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BAC and WM

Corey said: "These two have been discussed a bit recently, and I wanted to basically say why I believe that they are absolutely terrific buys, despite the subprime debacle (which, for BAC especially, isn't really a big deal for these boys) WM: Forward Dividend Yield 6.60% Trailing Dividend Yield 6.10% 5 Year Average Dividend Yield 3.90% BAC: Forward Dividend Yield 5.40% Trailing Dividend Yield 4.70% 5 Year Average Dividend Yield 3.80% These figures speak for themselves. Let me explain why! :lecture: Now, yield, for those who don't know, is Dividend / Share Price. Yield is telling about a company -- companies with high yield can often be seen as risky -- otherwise, people would buy it up, increasing the price, and driving down the yield. Too low, and the company simply isn't paying much out! Often the sweet spot is around 3-5%. Companies above are often above for a good reason -- they are risky picks! But, more important to look at, is yield versus historical yield. Think of Current Yield versus Historical Yield as: (Current Dividend / Current Price) ---------------------------------------- (Average 5 Year Dividend / Average 5 Year Price) Which can also be written as (Current Dividend * Average 5 Year Price) --------------------------------------------------- (Average 5 year Dividend * Current Price) Now, WM and BAC both belong to a special selection of stocks known as the dividend achievers. Basically, they have increased their dividend for more than 10 years in a row. Realistically, 1 or 2 companies fail to stay within the dividend achievers index every year, but those are rare. But the premise of my argument is based on the fact that these two companies will not be delisted next year -- so if you don't believe that, you should stop reading! Anyway, continuing -- if the future dividend is always greater than the current dividend, then we can assume that the only way to bring 'balance' back to the yield versus 5 year average yield ratio is to increase share cost -- driving yield down back to its historic mean. It is all about reversion to the mean baby! So, what does this mean? BAC and WM are wayyyy undervalued! So should you buy now? Eh. I wouldn't quite yet. Now that we have a strong fundamental reason to buy, wait for the technicals. JAP, let us know mate! :laugh:"

newinvestor123 said: "The past couple of days, they've both been pretty strong, and I'm kicking myself (softly) for not picking them up a few days ago. W/C/S... No big deal though. Edit: Decided to pick up some WM tomorrow."

Corey said: "Just to give an opposing example ... CAT's current yield is below its 5 year average, meaning that the only way for its yield to increase is for its price to decrease. Mind you, the yields are slowly converging (forward yield is 1.8% versus historic 1.9% while trailing was 1.6%) -- it is one stock is getting back to a fairly valued price ... but might be a bit overbought at the moment. And to think, CAT was so damn undervalued a month ago ... :shocked:"

BenHouston said: "I agree with you on WM and BAC both being fundamentally strong companies. Let me know when tis time to buy :)"

thezster said: "Welcome back Ben.. we've missed U"

lil dickie said: "Ben Houston? Is it really you? :th_salute:"

JAP said: "Buying stocks when they're on sale is a great idea (I bought 4 dog stocks today as well), but I believe owning [B]anything[/B] in the financial sector is a very risky play right now. Dividends are nice, but bank stocks will continue to be very volatile until this subprime mess shakes out. That could take a while. As we've seen this morning, many other countries besides the US are facing a liquidity crisis. Hedge fund fraud/blow-ups, subprime issues and failed LBOs (all caused by cheap money) will continue to weigh this market down. All these things have taken time to affect the market. It's like a huge ship making a 180 degree turn... it takes a while, but it eventually happens. Many here see me as cynical or pessimistic, but I'm really not. I'm simply anticipating what I believe was on the horizon for quite some time now. I feel we are right around the corner from (if not already in) a "dot.com type" of crash. Once the LBOs start falling apart, the bear market will be upon us... stay tuned."

newinvestor123 said: "[QUOTE=JAP]Many here see me as cynical or pessimistic, but I'm really not. I'm simply anticipating what I believe was on the horizon for quite some time now. I feel we are right around the corner from (if not already in) a "dot.com type" of crash. Once the LBOs start falling apart, the bear market will be upon us... stay tuned.[/QUOTE] I'm wondering myself. My father, who I have learned through trial and error (mostly error) never to argue with, believes the subprime debacle is going to end in a recession/bear market. I'm still on the fence, but I'm definitely leaning towards the bear side of the yard. My WM is still marginally up from my buy in, and my BUD is break even, and I'm considering selling both to protect the gains in my IRA."

