Bank of America (BAC) continues to reduce its home mortgage servicing portfolio as it reduces its role altogether in the mortgage business. New international rules require more capital and expenses in servicing, collecting payments, and assisting delinquent home owners. It is reducing its loan portfolio by 6 million which is half of the 12 million it serviced at its peak. In the last three years, the company has shed about $60 billion in what it calls "non core assets" while generating more than $12 billion.
Way back in September, it was reported Bank of America Corp. was planning to cut 16,000 jobs by year end as it speeds up a company-wide cost-cutting initiative amid declining revenue.
This concept of a "fiscal cliff" we are so fond of calling it is already affecting the U.S. economy and businesses are investing less and less in equipment right now just waiting. It is the uncertainty that is holding back our whole recovery. And this hurts the banking industry as a whole. Clarity is needed before investments will be made. Sam Stovall of S&P Capital said this about the financial sector of the market after the election:
"We believe the two main negatives affecting the U.S. banking industry today, in our opinion, are the upcoming fiscal cliff, and the low interest rate environment. We see taxes going up on higher income individuals, as well as proprietors of successful mid-market businesses, which is a negative for capital formation and spending, and will likely constrain loan growth."
So there are not a lot of positives for the financial sector right at this time. For this reason, I am of the opinion that banks like Bank of America and competitors like JPMorgan (JPM), Wells Fargo (WFC) and Goldman Sachs (GS) will top out and find the stock prices weakening. I cannot say that the stocks will have a huge down turn but I do not expect a huge upswing in the near future. It appears like the atmosphere is prone to be more bearish at this point.
For better or for worse, Bank of America looks like it is consolidating at the present. It does have a mild bullish flavor to it as it moved up and down between a trading channel of (9 and 10) presently but all observations I have are signaling weakness. The RSI indicator is moving in a downward direction and just recently entered the bearish territory under "50" for the first time. The MACD's daily average has been subsiding since the stock's peak (and over bought) position at 9.9 around mid September. The Bollinger Bands may give us the best signal of the strength of the stock. The last three lows in the stock have been getting lower and this last drop yesterday touched the bottom band, pushing through the 50 day MA also. I am of the opinion that the stock is either weakening for a down turn in the short run.
The Option Play
Honestly, at this point I would go for a straight Put option buy at "9."
- Buy the January 2013 put with a strike of '9' (priced at $0.49)
- Net Debit to Start: $0.49
- Maximum Profit: unlimited
- Maximum Risk: net debit
- Maximum Length of Trade: 2 months
Reasoning Behind the Trade
- Stock looks like it is weakening
- Fiscal cliff will wreak havoc on the markets short term
- I see no short term bullish catalysts ahead
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.