Dear Reader,
A lot of folks have written in asking why Warren Buffett is selling Bank of America stock (SYM: BAC)…
Is Bank of America in trouble? Is it a bad company? Is there any real reason to sell it?
So I figured I’d touch on that for a minute here.
I’m not Warren Buffett; I’m not in his head, but here’s the basic rule:
When the Fed starts to lower interest rates, bank profits go down.
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And that’s because, let’s say the Fed borrows money at 1%, and they lend money out at 5%…
When the Fed starts lowering rates, their margin – the spread between the rate at which they borrow money vs. the rate they charge to lend it – starts to shrink.
Bank stock profits are going to go down if the Fed keeps lowering rates.
Period. That’s a law of economics.
It’s not a Dylan Jovine rule… it’s not a theory… this is just the way it is.
Banks make money by lending money, and when the amount they are able to charge for lending money goes down, their profits go down. That’s the bottom line.
So, Buffett’s selling Bank of America in all likelihood because he knows the trade is done – at least in the short term.
And that’s one of the reasons why we haven’t recommended any bank stocks in the last few months.
We did recommend Bank of America last year and then sold shortly after for a nice little gain. Not a home run but a base hit, 30%-35%.
But we haven’t recommended any bank stocks except one in Breakthrough Wealth – a special situation. But that is a very special situation.
Now, if you own say, JPMorgan Chase for 20, 30 years and this is one of those things you’re holding onto, I would not sell that, but if you picked up some bank stocks to ride the interest rate run, now is the time to sell them – in my view.
Jamie Dimon, the CEO of JPMorgan Chase, was asked the other day his opinion on doing stock buybacks. He laughed and basically said, “our stock is too expensive.”
So that tells you something about whether you should be buying bank stocks – especially on banks that lend money as their core business – home loans, credit cards, etc.
As interest rates fall, profits are going to go down.
So, that’s my opinion. The only exception again to that rule, for those of you watching who own Breakthrough Wealth is that special situation we have in our portfolio.
But that is a very special, unique situation.
Again, generally speaking, I would be out of banks.
And again, to make this perfectly clear to get ahead of any questions – if you’re a long-term bank investor – 10, 5, 20 years – don’t even worry about this.
Bank stocks go up, they go down; they’re cyclical based on interest rates, the expansion of the economy… I wouldn’t even think about it.
But if you’re a trader and invested in the last year or two…
You’ve ridden the cycle up, this is the signal to sell.
When the Fed starts to lower rates, bank profits will shrink.
That’s just the way it works.
And frankly, you have another incentive to sell – the tax regime could be very different next year.
Remember, we have $5 trillion in tax cuts expiring – basically the Trump tax cuts. They were set to sunset after next year – so they’re going to go away.
There will be a lot of haggling about how to do this without such a big hit to the economy.
If you’ve watched my Midnight in America documentary you know where I stand.
We’re running deficits that are not sustainable.
I’m a big believer in not running deficits like we’re fighting a two-front war.
Because we’re going to hit a wall sooner than later by running those kinds of deficits.
Here’s what will happen, and 4 steps to prepare (these 4 steps made me a fortune in the Great Recession).
If the Democrats take power the tax regime will look different than if the Republicans take power. Not that I want to talk politics, because no one wants to hear me talk about that – you have your own opinions on politics.
My mom always taught me, you don’t talk about politics or religion in public, so I’m going to stick with that.
Here’s the bottom line:
If you’ve owned bank stocks forever, don’t even think about it.
If you’ve owned bank stocks a year or two or three and you’ve ridden the interest rate curve, I personally would be out of them.
Because their profits are likely going to go down on the Fed lowering rates.
Again the only exception is that one special situation bank stock because that is a rare special situation and a long-term special situation at that. We’re targeting 1,000% here.
“The Buck Stops Here”
P.S. If you’re a big Buffett fan like I am…
This is my favorite “income” strategy and it’s the same one Buffett uses.
Jim Cramer says, “It’s just like hitting the lottery.”
Billionaire Mario Gabelli says, “It’s how we make money.”
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Go here now to get on our list for tomorrow’s trade.
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