ZEB and Gold

by JDH on May 30, 2020

As mentioned last week, I have taken a position in ZEB.TO – BMO Equal Weight Banks Index ETF, an ETF that has an equal weight of the six largest Canadian bank stocks.

You would think this is a horrible idea, given that the banks this past week reported much higher loan loss provisions, and therefore much lower earnings.  We all assume that loan losses will continue to increase, so it would be logical to assume that bank stocks will continue to decline.

That may be true, but here’s the kicker: at current prices, ZEB is paying approximately a 5% dividend, and given that the banks distribute approximately 50% of their earnings in dividends, it is unlikely that the dividend will drop substantially.  More specifically, even with declining earnings, the banks will keep their dividends at current levels even if they need to distribute 90% of their earnings as dividends, so I don’t expect dividend levels to drop.

If that’s true, and if you plan to hold ZEB for the next two years, the daily stock price is irrelevant.  Buy it, hold it for two years, and as long as the share price is around where you bought it in two years you’ve earned 5% a year, at moderate risk.

At the bottom of the crash ZEB dropped to $18, but quickly recovered, and has traded in the $21 to $24 range since, so a purchase between $21 and $23 is a good bet.

We live in a world of zero interest rates.

Literally.

If you want to put your cash in a “savings” type vehicle, products offered by Manulife and the big banks are currently paying 0.15%, which is essentially zero.  You can earn more if you lock it in for a year or longer, but if you want cash, you can’t earn anything.  ZEB becomes a good alternative.  It becomes your savings account, and provided you are willing to let it sit, you likely won’t lose.

In fact, if ZEB recovers to $29, where it traded in February, in addition to your 5% yield you could earn a nice capital gain.  It’s a moderate risk win-win.

Gold

As for gold, it’s stuck in a trading range between $1,675 and $1,775, and given that it is now the summer, it may be range-bound for a few months.

I have trimmed my gold holdings, and I’m holding cash, and I will wait to see what happens next.

That’s the update; more next week.

We’ll get back to talk of gold and bitcoin next week.  (I still like gold, by the way, and Bitcoin will be higher in a year than it is today, but it’s a speculation, not an investment).  But let’s go off the board and discuss something I have never discussed before:

Bank stocks.

What?

The world is in lock down, everyone is deferring their loan payments, bank loan write offs will be huge; why would you buy bank stocks now?

Because they have already crashed, they have not recovered, and they still pay a good dividend.

Here’s the chart of ZEB.TO – BMO Equal Weight Banks Index ETF, and ETF.  The full fact sheet is here, but here’s the gist:

It’s an ETF that invests, in relatively equal weight, in the Big Six Canadian Bank Stocks:

  1. National Bank (the smallest of the Big Six, by far)
  2. CIBC
  3. BMO
  4. RBC
  5. TD
  6. BNS

That’s it.  They hold the stocks, and collect the dividends, and pay out the cash monthly.

The next distribution will be for Unitholders of record at the close of business on May 28th, 2020, who will receive cash distributions payable on June 2nd, 2020.  The distribution will be 10 cents, which extrapolates to $1.20 per year, and with the ETF trading around $22, the yield is just over 5%.

Not bad.

But what about the risk?

ZEB was trading at $30 on February 21, 2020, just before the crash.  It bottomed out at just over $18 on March 23, a crash of 40% in about a month.  That is a massive crash for “safe” bank stocks.  It has now recovered 13% of the 40% it dropped, so it is still near the bottom.

Could it crash more?

Sure.

It was $15 in November 2011, and July 2010, so it could fall another 30% from these levels.

Will it?

I don’t think so.  It is true that bank’s will have loan losses, but that’s largely priced in.  That’s why the banks crashed 40%.  The world is re-opening.  Borrowers are going back to work, and will resume payments, so it is unrealistic to assume that banks will lose another 40% of their value from here.

Also, rough numbers, the banks pay out about 50% of their earnings in dividends.  Big Canadian Banks never cut their dividends.  So even if their income drops significantly, they could still pay out 90% of their earnings as dividends, which implies that their dividends don’t change.

So if you buy ZEB for $22, you get your 5% return.  If ZEB falls to $15, you will likely still get the same cash dividend, so provided you don’t sell, you get your 5% until it recovers.

This seems to me to be a good, relatively low risk bet.

If the market recovers, the $22 stock could be $30, so in addition to your 5% yield, there could be 36% capital appreciation.

I have taken a position; let’s watch and see what happens.

 

Gold and Bitcoin

May 16, 2020

It’s the long weekend here in Ontario, and today, Saturday, we will have our first decent weekend weather day in a long time, and the next few days will be rainy, so everyone will be outside today, lock down or not.  That’s good.  Let’s be safe, but let’s get on with it. Two charts for […]

Read the full article →

Stress Levels Rising

May 9, 2020

To answer my question from last week: Tesla: Is this the end? the answer, apparently, was no, at least not this week, as Tesla went from $700 on Monday to $819 on Friday.  Yup, a 17% gain on the week when factories are shut down and no-one is buying cars.  Amazing.  The crash will be […]

Read the full article →

Tesla: Is This Finally The End?

May 2, 2020

I currently have no position in Tesla, but I am on record as thinking it’s a gigantic fraud.  Their technology is no better than anyone else’s, and despite a decade in business they have never made an annual profit.  They exist entirely due to government largess. And their CEO is nuts.  On Friday he tweeted […]

Read the full article →

Equinox Gold: Big Win, So Taking Some Cash Off the Table

April 25, 2020

Back on February 15, 2020, in my post on Equinox Gold – New High – What’s Next?, I said this: As of today EQX is not part of GDXJ, but I expect it to be added over the next month or two.  When that happens a new wave of buying is required to include it […]

Read the full article →

My Fun with Apple

April 18, 2020

This week I decided to play with Apple options. Apple, in case you haven’t heard, is a really big company; as goes Apple, so goes the market.  If Apple is up, it’s likely the market is also up, and vice versa. As you know, we had a crash, and then a partial recovery, which leads […]

Read the full article →

And now, we wait

April 11, 2020

By all accounts, it was a great week on the market.  I know.  The Wall Street Journal said so: U.S. Stocks Log Best Week Since 1974 Unemployment claims are at record highs, the economy is in lock-down, and the market has it;s best week in 46 years? All is not what it seems, of course. […]

Read the full article →

Is April the Pivot Month?

April 4, 2020

Last week I asked When Will We Hit Bottom? I posited the theory that the key is to watch the death rate: Here’s a test: How many deaths are occurring?  Obviously the number of cases will increase exponentially over the next week or two, as more people are infected, but if there is an effective treatment, […]

Read the full article →

When Will We Hit Bottom?

March 28, 2020

How do you know when stocks have stopped falling? The easy answer is “when we have a double bottom”.  That makes sense, psychologically.  In the absence of specific news (like a bankruptcy filing and the company shutting its doors forever) stocks don’t fall every day for 30 straight days until they hit zero. As this […]

Read the full article →