Why BoA Really Raised ATM Fees

There has been much discussion in the media in recent days about the fact that Bank of America is increasing its fees to non-customers who use its ATM network from $2 to $3. Analysts say that one of the reasons for this increase is that banks now rely to a larger extent on fees, since the spread between the interest they pay on deposits and the interest they charge on loans is diminishing. Yeah, right. Banks really need a reason to increase fees.

A Bank of America spokesperson gave USA Today a different reason. Try not to laugh hysterically as you read this:

"...Betty Riess says the higher fees help offset the "significant investment" the bank has made to upgrade and expand its cash machines. The bank decided to charge non-customers a $3 fee at 10,700 ATMs — nearly two-thirds of its network — in bank branches and supermarkets as a way to "reduce wait time for our own customers," Riess says."

If the spokesperson's name was Pinocchio, we could have used her nose for a mast on an ocean going yacht.

Seriously, if you want to increase fees, do so, but don't try to feed us a line. I am a BoA customer, and I use the Bank's ATMs all over the country. I can remember very few times in which I actually had to wait in line to use the machines, and even when there was a line it was gone in about 20 seconds. If customer service was a true concern, BoA would hire more tellers so that I wouldn't have to wait in line for 15 minutes when I go into my local branch in the middle of the day. How gullible do they think we are?

Since that excuse didn't fly, BoA tries an even more ridiculous one: they would have us believe that they increased fees to off-set the cost of their investments in ATMs. Any moderately intelligent consumer sees right through this excuse. The return on the ATMs is immediate and dramatic and it comes in the form of fewer customers who need the assistance of a human bank employee. This means that BoA can employ fewer tellers, which translates into big savings come payday. And yes, the same long lines at the bank remain, because each remaining teller still needs to serve the same number of customers.

Here is what I think is the real reason for increasing the fees: BoA is increasing the fees because it thinks it can get away with it. I don't blame them. BoA is a for profit corporation that is there to make as much money as it can. If they thought they could charge us $27 to use a Kleenex, they would do so faster than you can say gesundheit...

I have another sneaking suspicion about the reason for the increase. Many independent banks that either have no ATMs of their own, or have only a small number of them, such as E*Trade and HSBC, have recently started offering to reimburse their customers for any ATM fees the customers incurr when using another bank's ATM network. This strategy essentially negates a major competitive advantage that the banks with large ATM networks have over their smaller rivals. Bank of America has the largest ATM network in the country, and has been aggressively leveraging this network as part of its customer acquisition strategy. Remember their commercials about "where can I find a BoA ATM?" I think that the increase in fees may not even be an effort to improve the bottom line, so much as it is an effort to prevent smaller banks from being able to cost-effectively lure customers by offering to reimburse them for ATM fees. I think that this may be part of a larger strategy to combat small rivals and online upstarts. Of course, the extra $1 per pop is certainly nothing to sneeze at. Gesundheit.

Your Opinion: Is Recession Looming?

I have added a new quick poll (top left corner). This time I am asking my readers to vote whether they think the economy is about to go into recession. Point and click folk, point and click.

WSJ: 36% Chance for Recession

The Wall Street Journal yesterday published the results of a survey it ran regarding the outlook for the economy. Here is a brief quote from the article:

"Economists in the latest WSJ.com survey pegged the risk of a recession at 36%, on average, up from 28% a month earlier. Fifty-five economists took part in the survey, and 52 answered the question about the likelihood of a recession. The survey was conducted after last Friday's report on August employment, which
showed the first monthly jobs decline in four years."

Even though the Journal survey placed the average chance of a recession at 36%, it showed a wide range of opinions by economists. Some say a recession is practically a foregone conclusion, while others seem to think that a recession is simply not in the cards.

To me this survey suggests that even the professionals, the so-called smart money, don't really have a good sense for where this economy is going. Having said this, the trend in expectations is clearly negative, with far more economists now worried about a recession than were concerned about one only a month ago.

I think that this lack of consesus about where the economy is headed is also a clear indication that the volatility that we have seen in the financial markets will continue, so buckle your seat belts and enjoy the ride. Expect strong up days and dismal down days to follow each other in quick succession in the near term. Personally, I intend to ignore these swings. My friend put it best when he told me the other day: "I know where I am going. Sometimes the view from the road is beautiful, sometimes its ugly, but the view outside my window does not change my destination." Amen to that.

There is one thing that analysts seem to be in agreement about: more pain for the housing market:

"...few analysts say they believe the housing market has reached its low point. Home prices are expected to drop, sales are expected to slow and construction activity is set to decline further through at least the next year."

I think that the operative phrase in the paragraph above is: "at least". Unfortunately, if you party too hard a hangover is part of the deal.

