Should You Invest in Banking Stocks?

I've seen and heard many retail investors (people like you and I) contemplating buying stocks in recent weeks. What they are interested in particular is the banking sector. The thought of buying Citi (C) or Bank of America (BAC) has come to me several times. What kept me away? My inability to value anything on their balance sheets. Even if I could value them, I do not believe them to be of true value (because the mark-to-model accounting method). Fundamental analysis aside, I can present you some analysis using my technical skills. The last thing I want to see is a friend or family going out to buy bank stocks and seeing their money get cut in half. So let's take a look at Bank of America and Citi.

Bank of America

This survivor acquired one of the biggest names in the mortgage industry as well as a brokerage firm during the crisis. The chart tells an amazing story. The stock hit a low of $2.52 then rallied to $18.24. If you were able to catch the low and high, you would have gained 623.8%. What if you missed it but are now looking at BAC and saw that it was once at $48? At $16, it could still gain 190% if the stock goes to the high. As a student of the market, I can tell you that it will probably take a long time for this stock to test its high.

If you are looking to buy, I recommend watching the $15 and $12 range. I expect the stock to break below $15 rather quickly and $12 will become a strong support. If you want to get into BAC, wait until the stock trades down close to $12. If you buy it at $12 and you sell at $15, that's still a 25% move. Don't be afraid to sell.

Citibank

The one stock everyone wished they bought at $1. I wonder if the same people have the same wish for Bear Stearns, Lehman, Wachovia, Washington Mutual, Freddie Mac (FRE), Fannie Mae (FNM), and A.I.G.? In hindsight, we see 20/20. I didn't have the courage to buy it then and I still don't have the courage to buy it now. The chart tells me this is a trading stadium full of gladiators. The trading range of $4.25 and $2 is amazing because that is a 112.5% upside OR -53% downside. The green box tells me there was a strong accumulation during August and those investors will be able to protect their profits well. At $4.25, a good support is there but if the stock fails to hold that level, I can see it fall to $2.

If you want to invest in Citi, I would buy half of the position around $4.25 and buy the other half around $2.

Psychology drives short-term price but value determines long-term price.

Before you invest, understand that if your investment declines 50%, your investment need to double (100% gain) for you to break even. Know your risk and don't be afraid to take profit or cut your loss.

Comments

[lanmodiri:]

Waht do you think about fslr stock?

Sep 28 05:33 PM

[lanmodiri:]

What do you think about fslr stock?

Sep 28 05:34 PM

[Mad Hedge F...:]

ynd I’ve never been much of a jock. But at least once a year, recollections of my sporting childhood irresistibly draw me towards the crack of the ash, the mile long hot dog, and the beer of a baseball game. Of course there was no more beautiful place to watch the San Francisco Giants take on the Chicago Cubs than the spectacular retro bayside AT&T stadium, surrounded on two sides by tacking sailboats, and a flotilla of kayakers with mitts hoping to catch a lucky right field home run. The contrast between the two sets of fans couldn’t be more obvious, with the latte sipping, sushi eating Giants fans lithely gliding between the wallowing, voluminous, garlic fries smelling Cubs supporters. Clearly bad breath obesity are sadly rampant in that unfortunate city. I’ll say no more, lest my futures trades on the CME suddenly start failing. And Obama is a White Sox fan. So it’s the second inning when a Cub batter fouls out and nails the Bank of America (BAC) sign on the third tier, neatly missing the billboards for Visa (V), Charles Schwab (SCHW), and Chevron (CVX). Is it a sign from above? An omen? Do Cubs players know that despite choking on a subprime portfolio and baskets of bad real estate loans, the stock has soared by 620% in six months? Should I be shorting this stock? I made a note to run the charts and stats as soon as I got home. Alas, the home team was trounced 6-2, allowing the fans from the windy city to return home to happily wolf down more polish sausage and suds. It was a miserable performance by the Giants. In four hours I didn’t see a single first down. Hey, I told you I was never much of a jock!

Sep 28 05:52 PM

[Tammi:]

I do think it was a gamble..but i bought C @ 2.42 and BAC @ 4.40 in March. $5,000 each in my Roth IRA. Thinking they both had significant bailouts and that the govt won't let them fail. Major gamble...now watching for best time to sell.

