December 3, 2013
- Mr. Potter couldn’t shut down George Bailey’s bank, but the feds sure can
- Chris Mayer on how to play the incredible shrinking number of banks
- Latest on the ADIZ drama: Has China already overplayed its hand?
- The Alzheimer’s treatment that might succeed where all others have failed
- Romancing the drone? Chris Anderson on Amazon’s big announcement
- Holiday follies, courtesy Obamacare and the NSA… 3,000 years of war… more accusations of “partisanship”… and more!
“If there is one sure trend in banking,” writes our recovering banker Chris Mayer, “this is it: There will be fewer and fewer banks.”
And Chris has two ways to play the trend.
We should note that Chris wrote those words to his Capital & Crisis readers last month. It’s timely this morning in light of a front-page Wall Street Journal article.
The number of U.S. banks is now at its lowest since the Great Depression, says the Journal.
From more than 18,000 in the late 1980s, the number has sunk to 6,891 as of Sept. 30, according to figures kept by the FDIC — figures that date back only to 1934.
Chalk up much of the shrinkage to the savings-and-loan crisis of a quarter-century ago; more than 500 banks failed in just one year, 1989.
More recently, regulations are driving the urge to merge: “In the aftermath of the 2008 crisis,” Chris explains, “higher regulatory costs are driving smaller banks to combine into bigger banks.” Starting a new bank is nigh impossible; there’s been only one since 2010, and it opened this week in Pennsylvania Amish country. Of the application process, the bank’s attorney tells the Journal, “You are talking perhaps anywhere from 8-16 inches of paper.”
That’s a formidable obstacle. “More and more executives of small banks,” says Chris, “will decide — and their shareholders will push them to decide — to sell out, to combine into bigger banks. Shareholders stand to reap the efficiencies gained as the small banks disappear.
“You don’t have to like it,” he hastens to add. “I feel a certain nostalgia for the lost old banks and for the varied landscape that has been American banking. Nobody likes big banks.”
But the reality of the situation opens up “a low-risk investing theme,” says Chris, “in a market where there aren’t too many of those left.”
First, you could buy shares of the acquiring banks.
Before you ask us whether Chris has lost his mind, hang with us: “I know that sounds odd,” he says, “because acquirers in most industries tend to be laggards in the stock market. But this is one of those cases where both sides can win when banks combine.”
Indeed, Chris urged his readers to pick up shares of one bank a year ago for less than book value… and this bank has a history of eating up small, troubled banks. They’re up 36%, and Chris thinks it’s still worthy of the “coffee can portfolio” — the lazy man’s road to riches over a 10-year span. (Curious? Chris explains in this brief presentation.)
Then there’s the flip side of that win-win combo: “You can accumulate lots of small banks and make a nice return if they get bought out for premiums,” says Chris.
That’s exactly what readers of his high-end letter, Mayer’s Special Situations, are doing. “We own 10 little banks. All of them are up, some up a lot.”
The textbook study here is a Connecticut-based thrift called Rockville Financial. Chris’ readers picked it up in 2011 for less than book value. Now it’s merging with another firm. “The cost savings will be significant. The new merged entity will be much more competitive and economic.
“We’re up 55%, including dividends. This is an excellent return for the low risks we took.” Chris has a sizeable chunk of his personal portfolio in plays just like these. For access to his favorite names in this small and highly attractive sector, give this a look.
Stocks are in consolidation mode this morning, as they were much of yesterday.
As we write, the Dow has slipped below 16,000 and the S&P below 1,800. But the Nasdaq and the Russell 2000 are both in the green, barely.
Gold sits about where it did 24 hours ago, at $1,224.
On the war watch, Vice President Biden is in Tokyo, and the State Department is calling on China to scrap its new Air Defense Identification Zone (ADIZ).
As described in yesterday’s episode, China has extended the ADIZ around its territory all the way past the Senkaku Islands — territory claimed by China but controlled by Japan. Aircraft flying through the territory must notify Chinese authorities in advance and follow instructions from Chinese air-traffic controllers.
“As in the Cold War,” says a New York Times story, “the immediate territorial dispute seems to be an excuse for a far larger question of who will exercise influence over a vast region.”
“It has to do with influence and natural resources,” adds the German newsweekly Der Spiegel, “with hegemony and nationalism, and with bitter historical memories and fresh, global aspirations — in short, it’s a toxic mixture of geopolitics.”
“Analysts… have concluded that China now appears to have overplayed its hand,” says the Washington Assessment and Analysis Service, “and is softening its initial position in the face of a firm U.S. reaction.”
Not to mention the potential for a new Asian arms race. We’ll stay on top of this one…
“Alzheimer’s is now the No. 6 killer in this country,” reports Ray Blanco on the science-and-wealth beat.
“The growth in the number of Alzheimer’s-related deaths over the past several years is in the high double digits. This is a stark contrast to other big killers like heart disease and various cancers, in which we are seeing mortality reductions, thanks to better technology.”
The disease is complex. Progress on new treatments is slow. “There have been some spectacular clinical failures of potential Alzheimer’s compounds in the last few years,” says Ray, “and nothing new has been approved for the condition in a decade.”
Into the breach steps a company he’s been following for a couple of years: “The firm has presented new data in scientific journals showing its compound blocks the formation of beta amyloid proteins in the brain. The accumulation of these proteins has long been considered a hallmark of the disease’s presence.” And the higher the dose, the greater the effect.
The treatment has already passed Phase 1 testing for safety. “The company is going to enter a Phase 1/ 2 safety and efficacy study next year,” says Ray, “for a novel compound in a large and exploding disease market. I think this will raise the company’s profile in the investor community and correspondingly affect its share price — good news for current investors.”
