Bank Stocks

The news this past week, other than the rescue of the miners in Chile, was on suspending mortgage foreclosures and the impact on bank stocks. This newsletter will look at bank stocks, in particular Bank of America, and the impact of suspending mortgage foreclosures. First will be weekly recap by Vanguard and at the end will be some trivia on Columbus Day which also occurred last week.

Vanguard

If you're old enough to remember the 1970s, you may think inflation is a dirty word. Lately, though, some economists (joined, this week, by the chairman of the Federal Reserve) have dared to utter an even dirtier one: deflation. For the week ended October 15, the S&P 500 Index rose 0.9% to 1,176 (for a year-to-date total return—including price change plus dividends—of about 7.1%). The yield of the 10-year U.S. Treasury note rose 16 basis points to 2.57% (for a year-to-date decrease of 128 basis points).

Bank of America Stock

This is one of a few stocks that I have previously recommended. This recommendation is a result of the company acquiring Countrywide Mortgage and Merrill Lynch Investments during the financial crisis at a bargain basement cost without issuing shares of stock for the purchases. Anytime a company can grow revenue and profit without issuing more shares is very positive for a stock holder. Since the acquisition, additional shares have been issued but not as many as the sum total of the 3 companies.

As far as the item in the news, the delay in foreclosures, it would have been a lot better if we would have had these delays when the loans were being made. So instead of doing due diligence when the loans were issued we are now researching if the loans were done properly, it think this is called looking at the technicalities now instead of looking at the fundamentals when the loan was made. Ultimately, a mortgage loan has to be either paid or the property goes back to the originator as stated in the contract. The best thing for everyone is for economic prosperity to return to our country so that this foreclosure issue goes away and people can pay their loan.

Bank of America stock went down 11% last week because of this issue. The concerns include: higher costs associated with the issue reducing profits, loss of revenue ie. mortgage payments, and uncertainty about the future for these loans. The size of the drop does not make sense to me.

The real question is what does this mean for an investor and the future price of Bank of America stock given that they report earnings in 2 days? Since morgage loans are a fraction of the business and they are not getting revenue anyway from these loans that are in the foreclosure process the impact on earnings will probably not be very large. This looks more like a footnote item rather than a headlline item.

If you are an investor with a short term time horizon that is nervous about the issue then selling on a price rebound makes sense. If you are an investor with a long term horizon then holding and buying more makes sense. I would be much more nervous if Bank of America only did mortgages. An improving economy is always good for a bank stock.

Columbus Day Trivia

A U.S. national holiday since 1937, Columbus Day commemorates the arrival of Christopher Columbus in the New World on October 12, 1492. The Italian-born explorer had set sail two months earlier, backed by the Spanish monarchs King Ferdinand and Queen Isabella. He intended to chart a western sea route to China, India and the fabled gold and spice islands of Asia; instead, he landed in the Bahamas, becoming the first European to explore the Americas since the Vikings set up colonies in Greenland and Newfoundland during the 10th century.

Later that month, Columbus sighted Cuba and believed it was mainland China; in December the expedition found Hispaniola, which he though might be Japan. There, he established Spain's first colony in the Americas with 39 of his men. In March 1493, the explorer returned to Spain in triumph, bearing gold, spices and "Indian" captives. He crossed the Atlantic several more times before his death in 1506; by his third journey, he realized that he hadn't reached Asia but instead had stumbled upon a continent previously unknown to Europeans.

The first Columbus Day celebration took place in 1792, when New York's Columbian Order–better known as Tammany Hall–held an event to commemorate the historic landing's 300th anniversary. Taking pride in Columbus' birthplace and faith, Italian and Catholic communities in various parts of the country began organizing annual religious ceremonies and parades in his honor. In 1892, President Benjamin Harrison issued a proclamation encouraging Americans to mark the 400th anniversary of Columbus' voyage with patriotic festivities, writing, "On that day let the people, so far as possible, cease from toil and devote themselves to such exercises as may best express honor to the discoverer and their appreciation of the great achievements of the four completed centuries of American life."

In 1937, President Franklin D. Roosevelt proclaimed Columbus Day a national holiday, largely as a result of intense lobbying by the Knights of Columbus, an influential Catholic fraternal benefits organization. Originally observed every October 12, it was fixed to the second Monday in October in 1971.