Five days ago I reported that Bank of America's dividend was at 11% and that the stock might present a good buy. Did I listen to my own advice? No. Today, BofA was up more than 20%.
Five days ago I reported that Bank of America's dividend was at 11% and that the stock might present a good buy. Did I listen to my own advice? No. Today, BofA was up more than 20%.
"So who is an investor to believe? I personally think Bank of America is a pretty savvy operation and that they knew what they were buying with Countrywide. They probably were able to model a range of losses that they would experience with their porftolio and included that in their business projections. Surely, their data is more accurate than the models created by Wall Street bankers who have no first-hand experience with the mortgage markets.
I also believe that if you look at Bank of America's stock, it is back to its 2001 values. That means that all of the gains of the last seven years, the height of the mortgage and housing bubbles have been wiped out. I also think that's reasonable."
I still believe that. I expect a few more bumps in the road with financials. I don't think the mortgage or overall credit crisis is fully over. Maybe sixth or seventh inning and banks will take a few more hits. But I also believe that markets have priced most of this in. The near insolvency of Fannie and Freddie certainly lowered future expectations.
Is the BofA still a good buy? Maybe, but not as good as it was a week ago. I'm still kicking myself for not buying.
If the market is open, the financials are down 10%. This will continue until we have another Bear Stearns-like failure. Bernanke has told us as much. Don't try to bottom-fish. These are failed business models.
The business model of leveraging credit upon credit has failed. It wasn't a Bear Stearns model, it was an industry. There were many culprits, banks without the intellectual capital to grow the business of the basis of investment banking or trading like Goldman, Morgan Stanley or JP Morgan, that just leveraged their balance sheet and kept leveraging and leverage. A crazy credit environment, a housing bubble and a strong economy all contributed to the environment. But, when you build with leverage on leverage, it doesn't take too much to bring down the house.
The house is falling now. These banks are down 10% every day. The model has failed and there is nothing left. This will continue until we see a major failure.
I believe that Citi will be bailed out by some middle eastern prince or sovereign wealth fund. I am less certain of Lehman, Merrill and Wachovia. I think that one of these banks will fail and fail soon.
However, I could be wrong so I wouldn't dream of shorting one of these.
In the current dreadful economic environment, online savings accounts may provide security of your principal (as long as you stay within FDIC limits), but the rates can fall out from under you in a second.
The current economic environment is pretty miserable and the only place to hide is in cash.
But, when you hide, don't rely on the interest rate that is advertised. The reality is that there is no guarantee that you will be getting that rate from one day to the next.
In this environment, banks will compete for deposits with one another on any given day. The next day, the economy will deteriorate, short term treasuries will fall (as will expectations about a Fed rate hike), a bank or two may go under, and the rate that is being offered may fall.
Plenty of banks, including Countrywide and One United, have lowered their savings rates over the last couple of days. As a result, short-term CDs are beginning to look like a much more attractive way to get through this period without seeing the interest rate that you are earning decline immediately. The exception, of course, is the Everbank program, which is guaranteed for new depositors for 3 months (so is effectively a CD).
