Tag Archives: BAC

Bank of America – Who to Believe?

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Bank of America reported its earnings on Thursday and beat estimates. As a result, the stock got a small pop when the market opened, but nothing special.

In reading excerpts from the post-earnings interview as reported by Reuters, chief executive officer Brian Moynihan was upbeat, saying, “Our strategy is paying off: with the economy steadily improving and because of the work we have done to strengthen and simplify our company , we saw improved profitability in all of our businesses this quarter compared to the fourth quarter of last year.”

So, Moynihan seemed to be quite pleased with the bank’s progress and the direction it is headed in, but what about the more important question; what does the market think?

If you take a look at a few charts, you could come to the conclusion that Moynihan’s words ring hollow; that is, while he’s doing his job in promoting the direction of the bank, the market feels otherwise.

Let’s start with a one year chart of BAC. We see that the stock closed at 12.27 one year ago. Today the stock is trading at $9 a share. So, by my math, BAC is trading 25% lower than it was a year ago. This compares to a rise in the S&P of just over 4% for the same period of time. That’s quite a negative spread.

Bank of America 1 Year Daily Chart

Now let’s take a look at a 5 year chart. We see that the stock was trading near $51 a share 5 years ago in April, 2007. At today’s share price of $9, that’s an 82% haircut. This compares to a loss in the S&P of 6.5% for the same time period.

Bank of America 5 Year Daily Chart

So, by any measurement, BAC has badly underperformed, yet Moynihan is putting a positive spin on what can only be described as woeful performance.

One might argue that BAC has done well since it hit a bottom of roughly $5 a share back in December, rising to $9 a share. But, any way you cut it, the market continues to be underwhelmed by its performance.

This basically goes to the heart of the market; it never lies. Instead, investors and traders vote with their wallets, and in the case of BAC, it hasn’t performed as admirably as Moynihan would like everyone to believe. Point being, don’t put too much stock (pun intended) in what the CEO of a company says; let the market be your true guide.

Another year begins

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Happy New Year 2012Here’s what we know about the market in 2011. The S&P ended at 1257 as of December 31, 2010, and ended at 1257 as of December 31, 2011. So, over a period of 365 days, the S&P was totally flat for the year.

It’s hard to fathom that after 365 calendar days and hundreds of trading days that the S&P would not gain or lose one point, but that’s exactly what happened. It’s hard to imagine that with everything going on during 2011, including a stalemate on balancing the budget, the near implosion of Europe, millions of people losing their homes and unemployment remaining high that the S&P didn’t move. If you had decided to bury your head in the sand for a full year, put your money into the S&P Spiders with hope that your portfolio might jump, you discovered a year later that you hadn’t made a dime; nada. In fact, inflation adjusted, you would have been in the hole.

Of course, the market did move throughout the year, with the S&P getting as high as 1370 on May 2 when it peaked and then falling as low as 1074 on October 4. Thus, the S&P was up as much as 9% at its peak for the year and then fell over 20% from that May 2 high to the October 4 low.

Still, 2011 required a unique set of trading skills and discipline to keep the average trader from losing his/her shirt. Yes, that sounds a bit odd; if the S&P broke even, at least one should be able to preserve 100% of capital. Sorry, doesn’t work that way.

Instead, those individuals who like to call themselves “trend traders” were pretty much forced to approach the market more like “day traders”, or risk losing heavily, when, for example, news from Europe overnight left them vulnerable to heavy losses. You would think this would be a big boon to companies like Charles Schwab who rely on heavy trading to make their money, but this was not the case. In fact, despite the churning throughout the year, Schwab lost 33% of its value over the course of the year, so even the brokers suffered.

Bank’s were hit particularly hard during 2011, with Bank of America itself losing nearly 60% of its value over the course of the year; Goldman Sachs lost 45% of its value; Morgan Stanley lost over 40%. This is compared to a flat S&P, so it gives us some perspective on how poorly the banking sector did perform for the year.

