Bank on Dessauer
08/26/2005 12:00 am EST
With experience and expertise that spans the globe, John Dessauer assesses domestic opportunities with a full understanding of the impact of international developments. Although contrary to many, his analysis points him to potential gains for the US financial sector.
"The driving force behind the Fed rate increases is that they worry that something might happen to cause inflation. For example, if oil rises too far, then the Fed needs to be in the position where they can bring rates down and become more accommodative. Under no circumstances is the Fed going to let oil cause inflation. How far will they go? We’re at 3.5% and going higher, to maybe to 4%. The number to watch is not the real growth rate, which is being pushed around by oil prices. The number to watch is the nominal growth rate, which was revised upwards for the first quarter to 7% at an annual rate. That’s too high for the Fed to be comfortable.
"The second quarter number, which is still subject to revision, came in at 5.9%. That’s a nice, slower economy in nominal terms. I think that makes Greenspan & Co., a little more comfortable. I think they would like to see that number stay under 6% for the third quarter. To play it safe, they will probably mark rates up at least one more time. But I don’t think long-term rates will go much higher, as there’s just too much money out there looking for yields. My guess is that long rates are not going anywhere, unless the Fed loses control of inflation, which I seriously doubt.
"Meanwhile, a developing story is the global savings glut. There is so much money sloshing around the world, and that is affecting banks and financial institutions. Most investors have a one-dimensional model of a bank. The believe that if short-term interest rates go up and long-term interest rates don’t, then margins at these banks will get squeezed. Well they do in some areas. But, increasingly over the years, banks have become financial intermediaries. So whether they get their money from an interest rate spread or from fees, they still get it. And since Wall Street has relatively low expectations for the banks, I think that is probably a good place to invest.
"Citigroup (C NYSE) now has a 4% dividend yield and the chance for a nice upward surprise as we march forward. CEO Charles Prince has been cleaning up many regulatory messes from past management. Past errors have taken a toll on Citigroup’s reputation and ability to generate profitable new business on world markets. This showed in the second-quarter results, as earnings from operations fell 7%, compared with 2004. But Citigroup was still very profitable. Earnings estimates for this year are about $4.20 a share. The stock is trading at less than 11 times that estimate. The historical average p/e is much higher. Citigroup is a long-term buy.
"Wachovia Corp. (WB NYSE) is one of the dominant banks in the Southeast, a fast-growing part of the country. And its South Trust deal extends Wachovia’s reach into another fast-growing market, Texas. The bank had an excellent second quarter. When merger-related expenses are excluded, earnings per share were $1.07, or $0.02 better than expected. For this year, estimates are for $4.30 a share, rising to $4.80 in 2006. The stock has been slightly down this year because of persistent rumors that there could be a dilutive major acquisition. However, Wachovia has shown in the past that it will only do deals that are attractive to its shareholders. At under 12 times this year’s earnings estimates, and with a 3.5% yield, Wachovia is a very attractive buy.
"South Financial Group (TSFG NASDAQ) reported second-quarter earnings of $0.45 a share, down from last year’s $0.48, and the stock pulled back. This is very misleading because there are significantly more shares outstanding this year than in the second quarter last year. The increase is due to a major acquisition of a Florida bank, which enhanced its long-term attractiveness, as Florida is one of the most attractive banking markets in the US. South Financial is led by an experienced team of bankers and has a clear long-term business plan. Wall Street’s impatience astounds me. Why sell South Financial when its underlying growth rate is intact? We will soon be past the share dilution anniversary, and double-digit earnings growth will return. South Financial is a buy."