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(B)(N) Banking in America

October 18, 2013

Drama. The earnings season is upon us and the banks are stepping up to be counted, one by one. Rather than wait for the results, we should be ready for them, good or bad. If good, that’s good; if bad, there might be a buying opportunity if we’re sold out on our stop/loss or our puts are suddenly in the money. Please see Exhibit 2 and 3 below.

Obviously, our approach is different. We know that earnings don’t matter and that volatility is not risk (end of story) and that those two facts dispatch a world of worry in the flat world of investing and give us something that we can embrace because we can understand what’s left – we invest our money not to have a better chance of losing it but in order to obtain a hopeful non-negative real return in our portfolio. One company more or less doesn’t matter. It’s the team that counts and we will buy and hold anything and everything that’s trading above the price of risk, depending only on our budget.

Just Say No

Just Say No To 6.25% (=1/16)
Think Outside The Box

Economists hate that idea because they don’t know what to do with it. How does one invest their money in order to obtain a hopeful non-negative real return in a portfolio?

Shouldn’t we rather invest our money to obtain an optimal return in the context of all economic factors – the best possible in the best of all possible worlds?

Shouldn’t we rather respect the iron law of The Risk/Reward Equation that relies on super-efficient but non-existent markets and the differential calculus so successful in calculating the trajectories of cannon balls, the planets, and the best field with sides (a fence) summing to 1 (mile) and the largest area for the sheep to graze in?

The answer is “No” – such alleged optimization is utterly nonsensical – but the US banks and many others were not able to say “No” to that intriguing and marketable idea for several years leading up to the banking crisis in 2007 and the general failure of “wealth management” to provide non-negative real returns for its customers. The thought is simply not built-in and the results are necessarily unpredictable but our solution does not require us to flee the markets and jump into hapless index funds and macro-economic parables. It requires us to embrace the markets, not with an iron law but with an iron grip.

The American Piggy BankOutside of the Box +27%

The American Piggy Bank
Outside of the Box +27% More

Sometimes, we need to think outside of the box. For the “best field” problem, pentagons, hexagons, and so forth, are better than the square, but a circle is best (and there is nothing better absent fractal dimensions which some new economists are working on; the area is always infinite but we can’t find the sheep) and gives us a +27% improvement in area per unit of fence which means more sheep, fatter pigs, and more money.

And things appear to be changing and although the litigation is far from over, the banks are reaching out for more “bankerly business” (Reuters, October 16, 2013, Bank of America posts profit, fueled by consumer banking) and because so much of our investment money is tied up on the banks, and in them, we’ll follow our money and see how they’re doing this year despite the headwinds (Reuters, October 15, 2013, Insight: Three years on, Fed keeps BoA-Merrill waiting on commodity trade).

There are well over 6,000 FDIC insured deposit taking institutions or regional “shops” in the United States, but only five account for 50% of the customers’ money, and another five brings us to 70% and another dozen typical regionals to 80%, notwithstanding that more than six hundred of the banks have assets in excess of $1 billion (which is 10,000 mortgages or small-business loans of about $100,000 each and, typically, too small a matter for the bigger banks absent the “securitization” that brought them down in 2007). Please Exhibit 1 below.

All of these banks are in the Perpetual Bond™ now and have been for most of the year (please see Exhibit 2 and 3 below for details). The leveraged portfolio (Portfolio line) has returned +53% so far this year and is still active; if we were to sell all the stocks and pay off the margin account, the return is +27% plus dividends of another +2.2% (please see Exhibit 3 below, Total line).

Our take home pay, as investors, is a lot better than the banks themselves. They returned 0.6% of earnings on assets, or 7.3% of earnings on equity (please see the bottom line in Exhibit 1 below) but on earnings of $115 billion in the last year, the banks have paid $40 billion in dividends to the shareholders for an average yield of 2.2% and a 34% return of earnings to the shareholder.

And whereas the banks added $115 billion less dividends of $40 billion ($75 billion before taxes) to their balance sheet, investors added $285 billion to their market value.

Exhibit 1: US Banks Portfolio – Fundamentals

Return on Assets - October 2013

Return on Assets – October 2013

(Please Click on the Chart to make it larger if required.)

Exhibit 2: US Banks Perpetual Bond™ – Prices & Portfolio – October 2013

US Banks Perpetual Bond - Stock Prices & Portfolio - October 2013

US Banks Perpetual Bond – Stock Prices & Portfolio – October 2013

(Please Click on the Chart to make it larger if required.)

Exhibit 3: US Banks Perpetual Bond™ – Portfolio & Cash Flow Summary – October 2013

US Banks Perpetual Bond - Portfolio & Cash Flow Summary - October 2013

US Banks Perpetual Bond – Portfolio & Cash Flow Summary – October 2013

(Please Click on the Chart and again to make it larger if required.)

For more information on the Chart Elements, please see our recent Post, The RiskWerk Company Glossary.

For more on what risk averse investing has done for us this year, please see our recent Posts on The S&P TSX “Hangdog” Market or The Wall Street Put or specialty markets such as The Dow Transports & Utilities or (B)(N) The Woods Are Burning, or for the real class actionLa Dolce Vita – Let’s Do Prada! and It’s For You, Dear on the smartphone business.

And for more stocks at high prices, The World’s Most Talked About Stocks or Earnings Don’t Matter – NASDAQ 100.

Postscript

We are The RiskWerk Company and care not a jot for mutual funds, hedge funds, “alternative investments”, the “risk/reward equation” and every other unprovable artifact of investment lore. We have just one product

The Perpetual Bond
Alpha-smart with 100% Capital Safety and 100% Liquidity
Guaranteed
With No Fees and No Loads on Capital

For more information on RiskWerk, please follow the Tags or Categories attached to this Letter or simply enter Search for additional references to any term that we have used. Related data may be obtained from us for free in a machine readable format by request to RiskWerk@gmail.com.

Disclaimer

Investing in the bond and stock markets has become a highly regulated and litigious industry but despite that, there remains only one effective rule and that is caveat emptor or “buyer beware”. Nothing that we say should be construed by any person as advice or a recommendation to buy, sell, hold or avoid the common stock or bonds of any public company at any time for any purpose. That is the law and we fully support and respect that law and regulation in every jurisdiction without exception and without qualification to the best of our knowledge and ability. We can only tell you what we do and why we do it or have done it and we know nothing at all about the future or the future of stock prices of any company nor why they are what they are, now. The author retains all copyrights to his works in this blog and on this website. The Perpetual Bond®™ is a registered trademark and patented technology of The RiskWerk Company and RiskWerk Limited (“Company”) . The Canada Pension Bond®™ and The Medina Bond®™ are registered trademarks or trademarks of the Company as are the words and phrases “Alpha-smart”, “100% Capital Safety”, “100% Liquidity”, ”price of risk”, “risk price”, and the symbols “(B)”, “(N)” and N*.

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