Market Report: Bank Shares Clearly a Losing Proposition

Investing in Bank Shares: Some analysts suggest that the market is overly “psychological” regarding bank shares. To date, the BAC puts I have recommended to WOW readers are up 12.5% and 22.73%. Add in the 67% gains on my recommended Wachovia (WB: NYSE) puts, and I would have to say that my ego has not overly clouded my perception of the facts on the ground.

In this Article:
- John Dessauer, of Investor’s World recommends buying big bank shares
- I disagree, and suggest that there is more pain to be felt here
- WOW readers’ puts on Bank of America (BAC: NYSE) are up 12.5% and 22.73%. Wachovia (WB: NYSE) puts are up 67%.

Bank Shares Clearly a Losing Proposition

In the predicting biz, the hardest thing to do is to maintain an informed point, without falling into prejudice. It’s a thin line indeed between engaging decades’ worth of hard-earned wisdom… and lighting a candle for a group of stocks in which you heavily invested, via either hard-earned cash or advisory reputation.

Early last week, John Dessauer, a veteran financial scribe and a player in his own right, caviled that investors’ nerves were overly sensitized to bad banking news. In an article posted on CBS MarketWatch -- oh, like I don’t read the competition? -- Mr. Dessauer apprised us that the market was not acting evenhandedly to actual news, but rather reacting “psychologically” to scary headlines.

Now to be frank, John has been doing this a long time. His eponymous “Investor’s World” column was already in circulation when I was a young entrepreneur desperately ginning up ways to pay off the cost of my oldest daughter’s birth.

Investing in Bank Shares: Tipping the scales.

But I do think that he is putting his thumb on the scales when he advises that banks are a buy right now. His principle theorem: “Folks gotta live somewhere, so eventually mortgage banking will come back.” This only works if you have a spare billion that you can ignore for a decade or two. (This might explain why uber-investor W. Buffett also likes the banks and builders right about now.)

Perhaps my relative inexperience causes me to see things a bit differently (my decades of owning and running real businesses having only allowed me the spare time to write about 10 years ago). But here’s my take anyway.

Personally, I think the fact that independent pollster RealtyTrac sees a 93% spike in foreclosures as somewhat indicative, and not in any good way. What’s more, I don’t think that the (somewhat self-interested) Mortgage Bankers Association slicing and dicing of the numbers until they are only slightly less damning does nothing to ameliorate that negative indication.

Dessauer also likes the fact that various bankers are acting to shore up their positions. For example, he very much appreciates that Bank of America (BAC: NYSE) recently flaunted Merrill Lynch’s (MER: NYSE) warning that 800-lb. mortgage gorilla Countrywide Financial (CFC: NYSE) might go belly up sooner rather than later. The fact that BAC was already in the hole with CFC for Lord-only-knows-how-much, did not prevent them from tossing another $2 billion into that same hole.

When I was a business owner, I learned the following adage from a friend in banking (after plying him with much scotch and two good Cuban cigars): What do you call someone who owes a bank $100? A bum. But what do you call someone who owes a bank a million? A stockholder.

I don’t much like CFC’s position (despite CEO Angelo Mozilo’s assurances that the company is worth just as much now as it was when its share price was three times what it is today). The fact that BAC is joined to their hip does not make me like it more. Rather, it makes me like BAC less.

So what would make Mr. Dessauer turn a blind eye to all this, and advise you to do the same? I am not genuinely privy to the inner workings of his mind, but I might suggest that the fact that he owns stakes in such enterprises as Citigroup (C: NYSE), Countrywide, IndyMac (IMB: NYSE) and Wachovia just might be obscuring the clarity of his vision.

And as I said earlier, clarity is hard to come by in the predicting biz. At this point, I must confess that I too have something at stake here. Two weeks ago, I wrote to you warning that the last thing in the world you wanted to own was banking shares. I had all sorts of reasons for saying this, and while none involved a personal stake, either long or short, I will concede that I have advised readers repeatedly that these banks were in for a world of hurt.

I was quite specific: I warned that the chart for Bank of America, which addresses those very same mass psychological aspects that John D. deplores, indicated that BAC shares were headed southward posthaste.

So whose vision was clearer? When I wrote to you in August, BAC shares were trading as high $51.77. As of lunch today, they have traded as low as $48.60, and despite John’s suggestions to the contrary, they show no signs whatsoever of turning around.

To date, the BAC puts I have recommended to Wavestregnth Options Weekly readers are up 12.5% and 22.73%. Add in the 67% gains on my recommended Wachovia puts, and I would have to say that my ego has not overly clouded my perception of the facts on the ground.

Adam


Outside Links:

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