The importance of the financial sector can’t be understated
Market analysis from New Oak Risk Advisory and Financial Services
“When you think of sexy stocks and sectors, technology companies usually come to mind. But after posting a nearly 25% return this year, the financial sector deserves a lot more respect and attention,” says James Frischling, President and Co-Founder of NewOak.
The importance of the financial sector can’t be understated. The collapse in housing and the financial crisis brought many of these companies to their knees and without a properly functioning financial system the US economy became unraveled and destabilized. Unprecedented government support and stimulus provided the necessary backstop and helped turn things around. Now with the banking sector making a strong comeback, it’s a good sign for the economy as a whole as the increase in lending can help feed more borrowing, jobs creation and consumer demand.
The core four banks of the US – Wells Fargo, JP Morgan, Citibank and Bank of America have been the biggest drivers of the rebound and performance of the financial sector. While each have rebounded remarkably since their respective lows in March 2009, their performance is even more impressive given the tremendous headwinds they’ve faced. The regulatory scrutiny and changes in order to protect the financial system from another collapse have added significant costs to these businesses, while the private and government litigations associated with the financial crisis have also forced these institutions to take large reserves.”
Despite these challenges, the financial index rallied to become the second most important index of the entire S&P 500, trailing only the technology sector by a small margin. Technology may be the seen as the sexy and cool sector, but like the story of the Tortoise and the Hare, the slow moving and somewhat boring banks may prove to be the ultimate winner.
Agricultural Land Prices: A Bubble to Burst?
“While agricultural land prices are due to soften from their highs as a results of several factors including 40% drop in corn prices from their peak last year, it is not cause for alarm but should be carefully watched,” says Ron D’Vari, CEO and Co-Founder of NewOak Advisor.
In areas of the country such as Iowa and Nebraska, farmland prices have nearly doubled since 2009. Unique conditions driving prices of farm land to their record high include: 1) rising global demand for commodities such as corn and cattle, 2) upsurges in crop prices, 3) the Federal Reserve’s extraordinary easy monetary policy, 4) investors’ huge appetite for hard assets, and 5) hunger for achieving higher returns over unprecedented low U.S. treasury rates. There is also signs of increased lending by non-bank finance companies along with amplified vendor finance.
Many of these financial factors are expected to reverse in 2014 onward. Rising interest rates and normalization of crop and cattle prices will inevitably lead to some correction in land prices and rents. Some fear that the outcome may resemble the last housing bubble burst. Despite agricultural land values having reached their all-time highs, investors and policy makers don’t seem to be particularly alarmed and many are not even familiar with it.
Any correction is expected to be kept under control by the fact that farmers and agricultural landowners have not been over levered and most purchasers have been strong added value local hands as opposed to speculators. High crop prices in the last few years have allowed them to pay down debt and lock in extraordinary low long-term interest rates. Hence farm land debtors are expected to be willing and able to hang on to their land through the correction and service their loans. Another mitigating factor is that supply of farmland is expected to remain constrained. Some will see a potential 20% to 30% drop in prices of farm land an opportunity to buy. While the agricultural land price correction is expected to be controlled, the buildup is likely to still create concerns for those over exposed.