Betting on the Big Banks

If you purchased Bank of America (BAC) stock in early March at under 3 dollars like I did and sold it last week when it reached a 3 month high of 11.40, you would have made almost 4 times your original investment. Unfortunately I sold a week too soon and only doubled my money.

At this point, gambling on any of the big banks that suddenly find they really didn’t need the TARP funds is like a roll of the dice; seems like yesterday they were begging for government support.

The following shows the closing 2 month lows, highs and current share price for big banks including BAC. Take note how each of these investments more than doubled in less than 2 months.

Stock	Date	Closing Price
BAC (Bank of America)	March 6th	$3.14
BAC (Bank of America)	April 13th	$11.02
BAC (Bank of America)	April 21st	$8.76
C (Citigroup)	March 5th	$1.02
C (Citigroup)	April 14th	$4.01
C (Citigroup)	April 21st	$3.24
WFC (Wells Fargo)	March 5th	$8.12
WFC (Wells Fargo)	April 17th	$20.26
WFC (Wells Fargo)	April 21st	$18.81
JPM (JP Morgan Chase)	March 9th	$15.90
JPM (JP Morgan Chase)	April 13th	$33.70
JPM (JP Morgan Chase)	April 21st	$32.53

Since we the taxpayers are funding these behemoths, frothing with both quarterly profits and loan losses, we should require them to be a bit more up front when discussing quarterly earnings. Case in point, Bank of America reported a 4.2 billion dollar profit Monday; however the fine print shows that the company sold a portion of its investment in China Construction Bank. In addition, it profited on Countrywide and Merrill Lynch, which it purchased with government help for pennies on the dollar. It also had to set aside over 6 billion in loan loss reserves proving the recession is still on-going.

JPMorgan Chase’s (JPM) profit of over 2 billion could be partly attributed to the handover of the prized franchise of Washington Mutual by the government at pennies on the dollar.

I believe this lack of transparency is causing wild swings for financial stocks since early this year, when Wells Fargo (WFC) gave us a rosy forecast. As foreclosures continue to rise, these banks should just report the facts and stop forecasting. These companies should get back to basics by loaning money to taxpayers at a reasonable rate since we are minority owners and in turn paying us back in preferred dividends for the money we graciously loaned them.

Treasury Secretary Tim Geithner’s comments Tuesday that the TARP banks have enough capital helped lift these stocks. At this point, he should keep his comments to himself and let market fundamentals decide the fate of these volatile investments.

If I had to choose one bank that does have a bright future, it would be Bank of America. It is the largest consumer banking powerhouse with the market lead in deposits. I don’t own it currently, however I am waiting on the sidelines to get back in, once the market manipulation dies down a bit.

Comments

[southbeach:]

agree completely with your sentiments. it's a white knuckle ride in the big financials though, and the 'we changed the rules again' factor hardly helps. we're talking opportunist trades rather than line by line fundamentals analysis. I can't believe we won't crater again though given the rotten assets tucked out of sight - resi and commercial real estate need time to bottom and then stabilize. the relaxing of accounting rules and taxpayer intervention just slows this process. Still, i don't agree with those famous 'let em fail' guys either - too much 'innocent bystander' damage despite the costs of the bailout.

Apr 22 09:14 AM

[Chemist29:]

bought merrill for pennies on the dollar? are you nuts? the whole argument is that they OVERPAID, and I dont see anyone else stepping in to buy merrill or countrywide...Great example of revisionist history. besides, they hardly concealed the fact they sold 1.6 billion from CCB.

Apr 22 09:20 AM

[Perry1961:]

B of A and Merrill had a combined market cap north of $500B before the recession. Is there any reason BAC can't surpass that once the recession ends? Fed funds have never been this low. With 10% of the country's bank deposits,and Americans saving more than they have in decades,BAC is going to make a fortune next year. When loan loss provisions go into reverse,BAC will head to $80+.

Apr 22 09:30 AM

[Dr. Roberts:]

"At this point, gambling on any of the big banks that suddenly find they really didn’t need the TARP funds is like a roll of the dice; seems like yesterday they were begging for government support." One of the more misleading of many statements found on this Bearish web site. The better run banks NEVER wanted a TARP injection. You just have to chuckle when a "columnist" chides WFC for pre-announcing and rocketing the DJIA up about 250 points. Once in a lifetime share prices were available for our best banks after the Bears beat the shares to a pulp. Now the Bears have the difficult task of convincing traders the worst is yet to come. Circumstances have changed boys. Rigid thinking will doom the Bank Bears.