[Ed. Note: As breathtaking as a viable treatment for Alzheimer’s might be, it might pale in comparison with another breakthrough on the radar of our tech/biotech editors. It does far more than tackle a single disease… and the wealth potential is already proven. For details, check out this presentation. But do so quickly; we’re taking it offline in less than 72 hours.]
Reality is setting in about Amazon’s delivery-by-drone.
We steered clear yesterday of the media hubbub after Amazon CEO Jeff Bezos was the subject of a 60 Minutes puff piece, timed for maximum exposure after the big Chiefs-Broncos game on Sunday. The “news” that emerged from the story was that Amazon plans to begin delivering packages same-day via an “octocopter.” In four or five years. If federal regulators ever allow it.
Yeah, but can it deliver inside condo and apartment buildings?
For perspective, there’s no one better than Chris Anderson, author of Makers and CEO of his “DIY drone” startup called 3D Robotics. If you were with us for our Vancouver symposium last summer, he gave one of our most well-received talks.
“It’s a powerful concept,” he tells the Financial Times, “but is at the intersection of the two hardest challenges in the drone world today: reliable sense-and-avoid technology and regulatory approval for autonomous flights over people or built-up areas.”
In other words, the technology to fly large numbers of drones in dense urban areas without them smacking into buildings (or people) is still a work in progress.
Still, Anderson hopes the Amazon stunt will light a fire under the Federal Aviation Administration to draw up rules for the use of commercial drones. For now, it’s still illegal.
Defining down “success,” Obamacare style: You might recall last Saturday — Nov. 30 — was the White House’s self-imposed deadline to fix the “glitches” at HealthCare.gov.
That goal, says the administration, has been met. Not that people can now sign up seamlessly. No, it simply means that instead of the website outright crashing, you’re now put into an “online waiting queue” if the site is overloaded. Health and Human Services Secretary Kathleen Sebelius wrote an Op-Ed in USA Today urging people to visit the site during “off-peak” hours.
No point in our poking fun; self-parody is the best kind.
Elsewhere in the federal bureaucracy, the NSA has issued its employees a memo to help them make family members feel all warm-n-fuzzy about the agency’s work.
For real. The lively lefty blog Firedoglake got a copy of the memo, sent out Nov. 22. “It was clearly put together,” writes Kevin Gosztola, “for rebutting statements about the NSA from news stories on documents disclosed by former NSA contractor and whistle-blower Edward Snowden, and it encouraged employees to ‘share the following points with family members and close friends.'”
Alas, the talking points are loaded up with demonstrated lies. “NSA programs protect Americans and our allies,” reads one passage. “As an example, they have helped to understand and disrupt 54 terrorist events since Sept. 11: 25 in Europe, 11 in Asia and five in Africa. Thirteen of those had a homeland nexus.”
Good grief. The NSA’s No. 2 guy admitted before Congress in August that spying on bulk phone records had been “critical” in stopping only one of those 54 supposed plots.
[Ed. Note: We’ve had an overwhelming response to our 166-page manual of “practical liberty”… outlining practical steps you can take to muddy the digital tracks you leave behind for the NSA… protect your finances and your health from the ravages of Obamacare… and shrink your tax bill. Learn how to reclaim some of your lost freedoms at this link.]
“All superpowers have their own ADIZ,” a reader writes with some additional background to the dispute between China and Japan that threatens to drag in the U.S. “Try to approach Alaskan international coastline and American and Canadian air forces will intercept you!”
“The U.S. has absolutely no one to blame but itself for a rising China,” adds another reader
“Did anyone in their right mind believe the red Chinese communists would remain benign when Americans have been so stupid to give these power-mad a**holes all this money the last 15 years? So predictable.”
The 5: We suspect a “rising China” was going to happen even without the U.S. helping things along.
Still, we’re struck by the irony of the present situation, summed up by the Independent Institute’s Ivan Eland: “America is now borrowing money from China to subsidize the defense of rich East Asian allies in their quest to militarily counter… well… China.”
“Once,” adds another reader, “I became interested in the longest peacetime on record.
“I decided the best way to discover it was to find out when wars occurred. I started about 3,000 B.C., which seemed to be the point at which the first armed conflict I could define as a war occurred. From that time on, I could not find a time when some country was not fighting a war. In other words, for the last 5,000 years man, has been continuously at war.
“I took this to mean that war is the natural condition of man and peace is an aberration. I guess we should be thankful for whatever peace we can find wherever and whenever we can find it.”
The 5: Indeed. And invest accordingly.
“I too think you do a disservice to your readers,” reads an email piling onto yesterday’s correspondence, “when adding inflammatory political rhetoric that is designed to push buttons.
“You may have meant, ‘We can’t help it if the clown who occupies the White House at any given time belongs to one party or the other’ in jest. However, it is just one more example of what the subscriber was saying when he criticized your partisanship.
[Huh?]
“I dropped a competitor’s service because their extreme partisanship was so over-the-top as to be highly offensive. Yours is less so, but it nonetheless cheapens the seriousness of your commentary and causes me to devalue your opinions.”
“I feel like I’m reading an online version of Fox News,” adds another reader, more directly.
The 5: Aw, c’mon, this is getting old. For evidence of our anti-partisan bona fides, read our comprehensive takedown of Paul Ryan, published the first business day after Mitt Romney put him on the 2012 GOP ticket. The hate mail from die-hard Republicans lasted for days. (Were we “pushing buttons” then? Maybe a little… heh.)
Our point then, as now, is this: You can’t count on politicians of any stripe to save your bacon. That’s up to you. We’re here to help.
Cheers,
Dave Gonigam
The 5 Min. Forecast
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