How “good” banks may defend their dividends

“Good Guy” banks that received taxpayer dollars are under increasing pressure to eliminate or reduce their dividend. Here’s a guess at some of their defenses:

We did not want these billions. We took them against our will, and in the spirit of cooperation. If we refused, our more troubled brethren would have been singled out as possibly “insolvent”.

Furthermore, refusing a big cash injection would have left us at a competitive disadvantage. Besides, we never needed or wanted it. Even though the government’s terms were much better than any private source would have offered to us.

Will they keep paying big dividends while receiving taxpayer money? Mr. Obama has signaled strict, transparent, and less favorable bailout terms. We’ll see how it plays out soon. Next week should be another interesting one for financial stocks.

There’s also the seizure of First Centennial to consider, which was announced after the close Friday. Estimated cost to the FDIC: $227 million. Not a huge chunk, but still worrying. And there’s something… dishonest about Friday-evening press releases that makes me skittish.

Recovery.gov – Obama’s transparency pledge starts to take shape

Obama’s weekly address contained one juicy nugget about his pledge for transparency. I’m trying not to get my hopes up, but this part of the speech did just that:

Instead of politicians doling out money behind a veil of secrecy, decisions about where we invest will be made public, and informed by independent experts whenever possible.

The information will eventually live at www.recovery.gov. Sounds like a very good plan in theory, but I’ll withhold judgement until we get more details. Will transparency be retroactive, include previous investments, loan collateral, everything? I hope so. After all, Mr. Obama is a constitutional scholar. And nothing so far seems to gel with the constitution.

It’ll be interesting to see how bank stocks react on Monday morning. I think Obama has investors spooked about banks, and rightly so. Disclosing details about these guys could mean some common shareholders get wiped out. That’s what happens in an open, efficient market.

Banks crashed during Mr. Obama’s inauguration speech (related post here). He made pointed comments about greed, accountability, and bailouts. Not good things for common shareholders of banks with anything to hide. His decisions could dictate the future (or lack thereof) for some banks. A few days later banks spiked, after Geithner, who is perceived as a banking-insider, sailed through confirmation. That’s enough for now.

Evergreen Precious Metals: A Great Gold Fund

Want to invest in gold miners? Consider Evergreen’s Precious Metals Fund (EKWAX), which is up 17% on average over the past 10 years, compared with the S&P 500’s -1.5% avg performance.  So if you invested $10,000 in this fund 10 years ago, it’d be worth over $40,000 today, compared with a basically flat S&P. That’s incredible performance, consistently beating it’s peers.

Chasing past performance is usually a bad idea, especially with mutual funds. But this is a unique period in America’s history. We have unique risks like hyperinflation, and the only-whispered possibility of dollar collapse. Plus, gold stocks have taken a beating over the last year. EKWAX is down from a high of $81 to $46 today. So at least you’re not buying in at the very top.

Every investor should have some exposure to precious metals. There are a few ways to achieve that: physical ownership of bullion (coins/bars/grams), stocks, or mutual funds like EKWAX. Picking individual gold stocks is hard. It’s a specialized field, and requires a lot of industry-specific knowledge. I’d rather pay 1.x% to have an expert like Evergreen’s Michael Bradshaw manage it. He also has the option to buy preferred stocks, which are difficult for small investors to buy.

Isn’t gold for whackos and conspiracy theorists?

Gold and precious metals are arguably the best hedges against inflation (and the unspeakable; a currency collapse). Gold has been the world’s most important store of wealth for thousands of years. Some people suggest putting 10-15% of your investable assets into gold/metals, some suggest more.

People may give you strange looks when you mention gold as an investment (especially your broker/financial-advisor). Listen to what they have to say, but be skeptical and do your own research. There’s a growing number of people who believe that gold has been slandered by parties who have a vested interest in its decline/stagnation. Gold is viewed as competition to the dollar by some, and there are strong forces that want to maintain the status quo (dollar dominance). If you want to learn more, go to www.gata.org and browse around. They get somewhat conspiracy-theorist at times, but I enjoy reading content like this. Take with plenty of salt and skepticism, and make your own decisions. And check out the full-page ad they put in the Wall St. Journal, titled “Anybody Seen Our Gold?”. Very interesting stuff, especially if you enjoy a good controversy like me.

Disclaimer: This is not financial advice, always talk to a certified professional before making any investment decisions. I have no relationship with Evergreen investments, other than owning one of their funds. Nobody reads this blog, so it doesn’t really matter.

Staying Diversified on the Short Side

Staying diversified is just as important on the way down. Shorting homebuilders may seem like a sure thing, but crap like government intervention and desperate mutual fund managers can get in the way of a profitable short position.

So I added XOM as a new short yesterday, after hours at $77.95. Exxon has a LOT of meat left on its bones. And I don’t see how they can maintain that valuation with oil demand shrinking and gas stockpiles overflowing.

My basket of shorts is getting more diverse, still needs some work: financials (GS, JPM), homebuilders (TOL, CTX), commercial real estate (SPG), energy (XOM). I don’t have a tech, but am OK with that for now. I also own two bear mutual funds which provide good diversification, as noted here.

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