Apr 22 09:52 AM

[Dustinian:]

I dislike Bank stocks precisely because of their volatility.

However, lately I have been considering getting into Wells Fargo, because they seem to be in the safest position, and have a hefty yield.

Apr 22 10:28 AM

[Jason722:]

Interesting analysis. The financials are carry significant risk right now because the information available for fundamental analysis is even less reliable today than it was before this crisis started. Did JMP and WFC want to avoid TARP or not? I think so, but there are contrary reports daily. Can they and GS repay now if they want? Some say yes and some say no. Who really knows?

The analysis above is severly flawed though if the outcome is that BAC is the best financial to own. Setting aside the information deficiency, BAC paid a premium for two assets that they could have gotten for pennies on the dollar just a few weeks/months later. The buy-at-any-price behavior displayed by BAC, especially when contrasted to the buy-when-cheap method of JPM and WFC shows a lack of strong management at BAC. BAC will not recover from the crisis as quickly as others because after the crisis, they will still need to overcome the overpayment for Merrill Lynch and Countrywide.

Apr 22 01:09 PM

[Jasper M:]

I am reminded of an earlier post, pointing out that big banks were trading like penny stocks.
Perry, how long are you willing to wait? The market cap you cite is an artifact of an environment that no longer exists, probably won't in our lifetime.
Dustinian, Wells fargo is the bank whose boss ALmost walked out when TARP was first shoved at them. Slight moral advantage there, for what it's worth.
Jason, spot on. Corporate culture counts, and the Morgan, for example, did not display the level of drunk sailor spending BoA did.

Apr 22 01:32 PM

[optionsgirl:]

There is an old commodity story about two guys that kept trading a load of tuna up and back between them. Finally, one guy takes possession of the tuna. He calls the other trader up and says "This tuna stinks! It tastes awful! It's rotten." The other trader responds, "Yes, that's because there are two kinds of tuna- one for trading, and the other for eating".
Substitute banks for tuna.

Stephen Leeb wrote an interesting piece about Wells Fargo the other day, in The Complete Investor. He noted that there is an asset marked as "other" on their balance sheet for $100 Bil. In a footnote, only part of this asset is explained. $48 Bil is marked again as "other". Leeb's point was, why bury an asset as a foot note, unless you have inflated it and deliberately don't want to define it. Why call it "other other"? What is it, and what's it worth?
Until there is truth and transparency, these banks smell to high heaven. Creative accounting and bully CEO's serving as cheerleader squads don't cut it.

Apr 22 01:52 PM

[mikebrah:]

This is one of the more asinine statements I've read...no offense Perry.

But regardless of how any individual feels about any individual financial company's health, the indisputable reality is that there WAS a credit bubble. We are in the midst of the popping, and in the history of bubbles no participant EVER returns to their bubble valuations.

I wholeheartedly agree that over the next 3 or 5 years many financial companies will provide excellent returns. But only to those investors who paid an appropriate price, and whether that is today or in another year I don't know.

Just like in the tech bubble collapse of 2000-2002 there were handsome opportunities for those investors willing and able to differentiate between AMZN and EBAY and the "UsedPetDealer.com's" of the tech world. There will be those same types of opportunities in the current environment.

But the essential element of a bubble is that valuations become based on PROJECTED data that turns out to be very far from reality. The $500B market caps you refer to were a result of projections based on unsound and unsustainable business models.

The result of this credit bubble will be a general reduction in credit, and without a rapidly expanding level of credit these banks' growth will be retarded. The winners (those with minimal participation in the bubble) will swoop in and pick up good assets on the cheap and the losers will cease to exist.

MM


On Apr 22 09:30 AM Perry1961 wrote:

> B of A and Merrill had a combined market cap north of $500B before
> the recession. Is there any reason BAC can't surpass that once the
> recession ends? Fed funds have never been this low. With 10% of the
> country's bank deposits,and Americans saving more than they have
> in decades,BAC is going to make a fortune next year. When loan loss
> provisions go into reverse,BAC will head to $80+.

Apr 22 02:56 PM

[InvestBaboo:]

"Things are never as bad as they seem while they certainly are not as good as they seem" -- so goes the old adage and it is probably an accurate description of the uncertainty surrounding banks.