Corey said: "JAP -- that is exactly why I see BAC and WM as good buys. They have low exposure to subprime, are on sale, and have the best history possible of paying dividends. When people think of 'defensive stocks', they think of blue chip dividend payers. I am banking on a bear market to get people to start jumping in these dividend payers. And even if they don't, I am all about 'up-down' capture. I want to capture as much of the up, and as little of the down. These 5 and 6% yields are serving as a bit of a safety net. And as always -- these are 10 year positions I plan on adding to every chance possible (unless they are overbought). But you are definitely right -- a lot of financials are starting to look like the .coms of 1999 -- and the market (S&P 500) is a bit overexposed to them with a 20% allocation."

newinvestor123 said: "[QUOTE=Corey]They have low exposure to subprime.[/QUOTE] Yep, which is why I picked up some WM in the first place (which has now been sold). When this thing blows over and/or the heat shifts away from the financials, I'll pick it back up, and maybe some BAC too."

JAP said: "[quote=Corey] And as always -- these are 10 year positions I plan on adding to every chance possible (unless they are overbought). But you are definitely right -- a lot of financials are starting to look like the .coms of 1999 -- and the market (S&P 500) is a bit overexposed to them with a 20% allocation.[/quote] Heck man, if these are [I]10 year[/I] holds, than you can ignore everything I just said! ;) Good luck with those."

Corey said: "Just to put some numbers behind my theory here -- on a black box system that uses this premise as a corner stone for choosing stocks, here are the results of the back-testing (with 0.1% slippage and 30% taxes (taxing all capital gains at every sell)). Started Trading: 6/20/90 with $1,000,000.00 Ended Trading: 4/30/07 with $7,599,511.83 Annualized Return: 11.73% (post 30% taxes) % Winning Trades: 85.72% % Losing Trades: 14.28% Not as good as 'traders' -- but pretty good evidence of the long term power of the system?"

newinvestor123 said: "What's the annualized return of the S&P for the same time frame?"

Corey said: "Sorry -- that was a mistake. That was 70% taxes! I am a bafoon. 30% takes returns annualized of 15.5%. 0% tax returns 19%! S&P during the same period? I can't seem to find an equivalent period (because I take months into account) -- but 1989 to 2006 had an annualized return of 8.6%... :go:Oh, and the Dividend Achievers Index returned 8.9% annualized or something like that over the same period."

newinvestor123 said: "Nice! :th_dblthumb2:"

