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tmd6966 (22.31)

The Next Bull Market...



March 15, 2009 – Comments (28) | RELATED TICKERS: BAC , WFC , GE

I am more excited about equities now than I have been in my entire life.


Everywhere I read headlines in the media, financial and otherwise, that life as we know it, the United States as we know it, is finished.


It's over.


Houses are being left abandoned all over the suburbs, weeds are rapidly replacing the lawns, and a whole industry is springing up to tear down homes and recycle the lumber.


Everyone I know, thinks things are going to get worse; a lot worse. 


In many cirlces, anyone who is still investing in the stock market is considered a fool.   


Guns are flying off the shelves, and stores cannot keep ammo in stock. 


Fear is so prevalent, that it has become the norm.  The pessimism is so complete that the talking heads, who never saw the downturn coming, no longer talk of a severe recession, instead they confidently drop the word, "depression" as if it were an everyday occurrence.


An entire generation seems prepared to abandon stocks just as their grandparents did for two decades after the Great Depression.


I have read about times like these in books, but never thought I'd ever be lucky enough to be able to buy into such a market.  It is hard to count he fortunes that were made by those men who began investing careers in or just after the Great Depression, but several prominent names come to mind:  Benjamin Graham, John Templeton, Philip Fisher, Shelby Davis.


My friends are tired of hearing me talk about what Bank of America could be worth in 5 years; they are sick to death of hearing about how BAC's market cap is lower than it's estimate of this year's pre-tax, pre-provision income.  


The legendary investor, Sir John Templeton, who passed away last year, once said that if you could find a company trading at 20% of it's true value, then you have found a great bargain.  He shared his formula for evaluating a bargain, in a book penned by his great-niece,  Investing the Templeton Way:


Calculate the earnings 5 years out.  (Use the most conservative assumptions, and take into account the macro conditions)


Divide that number into the current stock price, and if the result is less than 5, you have a bargain.


I took Barron's estimate of Bank of America's earnings 5 years out (4.00 per share), and came up with an extreme bargain:


5.76 - 4.00 = 1.44


Last Sunday, when I originally did this calculation,  the stock price was hovering just above 3.00 per share, and the result was .812, a screaming buy signal considering the stock price was lower than the projected earnings in 5 years.


If you had the fortitude to step up and buy on Monday, March 9th, in the 3.25-3.50 range, you made a nice return in just 4 days, or you are holding onto a stock with such a low cost basis, that if you can wait 5 years to cash out, you might be able to make up all the losses you had if you were as stubborn as me, and rode the bear all the way down.  Or you might have a story to tell your grandkids as you help pay for their college.  


No one knows what the future holds, but one thing is sure:  if you can follow Warren Buffet's advise, and "be greedy when others are fearful, and fearful when others are greedy," it won't matter if you buy before, after, or just at the bottom as long as you have conviction to hold onto your bargain until it is no longer undervalued, and becomes popular again.  


Financial stocks, especially banks like Bank of America and Wells Fargo, are out of favor.  This is largely because they have serious problems, and everyone is worried that the problems will get worse, not better. No one completely understands the full extent of the problems, but one thing is clear:  they are afraid, very afraid. No one, but "we few, we lucky few, we band of brothers" have been buying the stock at these levels. Yes, it's scary when what you buy keeps dropping, but that is the nature of trying to buy out-of-favor bargains.  It is a lonely endeavor.  


What is surprising to me, is that the mutual funds are hoarding cash even as the market has sold off to level not seen in years, and yet financial stocks in particular, seem poised to outperform for years to come.


From here on out, it seems unlikely that the new administration will repeat the blunders of the previous administration, so in essence, BAC, WFC, JPM, GS, GE and other major financial companies will not be allowed to fail, no matter how bad it gets.  It is also unlikely that the government will deviate from whatever course spooks the markets the least.   This means that it is unlikely we will have any late Friday afternoon or late Sunday night surprise takeovers, and when the investment community finally regains confidence in the system, these stocks will eventually be bid up to something approaching their true value. 


