bank space. Besides large companies trying to claim additional size in Ohio, buyers likely will be those strong community banks that are big and profitable enough to make a deal, but still at an uncomfortable size where regulatory costs coupled with profitability headwinds make organic growth quite tough. There’s a sense among bankers and analysts that $2 billion in assets is a comfortable size that companies below that threshold, yet in realistic reach of it, want to achieve. Meanwhile, banks who have been holding out for that meaningful interest rate hike that hasn’t come may be realizing acquisitive growth is the way to go. He also quoted Ben Mackovak of investment firm Strategic Value Bank Partners LLC as saying ““Some management teams were holding out, hoping for that uptick in interest rates. It’s very hard to see interest rates coming back to historical norms. So given that reality does it make sense for a bank to stay put making a return on equity that’s subpar?” In my mind community bank stocks make the single best choice for individual investors today.

The money will be made in community bank stocks as M&A picks up. The only question for you is are you going to join us on this profit rich adventure in community bank stocks? Click here to join Banking on Profits at 50% off for life and a free subscription to The Community Bank Stock Investor. Use coupon code 50OffBoP.

With the market at all-time highs I am continuing my mini buyers strike as chasing stocks higher is just no my bag, baby. I am not selling anything as owning stocks bought at lower prices is working out quite well for us right now but I am hoarding new money as cash We haven’t hit sell valuations yet but we are well above buy levels for most of our portfolio sticks so I am quite content to sit still and let things play out. If the market keeps moving higher we are in pretty good shape as my stock are doing quite well and of it moves lower we have lots of cash to deploy. It is not a bad position to be in at the moment.

The kids are back to school already here in Central Florida so the crack staff and I have a normal schedule once again and to her credit the staff never complains of being bored or my tyrannical control of TV and internet time. A few treats, maybe a little slice of whatever I am having for lunch, a walk or two and she is a happy camper. We are enjoying the late summer quite although both of us are quite distressed that the Orioles have lost 6 of 10 and are now in third place two games back in the AL East!

Cheers,

Tim

PS- Buy Community Bank Stocks , sit back and enjoy the rest of https://www.youtube.com/watch?v=uPlU9xYmWKI

Posted to The Community Bank Investor… on Aug 18, 2016 — 4:08 PM
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