FirefighterB said: "[QUOTE=Corey]JAP -- that is exactly why I see BAC and WM as good buys. They have low exposure to subprime, are on sale, and have the best history possible of paying dividends.[/QUOTE] While they might not be as exposed to subprime mortgages and their personal banking business will likely keep them from suffering too heavily, they have HUGE exposure to the mortgage market. According to [URL="http://www.cleveland.com/business/plaindealer/index.ssf?/base/business-3/1186825060119570.xml&coll=2&thispage=3"]THIS ARTICLE[/URL], they are the 3rd largest mortgage lender. I was a WM fan, too, but I'm thinking that things are not going to be good for the financials for quite some time. I just got back from a trip to Cleveland, Ohio, where, the real estate market is, arguably, one of the worst in the country. The amount of homes for sale and the values they are asking is rather astounding. The sheer number of real estate signs in the yards of a single neighborhood is SHOCKING. And these are CHEAP (by national standard) houses in good/decent neighborhoods. How can any one of these places stand out over another besides for cutting price? If the person owns it, they've likely not even covered their principle if they're recent buyers, or they aren't getting much if they have owned for over 5 years. If the bank owns it, they're going to be writing down these things for AWHILE. Browse through the business section of the newspaper's website, [url]www.cleveland.com[/url], if yer interested. Every day for the past few that I read the local paper, there has been BAD news (FED, mortgage issues, credit market possibly affecting pensions, etc.). There are some good articles about conditions that don't seem too sugar coated. After reading some of them, I seriously don't see how this won't spread to other markets or, at least, other areas of the country... Also, I've been reading a good book that has caused me to alter my view of our economic picture: [I]The Real Estate Gamble[/I], by Alan Rabinowitz. This book was written back in 1980 and covers the RE market from the early 20th century up until the time it was written. Now, I'm by no means whatchu call "smart," nor do I totally understand every aspect he talks about (I think I have ADHD because I lose focus easily), nor am I finished with the book. However, I am almost through the time period (it's in chronological order) up until WWII. I never really knew this, but there was a RE crash that began occurring before Black Tuesday in 1929, as well as after. This crash brought about many of the mortgage agencies that we know of today (e.g. FHA, Fannie Mae, Veterans, etc.) as the government stepped in to try to ease the pain. Granted, a large portion of it was due to the unscrupulous underwriting/trustee relationship of mortgage bonds (echos somewhat of Bear's recent hedge issues, though), but there was an explosion of values, amount of mortgages, and people who couldn't afford/didn't pay up on them. I honestly don't think I'm giving this book enough credit (maybe because I'm tired, can't explain it well enough, smoke crack on the weekends, ya know...). The point I'm trying to get across is this: from what I've read/understood/and have seen...we're looking an AWFUL lot like 1928-early 1929 in both the stock and real estate markets. Now, I get that things are MUCH more global than they were then. Our weakened dollar has brought in extra buyers from across the globe (although not enough to fix the problems we're facing...but they help), our economy is MUCH more global, information is much faster and more available, and I don't think things have hit the skids...yet...but, to me, things are looking shockingly similar. Just my tired ramblings...thoughts...two cents."

scottlarock said: "[QUOTE=FirefighterB] The sheer number of real estate signs in the yards of a single neighborhood is SHOCKING. And these are CHEAP (by national standard) houses in good/decent neighborhoods. How can any one of these places stand out over another besides for cutting price? If the person owns it, they've likely not even covered their principle if they're recent buyers, or they aren't getting much if they have owned for over 5 years. If the bank owns it, they're going to be writing down these things for AWHILE. [/QUOTE] Welcome to MOST of the U.S. I live in Arizona that has TONS of people moving here daily and there are boatloads of for sale signs here too. I follow the real estate market of Detroit and the number of homes for sale on any given street/bank owned homes is absolutely CRAZY. Florida's real estate market is horrible too because no one can get home owners insurance. All of the midwest is in the pits. etc. etc. also.... [url]http://www.businessweek.com/bwdaily/dnflash/content/aug2007/db20070812_749120.htm?chan=top+news_top+news+index_businessweek+exclusives[/url]"

FirefighterB said: ""All told, banks are on the hook for billions in bridge loans, although Citi, JPMorgan and others decline to reveal their precise exposure. JPMorgan and Citi declined to comment beyond their previous public statements. Bank of America (BAC) officials referred inquiries to the company's second-quarter conference call on July 19, during which executives declined to specify the bank's exposure." ...that's not very inspiring. What financial bomb are they hiding?"

DaveinJapan said: "There are bombs all OVER the place. I have to say lol to those bullish on WaMu...that very well could be the next to fall after Countrywide (deep shit doesn't begin to describe it)."

AlfredSokol said: "That's a funny analysis about Cleveland. The housing market here is about the same as usual. We didn't participate much in the boom and we won't participate that much in the bust. It's business as usual in Cleveland."

