Streetwise for Mar 21,  2010

Streetwise

Lauren Rudd

Sunday, March 21, 2010

Dear Dad...

Dear Dad,

It has been almost seven years since you passed away and although I know I can never actually give you this letter, if you could read it you would undoubtedly be both surprised and saddened by the path taken not only by Wall Street but the country as a whole.

Meanwhile, I recently came across the first book you gave me on Wall Street. It has an inscribed date of 1955 and I could not help but reminisce about those early 50’s. You had a NYSE brokerage firm, a seat on the Big Board and trading took place on Saturdays. Remember how I was the Saturday chalk boy, ripping the latest Dow Jones Averages off the teletype machine each half hour and writing them on a blackboard for everyone in the office to see.

Today there are no more Exchange seats. The NYSE is now a publicly held corporation called NYSE Euronext, formed by the NYSE's 2007 merger with the fully electronic Euronext exchange and the acquisition of the American Stock Exchange in 2008.

Although both computer technology and sophisticated mathematics have become an integral part of investment analysis, many of the principles you taught graduate students using Graham and Dodd’s classic “Security Analysis” text remain relevant, even in today’s complex world of financial engineering.

And yes, I still have my well used and underlined fourth edition of Graham’s book from when I took your classes, although it is buried deep within an innumerable compliment of investment volumes, most of which bear a striking resemblance to treatises on advanced mathematics.

Perhaps if the Street had shown a greater adherence to Graham’s principles we would not have had the deadly development of toxic securities and rampant greed that nearly brought down the economy.

As chagrined as you might have been with Wall Street’s antics, its complicity with the banking and bond rating industries would have concerned you the most. I can remember when you left Wall Street to start D.C. National Bank because you felt that the ethics of the Street had degenerated, while the banking industry supposedly held itself to a higher standard.

Unfortunately, what concerned you about the Street back then would not even merit a slap on the wrist today. At the same time, the banking industry has morphed into an industry that is often looked upon with scorn. When D.C. National was acquired by Bank of America, not because of failure but because of its outstanding growth and performance record, it appeared to be the pinnacle of success for D.C. National’s shareholders. I wish I could tell you that Bank of America continued on that high plane. Unfortunately, I cannot.

Remember back when you were D.C. National’s president and the Comptroller of the Currency would periodically ask for your assistance in helping out troubled banks, despite your being a relative newcomer to the banking industry? Well, Bank of America would have been well served by your presence over the past several years.

With the elimination of virtually all regulation, including Glass Steagall, which brought about the subsequent collapse of Wall Street and the economy, many felt that Bank of America was among the walking dead. I took a contrarian position, despite the bank’s heavy losses and the need for a government bailout. When I last wrote about the bank a year ago, the share price was $4.60.

Although earnings growth in 2009 did not meet my expectations, my forecasted share price of $6.00 was left in the dust, with the shares closing recently at $17.27. Nonetheless, I am lowering my earnings estimate for 2010 to $1.40 per share, with a projected 12-month future share price of $20.