In the short term stock prices are dictated by any number of things; psychology, emotion, fear, greed, the media, hedge fund traders, rumors, etc. The fundamentals don’t always matter.

Over the long term stock prices are dictated by corporate earnings. The fundamentals do matter over time because of what a share of stock actually is, a piece of ownership in a business that entitles the holder to a representative share of the business’s profits.

To me, one is far easier to predict accurately than the other. Said another way, my “batting average” predicting long term earnings patterns will be much higher than one trying to predict what the market will do today, next week, or next month. It really comes down to the definition of a contrarian value investor and what they are trying to accomplish.

As for Cramer, well, hopefully there aren’t too many of my readers who are using his advice to manage their own accounts. Remember, he used to be in the investment advice business but quit to be in the entertainment business.

I just dont see anything that will get people excited about banks in the near term but I guess that is why it is trading here now. Thanks.

Just to clarify, the trade idea was to buy BAC (it was around $48), sell the May 2008 calls at $1.75, and collect six months worth of dividends ($1.28). All of this would result in a breakeven point of around $45 per share. The stock today is $44 and change on renewed worries about the health of the banking sector.

As with every contrarian investment, a long term time horizon is imperative. I have no idea what will happen in the short term, especially in the financial sector where psychology and fear is driving market movements.

I don’t know you personally, so I can’t speak to what you should do specifically. That said, if you share my belief that this credit crunch will resolve itself at some point, and you are patient and have the time to wait it out, I do like BAC as a contrarian investment. They have less mortgage exposure than JPM and C, and I do think they’ll come out of all this just fine.

The short term though, is anybody’s guess. My trade idea was based on the fact that I felt good about having a breakeven point of $45 per share in May of 2008. I still feel that way, and still own BAC shares, even though near term volatility is clearly here to stay.