FirefighterB said: "[QUOTE=AlfredSokol]That's a funny analysis about Cleveland. The housing market here is about the same as usual. We didn't participate much in the boom and we won't participate that much in the bust. It's business as usual in Cleveland.[/QUOTE] Has there always been that many houses for sale in the Cleveland-area? (I saw most of E. Cleveland...Euclid and Willoughby-area). I figured the Ohio market wouldn't swing as much as the rest of the country, since it's not really a (no offense) highly-desirable boom state. I grew up in Dayton and definitely remember times where there were more signs in the yard than others, but I don't ever remember seeing as many for sale signs, there or in Cleveland, as I have in the past year or so. Couple that with the fact that both areas lead the country in foreclosures, especially when you consider the houses aren't that expensive in the first place, it makes me think there's something different going on..."

Corey said: "Looks like WM has turned sour. Most of you predicted this. I still plan on holding (and probably doubling down soon -- I have to reanalyze how much exposure they really have to subprime) -- but for those still looking at this guy, I wouldn't bother getting in at this point. Wait for the market to settle and pick a good strong cross above the 50DMA"

FatBucks said: "Well, those yahoo's on "fast money" were talking BAC is a play come Monday. What do you all think? It closed up today and there saying the market should push up even more. I'll be keeping my eye on BAC. :dazed052:"

JAP said: "[quote=FatBucks]Well, those yahoo's on "fast money" were talking BAC is a play come Monday. What do you all think? It closed up today and there saying the market should push up even more. I'll be keeping my eye on BAC. :dazed052:[/quote] Warning!... [URL="http://www.bloomberg.com/apps/news?pid=20601087&sid=aUeRvQA5LnT4&refer=home"]http://www.bloomberg.com/apps/news?pid=20601087&sid=aUeRvQA5LnT4&refer=home[/URL] Kudos to Scottlarock for posting this link in the shoutbox."

squarepusher said: "[QUOTE=JAP]Warning!... Kudos to Scottlarock for posting this link in the shoutbox.[/QUOTE] hmm, whats the smart move to make here?"

Corey said: "You have to make your own decision. Look at their subprime exposure. Look at their LBO exposure. Analyze how much you think is already baked into the price. There is a lot of fear already in the market about the financials, and many of them are already very depressed from their highs. Just look at their revenue stream versus their risk. Look at the history of these companies. For me, WM and BAC are very strong companies with lower exposure than the rest but that are getting dragged down equally. To me, that screams 'buy'. When others fear, I try to remain rational. In a year, I could easily be down 20%. In ten years, I expect much more than a 100% return. My yields are at the 6%+ level. As dividends paid increases, my yield will soar. In 10 years, I could be getting 20-30% yield based on my buy price."

newinvestor123 said: "From what I have seen, WM is being very proactive during this time of 'crisis,' and they are putting out press releases reflecting their actions every chance they get. There's also a lot of sentiment that WM will come out of this stronger due to an improved mortgage market share. If it dips again, I think I'll pick some up. 20-30% yields in 10 years sounds very, very nice..."

DaveinJapan said: "Here's my question. If not for a momentum/swing trade, why would anyone in their right minds WANT to own any homebuilders/banks/lenders???? I mean, if you really want to nail something in that sector, why not wait until the bad news slows to a trickle and THEN start shopping? Heck, there was a run on the banks in ENGLAND just Friday morning!! Following a run on the Countrywide banks 2 weeks ago. Why the heck would this be a smart time to buy, when bad news could be just around the corner for ANY of them!!?? There will be plenty of time to buy, but why now? Why before the dust settles? It doesn't compute with me, UNLESS you're talking momentum/day/swing kinda trading. The time for deciding on a long term buy in these sectors is yet to come, after all the cards have been played. That's just my humble opinion, of course."

