Some advice you can take to the bank
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Dear Mr. Berko:
My broker has advised us to buy 5,000 shares of Bank of America. He says it has bottomed out and that in the next two years it could return to its previous high price in the $50 range. We think he might be too bullish and told him we wanted to get your opinion. He said he has known you for more than 25 years but didn’t react kindly when we mentioned your name. He’s been our broker since 1997, and our experience with him has been good. He tells us that there are “impressive opportunities” in the banking sector and that Bank of America has the best prospects. We hope he is right but would also appreciate your thoughts.
S.P., Fort Walton Beach, Fla.
Dear S.P.:
I have known your broker for 20 years. I met him at a conference in 1989 when Prudential was debating the purchase of Thomson & McKinnon Securities. You know how you can dislike someone when you first meet? Well, my feelings haven’t changed. During the following 20 years, I’ve been in the same room with him on a half-dozen occasions, and I still dislike your broker. Frankly, the most unpleasant thing about him is that when he isn’t drunk, he’s sober. But I must say I have solid respect for his knowledge about the economy and the stock market. Though he tends to be overbearing, he’s very attentive to and protective of his clients, most of whom appreciate his care, personal service and sound advice.
There are two brilliant banking analysts whose opinions are closely followed by other banking analysts, portfolio managers, hedge fund investors and traders. Mike Mayo of Deutsche Bank is a respected analyst who is closely followed by the denizens of Wall Street. They hang on his words as if he were the oracle of Delphi. Mayo is a bear’s bear on the banking sector and predicts a “rolling recession” that will last into late 2010. Consequently, he has issued “sell” or “underperform” opinions on Bank of America Corp. (BAC-$11.77), Citigroup Inc. (C-$3.51), JPMorgan Chase & Co. (JPM-$36.23), Wells Fargo & Co. (WFC-$24.94), BB&T Corp. (BBT-$27.82), M&T Bank Corp. (MTB-$56.88), Bank of New York Mellon Corp. (BK-$28.50) and a half-dozen more. Mayo says the banks’ troubles stem from excessive risk exposure over several years, with the cost of expensive bets being felt today.”
Richard Bove of Ladenburg Thalmann Co. is also an esteemed banking analyst whose views are the polar opposite of Mayo’s. Bove insists that the economy has bottomed out and that the infusion of government capital and the various asset relief programs will be successful because they have generated enormous confidence in the public and private sectors. In fact, Bove has issued a number of “buy” ratings and even believes Bank of America, Wells Fargo and several other large banks can return to their old highs in the coming 18 months. It seems your broker and Bove are on the same glide path.
What to do? What to do? What to do? I prefer Mr. Bove’s optimism to Mr. Mayo’s pessimism; optimists certainly get invited to more parties. And I agree with your broker that there appear to be some “impressive opportunities” in the banking sector that could be enormously rewarding in the next couple of years.
However, as my good friend Jerry Robbins would say, “When opportunity turns to hope, it’s no longer an investment.”
If Richard Bove believes Bank of America will return to its January 2007 high in the mid-$50s, then I suggest the following: Rather than buy 5,000 shares at today’s price, just buy 2,000 shares of Bank of America. You see, I’d rather buy a stock feeling with some degree of certainty that it’s going higher, than buy a stock that might have stopped going down because it might have hit bottom. Then watch BAC like you would a 5-year-old. Chart its daily price movements, its volume, and pay attention to its various moving averages. If they represent a bullish picture over the next two to five months, then buy 1,500 shares. Then, when BAC announces that it will raise its dividend from a penny a share, purchase another 1,500 shares and round your total to 5,000 shares. And be mindful that losing an opportunity is a much less regrettable alternative than losing money. I think your broker will agree.
Please address your financial questions to Malcolm Berko, P.O. Box 1416, Boca Raton, Fla. 33429 or e-mail him at malber@comcast.net. © 2009 Creators Syndicate Inc.
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