We are experiencing an overreaction of historic proportions when it comes to the financial sector and specifically Bank of America (NYSE:BAC). In case you haven’t noticed, these extreme overreactions are becoming the norm; a thorough understanding of the reasons for the overreaction are paramount to generating great investment returns. The market has gotten Bank of America terribly wrong in the short run as the ‘cloud of uncertainty’ has collided with the ‘sea of negativity’. Governmental uncertainty combined with the market’s negativity are the contributing factors for Bank of America plunging below $4 a share. After riding Apple (NASDAQ:AAPL) calls to triple digit gains in 2007, and then riding oil puts to triple digit gains in 2008, I am making Bank of America my #1 holding for 2009. By next year this stock will be back to $20 a share. Consider the following:
1) The market is running wild on some hyped up article written in the Financial Times that claims Obama is considering nationalizing the banks. If you actually read the article you’ll notice the anti-American sentiment at the very beginning when they say that ‘nationalization has long been regarded in the U.S. as a folly of Europeans...’ Ok, I get it, Europe has been right all along. Whatever. Obama’s true feelings on nationalization came out in his ABC interview after Geither’s banking speech when he laughed out loud and said, “Sweden had like five banks. We’ve got thousands of banks...managing and overseeing anything of that scale...wouldn’t make sense. And we also have different traditions in this country."
2) Obama understands that the markets will determine his success. He has been very upfront in his stance that the success of this financial plan will depend on how the markets respond over the next few months. The idea of killing off current shareholders and taking Bank of America off the market during a nationalization phase is unthinkable.
3) Tim Geithner does not believe in nationalizing the banks either. Mr Geithner last week said: “Governments are terrible managers of bad assets.” He went on to outline a plan that will seek help from the private sector, will maintain a market for these toxic assets, and will increase transparency. Nationalization accomplishes none of these three.