I can’t say I’m surprised that Bank of America (NYSE:BAC) was not allowed to raise its dividend payment. And while BofA didn’t specify the reasons its plan was rejected, I think we know pretty much why.
For one, Bank of America is still struggling with mortgage issues. And it’s setting aside cash to cover potential “put-backs” of mortgage backed securities it sold. Plus, Bank of America is barely profitable. Its main source of earnings right now is coming from loan loss reserves that are returned to its balance sheet and counted as earnings.
Bank of America has said it will submit a new plan to the Fed in hoped of getting approval. But let’s remember that tangible book value is around $12.60 a share. If it falls that low, that’s a good buy.
I’m still surprised that Citigroup, Inc. (NYSE:C) was allowed to start paying a dividend. But Citi has less mortgage exposure than BofA, so that may be the reason.
The European debt problems keep coming. Portugal’s Prime Minister is on the verge of quitting if his austerity program isn’t approved. The alternative to austerity may be a bailout, but as we’ve seen, those bailouts come only with a promise of austerity.
Whatever happens, the uncertainty is ramping yields on Portuguese bonds, which makes raising money more expensive.
Yields on Irish bonds are up today, too.
Renewed concerns about European debt, as well as the situation in the Middle East, is driving money into U.S. Treasuries. But how long will the Treasury rally last?
The Fed will end QE2 in June. That means as much as 70% of Treasury buying will be gone. We should expect Treasury bond prices to fall, and yields to rise. But ironically, Treasury prices have been falling every since the Fed started QE2.
As you can see on this chart of the iShares Barclays 20+ Year Treasury Bond ETF (NYSE:TLT), Treasury prices peaked in late August, when the Fed started QE2 and sold off steadily until February, when the protests in the Middle East started.
It seems logical that Treasury prices should fall further once the Fed stops buying. After all, with such a sharp drop in buying volume, yields would need to rise to attract new buyers.
QE2 was supposed keep yields low. It didn’t. But it has succeeded in flooding the economy with capital and sparking a relentless 6 month rally.
It may well be that the end of QE2 is played out just as much in stocks as it is in bonds.
QE2 ends in June, but investors will be positioning themselves well ahead. This is a very important catalyst, and we will be discussing the end of QE2 more in the weeks to come.
Wyatt Investment Research is led by founder Ian Wyatt, who serves as Publisher and Chief Investment Strategist. Our team also includes a group of talented research analysts and editors who aim to uncover great investments and present those investment ideas to our growing group of loyal subscribers.
Ian Wyatt is an active investor, a well-regarded investment expert and an Internet entrepreneur. He is the Chief Investment Strategist at Wyatt Investment Research, and plays a leading role in each of the company’s investment newsletters and trading services. As a well-regarded market expert, Ian has written for Marketwatch, Zacks Investment Research, Seeking Alpha, Yahoo! Finance and The Burlington Free Press. He has been interviewed or quoted in articles in well-known publications including AOL Finance Blogging Stocks, Kiplinger’s Personal Finance Magazine, Barron Magazine, Barrons.com, Forbes.com, The Dick Davis Digest, The Dick Davis Income Digest, The Wall Street Transcript, TheStockAdvisors.com, Money Show Digest, The New Jersey Star Ledger, The Wisconsin State Journal and The Seattle Times.