Warren Buffett’s Bullish On the Banking Sector: Here’s What I Think

0 | By Shah Gilani

It’s been a whirlwind of a few months.

I’ll be honest, I am not comfortable with this market. Monday, the Dow swung more than 1,500 points in one day.

From the month of October, the Dow has swung more than 11,000 points, that’s a 41% swing in terms from the top to the bottom. That is a staggering amount of volatility, and I don’t think the market is done yet.

That being said, I’ve received tons of questions from my readers about everything from the role of high-frequency trading (HFT) to what I think about Warren Buffett’s bullish stance on the banking sector.

I’m always interested in hearing your feedback, and if you didn’t get a chance to ask me something before this issue, you can send me an email here.

Here’s what enquiring minds want to know…

You’ve Got Questions, I’ve Got Answers

Here are your most-asked questions:

  1. Why not outlaw high-frequency trading? It doesn’t seem to have any redeeming social value. – Randy A.

That’s a great question, unfortunately the answer is anything but great. It’s about money… As usual.

There’s so much money being made in HFT that, for years, the players have slathered lobbyists with money to exert every pressure on the inanely ignorant, and bought and paid for SEC to not only allow HFT, but to actually aid and abet it.

The SEC oversees the exchanges, who – with the blessing of the SEC – grew their server floor space (to the size on several football fields) so HFT operators could “co-locate” their superfast servers right next to the exchange’s servers, to be able to read and front-run our orders.

That’s power. The kind of power that’s self-perpetuating because it begets more money to keep legislators paid and regulators as lap dogs. There is no redeeming value to 95% of what HFT is about. It should be illegal.

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  1. What is the most important takeaway you have regarding volatile markets going into 2019? – Thomas F.

What’s important to understand about the crazy volatility we’re seeing more and more of is it’s directly related to HFT. And since that’s not going away, neither is the crazy volatility we’re seeing.

The first order of volatility is about investors making decisions, about fear and greed, about speculation, and about investing and profit-taking.

The second order of volatility is about the mechanics of the markets, about HFT’s undue and overbearing influence, about too many exchanges and dark pools, about decimalization, about the lack of a central order book. The new order of volatility isn’t going away any time soon, or ever. It will subside in up-turning and bull markets.

But in sideways and downward-heading markets, it will make life for investors virtually intolerable. Going into 2019, that’s what we’re facing – more of the kind of volatility we’ve been seeing since February, then again in October.

2019 is going to be a stock trader’s market. Not a stock pickers market, a stock trader’s market.

Buy ’em and sell ’em higher, but take your profits. Short ’em and cover with quick profits, but take your profits.

It’s a trader’s market now, get used to it, because this is now our future. For how long is anyone’s guess, but I’m guessing for at least another year – or maybe two.

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  1. I’ve heard lots about your products, but I do not understand carbon trades, neither does any other person that I have asked, even those selling put options. Can you educate me on carbon trades? – Alton B.

Sure thing, Alton. Carbon trades are similar to, but not quite like, rolling your options positions. When you roll an options position, you’re closing out a position that’s expiring, and buying another option on the same side of the market that’s got more time to expiration. In other words, you’re extending your play.

Carbon trades are about taking a similar position to one you’ve already closed out and made good money on, and reconstituting a similar position using another option. Sometimes we carbon trade using the same strike but with a further out expiration, but more often the carbon trade isn’t an exact replica, meaning we’ll use a further out-of-the money put or call that we can buy less expensively, expecting the underlying stock to continue in the direction its already gone, so we can profit again on the same play.

If you’re interested in learning more about the ins and outs of carbon trading, click here to view my full presentation.

  1. Warren Buffett said he’s bullish on the U.S. banking sector, now that rates are rising. Should I follow his word? – Ophelia M.

No, not yet. Sure, banks traditionally benefit from rising rates. But, there’s more to rising rates, because there’s more than one rate.

Banks’ net interest margin, or NIM (the interest spread between what a bank pays to borrow short term, like in the fed funds market, and lend long term by making loans and mortgages), increases as long as the spread between long and short rates increases, or more properly said, widens. That’s not happening now.

For example, the spread between the 2-year and 10-year Treasuries is actually narrowing, so NIM isn’t expanding as Warren expects it to. NIM may eventually, but until it widens significantly there’s no need to chase underperforming financials, especially banks.

Besides, banks are loaded with “leveraged loans” and other leveraged “assets” that are subject to down-round pricing as rates increase, if they aren’t adjustable rate loans. Even if they are adjustable, borrowers, who are themselves less than prime borrowers and are already leveraged in terms of their balance sheets, might have a hard time making jacked up debt service payments.

Then there are the hedge funds, increasingly stepping into the arenas where banks lend. All in all, I don’t see banks the same way Warren does. In time that may change, but right now buying banks is a speculative trade.

I’ll be back soon with more, hopefully good, news. Right now, just hang tight, and get ready for anything. 2019 may not be fun, but I’ll be with you every step of the way, answering any tricky questions you may have.



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