It’s a bird, it’s a plane, no … it’s Ben Bernanke, and he’s throwing money out of a helicopter! That’s right, air supply Ben delivered the news that the market has been waiting for all year: QE3. This round of quantitative easing will take shape in the form of The fed committing to purchase $40 billion worth of mortgage-backed securities per month, and committing to low interest rates until at least mid-2015.
Que piñatas, disco balls, and spiked punch, because it’s time to party -- at least that’s what the market indicated.
The Dow Jones Industrial Average (INDEX: ^DJI ) cheered the news to the tune of a 1.15% gain, but that wasn’t even a stone's throw from the biggest Dow winners for the day.
Bank of America (NYSE: BAC ) , JP Morgan (NYSE: JPM ) , and American Express (NYSE: AXP ) all roared more than 3% higher today, with Bank of America getting the rowdiest, with a 4.8% pop. Notice anything in common? They’re all finance stocks, of a sort. Fellow big bank Wells Fargo also popped 3.6%, in harmony with the rest of the class.
This may seem counterintuitive, because low rates can mean less money for banks; but that’s not how things have played out, so far. Despite falling rates, the yield spread is still wider than the historic average for banks, basically giving them free reign to shore up their balance sheets and become "better banks."
I’m of the firm belief that finance stocks will be some of the market’s best performers over the next few years. After falling out of grace, they’ve come back down to earth, and then some. The pendulum of pessimism has swung too far this time, as basically every major financial institution trades at a discount to their price to tangible book value, despite being far better institutions than they were just a few years ago.
It’s a bad time to be short banks -- I’m looking at you Direxion Daily Financial Bear 3x (NYSE: FAZ ) shareholders. Seriously, those 3x levered ETFs are landmines -- get out yesterday.
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