The Fed spoke yesterday, set out a hypothetical timetable for reducing and ending its bond buying program and of course traders sold off the market. Investors need to heed the Fed and invest in what they are telling us – the general improvement in the US economy and the turnaround in disposable income and spending by American consumers. To me, short and long term, that means you need to look at Bank of America (BAC).
Listen to the Fed
The Fed is now looking at the economy, saying things are all right now, will soon be good and then will get better. That cannot be said of any other large developed economy in the world – or even about China, given yesterday’s manufacturing numbers coming out of that country. The Fed sees that the cost shift is on – according to the Boston Consulting Group, by 2015 the US will have a 10%-15% cost advantage over many developed manufacturing nations, the cost differential between the US and China is narrowing, and a stable, cheap source of natural gas combined with a flexible work force is pulling manufacturing back to the US. Alongside this shift are the slow but steady creation of real jobs: layoffs are the lowest in nineteen years; home prices are upl the stock market is up and the attitude of American consumers is way up. The foundation of a steady, durable recovery is in place.
Yes, the market sold off yesterday, no big deal. The indices are fairly valued, and the traders hyper-sensitive to whether Ben Bernanke has bad breath or not are having less and less an impact on the market for more than a day or two. Think about investors coming in due to the optimism of the Fed.
Forget picking winners among sectors – pick the most undervalued company in the sector that always benefits when consumers pick it up a notch – BAC. Alone among the banks they have a balance sheet that is on a trend of being shareholder friendly – they are reducing leverage. BAC has a great brand among consumers (I bank there) and is well positioned for the slow and steady rebound. More importantly, the stock is positioned for another bump once the bank increases its dividend. BAC received permission this March to buy back shares and increase its dividend, it announced a $5 billion dollar buy back. The dividend will be next.
Two Ways to Trade BAC
What to do? One of two things – sell some July puts or buy the shares and sell some calls. You can get $40 a contract for the $13 puts. If they expire worthless, you have a gain of more than 3%, on an annualized basis that is 36% a year. Or if you buy the shares (currently around $13) and sell the July $13 calls, you get the same return if you are called out.
If you want something right now and I mean right now, buy the shares and sell the June $13 calls that expire tomorrow. You will get about 0.5% in a day of you are called out. And if you are not called out, sell the calls again on Monday. And the Monday after that, and the Monday after that, and so on.
Michael Shulman is the author of Made in America.