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Making the Bull Case for Financials Courtesy of QE3

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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.

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The continued compression on NIM will hurt financial services companies over the short term. These firms that rely on NIM will certainly continue to feel pressure on their bottom lines in the short run, but I fully expect these firms to find new fees to charge clients. I don't think these firms have any choice in the matter. Prolonged compression of the revenue associated with NIM through 2015 will not be acceptable to shareholders. So, expect many financial services firms to generate new revenue streams through new fees they can charge clients. I expect that every firm has some pricing power in the margins. And I guarantee that every large financial services company has been discussing the potential for raising prices and fees. It will not be a big boost, but it will be something.

To me, the biggest impact of QE3 on the banks is the promised stability it offers to the housing market. Continued lower mortgage rates will help promote more re-financing and help to support a potential floor in housing prices. Even if housing prices might decline further, the decline will certainly be slowed by the support of lower mortgage rates from the Fed.

Stability in the housing market and increased refinancing should translate to improved stability for the banks that are holding US mortgages. That kind of stability might help to clear away some of the uncertainty related to the balance sheets of the largest banks. Or, at the very least, it should help buttress those banks and help them continue to "earn their way" to a healthier balance sheet. If these firms can get their balance sheets in order, then that will equate to more shareholder value – either in an improved stock price or in some release of capital that is returned to shareholders.

My firm is long the Financial Select Sector SPDR (XLF). We are also long Bank of America (BAC). Both of these investments stand to benefit in the long run from improved stability in the housing market – even if the short-term pressure on NIM might hurt some. We plan to stay long both of these positions, and any pullback in JPMorgan (JPM) we would view as a gift, given that it is best-in-breed in this sector. And, as usual, we are hedged in every one of these positions.
No positions in stocks mentioned.
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