Ford drops another $11 billion on EVs and batteries … banking stocks look interesting as we near the era of rising rates … how big of a deal is the China 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 U.S. plants that will produce electric vehicles and batteries.
Ford is building twin lithium-ion battery plants in central Kentucky through a joint venture with South Korea-based SK called BlueOvalSK as well as a massive 3,600-acre campus in west Tennessee, the automaker said Monday night.
The campus will include another a battery plant built with SK along with a supplier park, recycling center and a new assembly plant for electric F-Series trucks, Ford CEO Jim Farley told CNBC.
This new investment comes on top of the $30 billion that Ford previously said would go toward electric vehicles through 2025.
It’s not just Ford. This is a sector-wide revolution.
For example, GM is spending $4.6 billion through a joint venture with LG Chem for battery production starting in 2023.
And earlier this month, BMW announced it had ordered upwards of $24 billion of batteries. That 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’ve noted here in the Digest, this EV revolution will drive enormous investment returns for top-tier EV manufacturers, EV infrastructure companies, battery companies, and battery metals (and battery metal miners) this decade. Our September 9th Digest dug into this more if you’d like more details.
Bottom-line, this is a massive mega-trend offering many ways to profit, and this news from Ford is simply the latest illustration. Best of all, it’s a multi-decade growth story.
Make sure your portfolio has exposure.
***Switching gears, it’s not too early to think about positioning your portfolio for the coming era of rising rates
Last Wednesday, the Fed held its benchmark interest rate near zero. However, the updated Dot Plot showed us that we could see six or seven hikes by the end of 2024.
From Yahoo! Finance:
The updated forecast now has the committee split on rate hikes in 2022, with 9 members seeing the case for no rate hikes next year but the other 9 seeing the case for at least one hike. By the end of 2023, the median dot projects three to four total rate hikes.
Through the end of 2024, the median FOMC member sees six to seven total rate hikes.
While climbing rates will be a headwind for certain sectors, there’s one market corner this will help…
Banks make money on their net interest income. This is the difference between the revenue they generate from interest on loans, mortgages, and securities, versus the interest they pay out on their deposits.
In general, banks pay you a lower short-term interest rate – think the Two-Year Treasury yield – while charging you a higher long-term interest rate – think the 10-Year Treasury yield.
So, as rates and yields rise, a widening spread between short- and long-term rates represents more profit for banks.
The chart below shows this “10-2” yield spread.
One year ago, the spread was just 0.53%. Today, even though it’s down from highs this spring, it sits at 1.23%.
That’s more than 130% higher.
This increase is padding banks’ profitability.
***Another thing to keep in mind, bank stocks are cheaper than the broad market today
The S&P 1500 bank industry group trades at a price-to-earnings ratio of 12.6, based on weighted consensus price-to-earnings estimates for the next 12 months among analysts polled by FactSet.
The full S&P 1500 Composite Index trades at a forward P/E of 20.5. The average forward P/E for the banks over the past 15 years has been 12.5, while the average forward P/E for the full index has been 15.4.
In other words, banks now trade for 61% of the S&P 1500’s forward P/E valuation. But on average, they usually trade for 81%.
Translation – historic discount.
As the Fed slows down bond purchases and then hikes rates, look for long-term interest rates to push higher – leading to higher spreads and more profit for banking investors.
If you’re looking to take advantage, check out XLF, which is the Financial Select Sector SPDR Fund. It holds financial heavyweights including Berkshire Hathaway, JPMorgan, Bank of America, Wells Fargo, Morgan Stanley, Goldman, and Citigroup.
***Finally, to what extent do crypto investors need to worry about China’s flat-out ban on cryptocurrencies?
Last week, the Chinese government announced it would ban trading and mining of cryptocurrencies.
Though this should have surprised literally no one, it still served as a sell-off catalyst.
But what are the broader ramifications of this? Both from a short-term and long-term perspective.
For those answers, let’s turn to our crypto specialist, Luke Lango, editor of Ultimate Crypto.
Let’s begin with Luke’s take on the short-term impact:
Let’s rewind to the last time China instituted a similar ban on crypto mining…
That happened in June. Back then, Bitcoin dropped from $40,000 to $30,000 on the news. It languished there for a few weeks. Then, by early September, Bitcoin prices were above $50,000 again.
In other words, the last time China instituted a big ban on crypto, it ultimately was nothing more than a great buying opportunity for investors.
We suspect this will play out similarly.
It appears that scores of crypto investors agree.
According to CoinShares’ weekly report on Monday, assets backed by bitcoin saw inflows of $50.2 million over the week ending last Friday. That’s the most since the week ending April 19th.
Additionally, assets backed by Ether saw $28.9 million worth of inflows. That’s the most since June 7th.
Regardless of what happens in the short-term, the real story for crypto investors will play out over a longer time horizon. So, what are we to make of China’s move on a broader, long-term scale?
Back to Luke:
While China has an enormous population, the crypto market wasn’t reliant upon mass adoption there to drive crypto prices higher.
Instead, the real value creation in cryptos will happen through adoption in Western economies (America, Canada, and the European Union) and emerging economies (Southeast Asia, South America, and Africa).
So long as those countries don’t make moves to ban crypto, the long-term outlook for crypto prices will remain favorable.
And guess what? Those countries are actually doing the opposite.
Outside of China, legislation is advancing in nearly every other applicable country toward normalizing crypto usage.
That’s why we remain steadfastly bullish on the crypto market.
If you’re a crypto investor, this bigger-picture awareness is critical. The more you focus on the short-term – for instance, frequently looking at your crypto balance during painful selloffs – the more you’re risking letting emotions knock you out of your holdings.
Now, if you’re a short-term crypto trader, then by all means, you have to follow these ebbs and flows.
But if you’re in it due to the long-term growth story, do yourself a favor and go busy yourself with other things.
Here’s Luke’s bottom-line to take us out:
The rest of the world is pivoting toward legitimizing and normalizing cryptos. So long as that remains true, crypto prices will trend higher in a multi-month and multi-year window.
Stay patient. Stay the course. You’ll be happy you did.
Have a good evening,