There were also some big names, what I like to refer to as “cult” stocks, ones that traders love to get involved in. Research in Motion (RIMM) was one that got hammered for the year, down over 70%; Netflix (NFLX) was down roughly 60%, and over 75% from its peak to year end.

The combination of a dismal financial sector and such uncertainty abroad made it nearly impossible for the market to advance. 2011 was the year that Europe took center stage, with investors in US stocks being held hostage day in and day out, never knowing what the morning might bring. This was a dramatic shift from the norm, where most investors around the globe had become accustomed to letting the patterns in US stocks dictate the move in world markets.

Yields in US treasuries fell off the cliff, with the yield on the 10 year Treasury Note falling over 40% from the end of 2010 to the end of 2011. In that respect, one could argue that US equities did well to break even, as investors around the world fled to safety.

What will it take for US equities to shine during 2012? For starters, banks need to perk up. When you have banks like Bank of America, Goldman Sachs and Morgan Stanley faltering, it’s a sign of uncertainty – i.e., what might be lurking on the collective balance sheets of the banks? Next, the consumer needs to perk up, and that’s going to be tough as long as unemployment remains high. It has been encouraging lately to see weekly jobless claims fall, down under 400,000 for more than just one week at a time, and the unemployment rate is back below 9%. But, rest assured that corporations will do everything they can to increase their respective bottom lines without adding bodies, leading to the continuation of skeptical consumers.

One other thing. When the US implemented its TARP program back in 2008, it took almost 6 months for the market to bottom, when the S&P reached 666 in March, 2009. So though it may appear that Europe has made progress with its banks, we may yet see a delayed affect that will affect markets around the world.

Bottom line for 2012? Honestly, it’s just too hard to tell. It’s a presidential election year, so that could affect the market, depending on the outcome. Banks could continue to struggle as more loans go sour and as the realities of dealing with so much bank owned real estate. And, without the banks participating, it is hard to imagine the market able to make much headway. Expect corporations to squeeze as much as possible out of the work force; no one is going to hire unless absolutely necessary. It’s also quite possible that the effects of recent actions in Europe will continue to be felt in the US, keeping a significant number of investors on the sidelines.

On the other side of the spectrum, if the banks can make headway on their bad loans while minimizing real estate related losses while open up lending in an even bigger way to small businesses, that would be a net positive. It’s also possible that the affect of all of the Fed‘s efforts the past many months will kick in big time, stimulating the economy and the market as well.

A potential huge impediment? Rising oil prices, particularly if it translates to higher prices at the pump. That could be a deal killer. It certainly had a near devastating impact when oil neared $150 a barrel back in 2008; we all saw what happened to the market and the economy in general. The US economy is not yet strong enough to withstand a repeat of 2008.

Which gets me to my 2012 forecast…see me in about 12 months and I’ll give you my number then!

Housing Starts Beat Expectations and other Mid-day News

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The November housing starts came out earlier today and appear to have really beat the expected number, up almost 10% month-over-month to a seasonally adjusted annual rate of 685,000 units. (The market was expecting around 627,000.) Is this a sign of recovery, in the housing market and in general? Keep an eye on the Home Sales report tomorrow to see if the good news continues…

Wall Street seems to be reacting well to this report, as well as to some positive developments in Europe. The S&P is back above it’s 20 and 50 day moving averages, up about 2.6% as of 11:20 AM Eastern, and the VIX is down about 10%.

Finally, Bank of America appears to have held the all important $5 line, for now…This isn’t just a psychological barrier, many institutional investors are supposed to remove stocks from their portfolio once it gets below $5.

Anything else you’re watching today?

Chairman praising Moynihan baffles the mind

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The Chairman of the Board of Bank of America came out today saying that CEO Brian Moynihan’s job is safe. Whenever I hear that, it makes me think that something’s about to happen.

