💵 Banks are throwing cash at you

US banks are getting all steamed up | Won't somebody think of the first-time buyers? |
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Today's big stories

  1. US banks have got the green light to increase their cash payouts to shareholders, and they’re wasting no time
  2. One of the world's biggest hedge fund managers has a simple-to-use "magic formula" for how to pick stocks – Read Now
  3. UK house prices rose at their fastest annual pace in over 17 years

Hot Banx Summer

Hot Banx Summer

What’s Going On Here?

The US Federal Reserve (the Fed) has finally released frustrated US banks from its lockdown on dividends and share buybacks, and they can’t wait to go wild.

What Does This Mean?

With so much uncertainty at the height of the pandemic, the Federal Reserve (the Fed) froze banks’ share buybacks and dividends to make sure they had enough cash to see them through. Fast forward to this year’s annual “stress test”, and the Fed’s been assessing how those banks would cope if – among other things – there was a severe global recession, a more than 50% drop in the stock market, and a spike in unemployment.

The Fed concluded that US banks by and large had enough money in reserve to survive – unsurprising, considering that doomsday scenario mostly played out last year. And once it gave the okay to start payouts again, there was no hanging around: Morgan Stanley and Wells Fargo quickly doubled their quarterly dividends, and announced up to $12 billion and $18 billion of share buybacks respectively.

Why Should I Care?

For markets: Value investors told ya so.
Bank stocks tend to do better when interest rates are high, since they make more money from loans than it costs them to borrow. Rock-bottom interest rates, then, have made it harder for banks to earn as much, which – along with absent payouts – might be why investors sold off their shares last year. So investors who bought back then don’t just benefit from higher cash payouts: the stocks themselves are worth a lot more since the banks’ announcements earlier this week.

For you personally: There’s still value in European banks.
European banks are doing well too, with one key index up 76% from its September lows. But that index is still below pre-pandemic levels, and banks’ earnings are looking promising: trading desks are likely benefiting from buoyant financial markets, while rising bond yields should make it more profitable for banks to lend (tweet this).

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2. Analyst Take

A Spellbindingly Simple “Magic Formula”

What’s Going On Here?

Joel Greenblatt’s “magic formula” is well-known in investing circles.

The world-famous hedge fund manager’s stock picking strategy is easy to roll out, takes the emotion out of the equation, and it gets results. Serious results.

Back when Greenblatt published his book on this magic formula, the strategy boasted returns of around 30% a year – twice what the S&P 500 delivered over the same period.

And today, value stocks – which have been underperforming the market for the last few years – are well-placed to start delivering big returns again.

All you have to do is follow a few simple steps. First up, you need to find a –

Nice try. That’s today’s Insight: how Greenblatt’s “magic formula” works, and how you can put it into practice for yourself.

Read or listen to the Insight here

Sore Losers

Sore Losers

What’s Going On Here?

Data out on Tuesday showed UK house prices rose at their fastest annual pace since 2004, in a frustrating game first-time buyers don’t have any chance of winning.

What Does This Mean?

UK house prices have been pushed up and up by ultra-low borrowing costs, a limited supply of properties, and a temporary tax break on purchases (that, as of Wednesday, will be phased out). Plus, Brits have had their hearts on upsizing after a year spent staring at the same four walls. So much so, in fact, that London was actually one of the weakest-performing regions as homebuyers swapped the urban hubbub for tense village politics. All in all, it’s driven the average house price to a record $353,000 – a figure which both threatens to broaden the wealth gap and leave the next generation of buyers out in the cold.

Why Should I Care?

For you personally: Won’t somebody please think of the children?
It’s true that the typical mortgage payment isn’t actually all that high compared to monthly salaries by historic standards, thanks to record-low rates. But cheap mortgage payments don’t mean much if you can’t afford somewhere in the first place, and house prices relative to average incomes are close to an all-time high. That’s making it harder than ever for prospective first-time buyers trying to get their foot on the property ladder.

Zooming out: It’s the same story all over the world.
House prices aren’t just soaring in the UK: data out last week showed average US house prices rose 24% in May compared to a year ago, hitting a record high for much the same government-stimulated reasons as the UK. And now, Bloomberg Economics has pointed out that certain indicators – like the ratio of global house prices to rent or locals’ salaries – are higher than they were even in the lead-up to the 2008 financial crisis, suggesting this bubble could be about to burst.

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💬 Quote of the day

“The big lesson in life, baby, is never be scared of anyone or anything.”

– Frank Sinatra (an American singer and actor)
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