DaveinJapan said: ""In a year, I could easily be down 20%. In ten years, I expect much more than a 100% return. My yields are at the 6%+ level. As dividends paid increases, my yield will soar. In 10 years, I could be getting 20-30% yield based on my buy price." Why not wait a year then, and get an even cheaper price for the long run? Is there some reason you wouldn't rather commit your assets elsewhere in the meantime and actually MAKE money? For a long-termer, I just don't see a desire to buy these sectors and "ride it out", rather than wait for a true bottom. Why not see which companies even SURVIVE (with the number one lender on the ropes, and a huge investment bank as well...ANYONE is fair game for trouble)...and THEN pick and choose which carcass you think is only half-dead. I just don't get it. NOT smart thinking in the long run imo...what if you pick the wrong horse? You're all smiling and happy to be down "only" twenty percent after a year...then it's thirty after 18 months...what are you gonna do then? Keep smiling?"

crankitdb711 said: "Very good points, Dave. No doubt it's important to keep things in perspective about all of this. So many stocks in so many industries look so cheap but haven't even remotely established bottoms. I've been watching TOL retreat since 30 and all along the way been thinking that it's cheap. Down 30% later... still haven't seen a bottom. CAL's my favorite airline and have been watching that one get cheaper since 50 and it's at 32. GS, LEH, MA, so many other financials/banks that can be said for. Instead of looking at the 1-year chart, you look at the 5-year chart, so many are still up 100-300% over that time. So many stocks look cheap now but the companies with problems haven't even begun to report earnings or flush out their problems. I absolutely agree that there needs to be a solid bottom in the industry before one should get back in the financials/banks/etc for the long term. (swing/day trading doesn't count) This just isn't the time or place to say "oh here looks like a good time to buy, just because it's off its highs and it has a dividend""

Corey said: "As I said in my original thread (I believe) -- you need to wait for these companies to move above their 50DMA as well as have a yield that is at a premium to the 5 year average. I took the plunge too early, but I don't regret it. From my analysis, for both BAC and WM, the subprime problem is blown way out of proportion. WM would take a bigger hit, but I believe the fear is already built in -- the first subprime news that came out was far more sensationalist than the news currently trickling out. WM is a strong bank and is being very transparent about their business. It is one falling knife I don't mind catching."

DaveinJapan said: "It's your dime. :whacky011: WHY aren't you looking for other sectors, though? What's the point in catching the falling knife here? It's not like any of these guys are likely to skyrocket anytime soon..."

JAP said: "[quote=DaveinJapan]"In a year, I could easily be down 20%. In ten years, I expect much more than a 100% return. My yields are at the 6%+ level. As dividends paid increases, my yield will soar. In 10 years, I could be getting 20-30% yield based on my buy price." Why not wait a year then, and get an even cheaper price for the long run? Is there some reason you wouldn't rather commit your assets elsewhere in the meantime and actually MAKE money? For a long-termer, I just don't see a desire to buy these sectors and "ride it out", rather than wait for a true bottom. Why not see which companies even SURVIVE (with the number one lender on the ropes, and a huge investment bank as well...ANYONE is fair game for trouble)...and THEN pick and choose which carcass you think is only half-dead. I just don't get it. NOT smart thinking in the long run imo...what if you pick the wrong horse? You're all smiling and happy to be down "only" twenty percent after a year...then it's thirty after 18 months...what are you gonna do then? Keep smiling?[/quote] CONS: Very good points Dave. Divs don't matter than much if the stock falls another 10, 25 or 50%. BAC should be okay, but WM has too much mortgage exposure which will most likey lead to more problems, especially when ARMs reset and foreclosures increase. PROS: Traders are shorting the hell out of the financials and builders. When the shorts start covering, it's going to be a windfall for these sectors. Question is... how much pain you one take until they cover? If Corey sticks with his 10 year hold plan (props for his patience), he should do fine."