Moynihan has been in charge of BAC since January, 2010. Since that time, the stock has gone from $15 per share to just under $6 per share, a 60%+ haircut, and disastrous by any measure. This in spite of constant assurances that everything is fine at the bank.

Well, I can tell you this for certain; if everything was fine, the stock wouldn’t be down 60%. In fact, the S&P 500, during the same period of time, was up over 10%, so BAC is lagging the S&P by over 70% in a two year period. Awful.

Yet, the Chairman of the Board, Charles Holliday, gives Moynihan a public vote of confidence, saying, “Brian’s a great guy. It’s been a real pleasure to work with Brian the past two years. He’s put things in place (and has) a great team.”

Really? Let’s rewind the tape here.

Moynihan gets promoted to President and CEO in January, 2010. This is almost a year after the market has bottomed. The stock is trading for $15 a share when he takes over. He has two full years to get things in shape and the result is a drop in share price of over 60%, compared to a rise in the S&P of 10% during the same period of time. And for that, the Chairman of the Board pats him on the back for being a nice guy who has put together a “great” team.

I don’t know about you, but when I hear the term “great team” I think about the Yankees, or Red Sox, or Patriots, or Lakers. I don’t think of teams that are at the bottom of the totem pole, which is exactly where Bank of America is today.

So, it strikes me that Holliday was showing a vote of confidence in his public pronouncement when he gave Moynihan a thumbs up, when in fact he must be thinking, this guy’s got to go! And, who could blame him?

I can tell you one thing; I don’t have much confidence in the Board of Directors of a company when its Chairman is endorsing such poor performance. And, it’s likely that Holliday will be challenged to explain why he has condoned a trashing of the bank.

This whole situation reminds me of what happened before General Motors got rid of its CEO, Rick Wagoner. Everyone knew that he had tried his best, but everyone knew he had to go. Same thing with Moynihan. Thus, the only real question is, does he go now, or does he go when its too late to salvage BAC?

Bank of America weakens

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Once again, Bank of America is teetering on falling below the “magic” price point of $5 per share. BAC has not been this low since the market bottomed in March, 2009. The stock is down a shocking 75% from its April high of 19.86, compared to the S&P being down 10% during the same period of time.

It’s known that large institutions steer clear of stocks under $5 per share, so in addition to being a psychological level, there are other implications as well. Thus, traders are keeping a very close eye on the stock, knowing that a move below $5 could spell more trouble.

The reality is that Bank of America swallowed way too much when it absorbed Countrywide and Merrill Lynch. At the time they probably thought they were getting a bargain, when in fact, the acquisition of those companies practically put them under.

To me, it seems as though BAC is going to need another life line, and it won’t be the American taxpayer; not this time. Instead, I could see a scenario where the company is absorbed by another/other financial institution(s) who pick it apart in what might ultimately be a fire sale.

If the US ends up in another recession (I stated long ago that I felt we were already in one) and the market tanks, I don’t see how BAC survives. In fact, it may be a necessary process to cleaning up the mess that started several years ago when banks loss all sensibility in mortgage lending.

BAC isn’t necessarily the only bank that could go away. Morgan Stanley doesn’t look much better, and Citigroup isn’t exactly setting the world on fire. But to me BAC looks the most vulnerable, given the baggage it’s carried for too long now.

Of course, I could be completely wrong here; maybe BAC comes out of this mess better than expected. But, in many ways it symbolizes everything that went wrong in the banking sector leading up to our near meltdown, so sacrificing itself for the good of the whole might not be so bad after all.

Market Chatter for October 18, 2011

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As part of our free fall preview of Tom Bowley’s Market Chatter, we’re going to be posting the Market Chatter on our website every day for the rest of the month. If you want to have it delivered via email every day, you can sign up here.

