WASHINGTON, July 14, 2016 – As of 1:30 p.m. EDT, Thursday markets seem to be on a calmly bullish path, once again puzzling to many given the violent gag reflex exhibited by stocks and bonds alike just a couple of weeks ago after the UK’s pro-Brexit vote. Most sectors, including most financials, have been catching a bid, although REITs and MLPs are a bit wobbly as they were in Wednesday’s trading action.
In other news, the Indianapolis Star is reporting that Indiana Governor Mike Pence will indeed be Donald Trump’s announced running mate. We’ve received no confirmation from The Donald. But according to the paper, Pence has withdrawn from his 2016 race to win a second term as Indiana’s governor. The market appears to be little interested, but we thought we’d let you know anyway.
Financials—which generally benefit from a higher interest rate environment—have been in a pickle since earlier this year as it gradually became evident that the Fed, despite its strongest desires, was increasingly reluctant to pull the trigger on another interest rate rise, hemmed in first by the continuing economic mess in the People’s Republic of China and in late June by the pre- and post-Brexit hysteria.
The longer interest rates remain stagnant, or, worse, head downward, the longer it will take for the nation’s banks—particularly the TBTF (Too Big To Fail) variety—to get back to historical capital appreciation and dividend return levels.
Yet today, we learn from CNBC that in addition to JP Morgan Chase (symbol: JPM) CEO Jamie Dimon’s grandly announced pay raise for “lower level” employees like branch bank tellers, JPM would be eliminating a number of those branches—yet actually hiring even more tellers.
The Maven pondered this move a bit, finding it initially more puzzling than JPM’s magnanimous lower level employee pay hike. Banks all over the country have not only been closing down branches to save on overhead. They’ve been sacking tellers and branch managers like it’s been going out of style.
Case in point: We’ve banked with regional powerhouse BB&T (BBT) for years, initially attracted by available free checking plus a branch management system that, in keeping with the then-corporate philosophy, ran each branch much in the way that small local banks used to run them, up close and personal. Most customers, in fact, prefer this kind of banking experience, even in our current age of electronic everything.
But in recent years, at least at our local Northern Virginia branch, BB&T has either sacked or transferred any number of branch managers here, has badly understaffed its desk personnel and has severely trimmed the number of on-duty tellers. Now, when you pull your car up to the drive-in deposit window, one of the front desk tellers generally needs to run to the window from the front desk, run back to the front desk to complete a current transaction, then run back to the window to complete yours.
Or, if you’re at the branch window, the opposite often occurs.
Recently, I dropped in to my local branch to request an auto loan to buy a late-model used car to replace my DOA 2003 Saturn VUE. After a considerable period of time, the branch manager became involved and also tried to upsell me to a mortgage refinance, promising to get right back to me on that auto loan.
The manager never did until 2-3 days later, after which time I’d already bought the car obtaining excellent finance from the dealership in about 10 minutes. Turned out this manager was platooning every other day to manage another area branch as well, indicating that BB&T is not only understaffing its branches.
Clearly, the bank is not even staffing each branch—or at least many of them—with full time branch managers. Worse, it’s apparently sacking managers who, in a short period of time, aren’t able to come up with enough upsell business.
What happened? The Great Recession, Dodd-Frank, and the inability at least for larger banks to generate much profit from housing or consumer loans, given onerous restrictions on loan qualifications by the average Joe, as we’ve discovered many times over the last several years after failing to qualify for real estate loan re-fis.
On one level, at least, this nonsense is not the fault of banks like BB&T. But still, this situation doesn’t help either the average consumer or the small business, neither of which or whom can readily finance this or that even as the Warren Buffets of the world can finance anything they want.
Which gets us back to our musings on JPM. The Maven is making an educated guess as to why Dimon is really raising lower level salaries, cutting branches but increasing branch staff, including tellers. Dimon may very well be doing a sort of “reverse BB&T.”
In other words, by shutting down JPM’s least productive branches, then staffing up those branches that remain with both staffers from closed branches and new hires, JPM ends up with fewer branches but totally responsive full staffing, thus getting away with the kind of bare-bones nonsense I’ve been dealing with at my local BB&T.
