Watch Bank of America to Understand Where Economy Is Going

Bank of America's (BAC) share price declined to its lowest level in 25 years on concerns of being nationalized. Bloomberg reports:

Bank of America Corp., the nation’s largest bank, declined to its lowest level in New York trading since 1984 on concern regulators may seize the company after a $138 billion U.S. bailout package failed to halt the slide.

The bank fell 55 cents, or 12 percent, to $4.15 at 10:44 a.m. in New York Stock Exchange composite trading, and earlier declined as much as 20 percent to its lowest level since October 1984. The stock of the Charlotte, North Carolina-based company has dropped for six days and lost more than two-thirds of its value this year.

John Browne notes how this may lead to further nationalization of the banking industry in the United States:

There is now an increasing specter of a massive bank failure, despite the TARP. As a result, there is growing pressure to nationalize the banks, as is being done in Europe. So far, Americans have resisted this option, but with Bank of America now trading below $5.00 per share, the temptation is growing.

In a recession, falling loan demand and deteriorating credit worthiness result in fewer loans worth making. There is mounting pressure, especially from Democrats, for banks to make ‘social’ or imprudent loans. Such actions are practicable only if the banks are nationalized.

Nationalization of the banking/money supply sector is a concern we discussed in our comparison of the crisis in Britain with the one in the US. As the Federal Reserve's monetary policy continues to mandate inflation, increasing nationalization of banking will likely result in a weaker currency and the potential for an asset bubble in whatever sector the banking sector directs capital to.

The Trade: Long Gold, Short Treasuries

The trade that continues to be shaping up as the best trade for 2009 is long gold/short 20+year Treasury bonds, as we have discussed previously, as it best exploits the currency devaluation inflationary monetary policy will result in. The chart below illustrates the Treasury bond's recent activity as well as a potential trade opportunity.

Gold holding over $900 reinforces long-term bullish sentiment as well.

Disclosure: Long gold.

Comments

[GMiki1:]

Moreover, commercial real estate is collapsing but with no foreclosures by banks, which don't want them on their balance sheets. Also, a lot of mutual funds can't hold stocks when they're under $5 so these types of holdings are being dumped.

Looks as if silver will end the week nicely.

Feb 06 11:33 AM

[waf76:]

Yes its only a matter of time when the Fed has to nationalize the banks. Ken Lewis was probably told by the regulators to buy shares to put on a charade of confidence in the stock. When nationalized these shares will be wiped out. Stay away from all banks.

Feb 06 11:47 AM

[phdinsuntan...:]

1. if scared investors including japanese, europeans, chinese,etc
buy the bonds, your short will be toasted same as your long
in 2009, so you will need to wait 2010 inflation to breakeven,

2. if they dont buy the package, the fed will buy all the treasuries
and your short will be toasted, but you will be saved by gold profits,
ergo: I dont see a big upside in both scenarios, it will be a fun and volatile play for sure, enjoy and close it safely.

I sold XAU for a profit, today and got some food (CBA) just in case,
thinking in shorting IYR... today more than 5% up. good luck

Feb 06 03:26 PM

[mr freddo:]

I have been long gold and tbt (short long treasuries) since early January and these positions have progressed nicely. I think they will continue to perform well as the financial situation deteriorates.

The take-over of BofA may be the straw that breaks the camel's back. People will realize that their paper assets held in banks are in danger and they will rush to pull their assets out. At that point, all banks will close for an indefinite period of time.

Be sure that you have a private stash of food, water, gold coins, silver
coins, and other essentials. A bank closure may mean that access to credit cards will be denied. If you are prepared, at least you won't starve and you will be safe at home instead of running around rioting for food.

Feb 07 02:58 AM

[PeteK:]

mr freddo,
You make it sounds like this country may turn into some parts of Africa.
Relax, get a glass of wine and enjoy the evening sunset.
Gold is always a safe bet.
Oil & Gas maybe the best bet right now.
America won't survive long without oil & gas.
Riot did broke out in parts of LA during the gasoline shortage in the mid 70s. Don't think a bank failure will cause a riot. There's always another bank around the corner.

Feb 07 04:54 AM

[Conan the B...:]

Gold is no longer an indicator. Gold has been recommended by the big Financials as an investment and now is forever going to reflect buy/sell directions from the Big Boys.