To know what will happen to banks earnings we need to look at the broader economy. If you make a future prognosis while looking in the rearview mirror you see massive unemployment, foreclosures, even more dramatic fall-off in consumer spending, plunging housing prices and thus plunging equity markets. However, if you survey the scene around you see something interesting happening. Many companies are announcing better-than-expected earnings. Best Buy did it, Bed Bath and Beyond did it, Apple and RIMM blew it out the door and likely Amazon will do the same tomorrow and (get this!!!) JC Penney raised estimates! If it is true that the companies are feeling more optimistic about their future they are probably going to start hiring people. As they start to hire people the fear psychosis that has gripped the nation will start loosening. As people lose fear those that have jobs and money but are affraid to spend will start doing so. When this happens manufacturers that are operating with low inventory and low production capacity will start expanding their operations and they start hiring more people! All these wheels are in motion but meanwhile banks are raking in money as they get money at ridiculously low rates and lend it out at an exorbitant rate making a ton of money which many believe will help them cover the impending loan losses until the economy turns around. And when the economy turns around the banking frachises that have positioned themselves right will become financial behemoths.

Therefore, banks will be fine -- they are not going anywhere. The U.S. of A is not going anywhere -- rumors of her death have been greatly exaggerated. The strongest franchises will survive and thrive. The weaker will be eaten by the stronger ones (Look at what Mack the knife said Morgan Stanley is likely to do with regional banks). Those that invest today in these behemoths will reap huge dividends down the road.

Behemoths as per my book -- JPM, MS, GS, WFC, BAC.

Banks are a longer term investment. For the shorter term bank equities price movement will be driven by traders

Apr 22 11:00 PM

[nukldrager:]

Good story, but here again, even though it stinks, is the golden rule; he who has the gold rules.


On Apr 22 01:52 PM optionsgirl wrote:

> There is an old commodity story about two guys that kept trading
> a load of tuna up and back between them. Finally, one guy takes possession
> of the tuna. He calls the other trader up and says "This tuna stinks!
> It tastes awful! It's rotten." The other trader responds, "Yes,
> that's because there are two kinds of tuna- one for trading, and
> the other for eating".
> Substitute banks for tuna.
>
> Stephen Leeb wrote an interesting piece about Wells Fargo the other
> day, in The Complete Investor. He noted that there is an asset marked
> as "other" on their balance sheet for $100 Bil. In a footnote, only
> part of this asset is explained. $48 Bil is marked again as "other".
> Leeb's point was, why bury an asset as a foot note, unless you have
> inflated it and deliberately don't want to define it. Why call it
> "other other"? What is it, and what's it worth?
> Until there is truth and transparency, these banks smell to high
> heaven. Creative accounting and bully CEO's serving as cheerleader
> squads don't cut it.
>

Apr 23 08:41 AM

[Kyle Krol:]

Wamu Truth....Please Help....

www.wamutruth.com/

wamuqd.com/

www.wamu-shareholders-...

Apr 23 08:58 AM

[Plan B Econ...:]

Beware of bank accounting BS.

- Accounting profits on devalued bank bonds?
- Mark-to-fantasy asset valuation?
- One-time gains?

All accounting trickery...The rally started mid-March when the bank CEOs came out saying Jan/Feb numbers looked profitable.

Reality is the bread and butter of the banking industry is suffering - just look at rising loan loss provisions, defaults, credit losses, etc.

www.planbeconomics.com.../

Apr 23 10:47 AM

[tedstr:]

How tough is this to figure out. 20 years of increasing consumer debt with late stage shenanigans added in to give the bubble one last peak. Boom. It's over. GE Capital is the poster child

Debt was all the rage. Now not so much. Won't be like that again in our lifetimes. Sure most of them will get back to a decent business, but the non-banks and the credit cards will go back to being a shell of their former selves and GE will go back to mostly making locomotives or look for some other story they can sell like smart grid.

Probly ride them back up 100-200% from their bottoms(already done), but if anyone thinks they are going back 5-10x to their tops, good luck.

Nothing to see here folks, move along.

