More BAC and Financials

Accumulate more financials. This sector is going to lead the last leg of any rally.

Consolidation in the materials and industrial sectors will leave the DOW on a slow climb upwards as Financials recover from its mess.

Low Credit Losses is the key idea to take away.. Financials will recover huge.

With QE2, we are expecting inflation and growth in the US.

More Jobs will be artificially created with this stimulating monetary policy leading to lower credit losses.

Housing market will improve due to the inflationary trend where people usually want to take up mortgages to hedge themselves from losing purchasing power.

Banks which have been beaten down real hard due to large amount of Non-Performing Loans will finally recover when the unemployment figure goes below 9%. The climb to 10% was really fast, the drop back to 5% will take another 2 years. With this projection, banks are expected to hit normalized earnings by 4th Quarter of 2011.

Analysts are now expecting banks to reach normalized earnings by 2013… I think that’s a little too pessimistic. But even if it is true, then financials are dirt cheap.

Using TBE valuation of 1.4X for LARGE CAPS… (WAY BELOW NORMS of 2X to 2.5X)

BAC should be $18, JPM should be $48, WFC should be $33, C should be $5.

Using Normalized earnings…. (Assumed earnings power in 2014)

BAC should be $25 ($40billion earnings power!)

JPM should be $60 ($30billion earnings power)

C should be $6 ($30billion earnings power)

So by most valuation standards, Financials are looking extremely cheap.

Reasons for poor valuation now…

- LAW SUITS
- Mortgage Putbacks, REPS/Warranties,
- Unemployment rate too high

Recommended trades…

BUY BAC, JPM, RF, FAS

 

Nice Dinner at friend’s place