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Making the Bull Case for Financials Courtesy of QE3


The biggest impact of QE3 on the banks is the promised stability it offers the housing market. This translates to improved stability for banks that are holding US mortgages.

Regarding the second problem for financial services, the largest banks still carry many toxic assets on their books – mostly in the form of US mortgages that have been packaged into fixed income securities. These firms have had to raise capital to buttress their balance sheets because of the losses on these toxic assets. It is difficult for investors to put a size on the problem on the books of these largest banks because the insight to the exact holdings is unclear. This uncertainty just continues to weigh down on the valuations of many of the largest banks.

Despite these continued challenges for financial services companies, I can see a light at the end of the tunnel -- and it is not a train!

QE3 is now officially announced by the Fed. QE3 will keep interest rates for mortgages low for the foreseeable future. In fact, this is just a general continuation of the trend to keep interest rates low across the board.

At first glance, lower interest rates seem like a problem for financial services companies. Lower interest rates promote tighter and lower Net Interest Margins (or NIM). NIM is the primary source of revenue for most financial services companies. Think of NIM as the business model of loaning money-borrowers at one rate with your source for loaning that money at a lower rate.
No positions in stocks mentioned.
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