Sep 28 05:54 PM

[Jason B:]

Yeah....ok. Bank of America is going to drop to $12 just because you say so. Does this mean Goldman is going to test $100, JPM etc are going to drop $20 a share? You are too stuck on looking at charts and don't pay attention to history. The reason these stocks were so low was because the financial system was on the brink of evaporating, and these 2 companies were seen as ripe for bankruptcy. In September of 2009 we can see that is not a reality....so why would they lose half of the value of their share price? C is already trading 40% below BV..while it's peers are 2X BV...and you think it needs to go lower??? Complete, utter, dangerous, nonsense.

Sep 28 08:09 PM

[See through it:]

I agree with Jason. Unbelievably shallow reporting. No credibility. Buyer/ Seller beware...

Sep 28 09:57 PM

[Chris Shenf...:]

I'll just comment on Citigroup, which is the stock I own. Your analysis is not analysis at all. I'm not sure what it is. Citigroup is not trading in a range of $2 to $4.25. It is trading with technical support at $4.34, it has just passed the golden cross where the 50 day average moved over the 200 day average on strong volume, and the next resistance is $6.15. On a fundamental basis, Citigroup is way undervalued at $4.56 when book value is over $6.20 and its peers are trading at 1.5 times book. Citigroup will never see $2 again. The only reason it was at that level was because we faced economic meltdown until the Fed stepped in with massive liquidity injections. All the data show that Armageddon is not going to happen and we are pulling out of the recession. At 1.5 times book, Citigroup should be trading at $8 per share, which is where I expect it will be by years' end. You need to get your head out of the charts and THINK about history and what historical factors created the price points on these charts.

Sep 28 10:46 PM

[sethmcs:]

Here's my two cents. C is slowly breaking itself up and has USA gov't as a shareholder. BAC has a management team under seige and has to absorb two mergers --Merill and Country Wide plus deal with the government. Of course there is money to be made, witness the fact that GM stock still trades without any value whatsoever. My suggestion to buy regional banks that you know in markets you know. I live in Pennsylvania which has not been burned as bad as other parts of the country. I bank at FNB and own FNB shares. FNB has just recently exited the TARP program without any restrictions from the regulators and yields 6.7% at 9/28/09 price of $7.23. My point is invest in banks that you know and are comfortable with. I realize that this is a minority view.

Sep 29 12:40 AM

[healthpicker:]

To the article writer: I think you mean mark to market "model" - how does someone like you get to write stuff like this. Stimulating nonesense (mainly). But I actually agree with your analysis! The only thing that you don't have knowledge of is "insiders" and they all work for the USA Government. There will be enough law suits to keep all tose levely USA lawyers going for at least a decade on BAC/CFC/ML/SECWM/FDIC alone.
But when you see what has just happen in international derivatives trading - no regulation since early nineties - then fact is always stanger than fiction.
BAC board memebers are now being punished. Isn't funny that all these new Board were not involved. Lewis is just waiting to retire and handle all these wonderful law suits. BAC will move on in 2010 with very different management.
One thing for sure USA Governments knows how to react to a disaster.
I am out of BAC for now but will no doubt return after the next two quaters bring it down.

Sep 29 02:20 AM

[healthpicker:]

Seriously now is the best time. Look at cheap healtcare stocks - aet unh and take another big gamble! lol


On Sep 28 05:54 PM Tammi wrote:

> I do think it was a gamble..but i bought C @ 2.42 and BAC @ 4.40
> in March. $5,000 each in my Roth IRA. Thinking they both had significant
> bailouts and that the govt won't let them fail. Major gamble...now
> watching for best time to sell.

Sep 29 02:24 AM

[Dialectical...:]

Healthpicker:
I'm not defending the article, but "mark to model" is one name given for the type of valuation that is NOT "mark to market" but is based on valuing an asset based on cash flows and other things. It is sometimes knocked as "mark to myth" or "mark to make believe" and it is the opposite of "mark to market." Just an FYI.

This analysis is crude to be sure, but it never bothers me to see someone show an interest. I think most technical traders (even sophisticated ones or maybe especially sophisticated ones) sound a lot like astrologers as they explain the past better than predict the future, but if it works for them, that's fine with me.

I agree with one premise of this article: It is hard to place a fair value on banks right now. There are too many unknowns. I would not risk much with financials (because I do not do a lot of high risk/high yield stuff) but lots of folks will make a lot of money betting the right way with banks. I think they will rise or fall -- I don't think they'll languish at these levels long... now I sound like the astrologer.