FirefighterB said: "[QUOTE=crankitdb711]Instead of looking at the 1-year chart, you look at the 5-year chart, so many are still up 100-300% over that time. So many stocks look cheap now but the companies with problems haven't even begun to report earnings or flush out their problems. I absolutely agree that there needs to be a solid bottom in the industry before one should get back in the financials/banks/etc for the long term. (swing/day trading doesn't count) This just isn't the time or place to say "oh here looks like a good time to buy, just because it's off its highs and it has a dividend"[/QUOTE] I agree and have been doing the same thing. If you look at many of these financial companies, they are really up quite a bit over the last few years. I've been looking back to the 00-03 prices for a gauge of when things "weren't so good" and many of thse stocks could have quite a bit further to go before they hit bottom. As of now, most of them are just down because of NEWS, not because they're missing earnings. What's going to happen when the decrease in business hits? While they might bump up a bit here and there in the short term, I think there's much more downside for the mid-long term that will turn these current rates into 52-week highs...IMHO."

Corey said: "It really doesn't matter that the price is up 100-300% in 5 years. It matters what the Price versus the Fundamentals are and how they have changed. If the price versus a fundamental measure is up 100-300%, then you could make the argument that they have had 'quite a run' and are probably due for a 'correction'. But if I am paying the exact same today versus the fundamentals than you paid five years ago, did you really get it cheaper? The growth prospects would be the same, and the business would be the same. As I said -- it is a long term hold. These are companies I pretty much don't ever plan on selling (unless they become GROSSLY overvalued by my measures)... just accumulating over time."

FirefighterB said: "For the long term, I think they're great, Corey. But, it does matter if the price is up that much on inflated fundies. Since the fundamentals of these businesses are based on an industry that was in an extreme boom over the past few years and looks like it might be bursting, they might not be the same. A majority of their profits (some more than others) are built on extremely loose credit standards, M&A, and booming mortgage industry. If those go away, their $$$ goes away; both earned and on hand. WM will not be able to keep up it's profits from mortgages in this drying up market. If the foreclosures really hit, then they're property owners (if they haven't sold the mortgages) on properties that are losing value or relatively stagnant. The average consumer has not doubled their salaries over the past 5 years, which, to me, means that this housing and spending bubble (brought on by cheap credit and home ATMs) is blown WAY too far out of proportion. A couple of good articles that scottlarock pointed out to me about this money coming out of nowhere due to a lack of growth in Americans' wages. Recent one: [url]http://www.iht.com/articles/2007/09/11/business/leonhardt.php[/url] An older but good one: [url]http://www.nytimes.com/2006/08/28/business/28wages.html?pagewanted=1&ei=5070&en=0061dbf393692a74&ex=1190088000[/url] JMHO. P.S. I'm hung over and running on 4 hours sleep, which is my excuse if this doesn't make any sense."

JAP said: "4 Wall Street Investment Bank Earnings Reports Could Provide Glimpse Into Global Market Health NEW YORK (AP) -- On Wall Street, now more so than any time in recent memory, everyone is holding their breath and fearing the worst. Four of the biggest U.S. investment banks will report third-quarter earnings in the next several days. Everyone -- from traders on the floor of the New York Stock Exchange to highly paid bankers perched in corner offices -- is looking for any kind of sign these financial institutions have weathered one of the rockiest markets in years. [URL="http://biz.yahoo.com/ap/070916/earns_brokerages.html?.v=3"]http://biz.yahoo.com/ap/070916/earns_brokerages.html?.v=3[/URL] I don't anticipate good news from these banks... it could get ugly."

FirefighterB said: ""There is widespread fear that banks are not only sitting on bad loans and wrong-way trades, but they might also detail stalling takeover activity and a dearth in corporate debt financing. Accounting rules that let firms place a value on assets based solely on their best guess of the worth could muddy the waters further." I wish I could do this. I've got a $2000 toothbrush, a $35k razor, and an eleventy-billion dollar pair of boxer shorts. Oh yeah, and I might have paid some money out for rent and food over the past few months, but, as far as I can tell, it's only been about $23. That's my best guess, anyway. Ummm, yeah. Not inspiring..."