Apr 23 02:29 PM

[himike:]

Well as a former Mortgage Banker and mortgage Broker that sold loans to Countrywide at huge Service release, mortgage companies make money on servicing (that is taking care of the payments and remitting the rest to the securities holders) this would be much like discounting the cash flow from any asset, the sale price was way below the servicing value, assuming a stable servicing portfolio, by about 96% compared to what Countrywide would pay it correspondent lender's, a correspondent is larger than just mortgage broker and typically can fund loans itself; however the government's own actions have made Countrywide's, I mean BoA's Countrywide portfolio unstable. With current rates at about 5.25%, and using the yield curve (look it up if you do not know) loans can be had at little or no costs in the mid-to high 5% range. This makes any loan with a rate above 6% a prime target to refinance. This is also why many lenders are flooded with loan applications; this short term infusion of loan origination fees is temporary at best. I know I used to do this and ask any profession CFO, they will ride the debt curve down anytime it is profitable, same for individual borrowers. However, this makes they former yield analysis on mortgage backed securities, and not just "sub-prime", of 10-12 years, typically mortgage lenders track the 10 year treasury to help determine yield, yet with the loans prepaying in 1,2,3,4 years, and I am not just talking about modifications but pure "A" quality mortgages the value of Mortgage backed Securities has come into question. So unless BoA can recapture the servicing portfolio, and I am sure it is trying, I also know that any smart mortgage broker or lender, or for that matter commissioned loan officer, is actively soliciting the Countywide portfolio. It is very easy to get a list of loans a lender made, date amount and as I used to do mass market directly to them having the computer calculate each borrower's savings by coming to refinance with me. It is no secret what rate are, there are historic tables showing what rates were at "X" date compare that with when the loan closed and the known loan amount, it is a public record, and anyone that knows how to project the future balance, a simple formula, can then calculate the new payment's, savings and even show a borrower how to pay off early without any costs, or even increase in current loan balance. In theory BoA got countrywide for pennies on the dollar, the problem is the asset of servicing, and potential liability for the bad loans, has been over-rated if by no other reason than the government's "stimulus" package that has driven rates to a low that most borrower's have never seen in their lifetime of their mortgages. true the stricter, mainly due to fear, underwriting guidelines will lock out or block many of the refinance bleed off but the cannibalism of Countrywide's (I mean Countrywide BoAs) loan portfolio is inevitable and therefore the value is questionable at best in determining if they overpaid or underpaid.

However, I do know that “one-time” or windfall gains or losses are going to impact the quarterly profit’s but they need to be severely discounted I looking long-term.

Apr 23 06:33 PM

[jstratt:]

On the morning of 3/9 I bought several banks including JPM, USB, BK after seeing a list of the Worlds strongest banks here on Seeking Alpha. I intended to hold those banks for the long term.

Unfortunately the banks have more issues to come. If you take a list of the people who know the most and or have the best track record through this period there is a uniform consensus that banks have much farther to go.

After concluding that I sold all of the above about 10 days ago. My purpose for commenting is that banks are a dangerous investment. They may drop 50% of their gain from the lows now, or they may get crushed in July or October.

Unfortunately bank investments seem likely to get squished again in the future. Kind of like putting a juicy orange in a juicer.

Apr 23 07:05 PM

[a fat panda:]

At this point you aren't investing at all when you put your money into bank stocks. You are betting on the willingness of the taxpayer to gift profits to these companies. Your insight into the politics of Washington may be better than mine, but it has to be a lot better before you can call this investing.

Trade bank stocks as you like, but investing in banks seems to me to be unwise. We have excess lending capacity in this country. It is like buying a farm in the midst of a bumper crop in every crop. Lending is where they make money. As the economy sours we have loan losses on the rise. This is where they lose money. It is going to take time to unwind these forces.

Apr 23 11:11 PM

[Marc Forgang:]

You forgot the BAC got a free 50 Billion dollar loan to buy Merill, the value of the company cratered before BAC bought them. They got an awesome deal with help from you and me, the taxpayers.

JPM got WM for pennies, again the taxpayer helped foot the bill for the bad assests, JPM got an excellent bank franchise. Not only did I pay taxes, I also gave them my 300 shares.

Thanks for your comments, and yes I am nuts about the ridiculous TARP program.


On Apr 22 09:20 AM Chemist29 wrote:

> bought merrill for pennies on the dollar? are you nuts? the whole
> argument is that they OVERPAID, and I dont see anyone else stepping
> in to buy merrill or countrywide...Great example of revisionist history.
> besides, they hardly concealed the fact they sold 1.6 billion from
> CCB.

Apr 24 08:25 PM

[Marc Forgang:]

Appreciate the contradiction. I am actually bullish in this market. There are great healthcare, tech, utilities, and transport companies that are great long term investments the market has over manipulated.

I believe BAC and WFC will do very well in the years to come. I just don't think the government should be spending taxpayer dollars to save some of the failing institutions. C would not be a single company today if the government had not rescued them, the parts would have been sold off.

