Streetwise for Sunday Mar 15, 2009

Streetwise

Lauren Rudd

Sunday, March 15, 2009

Don't Fall Victim To The Dark Side

Your primary investment objective should always be to achieve financial returns in excess of what you will lose through taxes and inflation. However, do not ask for the impossible. To be desirous of “beating the market” or to reach for unrealistic returns is to fall victim to greed, and greed, to use an analogy from the Star Wars epics, is the dark side.

Now I know what you are asking yourself, given the current recessionary outlook, the downturn in the stock market, the plummeting real estate market, rising unemployment and the tab taxpayers are picking up after the last party on Wall Street, I would have the temerity and audacity to suggest continuing to invest in stocks?

Absolutely correct! In fact, I believe in equities now more than ever. The shares of American industry have, with only a few exceptions, been unfairly and undeservedly beaten down to levels that are unjustified. Yes, Wall Street has an unenviable record that is overly abundant in greed and stupidity. However, the Fed and the Treasury Department are taking the appropriate corrective action. Note that I left Congress off the list.

Unfortunately, our elected congressional representatives are so busy bickering, back-biting and playing one-upmanship that it is surprising when anything of merit is accomplished. Asking them to take rational decisive action on a subject as complex as financial regulation that is further complicated by fervent attacks from lobbyists, whose clients revel in an unregulated environment at taxpayer expense, is unrealistic.

Although there is some validity to the idea that a new broom sweeps clean, not everyone should be painted with the same brush. For example, Ken Lewis, head of Bank of America, may not be a candidate for angel wings or sainthood but he is an astute executive and one who appears to place shareholder interests above his own. Furthermore, based on publicly available material, it is hard to fault his decisions considering the data he had at the time he made them.

Would Lewis have made the same decisions today given how life has unfolded? Let’s just say that John Thain, former Merrill Lynch CEO, is probably no longer on Lewis’ Christmas card list. However, hindsight is always 20/20. Meanwhile, as the economy begins to expand in earnest, most likely in the first quarter of 2010, Bank of America is well positioned to capitalize on that growth.

Of more immediate importance is where the bank stands today. First of all understand that we are a capitalistic society and we do not nationalize industries. Furthermore, both the Fed and Treasury have made it clear that “nationalizing” the banking industry is not going to happen.

So what is the value of Bank of America? Consider first that it has shares of ownership in foreign banks valued at approximately $4.5 billion, in addition to its 16.7 percent share of China Construction Bank, worth about $20 billion. It also owns $5.75 billion of BlackRock, a successful asset manager. Added together the bank has external investments of $30.25 billion. Its recent market capitalization, defined as share price multiplied by outstanding shares, is $30.02 billion.

That means Wall Street is attributing a value of zero to the bank’s retail business, commercial clients, credit card customers, mortgage business, investment banking activities, asset management and brokerage businesses. Anyone see a blue light?