Hello Everybody,

Earnings season has started off very strongly for the big U.S. banks, which we’ve owned for over 5 years now.  Credit conditions started improving about 3 or 4 years ago and is now absolutely pristine.  Unfortunately, litigations and most importantly penalties imposed by government agencies have cost these companies and shareholders tens of billions of dollars.  Even with all of these obstacles, the investments have proven to be spectacular.  Like usual, we’ve both bought stock and sold a tremendous amount of puts on these stocks.  Unsurprisingly, the shares have fluctuated wildly many times as stocks do, but what has made the investments successful is that we bought them cheaply and the businesses have performed well relative to expectations.  This combination of price paid and business performance are the things that matter most when investing, yet so many market participants allow short-term fluctuations in stock prices to scare them out of or into various investments.  Moving forward, several of these big banks are still very cheap and are likely to see further improvements in their profitability and dividend paying capacity.  These should still be solid investments over the next 3-5 years, but are not likely to be as spectacular as they have been in the past, with one possible exception that is a unique situation.  I’d say 10-15% per annum performance on the low-end is a reasonable expectation over that time period on these companies, which I believe will be much greater than what the overall market does.  It is also important to note that many other investments are likely to be hurt by higher interest rates, but these banks are an exception and will see earnings increase along with interest rates.  Below are several articles that I’ve written over the last week outlining the current investment theses on the companies.  I hope that you enjoy.

Bank of America – Slowly But Surely, The Bears Are Being Proven Wrong

Citigroup – Improving Margins And Strong Capital Will Lead To Higher Evaluation

JPMorgan Chase – Premier Competitive Position But Just Adequate Value