Good luck on trying to use it as anything other than an Investment. IMO

Feb 07 05:18 AM

[upgrayed:]

I think you are working backwards, you pick an investment thesis and then look for arguments to support it. You were touting gold and shorting treasuries all last year for different reasons which would have gotten people creamed. I actually do think that trade will work short term now and I am doing it but I am keeping my stops very tight. Deflation is a very powerful force and will not go away soon, you need to think about the implications of that.

Feb 07 08:54 AM

[upgrayed:]

And you were also touting commodities at their peak.

Feb 07 09:11 AM

[MattZN:]

BofA isn't in quite that dire a situation. The big banks have a few things going for them that people tend to ignore, not the least of which being huge growth of their deposit base as consumers flee the smaller banks. A run on BofA's deposit base might consign it to hell but there is currently no indication that will occur.

Refinancing activity has gone through the roof. A refi has numerous advantages to the banks not the least of which being that they get to charge fees for doing it, but also because the refinanced mortgages will be in the black with at least a 15% pad between the principle and the home's current value. In otherwords, they become solid assets.

The difficulty of valuating banks will disappear *snap*, just like that, the moment the general market sees that housing has bottomed. Many people believe that home prices have ALREADY bottomed in numerous large counties in Florida and California.

Interest rates on savings accounts are at all-time lows right now. This won't last, but right now it is a godsend for the banks.

Is inflation a threat? It sure is. I personally think we are in for some severe inflation later on. Inflation is the market's safety valve. But given the choice between an ultra-long recession or depression, and a shorter recession followed by inflation, I would much rather have the shorter recession followed by inflation. Inflation isn't fun but it is predictable and manageable and in fact is equivalent to a huge boost, or at least par-value, to any home owner who has a fixed-rate mortgage. The mortgage becomes trivialized and home values (after stabilization) will appreciate at least in-line with inflation.

-Matt

Feb 07 01:41 PM

[mikeliu:]

Bears on US banks such as Bank of America tend to ignore the facts that a lot of net charges on the banks' books (which show up as losses) are actually results of mark to market rules. Banks are required to mark down their assets to the market value when fair market value is difficult to get in the market place. For example, assets backed securities on B of A's book may have a fair market value of 100 billion in normal times but are treated as 30 billion under the mark to market value rules because one or two trades on similare assets has a 70% discount. The same assets mentioned above are actually earning and have only lower than 3% default rate. Those marks will be added back to banks' books when market recovers. As a result, B of A is not in a dire ILLIQUID position as many people believe, and on a cash basis it is making lot of money pre provision. Those marks will add as least over 70 billion to B of A's book when a mild recovery comes, and its stock will go through the roof. Just wait for a dramatic rise in a few months when capital market and real estate market become liquid (not to mention a recovery).

Feb 07 08:17 PM

[Jim Hawthorne:]

Actually, User 348540, I suspect that much of the banks hatred of mark-to-market regulation is based on the fact that many of their so-called 'assets' are in fact worthless and when leveraged as some are become indeed most heavily toxic.

BAC will survive only if sliced and diced, the goodies sold off and the baddies bought/subsidized/guar... by the American taxpayer. Otherwise, it's a slide to Zero, bear rallies or not. Buy the rips and sell the dips on this turkey!

Ken Lewis will come out of this about as cherished a memory as Ken Lay.


On Feb 07 08:17 PM User 348540 wrote:

> Bears on US banks such as Bank of America tend to ignore the facts
> that a lot of net charges on the banks' books (which show up as losses)
> are actually results of mark to market rules. Banks are required
> to mark down their assets to the market value when fair market value
> is difficult to get in the market place. For example, assets backed
> securities on B of A's book may have a fair market value of 100 billion
> in normal times but are treated as 30 billion under the mark to market
> value rules because one or two trades on similare assets has a 70%
> discount. The same assets mentioned above are actually earning and
> have only lower than 3% default rate. Those marks will be added
> back to banks' books when market recovers. As a result, B of A
> is not in a dire ILLIQUID position as many people believe, and on
> a cash basis it is making lot of money pre provision. Those marks
> will add as least over 70 billion to B of A's book when a mild recovery
> comes, and its stock will go through the roof. Just wait for a dramatic
> rise in a few months when capital market and real estate market become
> liquid (not to mention a recovery).

Feb 07 11:03 PM

[Dave Wrixon:]

You mean the taxpayer is going to end up paying for everything?

Feb 08 02:41 AM

[Conan the B...:]

phd: thanks for all of those links that you posted in August of 08.

BAC was reamed by the Government. They tried to walk away from the MER deal but were forced to take them.

