Disclaimer: The content from The Daily Reckoning Australia’s global cast of characters is their own view and opinion. It is not to be taken as investment advice.
Easy credit is coming once again
Today’s Daily Reckoning Australia brings you another potential trade brewing right now in the global markets.
Every signal says the US economy will keep ploughing on for another 12 months.
That puts one sector right in the sweet spot. More on that below.
But just what are those signals?
The first one is US stocks. They just keep pushing higher.
The Dow Jones hit an all-time high in the last US session. That’s notable because the companies in the Dow are the big US multinationals.
They’re buffeted the most by what happens around global trade.
It’s highly likely this is the reason why the Dow has lagged the other two big US indexes this year. Those are the S&P 500 and the Nasdaq 100.
The Dow appears to be leaving global trade worries behind.
The second signal is the US bond market.
Yields are surging up, too.
The ten-year US government note yields well over 3% now. In fact, it’s at the highest level since 2011.
This is a big shift.
You might recall we’ve heard a bit this year about the ‘flattening’ yield curve, and how this could signal a coming recession.
Those voices are dying down now.
Yields are rising as the market prices result in higher growth and inflation.
All this puts one sector right in the spotlight.
The Fed is about to change the rules here – again
Perhaps you already guessed.
I’m talking about US bank stocks.
A growing US economy should, all else being equal, increase demand for loans.
Also, rising interest rates are generally helpful to the interest margins that banks can earn.
This is a sweet spot the banks can flourish in.
That’s not all.
The Wall Street Journal reports that the US big banks are trading on a forward price-to-earnings ratio of 10.
That seems rather incredible considering that US stocks are in one of the longest bull markets of all time.
Oh, and what’s this?
The Federal Reserve is considering loosening the criteria around how it defines a ‘big bank’.
This is part of the Trump administration’s efforts to deregulate the sector.
A bit of backstory is helpful here.
Much of current US bank regulation came in after the 2008 financial crisis.
It’s slowly being dismantled.
One of the proposed changes refers to the amount of ‘liquidity’ a bank needs to have on hand. This refers to how much short-term cash it can raise quickly to meet its liabilities.
Imagining a lot of people turning up at a bank and demanding their money back is one way to think about this.
There is a limit to how much the bank can meet these demands at any one time.
After 2008, the US regulators insisted banks hold more short-term assets that can convert to cash quickly so they don’t get caught as short as they did in the credit crunch following the subprime crisis.
Why would they want to change such a thing?
Here’s the key quote, also from the Wall Street Journal:
‘A financial company following a looser liquidity rule could have more freedom to jettison Treasury bonds or other safe assets and expand riskier, more profitable activities such as loans.’
Yep – the banks that fall under the new criteria can expand their lending.
Remember, a loan is an asset for the bank.
US rule change equals credit boom
This is setting up the USA to keep growing as more bank credit filters out into the economy.
It’s not guaranteed, of course. Nothing in the market ever is.
But every signal I see suggests this is the exact scenario to plan for.
I hear all the time how ‘expensive’ US stocks are. I’m sure you do too.
So often, this depends on what ratio or metric is being used, but we’ll leave that for another day.
For the purpose of today’s Daily Reckoning Australia, it’s enough to say that there is a sector of the US stock market that clearly appears at an at least reasonable value, if nothing else.
Whether it will turn into a lucrative idea from here remains to be seen.
I’ve said all along for 2018 that for US stocks to keep going higher, there had to be strong momentum from sectors other than the tech stocks.
Banks and energy were my picks earlier in the year.
The oil angle has worked better than the bank one – so far.
Bank stocks have actually lagged the overall market in the USA.
I suggest that’s going to change over the next year.
It’s another potential addition for your watchlist.
Certainly, it’s something I’m going to track in my new service, 100% free, called Profit Watch.
The markets throw up investment ideas almost every single day.
From Monday next week, I’ll bring you my best ones, all the time.