Remember, the banks are getting money for next to nothing, and they have half the competitors and twice the market they once had.  Expectations are so low, that it seems hard to see how their earnings can disappoint anyone.  In every major downturn related to a banking crisis, the banks that survived made better investments than just about anything else, if bought when there seemed to be no hope, and sold when "irrational exuberance" returned. 


I am guilty of having been optimistic for far too long, thinking that we were making a low on October 2nd of last year, only to find that 5 months later, we are trading close the October 2002 low of 7202.  I could never get negative enough because I am a true believer.  I could not see that the foundation of the global economy was rotten, having been destroyed by corruption and greed.  And I got taken down hard, punished for not getting out of the market last year.  


I never saw the downturn coming.  Nor did any of the great investors, whose work and methods I've studied, except Jim Rogers.  When Rogers made his call in the summer of 2007, I cut it out of the newspaper because it seemed so unlikely.  He was calling for a blizzard in the middle of summer.  And he was so right, but he was the only one who made that call when you could have sold near the market high.


I couldn't see the coming catastrophe.  Neither could anyone else. 


Warren Buffet came out on October 17th, 2008, over a year later, and said, "Buy American. I am."


If he foresaw how far the market could fall from that point of pessimism, I don't think he would written that compelling case for buying stocks.  But one of the most admirable traits that my favorite investors--Warren Buffet, Peter Lynch and Sir John Templeton--share, is humility.  


You can find no record of them calling tops or bottoms.  Instead they focused on buying 20 and 50 cent dollars when they could, and not buying when a dollar was trading for more.  


The average bear market lasts 14 months.   Most "experts" say we are in the 14th month of this bear market.  So, if history repeats, a bull market could potentially begin anytime, starting now.


Especially now, because according to Sir John Templeton, one of the greatest investors of all time (who passed away last year), "bull markets are born in pessimism, grow on skepticism, mature on optimism, and die of euphoria".


Every speech he gave, he would remind the audience that there would be another bear market if the bulls were riding high, and vice versa for a bull market.


In December of 1988, when pessimism ruled the day, he gave a speech called, "The Next Bull Market", and made the case for how the next bull market could be far bigger than the last one because:


1. corporate profits were projected to be as much as 40% higher


2. there was a ton of cash on the sidelines


3. there was a shortage of shares due to all the mergers and acquisitions in the 1980's.


Sound familiar?


 I don't know when the next bull market will start, but I do know there will be one, and when it starts it will pull all that cash off the sidelines, and that cash will be chasing far fewer shares in the financial sector in particular, and that will eventually lead to higher prices.  It always does.


Someday I hope to look back on this period, and know that my decision to buy BAC and WFC was the right one, even if it made me sick to my stomach when I clicked "buy" on Monday, March 9th, 2009.






28 Comments – Post Your Own

#1) On March 15, 2009 at 4:23 AM, MAURIZIO400 (54.33) wrote:

one gutsy post, and one gutsy fool.

I swear if I had any cash I would feel like clikin that buy button myself after readin this post.

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#2) On March 15, 2009 at 4:37 AM, coralbro (91.81) wrote:

And this post is why I'm betting we haven't quite hit the bottom yet.  Don't get me wrong, I have been putting money in the market since January, but I think we have another few months of gloom before we really see a recovery.  I wouldn't be arrogant enough to think I could time the market, but I do know that if the market continues to fall, the buying will only get better, unless the apocalypse is near. 

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#3) On March 15, 2009 at 5:16 AM, rajeevsingh111 (< 20) wrote:

Completely agree.. have been great admirer of warren buffett and completely trust his call when  he says be greedy when others are scred.. time to put money in these oversold markets.. not every day one gets opportunity like this...

Also visit 


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#4) On March 15, 2009 at 5:17 AM, rajeevsingh111 (< 20) wrote:

Completely agree.. have been great admirer of warren buffett and completely trust his call when  he says be greedy when others are scred.. time to put money in these oversold markets.. not every day one gets opportunity like this... 