You may have forgotten last year when C, JPM, and MS were first in line for TARP funds. Now that rates are just above 0, they are making big money on consumer loans, that is why you are now seeing profits reported.

We can all be bulls. Lets just try to go back to the days of long term investing and looking at true fundamentals and not just market manipulation and conjecture.


On Apr 22 09:52 AM Dr. Roberts wrote:

> "At this point, gambling on any of the big banks that suddenly find
> they really didn’t need the TARP funds is like a roll of the dice;
> seems like yesterday they were begging for government support." One
> of the more misleading of many statements found on this Bearish web
> site. The better run banks NEVER wanted a TARP injection. You just
> have to chuckle when a "columnist" chides WFC for pre-announcing
> and rocketing the DJIA up about 250 points. Once in a lifetime share
> prices were available for our best banks after the Bears beat the
> shares to a pulp. Now the Bears have the difficult task of convincing
> traders the worst is yet to come. Circumstances have changed boys.
> Rigid thinking will doom the Bank Bears.

Apr 24 08:35 PM

[Marc Forgang:]

BAC is the strongest consumer banking and investment franchise in the country. Half the deposits are in BAC branches. Remember that the market cap for Countrywide and Merrill were severly slashed before the purchase. The government forked over a 50 billion dollar loan to help BAC by Merrill. I also like WFC because they have a better balance sheet, however BAC is the strongest franchise. They have some of the highest fees in the industry and consumers still stick with them regardless.

Good feedback though. THANKS!


On Apr 22 01:09 PM Jason722 wrote:

> Interesting analysis. The financials are carry significant risk right
> now because the information available for fundamental analysis is
> even less reliable today than it was before this crisis started.
> Did JMP and WFC want to avoid TARP or not? I think so, but there
> are contrary reports daily. Can they and GS repay now if they want?
> Some say yes and some say no. Who really knows?
>
> The analysis above is severly flawed though if the outcome is that
> BAC is the best financial to own. Setting aside the information deficiency,
> BAC paid a premium for two assets that they could have gotten for
> pennies on the dollar just a few weeks/months later. The buy-at-any-price
> behavior displayed by BAC, especially when contrasted to the buy-when-cheap
> method of JPM and WFC shows a lack of strong management at BAC. BAC
> will not recover from the crisis as quickly as others because after
> the crisis, they will still need to overcome the overpayment for
> Merrill Lynch and Countrywide.

Apr 24 08:42 PM

[Taymere:]

All banks aren't created equal. Many regionals, foreign banks, and mutual thrifts are thriving investments. I bought HCBK and ING and I consider them both great investments, as Warren Buffet said "Do not hope." There is no hope in my portfolio therefore I have a lot of hope for my portfolio. Subscribe to SNL financial, you'll find some great banks that have been unjustifiably beaten down to PE<5, P/B<1 for the sins of their bigger insolvent zombie brethren. The only caveat is that when share price is unjustifiably beaten down too far you have the phenomena that Soros termed "reflexivity" and you may just get scared that the FDIC will shut it down because some of the greatest bank bargians are "small enough to fail" in the governments eyes. Investing in banks is a funny deal because while a low share price may make me want to invest, that same parameter lowers TCE and makes the Fed want to shut it down. A great disservice was done to these smaller savings banks when FNM and FRE preferred dividends were suspended. The government beckoned them to invest by only allowing savings banks to invest in these "safe" GSE hybrids, then backanded the snot right out of their nose by suspending the divvy. They are not getting government handouts, and they are ineligible to participate in the PPIP orgy of taxpayer theft. The small guys did what banks are supposed to do, no exotic derivatives, and now they pay higher FDIC insurance premiums to cover the sins of their big zombie brothers, while watching from the sidelines as Geithner and Bernake fellatio those same zombies.


On Apr 23 11:11 PM a fat panda wrote:

> At this point you aren't investing at all when you put your money
> into bank stocks. You are betting on the willingness of the taxpayer
> to gift profits to these companies. Your insight into the politics
> of Washington may be better than mine, but it has to be a lot better
> before you can call this investing.
>
> Trade bank stocks as you like, but investing in banks seems to me
> to be unwise. We have excess lending capacity in this country.
> It is like buying a farm in the midst of a bumper crop in every crop.
> Lending is where they make money. As the economy sours we have loan
> losses on the rise. This is where they lose money. It is going
> to take time to unwind these forces.
>

Apr 25 09:38 PM