Are Bankers Banking on Banks Again?

02/03/2009 1:00 pm EST

Focus: STOCKS

Mark Skousen

Editor, Forecasts & Strategies, High-Income Alert

Mark Skousen, editor of Skousen High-Income Alert and Skousen Turnaround Trader, says insiders at some of the nation's biggest banks are buying shares of their own institutions at bargain prices.

Clearly, Bank of America, like Citibank, JP Morgan Chase, and other big banks, is on the ropes. Citibank had to suspend its dividend to qualify for a bailout, and Bank of America had to cut its dividend in half, and may have to cut it further.  
 
Yet, amazingly enough, insiders at Bank of America, JP Morgan, and other major banks recently have invested millions in their own companies' stock.
 
Do they know something we don't?
 
Maybe. We've been misled by insider buying before, especially in the financials, and troubles at the nation's major money center banks are far from over.
 
But there is a strong probability that the federal government is going to reinstitute some version of former Treasury Secretary Henry Paulson's plan to buy up bad mortgage securities to help clean up the banking system. An announcement could come virtually any day.
 
It looks to me like corporate insiders sense this already. They also know that the US economy will not recover until lending returns to normal. An announcement that furthers Treasury Secretary Paulson's original plan to buy up toxic assets would surely drive bank stocks higher.

Bank of America (NYSE: BAC) absorbed two big losers, Countrywide Financial and Merrill Lynch, during the financial crisis of 2008. It now carries more than $600 billion in debt, including billions in TARP funds from the US Treasury (in the form of preferred stock). With revenues off 24% to $46 billion, and net income down to $2.4 billion, the stock has fallen 85% in the past year.

What do company officers know? For starters, the bank is so cheap it's now selling for just 3.3x projected earnings and only one-third of book value!
 
JP Morgan (NYSE: JPM) is a leading financial services firm with assets of more than $2.2 trillion. Major businesses include investment and commercial banking, asset management, private banking, credit cards, insurance, and equipment leasing [to] millions of customers in more than 60 countries.

JP Morgan Chairman and chief executive officer James Dimon bought $11.5 million worth of the stock recently. What does Dimon know? For starters, that the bank is so cheap it's now selling for just eight times projected earnings and only two-thirds of book value. The stock also is yielding 6%, although forward dividends in this sector are suspect.  

He also knows that the US economy will not recover until lending returns to normal. You can't have normal lending until these balance sheets get cleaned up.  

An announcement that furthers Treasury Secretary Paulson's original plan to buy up toxic assets would surely drive bank stocks higher.

So, buy BAC at market. And place a protective stop at $5.25. (It closed at $6 Monday—Editor.) If you prefer to play this one more aggressively, try the May $10 calls, symbol BYO-EJ.

And buy JPM at market (just above $25—Editor). And place a protective stop at $19. If you prefer to play this one more aggressively, try the June $30 calls (JPM-FD).

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