by Floyd G. Brown, Advisory Panelist, Investment U
Wednesday, June 18, 2008: Issue #809 The great banking stocks crisis of 2008 is still going strong. The lists of negative headlines in the financial press are omnipresent. Consumer confidence is in the dumps. Foreclosures are at all-time highs. More than 8% of all mortgage loans are past due or in foreclosure… Banking stocks, which are known for stability and high dividends, have transformed overnight into high-risk, volatile investments. The list of banking stocks, down more than 50%, grows with each sell off. Long-time shareholders have lost billions. Take a look… - Citibank has slumped from $54 to $20 per share, down 63%.
- Washington Mutual plummeted from $44 to $6.75 per share, down 85%.
- Wachovia fell off a cliff from $54 to $18.50 per share, down 67%.
- National City Bank has fallen from $34 to $5 per share, down 85%.
Investors buying the shares of these and other banks last winter bought a falling knife and have paid a dear price. The only individuals that profited in the last year were short sellers and the fired CEOs that walked away with millions. Stanley O'Neal of Merrill Lynch, for example, took more than $161 million with him, on top of the $70 million he made during his four-year tenure. Charles Prince of Citigroup left Citigroup with an exit package worth $68 million, including $29.5 million in accumulated stock, a $1.7 million pension, an office and assistant, plus a car and a driver, according to The New York Times. Amercia's Talking About Buying Banking Stocks With the tape so bad, why are some of the best investment minds in America talking about buying banking stocks? David Dreman, Chairman of Dreman Value Management, recommended three banks in his recent Forbes column. "The good news is that the worst of the liquidity crisis seems to be over," he wrote. "After a slow start, the Federal Reserve Board under Ben Bernanke has done an outstanding job containing the panic in the financial system and dispelling the fear of a total meltdown." Dreman, an expert on the psychology of investing, is a self-styled contrarian. He believes that by controlling your emotions and buying these banks while others are selling, opportunity abounds. These shares of banks are in distress and oversold. To be sure, long-term investors who understand the intrinsic value in this sector will buy and profit handsomely. Even More Bullish on Banking Stocks Tom Brown of Bankstocks.com is even more bullish on banking stocks… "Our take on the arc of eventual subprime mortgage losses," he said, "is simple: Most estimates, particularly of losses on loans originated in 2006 and 2007, are significantly too high. The reason why they're too high is simple, too. They assume that last year's credit performance will persist far into the future. Only it won't." The news media has been full of reports that homeowners underwater on a valuation basis have been walking away from their homes. Jim Cramer is famous for saying repeatedly on his CNBC show, "Here, take the keys, I'm outta here," as he mimics homeowners that overpaid talking to their bankers. That's not the reality, though… "Homeowners typically do not walk away from homes they live in unless they are unable to pay the mortgage. Usually [this happens] because of job loss, a death in the family, divorce or a big jump in their monthly payments. Real estate speculators, of course, do abandon properties when prices fall," writes Vikas Bajaj in The New York Times. The rate of foreclosures within the housing market will moderate as illiquid investors are washed out. The non-cash charges to the balance sheets at many of these banking institutions will be reversed and show on the later reports as profits. The year-over-year comparisons will be excellent and the shares should move substantially higher. One year from now, a likely scenario is that investors will look back at the spring and summer of 2008 as the last opportunity to buy shares of financial stocks at a generational low. Do not let fear keep you from participating in the buy of a decade. Good investing, Floyd Floyd Brown, a regular contributor to Investment U, began his highly successful investing career while still in high school… making his first million before turning 30. Floyd is a regular contributor to The Oxford Club, as well. To find out why becoming a member could significantly change your financial picture for the better follow this link for more information about The Oxford Club. Today's Investment U Crib Sheet - Predicting "top" and "bottoms" isn't an exact science, of course. Instead, we embrace the market's uncertainty and look to profit from its fluctuations. Dollar-cost-averaging is one way to do that…
Basically, you set aside a specific amount of funds and consistently invest them at regular intervals without regard to market movement. There are two main advantages to systematic investing:
Advantage #1: Because you aren't committing your entire investment, you lesson the impact of a bad day in the market. And in turbulent trading, systematic investments have been proven to outperform single purchases.
Advantage #2: A disciplined strategy can help investors defeat their greatest adversary - themselves. Systematic trading plans remove personal emotion from investing decisions.
You can start systematic investing with as little as $25 a month, or as much as you want… You can choose to purchase monthly, weekly, or daily.
- There have been many sectors that have hit historical lows and the investors are finding deep discounts in value stocks. Just last week, Floyd recommended a deep-value fund that re-opened its doors to new investors in Investment U Issue #798, The Dodge and Cox Stock Fund: Get into this Mutual Fund Before it Closes Again.
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