Stock analyst said, 'Sell' before big fall

— -- While most investors have been on the losing end of the market's ride down the past month, anyone who listened to Richard Bove could have limited their losses.

That's because Bove, who covers banks and brokerage firms for investment boutique Punk Ziegel, issued a blanket downgrade of all his stocks on July 18, the day before the Dow and the S&P 500 reached their highs for the year.

Analysts almost never use the "s-word," even in the new era where investment banking relationships are not supposed to affect an analyst's judgment. So Bove's call was a gutsy one, and profitable, for anyone who acted on it: Since he issued his "sell" recommendation, shares of the five investment banks have dropped 20% on average, even after a big rally Thursday.

Bove says his call was the result of several months of research into the proliferation of mortgage-backed securities and related products in the marketplace. While the development and popularity of these products helped the subprime mortgage industry prosper, and fueled profits for banks and brokerage firms, Bove says the size and scope of the new debt instruments concerned him.

The big problem, he explains, was that economic growth in the USA was only 1.8% in real terms in the past year. That's not strong enough to generate the income required to pay the interest on all these debt instruments. "The first sign of this is that poor people cannot pay their mortgages," Bove wrote last month. "The next step will be rich corporations not being able to pay for the leveraged debt that they have created."

Bove concluded that the banks holding lots of these questionable loans on their balance sheets were probably placing an unrealistically high value on them. But he had no proof of that supposition until two Bear Stearns hedge funds began to implode in June.