As a contrarian by nature, I have always made money going against the trend. When gold bullion was so depressed in the late 1990s, I saw it as a great opportunity. When U.S. real estate was “frothing” in 2005, it was time for me tell my loyal readers to exit. In a nutshell, some investors do very well going against the general trend that the majority of investors follow, against “the herd” mentality as they say.
Many great American fortunes have been made by buying an investment when most investors were panic selling. You will likely not read this anywhere else but here: I see a great opportunity developing in financial stocks as panic selling reaches the point of paranoia.
Fannie Mae, one of the two largest home lenders in the U.S., paid a record premium yesterday when it raised $3.0 billion to shore up its balance sheet. To attract investors to its newly issued two-year notes, the company offered a yield of 3.27% — almost 75 basis points higher than the current yield on two-year U.S. T-bills.
What is most interesting is that Fannie Mae was created by Congress to promote home buying in the U.S. Like Freddie Mac, Fannie Mae has a congressional charter that gives it tax benefits.
It is highly unlikely that the government would ever let either Fannie Mae or Freddie Mac go bankrupt, so there is an “implied” government guarantee on the bonds they issue. Obviously, that didn’t stop the market from asking for higher yields from Fannie Mae.
At this point, with the shares of the largest U.S. financial institutions near record lows, I believe we are getting close to a bottom in the financial sector. In fact, investors may be overdoing it on the sell side.
Freddie Mac shares are at their lowest level since 1992. Same for Fannie Mae. You can buy Lehman Brothers shares today at the same price you could have in 2000. Same for Merrill Lynch.
I track the shares of the big six Canadian banks closely. These banks are among the largest and safest in the world. Unlike American banks, Canadian banks need a charter from the federal government to operate and are highly regulated.
At present, the yields on some of the Canadian bank stocks are extremely attractive at over six percent. These banks had very little exposure to the U.S. subprime mess. If you are like me and believe the long-term trend for the U.S. dollar against other world currencies will be down over the next few years, these banks’ stocks could soon present a great opportunity for American investors looking for stock growth and a profit on the currency play.
I continue to monitor the financial stocks and am getting close to turning bullish on them. Of course, I’ll keep my loyal readers posted.