TECHNICAL ANALYSIS:

PRICE/VOLUME COMBINATION:

Volume is telling us little about the current state of the market. NASDAQ volume has been at or below 2 billion shares for the last six trading sessions. Prior to this weak volume trend, the NASDAQ had traded at or ABOVE 2 billion shares for 13 consecutive sessions. So it’s difficult to read too much into the recent rally as few are buying into it technically. That doesn’t mean the rally can’t continue, it’s just difficult to avoid being cautious.

The NASDAQ has set up quite interestingly in the near-term. If you look at a 60 minute chart, you’ll see a potential near-term head & shoulders top with the neckline established at the October 13th low and this morning’s low – both around 2585-2590. A potential right shoulder could form anywhere in the 2630-2640 area. Of course, a head & shoulder really isn’t a pattern to act on until the neckline breaks with force (volume). So for now, I’d just keep in mind that the pattern exists.

MACD DIVERGENCES:

Price action has been fairly predictable short-term as the bearish divergences on the 60 minute charts suggested a 50 hour SMA test. We’ve since seen those 50 hour tests to “reset” the 60 minute MACD back to its centerline. Therefore, the slowing momentum has now been accounted for and the reset takes the market to the next question. Is this simply a short-term pullback to reset that MACD or could the selling be much deeper? It’s hard to answer that question, but the daily MACDs are suggesting that we’ll bounce off 20 day EMA tests should we fall that far.

MOMENTUM OSCILLATORS:

The stochastics and RSI are as follows on our major indices:

Dow Jones: 88-55 S&P 500: 92-56 NASDAQ: 92-58 Russell 2000: 88-54

Volatility continues to make it very rough on traders, but the RSI and stochastics tell us that the bears are still in control of the action overall. A break on the RSI above 60 across the board would begin to change that thinking, however.

SENTIMENT:

The VIX approached 35 this morning, just two days after seeing a major breakdown beneath 29.50. Would the REAL direction in the VIX please stand up? This insane volatility really adds a layer of risk to trading that I simply don’t like. I know the thought process is to use these swings to make HUGE amounts of profits, but I want to remind everyone that this “potential” profit doesn’t come without an inordinate amount of risk. Apparently, the high volatility CRUSHED Citigroup (C) traders in the latest quarter, so if you’re struggling in this current environment, don’t feel alone. At Invested Central, we simply try to avoid overtrading and keep trading sizes smaller than usual.

The equity only put call ratio (EOPCR) is at .68 as of 11:30am EST. Relative COMPLACENCY is at 9.71%. Complacency is still “in the air”. But we’re still not at a level that would suggest a reversal is imminent.

MAX PAIN:

This past weekend there was a max pain video done to highlight the possibilities. I indicated that the market appeared susceptible to downside action this week, especially on the NASDAQ and S&P 500. We’ve already seen an initial push lower to confirm that belief. Is the market done selling off? We’ll soon find out.

HISTORY:

The Bowley Trend is our historical indicator that alerts us to specific periods throughout the year when three of our key indices (S&P 500, NASDAQ and Russell 2000) tend to trend in one direction or the other.

The major indices will be NEUTRAL all week, but will turn VERY BEARISH at Friday’s close as next week is the worst performing week of the year historically. More on that later this week.

SECTORS:

It’s great to see financials leading the action today. Bank of America (BAC) reported and while their numbers weren’t great, traders are excited. Industrials are also outperforming, while the defensive sectors – utilities, healthcare and consumer staples – are the primary laggards.

The 10 year treasury yield has fallen back to 2.12%. If you recall, it was the recent breakout above 2.11% that helped to fuel the equities rally. Therefore, it makes sense that we’d like to see the yield hold this 2.11% support. In addition, the 20 day EMA and 50 day SMA are at 2.06% and 2.07%, respectively. That combines for a LOT of support in the 2.06%-2.11% range. The bulls do not want to see the yield lose this support level because it would be an indication of a rush back into treasuries. More defensive posturing does not make for a bullish backdrop for equities, so keep an eye focused on treasuries.

