What Does Bank of America's Decline Mean for the Global Banking System?

Bank of America (BAC) was reviewed by me on September 15, 2008. I only applied Dow's Theory since there are so many unknown factors in the market. My conclusion on BAC was as follows:

Since Bank of America is now a bellwether stock for the banking industry, Dow's Theory is saying that either this banking crisis has hit bottom (for now) and might trade up from here (possibly in a range) or that anything below $18.44 is going to be chaotic.

Wednesday, BAC fell below $18.44 by a wide margin to the level of $17. Prior to the decline below $18.44, BAC's price action seemed to do everything it could to avoid falling further. When and if it happens, a decline below the $14 level will be a period of utter chaos for the banking sector.

Bank of America is ranked #1 in the US in terms of assets. Right behind BAC is Citigroup (C) which is now selling for less than $10. Globally, BAC and C are ranked #1 and #2 respectively. Why is this important? No banks that are ranked #1 and #2 in the nation and the world should have their stock prices cut in half in the last two months.

The stealth nature of the most recent banking sector declines will shock the financial system and require more talk of bailouts on top of the already proposed auto industry bailouts. In an economic environment like this, one needs to consider preservation of capital. The base of preservation of capital is the banking system. Right now the banking system is being challenged. Watch these two stocks for indications of where the banking system might be headed.

Comments

[buyforeclos...:]

yes but B of A is owner d 1396 funds and the redemptions have been making their mark... the shares could really rallly once funds start buying again ..near term hard to say..15th deadline hedgies so watch it after that..plus with share decline Merrill feal now cost them half of what it was cuz its based on stock price of BAC at closing

2008 Nov 14 08:16 AM

[icandoitdon:]

you're exactly right.

BAC had to be utterly out of their minds to take on merrill lynch and countrywide when they did and under the terms they did. they were utterly amatuerish in their approach...like a novice investor buying too soon. these deals could well push them over the edge.

these stocks are great shorts to hedge a long portfolio. if they go south from these levels, expect the market to go south in a big way.

2008 Nov 14 11:47 AM

[Kunst:]

There are two things Bernanke and company cannot allow:
* Deflation
* Collapse of the banking system
They will do whatever they think it takes to prevent these. Best guess would be more of the same medicine, massive doses of pseudo-money. I wonder if a patient can die from too much medicine?

2008 Nov 14 09:52 PM

[Arizona:]

I have been in banking for over 20 years and this is the first I have seen the devaluation of BAC and JPM just because! They are both strong with good balance sheets. BAC made an error in how they acquired Merril and CountryWide. I have to agree with icandoitdon. Once the funds start buying again (and they will), you will see an upward move. I have a good sum of shares of BAC and JPM and will hold no matter what. I made a mistake of dumping some energy (CHK and HK) in panic crisis and they came back. A lot of this is by hedge funds and panic. Hope to see better days for the market

2008 Nov 15 04:01 PM

[User 298901:]

Ken Lewis is the most reputable CEO in the US, acquisition is his expertise.Never doubt him. BAC never did option arm and other exotic loans, thanks to the Corporate Underwriting Group, they could have saved BAC. Bac audits their employees randomly to make sure they are in compliance especially regarding ethics. Barbara Desoer is very smart she will clean up the mortage mess of countrywide. BAC invest in technology one of the reason they are successful. They can easily target the problem loans fast and effectively. BAC invested and educated their people headed by Barbara Desoer in Retail and Premier Banking. They have the most Professional and educated associates in the banking industry.They have the ability to target quality clients.

2008 Nov 15 04:55 PM

[Syl:]

It is hard for me to see why BAC invested in a Chinese venture when everyone knows that in a Communist dominated country the government can nationalize any industry and take complete control of its assets and operate it as the beaucrats wish. I also agree that the take over of Countrywide and Merrill were risky moves. Let BAC stay with banking and not other activites in which they are not well versed.

2008 Nov 20 06:58 PM

[nyka:]

Write in the present tense, NOT the passive voice, in order to make your writing come alive. Try "I reviewed Bank America..." not Bank America was reviewed by me. Four words are better than six.

2008 Nov 24 09:29 PM