Since its present situation is Government induced, I would hazzard a look at their Preferred shares. Barron's has an article reviewing the difference between the regular and the "Trust" preferreds for a number of Banks.

Apparently, the Trust variety gets paid before the Government pref.s, a heck of a yield.

Feb 08 05:38 AM

[brain:]

Deflation is simply a contraction of the money supply. Obviously, the money supply is off the charts, it's just bottle-necked by the banks; building up like a wall of water behind a dam. Sooner or later that "dam" is going to burst, even if it takes Uncle Sam nationalizing said banks to dole it out. A flood of money is coming. Guaranteed. Just a matter of time.

The dollar will be toast sometime in the near future. Not all bad news though. If you have a secured loan - mortgage or car - it will be that much easier to pay off the principal amount via easier obtained monopoly money.

Feb 08 01:21 PM

[bobbobwhite:]

On target.


On Feb 06 11:09 AM sabre_jenn wrote:

> BofA, like most big banks was and is insolvent. If they had any chance
> of survival, ill timed and overpriced acquisitions (countrywide and
> Merrill) certainly sealed their demise.
>
> Like the other insolvent banks, BofA will exist only for as long
> as the Treasury and Fed can keep up their charade (which is measured
> in months and is nearing the end) -- and as long as other alternatives
> are not apparent (name anything BofA sells that you can't get ten
> other places).
>
> BofA's "impending" collapse is really more about regulators and investors
> pulling their heads out of the sand and recognizing what is already
> there

Feb 08 02:45 PM

[bobbobwhite:]

A company's failure is as much due due to a crisis of confidence as due to a crisis of its business model. BofA has a confidence crisis so large now, only partially due to its "purchase" of failed broker Merrill. And, in that pathetic position of course, BofA now has a pitiful twofer of crisis. And, that just might be too much to overcome in time to survive.

As all products found at BofA can be found in any bank brand, what does it have proprietarily to protect it when all is tumbling down around it and previously trusting customers(and employees) are leaving in droves? Nothing but a long history. Its desire for immense size and its resulting HQ move from SF to the east coast started the initial alienation and not much has gone as well for it since.

So, I too see the bank broken up(down?) into business segments in order to survive. And, firing CEO Lewis asap would be my very first recommendation. Then Merrill if possible.

Feb 08 03:52 PM

[St Alphonso:]

Since it is all fiat currency, no one knows if this is the end game or maybe another 10 years. Ravi Batra made and excellent case for the Depression of 1990 (millions read the book), but here it is 19 years later and it is still not a certainty that the Depression is here, although many of the most horrible things in economic history happened in the last 16 months.

Robert Prechter's book is also compelling. Even though everyone knows the Treasury is bluffing, as long as nobody calls, they can just keep raising the stakes. I personally believe we all almost there, but who really knows. We're all in the shadow of a quadrillion in derivatives unwinding. How do you suppose that will go? Good? Great? Super? Swell?

Feb 08 08:53 PM

[Dusty:]

Subprime is over, all will be well! Uhnnn. . . Does anyone remember the spring of 2008? And then the summer of 2008? And then. . . the fall of 2008?

Now the credit card balances, soon the derivatives, then the Alt-A and other ARM mortgages will all come home.

What has occured so far, inclusive, is equivalent to the spring of 2008. Calendar 2009 will compare with the summer of 2008. Fall and winter is on the way, calendar 2010 and 2011 and some of 2012. Thirty consecutive months.

Let us see who or what survives. It will very likely be a new world by 2015.

BAC and others do not need to be nationalized. Having the US Government as a majority shareholder with major representation on the board might be enough and easier to back out of by 2020.

Feb 08 10:58 PM

[Conan the B...:]

Did you read Prechter's predictions after the 1987 crash.

You would have lost almost all of your money. He was preaching doom...Dow 400. I Ignored him at that time because he ignored one of his own principles as put forth in his Book.

Once bitten, twice shy.

Granville was another who let his fame get the best of him, he started to predict earthquakes.

Only the Shadow knows, and he isn't talking.

Feb 10 10:29 AM

[Conan the B...:]

Considering the amounts of New Loans made quarterly by BAC, they are quite capable of repaying the Gov. within 12 months by actually only servicing Old Loans.

BAC was the only one able to buy MER. They were approached by the Gov. to do the deal, not the other way around.

MER is no longer a Primary Dealer.

Feb 12 02:31 AM