A lot of stories have lately come out in the media claiming that major U.S. banks might be nationalized. However, my experience suggests that there’s little likelihood of that happening.
However, my research indicates that there is a good chance that the U.S. government will take substantial positions in some of the nation’s larger banks in the same manner that it recently did with Citigroup.
By converting its shares of preferred stock holdings in commercial banks such as Citigroup and Bank of America into common equity, the government enables those banks to more easily attract capital. That’s because investors tend to seek a certain level of common equity in relation to a bank’s assets and debt.
Investor confidence in the viability of a bank tends to increase in direct proportion to the bank’s ratio of common equity to debt.
In regard to my investment newsletter, The ETF Strategist, I’m continuing to recommend that aggressive investors invest in regional banking ETFs, such as the KBW Bank Index (KBE). Although KBE has pulled back substantially since I recommended it for purchase in mid-October, my models indicate that commercial banking stocks are substantially oversold and that they’ll rebound sharply during the months ahead.
I urge investors to keep the following in mind — trying to pick a bottom is a foolish endeavor. The more sensible approach to investing in stocks is to buy them when they’re trading at bargain prices relative to their longer term earnings capacity and when other investors are shunning equities.
Banking analyst Dick Bove, who’s been right on during this financial crisis, agrees with my thinking. Last week, Bove told investors that he recommends aggressively buying certain banking stocks, such as Bank of America.
In regard to equity prices in general, my experience suggests that stocks could fall further during the next couple of weeks as investors digest President Obama’s socialistic federal government proposals. That’s because hard-working entrepreneurs won’t sit idly by while Obama attempts to steal more of their income in the form of higher taxes.
Although the government will obviously need to increase its revenues during the years ahead to continue funding massive entitlement programs like Medicare and Medicaid, a vast amount of empirical data clearly shows that increasing taxes is the wrong route to take. Investors are well aware of such ill-conceived plans. That’s the primary reason that equity prices have fallen sharply over the past few days.
On a more positive note, my models continue to indicate that the worst is over for the U.S. economy and that economic conditions will improve during the second half of this year.
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