It is very hard to argue that the so-called "market" does not crave predictability. When valuations of Utility and Consumer Staples stocks rise to historically high levels, which has driven their dividend yields toward historical lows, predictability of earnings seems to be an insatiable craving. This could change rapidly, as thing do in the financial markets on a day-to-day and week-to-week basis. However, for the time being, volatility is a 'four-letter-word' and predictability is a virtue.
Given the above argument, increasingly-regulated industries are likely to increase in desirability among investors. In fact, over time, despite our free-market ideals (however "rigged" things are on a regular basis), increasingly-regulated markets like health insurance and utilities and NOW banks usually generate massive stock returns while, in contrast, de-regulated markets attract too much capital from Wall Street investment banking which drives returns-on-invested-capital lower (Wall Street has rarely seen an opportunity not worth over-capitalizing. In the case of airline de-regulation and utilities de-regulation in the 1990s, Wall Street overcapitalization of those industries led to lower returns that were inadequate to service debt levels, resulting famously in the massive bankruptcy of TXU. The dot.coms rise and crash is another good example of this overcapitalization phenomenon, which the re-regulation in the Utility industry and in certain sectors such as Health Insurance has deterred new capital into those industries (other than company self-generated cash flows) and higher returns-on-invested-capital.
If the above analysis and argument is accurate, then the U.S. banking system should offer great returns for investors in the next several years. Few, if any, sectors have been as aggressively and quickly over-regulated than the U.S. banking sector. Various industry players periodically complain about the increased regulation, but in reality it is that regulation that drives those same companies to monitor, manage and streamline their businesses like never before. Moreover, the increased regulation deters "shadow-banking" enterprises from being capitalized by those looking to invest in "growth" industries such as mortgage brokers, mortgage insurance, mortgage servicing companies and related financial services businesses.
Finally, this argument is not speculative in its entirety. The benefits of increased regulation in the U.S. banking industry is already apparent. Dividends are RISING in the banking industry in the United States, as companies understand that they must generate strong positive returns on internally-generated cash flows. Moreover, moderate mergers and acquisitions (M&A) activity is occurring, albeit likely at an early stage; however, this area may accelerate as existing-operations margins and returns-on-capital max out and managements look for opportunities to reduce costs by consolidating operations. One additional impressive statistical difference between Utilities and Regional U.S. Banks is that the banks have negligible capital expenditures requirements relative to their profits; this fact too also supports higher valuations and better dividend growth prospects for the regional banks.
I have increased my investment exposure to regional U.S. banks recently and will likely continue to do so opportunistically.
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