Financial Transactions Tax and Investors

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Starting next year the European Union – less the United Kingdom and a few others – will begin collecting a tax on all financial transactions. That means that for stock purchases, derivative contracts, repurchase agreements and other items that traders execute there will be an extra levy attached. This should have a fun effect on the market.

This is one of a host of items, both in the U.S. and Europe, that drafters say are designed to provide insurance against another speculative bubble or to smooth out investment behavior. Right. What this is really about is tax revenue. It's a way for governments to extract more money for government services. Whatever else someone might say it is, that's what this is about.

It might not even be a bad idea. Yes, traders and financial institutions will feel some pinch, but it's possible that the restraint won't be a bad idea. But expect furious lobbying in the U.S. against it, because those guys don't want to pay any more taxes than they're forced to, and the banks have done a very good job of buying influence in congress and the White House. Still, with the EU regulations, there will be an impact on banks, both inside and outside the Eurozone.

Deustche Bank (NYSE: DB)

The single largest bank in Europe, according to a recent study, Deutsche Bank holds nearly $3 trillion in assets. Based in Germany, it has the fun of knowing that the German Government is one of the 11 nations that will begin levying the tax starting next January. Investors should expect the German Government not to budge on this one, so expect Deutsche Bank's earnings to take a hit.

In terms of investments, DB doesn't look bad. The firm's shares have appreciated by 65% since July and there's a solid 2.06% dividend. One could do much worse. The only concern I'd have is that the tax will hit the bottom line next year and the P/E is only at 11.39, indicating some expectation that the growth has already been seen.

JPMorgan Chase (NYSE: JPM)

Chase does a significant amount of business in Europe and, even if it's an American bank, it's going to get hit with the tax. That might have an impact on the bottom line. Even if the tax is small, and it can be as little as $100 on a $1,000,000 transaction, it begins to add up. Sure, Chase will do its best to pass that along to the customer, but it'll still depress response.

Chase's shares have had a good seven months, growing 53% since June, but are only up a bit year-over-year. There's a big trough there last summer that makes the growth look bigger than expected. Still, you can't discount growth. The dividend yield is 2.52% but the EPS is below 10. How much growth is left is an issue with an upcoming increase in the difficulty of the regulatory environment.

Banco Santader (NYSE: SAN)

The largest Spanish bank and the largest Eurozone bank by market value, Banco Santader has had one heck of a rough year. With the Spanish economy still in shambles and the firm having to write off $26 billion in bad assets just in Spain, there's reason to think the company won't be too happy about a new tax coming at it.

The firm's shares have traded up and down over the last year, but it's been within a four dollar range. Still, when your shares have a 52-week high of $8.86 a four dollar swing looks pretty big. P/E is a lowly 7.95 and it does pay a dividend. It's deceptive, though, as it's only 16 cents per share, but the year's dividend was much higher because of some large one-time payouts. Be warned. And stay away until the dust settles.

Bank of America (NYSE: BAC)

Yes, yes, the word 'America' is in the name. But that doesn't mean these companies aren't global. Bank of America has a significant presence in Europe and the Middle East. All of these are vulnerable to the financial transaction tax. And, of course, BAC has done some bone-headed things in the past year, such as the $5 check card fee and, apparently, the acquisition of Countrywide five or so years ago. Boy, that's a deal that's looking worse every day.

I'll be honest. I don't have faith in Bank of America. I don't care how much the shares have grown – 38.4% in the last twelve months – this is a company that still has to show me that it knows what the hell it's doing before I'd recommend them to clients. Toss in the insulting dividend of one cent per share and it looks like a silly investment. Even a P/E of 44.70 just tells me that the people who are buying it are hoping for an increase down the road and not in the short-term.

Look, a financial transactions tax has been around as a concept for a long time. My broker colleagues all hated the idea, understandably, but they were aware of it. It's coming in Europe, and if it works there, to any extent, it'll happen here, too. There are already proposals to do something similar in the U.S. that haven't gotten anywhere, but someday they will. There's still too many jokes going around about the evil bankers who caused the recession not to provide cover for politicians to enact something. So make your banking investments with that in mind.

Good luck!

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