August 26, 2024 | Premium Service | With the crowd on Wall Street unanimous in their belief that interest rates are falling and inflation is no longer a problem, it's is probably time to load up on duration for the Nantucket Sleigh Ride down the yield curve. This does not mean that we won’t see a significant market correction later in the decade, but now is not time to fight the Fed. Take what is given.
As we discuss in our new biography of Stan Middleman, “Seeing Around Corners,” there is a maxi home price correction waiting for markets several years out. As the founder of Freedom Mortgage likes to say: “Misery on the 8s,” meaning 1988, 2008 and 2018. Will 2028 be the date of the next major housing price correction? If you want a signed pre-release copy of "Seeing Around Corners," click below. When the 140 remaining signed copies are gone, you deal with Amazon.
The burning desire of global equity markets to inflate is evidenced in the WGA Bank Top Indices, which continue to outperform the mainstream passive strategies focused on big banks. The WGA Bank Top Indices track the top publicly traded banks in the US above $10 billion in total assets. Index constituents are available to subscribers to the IRA Annual Service.
Notice in the chart above the the WGA Indices have outperformed industry benchmarks such as the Invesco KBW Bank ETF (KBWB). Unlike KBWB, which uses a static “representative” group of 24 banks, WGA scores the entire population each quarter, then employs a unique pure constituent weighting system in constructing the Indices. You only get the top performers each quarter.
Our approach to curating the Indices, developed with our partners at Thematic, ensures that the highest scoring banks have the greatest impact on the Indices regardless of size every quarter. Because of WGA's unique methodology, the Indices are generally uncorrelated to existing bank indices and passive strategies. Thus in Q1 2024, when buy side managers dumped large cap banks, the two indices diverged. And guess what is going to happen now?
Below we ponder the asset gatherers among our bank surveillance group, including Ameriprise Financial (AMP), Charles Schwab (SCHW), Goldman Sachs (GS), Morgan Stanley (MS), Raymond James (RJF) and Stifel Financial (SF). We do not include Jefferies Financial Group (JEF), which through Jefferies LLC is the largest publicly traded nonbank broker-dealer.
The Wall Street Journal ran a story last week telling readers that the bank at SCHW was getting smaller. Two years ago, we told readers of The IRA that the SCHW bank trade was shrinking. And it is. The big question for the future is whether SCHW knows how to run a full-service bank, including duration management. Duh.
Meanwhile, those remarkable folks at Toronto-Dominion Bank (TD) have announced their intention to sell their almost $3 billion stake in SCHW. Whoa. TD ought to reconsider this strategy. Most of the big-six Canadian banks are planning to increase investments in US banks, but TD is selling a valuable stake in a bank they ought to buy instead.
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