Transportation issues are rallying again today, and are less than 1% from that key resistance level of 4700. CSX is set to report its Q3 results after the bell today. That could go a LONG way in determining which way transports are heading. A break above 4700 adds to the bullish case of the market, while another failure there would be bearish.

ECONOMIC AND EARNINGS REPORTS:

September PPI shot higher, rising 0.8% vs. 0.2% estimates, but the core PPI was only slightly higher, with an increase of 0.2%, just above consensus estimates of 0.1%.

In earnings news, BAC posted better-than-expected results, as did Johnson & Johnson (JNJ). IBM was beaten down this morning based mostly on top line results. Bottom line, IBM beat expectations and raised guidance. Thus far, traders are not impressed. Goldman Sachs (GS) has been downtrending for some time and this morning we found out why. GS posted only its 2nd quarterly loss in 12 years, steeper than expected. Much of that bad news appears to be priced in, however, as GS was actually ahead slightly today – at least at last check.

INDIVIDUAL STOCK TRADES:

The last two days really summarizes how difficult trading can be in this current environment. It appeared the bulls were being whipsawed after their Friday afternoon breakout and Monday failure. Then, this morning, the action was clearly bearish and suddenly buyers emerged and our major indices shot higher. It’s really difficult to trust anything we see from day-to-day. Therefore, we’ll continue to play it very cautiously for now and avoid any additional trades.

SUMMARY:

It’s a little interesting to see the NASDAQ 100 lag on a relative basis the day of Apple’s (AAPL) quarterly report. Normally, this is a stock that gets the market very excited. 420 seems to be an area of resistance. It’ll be very interesting to see where traders close this one before perhaps the biggest earnings report of Q3 is released after the bell. While I would certainly expect a very nice report tonight, especially since the 70 point run up off the early October lows, that line of thinking was proven incorrect for IBM, which had seen a similar run up in price.

Grab some popcorn and fasten your seatbelts!

Happy trading!

Bank of America vs Costco – two worlds apart

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Bank of America is in trouble and they know it, and this is why they have laid out a plan to downsize and cut $5 billion in annual expenses beginning in 2013. This downsizing will mean laying off thousands of employees while closing hundreds of branches.

The name assigned to this revamping of Bank of America is “Project New BAC”, incorporating into the jingle the companies stock symbol, and the idea is to try to clean out the ghosts from the past that have plagued the company for some time now. Of course, BAC’s true nightmare acquisition was Countrywide Financial Corporation, a company at the forefront of the sub-prime mortgage meltdown.

BAC’s stock has plunged from a high of 15.31 on January 14 to as low as 6.01 on August 23, so a 60% reduction in share price during calendar year 2011; by any standard, quite a haircut.

Some will argue that BAC’s plight was brought on by its former CEO Ken Lewis who embarked on an aggressive acquisition campaign, and it is true that Lewis carried out some ambitious plans. So, in that respect, it looks like BAC’s current CEO, Brian Moynihan, is trying to undo some of what was done under Lewis’s watch to get the bank back on track.

In some ways, what’s going on at BAC reminds me of what took place in the auto industry, especially General Motors, which was bailed out by the government and has moved to a lean and mean strategy. So, Moynihan appears to be willing to concede the bank’s top level ranking in financial assets while working towards greater profitability, and at any cost.

Now I want to contrast what Moynihan is proposing to do to an article I read in the Seattle Times.

The story is about Costco’s co-founder Jim Sinegal who will be stepping down by the end of this year. He’s described as colorful and unbending when it comes to employee retention, sometimes getting flak from the investment community for not doing enough to improve the bottom line. In fact, in reading the story, it is pointed out that during the recent recession, as other retailers closed and/or slashed jobs, “Costco laid off no one, aside from its usual seasonal workers and extra people hired for its new store openings. It also refused to cut back on on health benefits, despite rising costs and pressure from Wall Street.”