On Sep 29 02:20 AM healthpicker wrote:

> To the article writer: I think you mean mark to market "model" -
> how does someone like you get to write stuff like this. Stimulating
> nonesense (mainly). But I actually agree with your analysis!

Sep 29 02:39 AM

[Dialectical...:]

Tammi,

I am not an advisor and you didn't ask, but...

You might consider selling half of each position now. That would lock in some gains. Then since it is an IRA you could let the rest ride for years (or decades depending on your age). I think these are tough times for all, but I do believe that "the sun will come out tomorrow" and I think anyone looking back at these prices in 10-15 years is going to chuckle (or cry) about how much money some folks could have made buying in at the level you did... The selling half is in case I'm wrong and they go to zero :)


On Sep 28 05:54 PM Tammi wrote:

> I do think it was a gamble..but i bought C @ 2.42 and BAC @ 4.40
> in March. $5,000 each in my Roth IRA. Thinking they both had significant
> bailouts and that the govt won't let them fail. Major gamble...now
> watching for best time to sell.

Sep 29 02:48 AM

[Tack:]

What was a "myth" were the contrived and manipulated "market" values created by intentionally destructive, and often illegal, naked short selling of debt assets, coupled with long positions in derivative contracts (CDS) insuring those same debts. It's the classical valuation models, based on cashflows, not imagination, that were the reality, in fact.

A minority of people seem to understand this, and it explains why so many are confounded by the continued recovery of banks and other financials.


On Sep 29 02:39 AM Dialectical Materialist wrote:

> Healthpicker:
> I'm not defending the article, but "mark to model" is one name given
> for the type of valuation that is NOT "mark to market" but is based
> on valuing an asset based on cash flows and other things. It is sometimes
> knocked as "mark to myth" or "mark to make believe" and it is the
> opposite of "mark to market." Just an FYI.
>
> This analysis is crude to be sure, but it never bothers me to see
> someone show an interest. I think most technical traders (even sophisticated
> ones or maybe especially sophisticated ones) sound a lot like astrologers
> as they explain the past better than predict the future, but if it
> works for them, that's fine with me.
>
> I agree with one premise of this article: It is hard to place a fair
> value on banks right now. There are too many unknowns. I would not
> risk much with financials (because I do not do a lot of high risk/high
> yield stuff) but lots of folks will make a lot of money betting the
> right way with banks. I think they will rise or fall -- I don't think
> they'll languish at these levels long... now I sound like the astrologer.
>

Sep 29 07:01 AM

[Gurus Mundi:]

This is what we said on 11/3/08 (in spanish):
La Banca Rota


And this is what we said on 4/27/09 (in spanish):
La Banca Rota y la especulación en banca norteamericana

Sep 29 08:43 AM

[Gurus Mundi:]

Sorry, the links:

www.rankia.com/blog/fa...

www.rankia.com/blog/fa...

Sep 29 08:45 AM

[GMak:]

I sort of agree with the author that nobody can put true valuations on bank stocks these days as the so called BV is so manipulative. What we don't see are the toxic assets hiding under the inflated balance sheets. If I may predict, 3rd quarter revenues will come mostly from tradings as our government has loaned banks trillions in short term financing at almost; the same money intended to help underwater homeowners. But the banks have diverted the money on other uses. While it is properly legal; it certainly is extremely unethical.

Sep 29 09:07 AM

[birder:]

Why anyone would buy either of those worthless piles of crap is beyond me.

Sep 29 10:45 AM

[gebby:]

you buy these stocks because they will recover and then trade on normalized earnings. just like homeowners and consumers can work through their bad investments . the banks still have significant earnings power.

Sep 29 10:51 AM

[Dialectical...:]

I agree. Even if my mortgage was underwater, the holders of the loan could still count on getting my payment every month because I will keep paying off the house until I own it (because it is my home and not an investment). Now under mark to market, they need to be concerned with the market price of my house (even though I am not selling). Is the loan worth what I will continue to pay on it every month or the value of the home which I am not selling? I agree cash flow is the more important measure of the loan value in this case -- and in many cases.

