Happy Valentine’s Day from Smart Money and a gift from Jamie Dimon who surprised the markets with a large purchase of JP Morgan shares. He announced on Thursday that he was buying 500,000 shares of the company that he runs. He is investing about $25 million of his own money. The stock was down 20 percent for the year. Is this a sign that JP Morgan stock is undervalued?
Mr. Dimon already owns 6.2 million shares and he hasn’t been a big purchaser of stock. The last two times he bought 500,000 shares was back in July 2012 and January 2009. He’s not the only one, several bank insiders have bought stock in the past couple weeks.
“These purchases have been significant. In the case of Citigroup, the CEO and Chairman bought $1 million each. Four insiders at Huntington Bancshares recently bought $1.3 million. Radian’s CEO not only bought shares, but the bank initiated the first company buyback plan.”
Not only are U.S. bank stock prices down 20 percent on average, but most of the big banks are trading at a substantial discount to tangible book value.
- Goldman Sachs: 0.87
- Regions Financial: 0.84
- Comerica: 0.79
- Morgan Stanley: 0.72
- Bank of America: 0.72
- Zions: 0.72
- Citigroup: 0.58
JP Morgan is one of the few banks that trades above tangible book value at 1.1 and Wells Fargo is another at 1.62! However, Mr. Dimon has a track record of buying his company’s stock at opportune times.
I am waiting for the big banks to get uglier
My previous post contained reasons why the European banks are in terrible shape and how the selloff in Europe has spread to North American banks. Investors are worried that there is a risk for some European banks to fail. I expect more negative news regarding some Italian banks, plus ongoing problems in Greece may resurface soon, adding more fear of a banking crisis.
I have also recently learned that sovereign wealth funds of oil-producing countries have 48% of their assets invested in the financial sector. I believe that many of these funds have been selling bank stocks because they need money to fund their social programs at home due to lower-income from selling cruel oil.
Now, bank earnings for the four quarter were very good but it didn’t stop the selloff. First quarter earnings could be ugly if the price of crude oil doesn’t find a bottom soon. Fears of oil trading below $20.00 will add doubts that the banks can handle large loan losses from the oil patch.
The Federal Reserve has lost some credibility, more reactive than proactive
In remarks Thursday to a Senate committee, Fed Chair Janet Yellen acknowledged that the central bank hasn’t even studied the possibility of negative interest rates. Hello, the ECB, BOJ and the Swiss have already adopted negative interest rates. Don’t you think that the Fed should have done their homework regarding the possibility of adding another policy tool to their tool box to avoid a U.S. recession? I am not even sure that it is an effective tool but there are lots of data that should be studied.
The Fed is still on the fence regarding future rate hikes which is still a big issue for me. I am waiting for a clear direction on interest rate policy before investing in U.S banks. Being Canadian, I have only a limited amount of U.S. funds to invest.
That being said, U.S. bank stocks are cheap and most of the major ones are trading at big discounts to book. I would look for more announcements of insider buying and share buybacks. They could stay cheap for the next quarter or two but for long-term investors, insider buying is a positive signal to allocate some funds into the financial sector.