With more, and presumably friendlier (and higher-paid) staffers at remaining branches, JPM can offer better, faster, more responsive branch service, thus attracting cheap funds from more John Q. Public depositors, which will not only fund increasingly asinine Dodd-Frank capital requirements but also free up scarce dollars in our illiquid environment to start making profitable real estate and consumer loans again, buttressing its corporate business with often more reliable local business dealings as well.
With better service, more loan money, and a more responsive local staff, JPM could begin to scoop away business it’s lost over the years to the likes of BB&T, taking it back by doing what BB&T used to do.
Right. In this age of electronic banking, overhead like this seems needless and perhaps a bit foolish. On the other hand, the East and West Coast oligarchs and satraps who’ve been running our once-great country into the ground have been ignoring the potential for loads of business in Flyover Country, U.S.A., much of which is still accustomed to dealing with local banking officials, nearly like the situation in the film “It’s a Wonderful Life.” Addressing this chronically underserved and scorned market could begin to rake in a great deal of $$$.
The Maven is certain that neither Dimon nor JPM have any plans to turn that giant financial conglomerate into a Mom & Pop operation anytime soon. But it’s entirely plausible that if some bank, any bank, would start doing a better job going after the business that a vast majority of ignored Americans are desperate to transact, rather than aiming only at a select crowd of this country’s remaining high rollers—it’s entirely possible that such a strategy might help break the liquidity logjam that’s been killing us for years and help our failed, front-end loaded system rebalance itself.
It’s a thought. We’re not exactly worshipers of Jamie Dimon and his fellow Wall Street oligarchs here. But Dimon has consistently proven over the years that he’s far more capable of looking ahead to the future and planning for it than are most of today’s banking and corporate meatheads. Other banking CEO’s are considering following Dimon’s lead in the coming months. Maybe we’ll even get a permanent manager again at our own BB&T branch. That would be nice.
We are still finding it difficult to get into this ongoing post-Brexit rally by committing our still fairly large amount of sideline cash. Most of our investments are not “diversified,” but are sunk into preferred stocks, term-preferred stocks, large business acquisition and management companies, and a couple of REITs. This is contrary to the general philosophy that embraces a diversified portfolio as one that carries less risk. On the other hand, the high yields we’re getting right now have been largely insulating us on the downside, ever since we got smacked around in the January-February debacle earlier this year.
As a way of diversifying out a bit, we’ve started acquiring tiny amounts of ETF shares offered by our brokerage at zero commission. That means we can sneak into these investments with tiny dollar amounts at appropriate intervals—as when the market plunges, offering better prices—while not getting killed by commissions.
We outline a few of our recent and/or proposed moves in yesterday’s column, and continue to look for new ones. Undervalued stocks on our possible-buy radar screen include a still beat up Apple (AAPL)—which is usually a buy in the summer preceding its traditionally stellar fall and winter quarters—as well as a pair of underpriced pharmaceuticals, Pfizer (PFE) and Zoetis (ZTS), the latter being a veterinary pharma company that was actually part of Pfizer before it was spun off on its own.
PFE would be first on the list, as it pays a much more impressive dividend than ZTS. But with markets up nicely right now, along with the price of most stocks, we’d prefer to take another look when these and other companies are getting beat up again.
To return once again to our banking motif, Synchrony (SYF) is another “bank” we’re looking at seriously. SYF is the entity once known as GE Credit, a huge credit operation that actually created and managed branded credit cards for numerous well-known retail establishments like Lowe’s (LOW), Amazon (AMZN), Walmart (WMT) and many others. To get out from under having to deal with the Fed, Dodd-Frank and everything else that hamstrings today’s banking system, General Electric (GE) spun GE Credit off a couple of years back, and the “new” entity was renamed Synchrony.
After an occasionally painful transition, SYF seems to be off and running, offering, on a virtual basis, decent (if a bit high) credit card terms for the average retail consumer, once again tapping that vastly underserved market JPM seems interested in pursuing as well. To help with its re-org growing pains, SYF, unlike most banks, has been paying no dividend at all. But in its most recent quarterly announcement, it’s announced that it will now begin to pay a roughly 2 percent dividend moving forward, making its stock much more attractive. That, plus its historical neglected-consumer orientation, is putting SYF on our list to consider buying during a market selloff.
We’re running long, as usual, so we’ll exit for now. But we’ll be keeping you up to date on our investments and our thoughts.