I still think the banks have some challenges ahead, however, as I don't think all loans will perform as well as mine. Many mortgages will prove to be worth only what the homes can be sold for in foreclosure. Maybe this is a matter of bumping up a percentage of non performing loans in a formula just to be safe, or maybe that percentage shod be bumped up a lot to reflect current struggles, I don't know. And it is this not knowing that makes believe banks are hard to value right now. Things are not as bad as the "sell everything today in a depressed market" model, but they are not as good as "historical returns on loan portfolios" model either.


On Sep 29 07:01 AM Tack wrote:

> What was a "myth" were the contrived and manipulated "market" values
> created by intentionally destructive, and often illegal, naked short
> selling of debt assets, coupled with long positions in derivative
> contracts (seekingalpha.com/symbo...) insuring those same
> debts. It's the classical valuation models, based on cashflows,
> not imagination, that were the reality, in fact.
>
> A minority of people seem to understand this, and it explains why
> so many are confounded by the continued recovery of banks and other
> financials.

Sep 29 11:18 AM

[jdl51:]

Betting on financials, or the market in general, to go down this time of the year is more often right than not. We are still feeling the effects of the meltdown in real estate but things are less bad than they were a year ago. I sincerely doubt that BAC and C have hit their highs and anyone holding these two, especially BAC, should make out very well in the long term. 0% from the Fed, 5% mortgage rates and 14% +/- on CC added to BAC's Merrill acquisition, it would be almost impossible not to make a ton of money.

Sep 29 12:47 PM

[Kinabalu:]

The biggest banks, C, JPM, GS, and BAC, have much higher exposure to derivatives than the rest of the banking industry. The recent ruling in the Lehman bankruptcy that throws out the counterparty netting provision of the ISDA master derivative agreement substantially increases the risk exposure of those agreements and those banks.

Sep 29 03:57 PM

[fotokemist:]

First, a caveat: I am a simple country chemist trying to make a living down here in the big city. I have no formal training in finance, other than running a business for 20 years.

Before buying BAC or C, you might want to estimate the losses they face, then calculate how much time at what profit level will be required for them to earn their way out of their mess.

I am more familiar with BAC since they happen to be headquartered in the very state where I live. They have serious, and largely unrecognized, exposure to 2nd mortgage, sorry HELOC, in California. You might want to check the change in price of CA RE to estimate the true value of those loans. They also have significant exposure to CRE. Been to a mall lately? Checked on the hotel industry lately? Then we should consider off balance sheet SIVs. I have read credible estimates that BAC has over 1$T of notional exposure and perhaps as high a $30T. What % of those chickens need to come home to roost to take all earnings for the remainder of my life? (Currently estimated to be 23.6 years by some insurance company web site) Then there are the lawsuits. I read today that some group of hedge funds have filed a multi-billion $ lawsuit against BAC on the basis that they were mislead. As a minor sideshow, there is the very real possibility that the BAC CEO and various board members face active prison sentences for the ML fiasco.

Are you following the growing anger in middle class America to this rip-off. Go to C-Span and look at the size of the crowds in DC in 9/12. I have talked to blue collar friends and relatives recently. Any congresscritter voting to continue bailout of the finance industry does so with the near certainty of losing the next election, at least in my neck of the woods, Where will the TBTF boys be without a FED backstop?

All-in-all, betting against the NJ mafia seems like a better idea than buying BAC to me.

Sep 29 04:31 PM

[elliot_mllr:]

A major concern is that under prospective, new financial regulations capital requirements will be more stringent, necessitating more capital raises and thus further dilution on the part of all banks, including C and BAC.

Sep 29 05:15 PM

[DonFurio:]

C and Bac were at the prices they were in March because idiots in Washington, on this site and elsewhere wanted to nationalize the banks. If you want to play the banks but don't have the stomach for BAC or C, why not play the etf, KBE (big banks) or KRE (regionals). Or you can just play the financials overall, XLF.

Sep 29 05:25 PM

[healthpicker:]

As I said earlier the "too big to fail" banks are going to have to prove their worth over the next two quarters. BAC law suits are stacking up big time (don't forget CFC law suit as well but that's Mozillos problem - Lewis has plenty of his own) but the lawyers will be the big winners (as normal).
Regional banks are a better bet and I have been in HBAN for a few months. They have done well restructuring and raising fresh shareholder capital. An upgrade today has added some further interest.
If you really want to play a short term gamble healthcare HMO's is the game. UNH, AET are in my portfolio. They will have to pop once the "government" has finished putting the much needed reform together. AFL is paying almost 3% dividend and has a great record and still has a serious upside.

