There are already law suits against several major banks pressed by the attorney generals of all fifty states. These suits will be dwarfed by the US Federal Housing Agency if it, in fact, goes forward. There have been large numbers of bank foreclosures in the wake of the 2008 stock market meltdown and worst recession in nearly 80 years. Now more of the major banks may be at risk. There is talk already of another bailout with the US tax payer picking up the tab, again. However, this time the talk leans toward taxpayer ownership of these banks. If the situation gets bad enough banks will need to issue stock to raise capital. Doing so will drive down their stock prices. The investor interested in picking bank stocks at bargain prices will need to read the situation carefully with bank stock analysis in order to get in at the bottom of the price curve and not throw away their money on buying a stock on a bank that then goes bankrupt. Buying preferred stock might be an option in such a case as it puts one ahead of ordinary shareholders for payment if a bank goes under. Certainly how to invest in stocks of failing companies is to tread softly but there is a history in the USA of not letting the biggest companies fail. Many have earned handsome profits applying a “blood in the streets” strategy to buying failing stocks.

As always we are not suggesting that one buy bank stocks or avoid them. Bank stock analysis whether it be of Bank of America or any of the big banks currently in trouble can be instructive. The Federal Reserve chairman, Ben Bernanke, implied that the Fed would step in with further economic stimulation if the slowly recovering economy weakens. Successful bank stock analysis will take more than guessing what the Fed will do next or if their will another fiasco on Capitol Hill when in dealing with the US debt dilemma. Investment research including close reading of quarterly financial reports will give investors an idea of just how bad the situation is and when it appears on the verge of recovering. Those who time their investments just right could end up with handsome profits.

As technology moves into banking AI, there will be many changes and those who don’t keep up will loose ground.

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Over the long term investors need to apply fundamental analysis to BAC and other bank stocks in order to decide if they are likely to be profitable over the years. One obvious factor is that these stocks have been beaten down during the recession and are suffering from other factors such as lawsuits by the US government regarding the nature of mortgages that they sold to Freddie MAC and Fannie MAE. If the economy does not right itself and things do badly for these banks they could go bankrupt, need to restructure, and become long term losing propositions. On the other hand the current dismal market may have underpriced these stocks. Thus, buying BAC and other bank stock in the short term could be profitable in the short term.

An alternative to using options as a cue to buying BAC and other bank stocks is to buy call options one’s self. Investors can purchase options on blocks of 100 stocks, pay the current price for the options contract, and the purchase the stock at a nice discount if goes up on price. Some of the best stock investment in a declining market can be scouted out by watching the options market. If an investor buys call options on a stock like BAC he only stands to lose the price of the options contract is the stock takes a nose dive. He is essentially taking out insurance against a fall in stock price. On the other hand, if the stock soars in price, he will execute the options contract and purchase the stock at the contract price, known as the strike price, no matter how high the price may have risen.

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The basis for successful long term investing is still to find and buy underpriced stocks with strong earnings expectations and a margin of safety in the form of cash and unencumbered assets such as property and production facilities. Fundamental analysis of this sort has typically paid off in the long run. However, a problem for long term investors today is sorting out the truth of the matter from seemingly continual bad stock market news reports. Will the EU survive, will a debt default by Italy or Spain send the credit markets into a panic. Would such a situation be contagious with global consequences? The fear of the Euro and dollar continually falling drove the price of gold at the London gold fixing from $1,620 an ounce at the start of July, 2011 to $1,880 an ounce by August 23 before falling to $1,730 on August 25. Then, as Euro worries filled the news the London gold fixing has risen again to $1,888 on September 5 and 6.

Gold bugs expect to see further bad stock market news reports and commonly predict a gold price of $3,000 per ounce. Investing in gold certainly seems attractive in light of all the bad news. However, investors should be reminded of the panic that sent gold up in 1980 before it crashed, taking investor assets with it. Anyone who has invested in gold stocks and ridden them to profits might be thinking of buying puts on their stocks in case of another, more significant, market correction. Although gold stocks tend to rise faster than the price of gold in a rising market they also tend to fall faster when the gold market corrects, or collapses. It turns out that what might be bad stock market news reports for some might be good news for others to which investors in gold bullion, gold stocks, and gold ETF’s can currently bear witness.

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