Ford drops an additional $ 11 billion on EVs and batteries… bank stocks look attractive as we approach the era of rate hikes… how important is China’s crypto ban?
The electric vehicle (EV) revolution continues.
Earlier this week, we learned that Ford and its battery supplier, SK Innovation, are planning to invest more than $ 11.4 billion in two new US factories that will produce electric vehicles and batteries.
Ford is building two lithium-ion battery factories in central Kentucky as part of a joint venture with South Korean company SK called BlueOvalSK, as well as a huge 3,600-acre campus in western Tennessee, the automaker announced Monday evening.
The campus will include another SK-built battery plant as well as a supplier fleet, a recycling center and a new F-Series electric truck assembly plant, Ford CEO Jim Farley told CNBC.
This new investment is in addition to the $ 30 billion that Ford says would be used in electric vehicles until 2025.
It’s not just Ford. It is a sectoral revolution.
For example, GM is spending $ 4.6 billion in a joint venture with LG Chem for battery production from 2023.
And earlier this month, BMW announced that it has ordered more than $ 24 billion worth of batteries. This purchase is based on BMW’s forecast that at least half of all its sales will come from zero-emission vehicles by 2030.
As we noted here in the Digest, this EV revolution will generate huge returns on investment for leading EV manufacturers, EV infrastructure companies, battery companies and battery metals (and battery metal miners) this decade. Our September 9 Digest dig deeper if you want more detail.
Ultimately, this is a massive mega-trend with plenty of ways to profit, and this news from Ford is just the latest illustration. Better yet, it’s a story of growth spanning decades.
Make sure your portfolio has exposure.
*** Shifting gears, it’s not too early to think about positioning your portfolio for the next era of rate hikes
Last Wednesday, the Fed kept its key rate close to zero. However, the updated Dot Plot showed us that we could see six or seven hikes by the end of 2024.
Of Yahoo! Finance:
The updated forecast has now split the committee on rate hikes in 2022, with 9 members seeing the case for no rate hike next year but the remaining 9 seeing the case for at least one hike. By the end of 2023, the midpoint projects three to four rate hikes in total.
Until the end of 2024, the median member of the FOMC sees six to seven rate hikes in total.
While the rate hike will be a headwind for some sectors, there is a market corner that will help …
Banks earn money on their net interest income. It is the difference between the income they generate from interest on loans, mortgages and securities, and the interest they pay on their deposits.
Typically, banks pay you a lower short-term interest rate – think of the two-year Treasury yield – while charging you a higher long-term interest rate – think of the 10-year Treasury yield.
So, as rates and yields rise, a widening of the spread between short and long-term rates represents more profit for banks.
The graph below shows this “10-2” yield spread.
A year ago, the gap was only 0.53%. Today, even though it is down from this spring’s highs, it sits at 1.23%.
That’s over 130% more.
This increase inflates the profitability of banks.
*** Another thing to keep in mind, bank stocks are cheaper than the big market today
Banking group S&P 1500 is trading at a price / earnings ratio of 12.6, based on the weighted consensus price / earnings estimates for the next 12 months among analysts polled by FactSet.
The entire S&P 1500 Composite Index is trading at a forward P / E of 20.5. The average forward P / E for banks over the past 15 years has been 12.5, while the average forward P / E for the entire index has been 15.4.
In other words, banks are now trading at 61% of the S&P 1500 futures P / E valuation. But on average, they typically trade at 81%.
Translation – historical discount.
As the Fed slows down bond buying and then raises rates, look for higher long-term interest rates, which will lead to higher spreads and more profits for bank investors.
If you’re looking to take advantage of it, check out XLF, who is the SPDR Financial Select Sector Fund. He owns financial heavyweights including Berkshire Hathaway, JPMorgan, Bank of America, Wells Fargo, Morgan Stanley, Goldman and Citigroup.
*** Finally, how concerned should crypto investors be about China’s total ban on cryptocurrencies?
Last week, the Chinese government announced that it would ban trading and mining of cryptocurrencies.
While this shouldn’t have literally surprised anyone, it still served as a sales catalyst.
But what are the wider ramifications? Both from a short-term and a long-term perspective.
For those answers, let’s turn to our crypto specialist, Luke Lango, editor of Ultimate Crypto.
Let’s start with Luke’s take on short-term impact:
Let’s go back to the last time China instituted a similar ban on cryptocurrency mining …
It happened in June. At the time, Bitcoin went from $ 40,000 to $ 30,000 on the news. He languished there for a few weeks. Then, in early September, Bitcoin prices were above $ 50,000 again.
In other words, the last time China instituted a big crypto ban, it was ultimately nothing more than a great buying opportunity for investors.
We believe it will play out the same way.
It looks like dozens of crypto investors agree.
According to CoinShares’ weekly report released on Monday, bitcoin-backed assets registered inflows of $ 50.2 million during the week ending last Friday. That’s the most since the week ending April 19.
Additionally, Ether-backed assets recorded inflows of $ 28.9 million. This is the most since June 7.
Regardless of what happens in the short term, the real story for crypto investors will unfold over a longer time horizon. So what should we do with China’s move on a larger scale and in the long term?
Back to Luc:
While China has a huge population, the crypto market did not depend on mass adoption there to drive up crypto prices.
Instead, real value creation in cryptos will occur through adoption in Western economies (America, Canada, and the European Union) and emerging economies (Southeast Asia, South America, and Africa).
Until these countries take action to ban crypto, the long-term outlook for crypto prices will remain favorable.
And guess what? These countries are in fact do the opposite.
Outside of China, legislation is making progress in almost every other applicable country towards standardizing the use of crypto.
That’s why we stay resolutely bullish in the crypto market.
If you are a crypto investor, this overall awareness is essential. The more you focus on the short term – for example, frequently looking at your crypto balance during painful sales – the more likely you are to let emotions knock you out of your holdings.
Now, if you are a short term crypto trader, you should definitely follow these ebbs and flows.
But if you’re in it because of the long-term growth story, do yourself a favor and take care of other things.
Here is Luke’s result to get us out:
Forget about China.
The rest of the world is moving towards legitimizing and normalizing cryptos. As long as this remains true, crypto prices will tend to rise within a window of several months and years.
Stay patient. Stay the course. You will be glad you did.
Have a good evening,