Bank on this opportunity

This has been a scary week indeed! It is in situations like this one that investors like you and me freeze and really don’t know what to do. Most of your investments are in deep red and you wonder whether to sell and cut your losses or just weather the storm and hope for better times. Anyway, how much lower can it go? Most likely, you asked yourself that same question a few months ago –heck, a few weeks ago!- and as it seems, they could go much, much lower.

Jim Cramer likes to repeat this phrase that makes much sense in these times: nobody ever made a penny by panicking. And what we are seeing this week is just that: sheer panic. A very justifiable panic perhaps, but panic nonetheless. What I love about these times is that the market throws the babies with the bathwater. And I am seeing stocks that have reached prices that make no sense. Let’s be clear, though: I am not saying that we’ve reached a bottom and that even those stocks could not go lower. Even though I’d really love to be wrong, I think there is still pain ahead of us. I wouldn’t be surprised anymore if we revisited a Dow 10,000. But then, we have to look around: oil prices falling, commodity prices falling, an election coming soon, and finally some consolidation in the financial sector. Weren’t the high oil and commodities prices what were driving potential inflation and a squeeze in margins across the economy in the first place?

The US economy fundamentals might not be strong at this point, but one thing is true: ours is a very resilient economy. Eventually, the economy will improve. And as I stated in my post “May you live in interesting times”, the true leaders will come out of these dark times stronger and more powerful.

In the financial sector, I am particularly excited about one strong, clever player: Bank of America (BAC). Exactly as described in the referred post, Bank of America has been pondering the opportunities generated by this crisis and, when the time came, moved to acquire the right companies to strategically complement and strengthen its business. First it was the acquisition of Countrywide, the largest retail mortgage lender in the country. And now, it acquires nothing less than Merrill Lynch (MER), the most recognized name in the world in brokerage services and wealth management. The latter was, in my view, a brilliant move. Before this acquisition, Bank of America had little real opportunities to grow in the US: it was already too big in this market. And yet, it didn’t have a strong international presence to look for growth overseas. In addition, it really was a non-player in the profitable wealth management and brokerage services field. These two weaknesses are instantly turned into strengths with the acquisition of Merrill Lynch.

For sure, many have criticized this acquisition as reckless and untimely. Is this acquisition risk-free? Of course not! It is a very risky undertaking! But it is this sort of bold, aggressive moves that differentiate leaders from followers. It is by taking decisive action with sound strategic vision that leadership is exerted and enhanced. Merrill Lynch is a prime franchise with global reach, and provides Bank of America with immediate access to a huge portfolio of wealthy customers and new businesses around the world at an opportunity price. It would have taken decades for Bank of America to build that infrastructure by itself.

I believe Bank of America will come out of this crisis as a financial powerhouse. Although bruised, the institution has been able to weather the crisis with relative success so far, and has taken advantage of the turmoil to gain strong footholds in areas in which it was not participating, thus creating new opportunities for growth. For the patient investor, Bank of America might really be the bank of opportunity.

Disclosure: I own shares of BAC