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#5) On March 15, 2009 at 5:29 AM, Mary953 (84.21) wrote:

I am an optomist as well.  This is the time to follow technical analysis in expecting a dip to buy into stock followed by a good sized rise in prices.  This is a great time to use fundamental analysis to single out good strong companies that will weather the economic rough times.  Thanks for the ray of hope.

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#6) On March 15, 2009 at 5:41 AM, nihilkillsmemore (20.53) wrote:

I wish I shared your optimism

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#7) On March 15, 2009 at 5:56 AM, untiringeagle (67.71) wrote:

Looks like you've used every phrase in the Economic Cliche Lexicon.  You point out that the "average" recession lasts 14 months but you neglect to mention the "atypical" Black Swan or low probability event that turns the law of averages upside down.  Keeping in mind that many companies that survived the Great Depression have ceased to exist during this crisis and many more are on life-support and may yet cease to exist.  Bear Sterns, Wachovia, and Washington Mutual might have looked like great bargains at one point too.   GE, AA, C look cheap now but I can almost guarantee all 3 won't still be around a year from now.  Many of the great value investors of our time took it on the chin (look at recent downgrade of BRK-A).  Other than that, I agree with  your philosophy in general.  Just make sure a bargain is really a bargain.

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#8) On March 15, 2009 at 6:31 AM, kaskoosek (30.22) wrote:

Bank of America is insolvent.

The shareholders are going to get wiped out. Simple as that.

Balance Sheet is shit.


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#9) On March 15, 2009 at 6:33 AM, kaskoosek (30.22) wrote:

Anyone reccing this post is deluded.

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#10) On March 15, 2009 at 7:22 AM, kaskoosek (30.22) wrote:

The banking sector is a reflection of the private sector.


Since the private sector is insolvent, so are banks. 

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#11) On March 15, 2009 at 9:04 AM, columbia1 wrote:

And Buffet thought GE was a great buy at $22.

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#12) On March 15, 2009 at 11:09 AM, jgseattle (26.37) wrote:

The way I see it is the CEOs or C & BAC saying their companies are profitable means nothing when the assets backing the profits are depreciating.

I bet if you looked at all the last quarters and subtracted out writedowns of assets C & BAC and almost every other bank would have been profitable.

I have to say I am playing the options market in BAC with covered calls because you can get great premiums and a lot of down side protection.  I just hope I can make 4 or 5 of these trades and not get wiped out somehow.

I am also playing GE options selling puts short term.  Had a few get exersiced on me and sold calls on them.  Even these "bad" puts are now a wash. 

Use the volititily to your advantage and take prudent risks.

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#13) On March 15, 2009 at 11:58 AM, rofgile (99.52) wrote:

Good post - with all the pessimism happening now, it isn't a bad idea to make a _small_ investment (proportion to your savings) in the best banking business that is knocked down, or the best construction business.  

When the positive news comes out that the world isn't ending (believe me, this news will come - don't panic so much eh) - these could be fantastic investments.

I hate fear, I hate fearmongers! (Good riddance Bush/Cheney)


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#14) On March 15, 2009 at 1:35 PM, RonChapmanJr (29.95) wrote:

I read that Buffett lost 27 billions dollars this past year. 

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#15) On March 15, 2009 at 2:17 PM, BradAllenton (31.87) wrote:

RE: Delta air lines original shares when they went chapter 11. These companies whipe out share holders erase mistakes and issue new shares. What will BAC be worth in 5yrs? Who knows? But there is a good chance it will be under a modified ticker. Investing in insolvent companies is far too risky for me.

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#16) On March 15, 2009 at 4:11 PM, kaskoosek (30.22) wrote:



The only way banks would be a good investment is if we have hyperinflation very very soon.

Looking at the numbers  directly tells you that all American banks are insolvent. We have been having current account deficts of 40 bn dollars / month for the last 10 year. How do you think these will be paid off.

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#17) On March 15, 2009 at 6:33 PM, walt373 (99.88) wrote:

The goal of value investing is to buy an asset at a price less than its intrinsic value. But can anyone say with any degree of certainty what the intrinsic values for BAC is? Yes, bank stocks are depressed due to fear, but this fear comes from uncertainty, which is a legitimate reason for fear. This is why I believe buying bank stocks at this point is not value investing, but speculation.

