The rally in big banks is just getting started…

From Justin Brill, Editor, Stansberry Digest:

It’s a ‘payout party’ for the banks…

The Federal Reserve released the results of its annual “stress test” late last month.

As expected, all 34 U.S. bank holding companies passed the Fed’s Comprehensive Capital Analysis and Review. And all were given approval to boost capital payouts significantly.

And as Bloomberg reported, the biggest banks wasted no time in celebrating the news…

JPMorgan Chase (JPM), Citigroup (C), and Bank of America (BAC) led U.S. firms in unveiling plans to boost dividends and stock buybacks more than analysts had projected, after every lender passed annual stress tests for the first time since the Fed began the reviews in the wake of the 2008 financial crisis. Shares across the industry rallied in early trading Thursday.

JPMorgan, the nation’s largest lender, said it’s boosting its quarterly dividend 12% and may increase share repurchases to $19.4 billion over the next 12 months – roughly 90% more than in the prior year. Citigroup plans to double its dividend and may purchase up to $15.6 billion. Bank of America hiked its dividend 60% and will buy back up to $12 billion.

But it’s not just the big banks that are having all the fun. All told, banks are set to pay out an average of 100% of their expected earnings over the next year, according to Bloomberg. This is up from just 65% last year.

Buffett’s ‘Hail Mary’ pays off big…

The news also means a quick multibillion-dollar payday for Warren Buffett’s Berkshire Hathaway (BRK).

Longtime readers may recall Buffett invested $5 billion in then-struggling Bank of America nearly six years ago. And the terms were especially favorable. As we noted following the news in the August 25, 2011 Digest

By now, you’ve probably heard legendary investor Warren Buffett invested $5 billion in Bank of America. The bank’s CEO Brian Moynihan said BOA doesn’t need any capital, though he happily sells Buffett $5 billion of preferred shares paying 6%. This is expensive money for BOA. Where is it going to find 6% investments in this environment?

Moynihan didn’t just sell Buffett a $5 billion piece of the company. He gave him 7% of the company for free, too. With about 10.13 billion shares outstanding, BOA also gave Buffett warrants to purchase 700 million shares, struck at $7.14 each. The warrants can be exercised in whole or in part within 10 years of the deal closing.

Following a big dividend raise, Buffett is finally ready to cash in those warrants… and is set to become Bank of America’s largest shareholder in the process. As the Wall Street Journal reported on Friday…

Berkshire Hathaway said Friday that it would buy 700 million Bank of America shares via warrants at below-market prices, a deal that places the firm as the bank’s largest shareholder.

The move was expected after the Charlotte, N.C., bank received permission from the Federal Reserve this week to boost its per-share dividend to 48 cents a year. Mr. Buffett has said a dividend of this size would prompt his company to swap its preferred shares into common stock.

When the bank raises its dividend, Berkshire Hathaway will use $5 billion worth of preferred shares to buy 700 million common shares at $7.14 each, well below the current market price of $24.32 and the overall current value of $17.02 billion.

Buffett’s $5 billion investment has already earned nearly $1.8 million in preferred dividends alone over the past six years. When this transaction closes, he’ll soon have another $12 billion in capital gains to go with it.

‘The next leg of the rally begins now’…

Meanwhile, regular readers know our colleague Dr. David “Doc” Eifrig is bullish on the banking sector today. But he’s not alone…

DailyWealth Trader editor Ben Morris is bullish, too. In fact, he originally recommended going long financial stocks back in February. Subscribers who took his advice are already up more than 10%.

But if you aren’t among them, it’s not too late. As Ben explained in yesterday’s issue, he believes the next leg of the rally is about to begin…

For the first half of this year, they went almost nowhere… The market was digesting their big gains at the end of 2016. But that digestion period may have just ended…

On Monday, a handful of financial stocks broke out to fresh, multiyear highs. Many others aren’t far behind. The group as a whole (as measured by the S&P 500 Financials Index) is up 6.9% over the past month… more than twice the returns of the next closest sector (a 2.8% gain for health care stocks).

As Ben explained, two former headwinds for financials – interest rates and politics – have recently turned into tailwinds. And he believes the biggest gains are still ahead…

Falling interest rates have put a strain on the banks for decades. Most banks borrow money at low short-term interest rates and lend it out at higher long-term interest rates. Starting in the early 1980s, both long- and short-term interest rates have fallen.

The yield on the 10-year U.S. Treasury (the benchmark for global interest rates) dropped from 15% down to less than 1.4% in mid-2016. The short-term federal funds rate dropped from as high as 20% in 1980 down to about 0% for the seven years ending in 2015.

Now, though, the Federal Reserve’s Open Market Committee has raised short-term rates three times, up to 1.25%… And it expects to continue raising rates. The 10-year Treasury now yields 2.3%.

If the uptrend in interest rates continues, spreads will likely widen… and banks will benefit.

He also explained that last week’s stress-test results are just a part of a bigger regulatory trend that is positive for banks…

On the political front, President Obama signed the Dodd-Frank Act into law in July 2010. The act restricts how banks invest their capital and limits their trading abilities. It makes it more difficult for banks to generate profits.

President Trump is acting to repeal at least parts of the Dodd-Frank Act, and to reduce regulations. It’s a better political environment for banks, which are already navigating the rules well…

Stress tests are part of these regulations. During the tests, regulators try to determine how banks would perform in a crisis. They make sure the banks have enough cash and measure the impact they could have on other parts of the economy.

Last week, all major U.S. banks passed the stress tests. The banks got the go-ahead to return lots of cash to shareholders through dividends and share buybacks.

And while bank and financial stocks are up significantly from last November’s lows, Ben noted that they remain a great value today…

Financial stocks are still cheap. The S&P 500 Financials Index trades with a price-to-book ratio of just 1.43. That’s a 20% discount to its long-term average of 1.79.

With two major tailwinds supporting them, financial stocks could have much further to run… Monday’s breakout could mean that the next leg higher in financial stocks has begun. And you don’t want to miss out on the big potential gains.

You can get instant access to Ben’s favorite way to profit from this trend with a 100% risk-free subscription to DailyWealth Trader. Click here for the details.

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