In another telling commitment to its customers, Costco has left the cost for a large hot dog and drink (which I have to say is the best bargain on the planet) at $1.50 for 26 years and has no intention of raising the price. As far as customer loyalty? It’s pointed out in the article that almost 90% of its customers renew their memberships every year.

And, what does Sinegal think about being replaced when he steps down? He says, “It’ll be an upgrade”, so obviously possessing a self deprecating sense of humor, something so often missing at top levels these days.

So, there you have it; a tale of two paths, one that shows sole focus on the bottom line with little regard for the well being of its employees and another where employees are identified as the top priority and customers flock back each year. Oh, and how have investors treated the stocks of these two very different companies? Just look below, where a picture tells a thousand words.

Steve Jobs’ brilliant moves that others could learn from

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There’s a reason Apple, Inc. is the highest market cap company in America. It’s because they’ve had a visionary at the helm during their tremendous growth spurt, someone who had the foresight to prepare the market for his ultimate departure, and who has groomed a successor who can continue to guide the company to even loftier levels.

There are numerous lessons to be learned here, but the one that stands out the most to me is how the market has easily accepted Jobs’ departure. In other words, when he officially announced he was stepping aside, the market took it in stride, because it lifted the cloud of uncertainty as to what might happen the day he left the company. It’s no longer a mystery, and the stock is just fine.

This is a lesson that the US banks can learn from, because it goes to show that investors crave transparency more than anything, which is exactly the opposite of how the banks have been operating for a long time now. In other words, instead of being honest with the investment public and admitting how bad things are underneath the balance sheet, many banks simply go on like its business as usual, and then cannot understand why they are loathed by the average person on the street.

I’ve said this before, and I will say it again. If any major bank came out today and revealed the real extent of their true losses due to poor underwriting judgements, their stock would likely rally hard. If Bank of America came out and said they were going back to every borrower on the books who took out a questionable loan over the past several years and was now underwater, and forgave the amount greater than the value of the home, then the mystery would be gone, and THEN they might be able to get on with business as usual. Yes, they would take a pounding on their balance sheet, but then the worst would be behind them, and they wouldn’t have to pay above market rates to someone like Warren Buffet who smells blood better than anyone else on the planet.

To me, the CEO that comes to the confessional first will be the one who reaps the highest rewards, because it would be seen as an act of contrition, and in this country, people are more forgiving of mistakes than anywhere else. They just don’t like to be lied to and misled.

Steve Jobs will go down in history with other great innovators in American history, like Thomas Edison, Benjamin Franklin, to name just a few. We are fortunate to have been witness to his greatness, and now there is an opportunity for others to learn from his wisdom.

Warren Buffet’s Big Bet on BAC

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Warren Buffet is one of the greatest investors in the history of the world. So, far be it for me to question anything he does on the investment front. Still, I’m puzzled by his recent $5 billion investment (loan) to Bank of America.

In case you hadn’t noticed, BAC has fallen off a cliff lately. BAC was over $15 per share earlier in the year and got at low as 6.01 just the other day, a level it hadn’t approached since March, 2009, the last time the market bottomed.

Buffet did something similar with Goldman Sachs when it was falling apart along with the rest of the financial sector in 2008/09, and his Berkshire Hathaway group was handsomely rewarded. But, what puzzles me is why BAC needs the money in the first place and why they couldn’t have gotten a better deal than the 6% interest they will need to pay for getting access to the $5 billion.

To me, the whole deal is just another red flag; BAC is in big trouble. Rumors started floating around yesterday that JP Morgan would be buying BAC, and that’s why the stock price rose yesterday. But, as we can see, it wasn’t JPM, but Warren Buffet who has come in as a White Knight.

It is possible that the $5 billion cash infusion is just a stop gap. Maybe President Obama called on his friend to pony up the money to make BAC look in better shape that it is in. Buffet apparently said the idea came to him when he was taking a bath earlier in the week. Whatever the case, I’m going to keep a close eye on BAC in the near future to see if the initial boost to its share price will hold. If not, they might have more to worry about.