Tuesday, February 3, 2009

Who will buy bank stocks?

From Dick Morris' weekly email:

"The federal government's acquisition of preferred stock in virtually all our major banks sets the stage for full nationalization. After all, if the feds are using their "preferred" status to hog all the dividends, why should any private person buy bank stock?"

I assume that the idea that investors only buy bank stocks for the dividends is intentionally overstated here, but the question of why buy a bank stock here is a valid one.

Dividends are great, especially in a low or negative return equity environment such as we have been in. With common dividends having been cut to the bone at most financials, the main reason that you or I would buy a bank stock is the prospect of the stock going higher. It's pretty simple. Business needs to stop getting worse for the stocks to work. At that point. brave/early buyers step in, shorts begin to cover, fearful sellers take a break and sooner or later you have more buyers than sellers.


Oil seems to be very comfortable hanging out at $40/bbl or so.

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