To Time or Not to Time...

Some of my readers, friends and colleagues who know my opinion regarding the precarious state of the economy have been asking why I am still invested in the market if I think that it is likely we are headed into a recession. This is a very valid question and I think that the answer makes worthwhile post. Here are the three reasons that I am staying in the market and will continue to do so, regardless of my beliefs as to the state of the economy:

1. Timing is Bad for Your (Financial) Health - last week I read an excellent article in a Schwab publication that my wife received. The bottom line of this article is something that I have known for a long time, but have never tried to quantify: market timers lose money. This graphic really drives home the point. Here is a quote from the article:

"...for the 20 years 1986–2005, the S&P 500® index had an annualized return of 12%. Unfortunately, the average equity fund investor had significantly lower returns—only 4% annualized (barely nudging out inflation). Most interesting, though, was the difference in returns between "systematic" and "market timer" investors. For those who were consistent in their investments, the annualized return jumped to 6%—still only half that of the S&P 500 but much better than for the average investor. On the other hand, those investors who tried to outsmart the market by timing their inflows and outflows saw their returns plunge well into negative territory—generating an annualized loss of 2% over the period!"

I don't know about you, but negative 2% annualized returns don't sound that appetizing to me.

Here is a link to the full article, in case you want to read it for yourself.

2. I Am Not That Smart - quite frankly, I am wise enough to admit that I am simply not smart enough to predict the course of the economy. I have some ideas and I have some feelings and opinions on the subject, but I don't delude myself for a minute by thinking that my opinions are anything but opinions. Moreover, I am not going to try to outguess the combined wisdom of hundreds of millions of investors. The markets may not be correctly valued at all times, but the chances that I am the only one that will spot a pricing error are not very good.

If you think that you can time the market, you are implicitly saying that you are smarter than the person who will be buying the stock you are selling. For all you know that person may be a finance professor, a hedge fund manager, a star broker or the idiot day trader down the hall. You simply don't know. Under such uncertainty, you should assume that the person buying your shares is just as smart and informed as you are. What makes you think your decision to sell is better than his decision to buy?

Let's face it, I am simply not that smart, and neither are you... although have I told you lately how good looking you are? Have you lost weight?

3. Uncle Sam Always Wins - regardless of whether I make the right timing decision or the wrong timing decision, as soon as I get out of the market I automatically lose. Uncle Sam reaches deep into my pocket and grabs his share of my gains. That makes the cost of getting out of the market pretty steep.

So, even though I think the economy is not in great shape, I will hold my ground and continue to regularly invest and follow my long term asset allocation plan. Steady as she goes.

Battle of the Stock Indexes

Following yesterday's post, I decided to take a closer look at several broad stock indexes and try to calculate the average return that they offered to investors over the course of their entire existence. For this little exercise, I selected the following indexes: Dow Jones Industrial Average; S&P 500; NASDAQ Composite Index; Wilshire 5000; and Russell 2000.

Before I tell you the results of my inquiry, I would like to point out that I had some difficulty finding the year in which some of these indexes were first introduced, as well as some of the base values at which they were introduced. In the end, I think I got the correct numbers, but if anyone can spot a mistake, please let me know so I can correct it. Also, I would like to point out that the numbers are approximate, since I did not account for the fact that 2007 has not yet ended.

Without further delay here is what I have found:

Dow Jones Industrial Average
Year of Introduction: 1896
Base Line Value: 40.94
Average Annual Return (Sept 11, 2007): 5.35%

S&P 500
Year of Introduction: 1957
Base Line Value: 44.06
Average Annual Return (Sept 11, 2007): 7.27%

NASDAQ Composite Index
Year of Introduction: 1971
Base Line Value: 100
Average Annual Return (Sept 11, 2007): 9.47%

Wilshire 5000
Year of Introduction: 1980
Base Line Value: 1404
Average Annual Return (Sept 11, 2007): 9.12%

Russell 2000
Year of Introduction: 1984
Base Line Value: 100
Average Annual Return (Sept 11, 2007): 9.35%

These results are very interesting. First off, as I commented yesterday, the return on the Dow since its introduction is dismal. The S&P is the second oldest of the indexes I examined, and it too offers lackluster performance, although it is certainly more attractive than the Dow. The remaining three indexes are all substantially newer and all offered significantly better returns.

What do these results mean? Are the low returns on the Dow an artifact of the much less developed financial markets of the late 19th and early 20th centuries? Or are the higher returns exhibited by the Wilshire, NASDAQ and Russell simply the result of a fluke that has allowed them to so far escape from a protracted bear market? Am I simply making an error or overlooking something basic? Once again, I think I will continue to look at this question I stumbled across, and will keep you informed of my findings.