Using Ben Graham's margin of safety principle, the margin of safety for highly leveraged companies totally dependent on the state of the economy is huge and these stocks should not be considered by even more enterprising investors.

Not saying you won't make a ton of money in a few years. You could. Or you could lose it all. It's just a gamble.

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#18) On March 15, 2009 at 6:45 PM, bostoncelitcs (55.81) wrote:

9/11 happened.  Saddam Hussein did not attack us on 9/11 and had no WMD's. Regulations were removed by the Bush adm. with GOP support allowing "traders" to make bundles off of the retirement savings of teachers, policemen, and firefighters!  GM, Ford and Chrysler continued producing gas guzzlers while gas was selling at $4/gal.

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#19) On March 15, 2009 at 6:45 PM, anchak (99.91) wrote:

I did rec this are gutsy ....but listen to some of the fools taking the opposite direction in this blog.

BAC probably amassed one of the best business "apparatus" out of this crisis

(a) Excellent retail deposit outreach to fund asset/lending acitvity
(b) A workhorse mortgage originations/servicing platform thru Countrywide
(b) Possibly "the best" retail brokerage machine.


See I did say apparatus - You may have the best blender in the world - but without the fruits - there is no juice. The earnings estimate you have from Barrons is too simplistic - do not make the habit of taking the "KEY" input which is susceptible to maximal sensitivity for granted - and then do a forward cash-flow valuation to call something cheap.

One needs to understand the level of "impairment" in each of these business models and see how much accreditive they would be to earnings.

For eg. Countrywide's impact on balance-sheet earnings would be severly restricted - given the level of govt intervention in US mortgages for a while. If you do not "direct-lend" you'll not be able to put up big numbers - especially in a market that has shrunk.

BAC is still a value - but you need to compute it and then in my view simply discount that by 30% - due to the insolvency risk as mentioned.




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#20) On March 15, 2009 at 6:57 PM, tmd6966 (22.31) wrote:

Point well taken...I am not advocating putting anymore money at risk than you can afford to lose.  I think that BAC has the ability to buy time, which will cause some of the impairment to dissipate. The danger is having to sell everything at the same time as everyone else, to wit: Lehman.  But I think the upside is much more likely, now that we have been driving along the edge of precipice, and not fallen into the abyss.

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#21) On March 15, 2009 at 10:00 PM, Harold71 (< 20) wrote:

I always wonder who is still buying BAC, WFC, C, etc.  I'd rather set my $'s on fire than buy this waste.

It should be obvious by now that the entire central banking system is corrupt.  If there is any karma in this world, the current system will be destroyed.

Guns are a decent investment, btw.  :)

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#22) On March 15, 2009 at 11:07 PM, tmd6966 (22.31) wrote:

I wouldn't touch C...


BTW:  Just added SWHC & RGR to my caps  for Monday...


And buying both guns and ammo as an alternative to stocks... 

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#23) On March 16, 2009 at 12:20 AM, AnomaLee (28.79) wrote:

"...and when it starts it will pull all that cash off the sidelines, and that cash will be chasing far fewer shares in the financial sector in particular, and that will eventually lead to higher prices."

Shares in the financial sector are probably more than 40%  higher than they were just 12-18 months ago. The majority of people who invested in a majority of financial stocks before and/or during that timeframe will probably never see a positive return in their lifetime.

I basically agree with your macro outlook for the future, and it's refreshing to see posts and articles about a positive outcome from time to time. Personally, I am the most optimistic I've been in more than a year.

Who knows about timing. There are many more developments ahead. I am personally in no rush to chase anything.

"The only way banks would be a good investment is if we have hyperinflation very very soon. "

The standard model for banks is to borrow short term and lend long.  Hyperinflation would destroy most banks.

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#24) On March 16, 2009 at 12:41 AM, Harold71 (< 20) wrote:

"I wouldn't touch C..."