Regards

Sep 29 09:58 PM

[healthpicker:]

Did you buy WAMU?


On Sep 29 02:24 AM healthpicker wrote:

> Seriously now is the best time. Look at cheap healtcare stocks -
> aet unh and take another big gamble! lol

Sep 29 10:05 PM

[healthpicker:]

On Sep 29 02:39 AM Dialectical Materialist wrote:

> Healthpicker:
> I'm not defending the article, but "mark to model" is one name given
> for the type of valuation that is NOT "mark to market" but is based
> on valuing an asset based on cash flows and other things. It is sometimes
> knocked as "mark to myth" or "mark to make believe" and it is the
> opposite of "mark to market." Just an FYI.
>
> This analysis is crude to be sure, but it never bothers me to see
> someone show an interest. I think most technical traders (even sophisticated
> ones or maybe especially sophisticated ones) sound a lot like astrologers
> as they explain the past better than predict the future, but if it
> works for them, that's fine with me.
>
> I agree with one premise of this article: It is hard to place a fair
> value on banks right now. There are too many unknowns. I would not
> risk much with financials (because I do not do a lot of high risk/high
> yield stuff) but lots of folks will make a lot of money betting the
> right way with banks. I think they will rise or fall -- I don't think
> they'll languish at these levels long... now I sound like the astrologer.


Thanks for the input. Where I hail from that is not a financial term that I am used to.
However I am familiar with not marking to market and these "models" are supported by the various Accounting Standards Boadrs.
My favorite "model" (and favorite stock at the moment) is AFL - take a look at thow they do it. Mind blowing!!

Regards

Sep 29 10:10 PM

[Voice of co...:]

Reading all of this "total crap," I now thoroughly understand the term, "lemming investor."

Will Rogers has once again been proved correct!

Sep 30 12:19 AM

[Augustus:]

BAC will be lucky to earn money fast enough to pay their legal fees. The problems that are on the books now will bleed them for the next ten years. Investors will be vomiting this stock out of their portfolios. There are clean places to invest in well run banks.

Sep 30 12:36 AM

[Glen60:]

and here, all along, I thought gambling was the province of casino's. Place your bets.

Sep 30 01:18 AM

[Ray Winter:]

Anybody who buys equities in US and European Banks should be aware they are all being kept in business by their Governments and all have balance sheets which are still hiding calamitous amount of risk.

The Banks that are virtually unaffected by derivative and property risks are to be found in Canada, Australia and just one from the UK, Standard Chartered Bank.

One more strong economic earthquake and the debt-laden shaky Banks will all collapse like a pack of cards.

Sep 30 05:52 AM

[Fd:]

"If you want to invest in Citi, I would buy half of the position around $4.25 and buy the other half around $2."

Sorry, but this is one of the most idiotic articles ever written. To suppose Citigroup once again reaches pre-supposes a complete return to the financial crisis and all the accompanying uncertainty combined with terrible loans, unknown govt response, etc etc. Even a return to recession would not put us in this boat, with Citi already having a backstop n place, etc etc.

Never listen to a purely technical chartist

Sep 30 09:19 AM

[Fd:]

Sorry, it should read: Reaches $2


On Sep 30 09:19 AM Fd wrote:

> "If you want to invest in Citi, I would buy half of the position
> around $4.25 and buy the other half around $2."
>
> Sorry, but this is one of the most idiotic articles ever written.
> To suppose Citigroup once again reaches pre-supposes a complete return
> to the financial crisis and all the accompanying uncertainty combined
> with terrible loans, unknown govt response, etc etc. Even a return
> to recession would not put us in this boat, with Citi already having
> a backstop n place, etc etc.
>
> Never listen to a purely technical chartist

Sep 30 09:24 AM

[Tammi:]

Already did my Roth for the year so no more to gamble. But may take my 15k from BAC and 5k from C and run to the bank! It definately was gambling...only do it if you can live with losing it!


On Sep 29 02:24 AM healthpicker wrote:

> Seriously now is the best time. Look at cheap healtcare stocks -
> aet unh and take another big gamble! lol

Sep 30 11:04 AM

[multi007:]

I own BAC and C. Sure they both COULD drop to level you mention, but they are far from going to zero. In this day and age, if its not going to average, its only a matter of time before the economy improves - thus the stock will follow.

Oct 03 02:21 PM