TAKING STOCK: Bank of America

Dear Mr. Berko:

My broker wants me to buy 800 shares of Bank of America. I bought 200 shares of Bank of America at $53 in 2007 and the $12.60 price would reduce my cost basis so that I would break even if and when the shares move to $22. This makes good sense to me, especially considering that the unemployment numbers fell from 10.1 percent to 8.9 percent. That means more people will be borrowing, the bank will be making more loans and will hopefully improve its income and, therefore, its stock price. My broker wants me to buy Citigroup for the same reason. Please advise.

P.D., Vancouver, Wash.

Dear P.D.:

According to the administration unemployment has fallen from January's 10.1 percent to 8.9 percent today, and that's good--if it's true. Frankly, I do not trust government statistics; I never have and never will. It's generally acknowledged by most voters that members of Congress (politicians) frequently lie to the public. And since the White House is basically a snake pit of politicians, you must be mindful that the statistics reported from that iniquitous pit are calculated to demonstrate that administration policies are working. Hey, P.D., wake up and sniff the cherry blossoms!

I have no idea what the precise unemployment numbers are. Nor do I know how Washington defines unemployment. But I do know that only 12 percent of the jobs filled by previously unemployed Americans match the pay, the hours and benefits of the 8.8 million jobs that vanished during the recession. Now, give or take a few percentage points, some 65 percent of the new jobs offer wages between $9 and $14 per hour. About 20 percent of new jobs provide wages between $15 and $23 per hour and the remaining 15 percent of job offerings pay $24 per hour and up. This is disconcerting.

Lowe's (LOW-$26.70), which I rank as a good long term buy, is the second home improvement retailer next to Home Depot (HD-$37.01), which I also rank as a good long-term buy. Well, LOW is in the process of eliminating more than 1,900 managers responsible for store operations, revenues and administration. But LOW will add about 9,000 new weekend sales positions and create new assistant manager jobs. This is an industry trend, as large department stores, big-box stores, municipal and state government offices and manufacturers are following suit.

These folks whose jobs are downsized are earning less than they did before the recession and are borrowing from their IRAs and their 401(k)s to keep up with the Joneses, who are borrowing from their retirement plans to keep up with the Smiths, who are borrowing to keep up with the Browns. And all these folks were good, profitable customers of Bank of America (BAC-$12.60).

Most of these folks are still good customers, but few of them are profitable customers. And that's one reason I do not care for BAC.

The second reason is BAC is in a transformation. BAC's empire-building days are gone, and management is having difficulty integrating its diverse business interests in a single cohesive unit. I'm not sure management is up to the job.

The third reason is BAC's poor operating skills, lax underwriting standards and poor controls. Witness the recent brouhaha over its mortgage foreclosure practices.

The fourth reason is a "stinky" balance sheet. BAC needs more capital and may have to go shopping for additional funds or even consider selling Merrill Lynch, its crown jewel.

The fifth reason is management has yet to realize that BAC is an overstaffed, excessive bureaucracy with too many redundant employees. BAC must reduce its costs, as its return on equity is still half of what it was a few years ago.

And finally, if the economy tanks again, many observers believe that BAC will not survive. And while revenues and earnings appear to be higher this year and next, it seems this growth may be built on a house of straw so that a strong wind could blow this house down. Stay away from this stock.

And don't buy Citigroup, either. Keep watch this week or next for my column on Citigroup.


Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775 or e-mail him at mjberko@yahoo.com. Visit Creators Syndicate website at www.creators.com.

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Published: Mon, May 2, 2011