I don't see how BAC is any less corrupt than C.  Two peas in a just shows more rot than the other at the moment.

"And buying both guns and ammo as an alternative to stocks... "

Atta boy.


"I never saw the downturn coming."

Do yourself a favor.  Start listening to the people that did.  Jim Rogers is not buying banks...last I heard, he had sold calls on them. 

Plenty of others saw it coming as well, so there's no need to pretend that it was impossible to forecast...that is huge Keynesian copout these days.  They admit they didn't see it coming, and now they think they know how to fix it.  It would be hilarious to watch, if it wasn't so damn sad.

Mises is the real deal.

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#25) On March 16, 2009 at 12:42 AM, kaskoosek (30.22) wrote:


My reasoning is that the collateral backing the asset would increase in value.

While the liability side would not change, since deposits from either the federal reserve, the private sector, or foregn entities are sticky (basically money becomes worthless in a hyperinflation senario).

Therefore at least they will be solvent.

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#26) On March 16, 2009 at 3:33 AM, biotech4ever (24.16) wrote:

"I never saw the downturn coming." Neither did I but ..

Peter Schiff, Nouriel Roubini, Jim Rogers, Gerald Celente all saw it coming. I feel so bad for Peter watching him get mocked, laughed at, derided and ignored over the years from CBNC and Fox on the youtube video archives. 

These same people see it getting a lot worse. They all agree the dollar and treasuries are the final bubbles to pop, once that happens this country will change forever.

The sad part is the guys that warned us before are being ignored yet again while the idiots like Bernanke who have been wrong all along thinks we'll recover this year lol.

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#27) On March 24, 2009 at 12:20 AM, tmd6966 (22.31) wrote:

Not sure if I should sell these stocks now that they have both doubled from March 9th, when I bought BAC at 3.30 and March 6th when I bought WFC at 7.90.  My premise was a simple one:  buy a stock that was severely undervalued and hold it until it reaches "fair value".  The problem is, as many of you, who are far more successful than me on this board, have pointed out:  how to determine value in a bank where there is no consensus on how to evaluate it.  Given the actions of the government to create a market for the "toxic assets", these banks in particular, must be worth more because a) they can sell the toxic assets and shore up their balance sheets or b) hold the toxic loans b/c they have already written them down so low they have no place to go but up, thereby creating a stronger balance sheet and a pleasant surprise, which almost always causes Wall St. to bid up the shares.  Now that housing starts turned positive, and housing inventories are being cleared (albeit at bargain-basement prices), it is possible that we will look back to the month of March 2009, and realize that it was the beginning of the end of the worst market many of us have seen in our lifetimes.  My inclination is to hold on to these stocks for several reasons, not the least of which is the fact that after 17 down days in a row in February and early March, it is possible we could have more than two up days in a row.  But my main thought is that financials trade on confidence, and that seems to be filtering back into the market...your thoughts?

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#28) On March 28, 2009 at 3:10 PM, tmd6966 (22.31) wrote:

Update:  I sold all my BAC on March 24th.  Decided that a double from March 9th buy was something I needed to book, rather than staying something long, that I have lost faith in.  I think BAC has turbulent waters ahead because their CEO has not been forthright with himself, let alone with shareholders.  The company could do quite well at some future point, but I am not willing to be hard-earned money on someone that I no longer trust.  


On the flipside, I still love WFC, and the more I read about them, the better I feel. They have written down their bad loans, and therefore can take part in the PPIP without destroying shareholder value, or ceding control to the gov't or they can skip it, and hold their loans until a better time to sell, or just ride the whole thing out.  If the market place disposes of most of the "toxic" loans, it will make it safer to hold them as housing will eventually recover, and some of the loans that have been written down will be worth more, even as some fail altogether.  When those fail, WFC can take the RE that backed up the loans, and sell it into a better RE market in the years to come.   That's my take.  I trust Kovacevich and Stumpf.  I bought in the 7's, 8's, 13's and 15's, and will hold on for the ride.  Plan to sell 1/2 my holdings in the 20's.  Hold the other half for 5 years plus. 

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