Why Is It Time to Short BofA?

Ding dong, the witch is dead... a familiar reprise to many of us of a certain age. The first witch to go was the wicked witch of the East - John Thain of Merrill Lynch. Now the wicked witch of the west - Ken Lewis - is gone. West? Bank of America (BAC) was built in California, I needed to make this work somehow.

And Lewis leaving means it is time, once the charts are on your side, to short BOA.
Lewis, the second best cry baby among the bank CEOs (John Stumpf of Wells Fargo (WFC) is in a class by himself), is leaving not because he wants to re-grow his beard or get out of the spotlight. He is leaving because the bank faces years, not quarters, of trouble ahead:

• A weakening balance sheet due to bad loans and more bad loans - more on that in another post.
• Continuing government ownership via TARP funds - I may be wrong but given their balance sheet issues, deteriorating loan quality and size, I do not see them getting permission to pay back their government money soon.
• Lawsuits and investigations related to Merrill Lynch bonuses and the Merrill Lynch acquisition.
• A future - one to twenty quarters - of declining or stagnant earnings, depending on how much they want to legally cook their books. In the real world, earnings will be troublesome for three to five years.
• A need to raise capital that puts the CEO in the spotlight answering too many of the wrong questions with the wrong answers.

These are all reasons to avoid the stock. Many investors - well, traders - have bought in, due to the charts and a consumer franchise second to none. That too is taking a hit. Up until six months ago I could easily say BOA had the best customer service of any company I dealt with other than Amazon (AMZN) - I was and still am a BOA Premier Banking customer.

I am leaving -- they kicked me out of the Premier Banking Program by form letter and assigned me to a Merrill Lynch broker, saying I could stay in with a quarter of a million brokerage account -- getting rid of my private banker for fifteen years. A Merrill Lynch broker is not the guy or gal you want to talk to when discussing mortgages or home equity lines of credit. Bad move, that - an indicator of things to come.

Why short the stock? Most big banks are getting by on government largess and legal but bogus accounting - totally unfriendly and opaque to investors. 2010 will see the end of one-offs, such as mortgage refis and the sale of assets, that boost earnings. Real earnings, declining home values, more than 10% unemployment and the other parts of the Great Recession will take center stage. More home equity lines will default, more commercial mortgages, more regular mortgages, more credit cards - and this will hit the income statement as reserves are set aside. And for BOA, it will also hit the balance sheet as write-downs increase, making it necessary and expensive to raise capital, diluting shareholders.

So, if you believe fundamentals eventually take over the movement of a stock, watch the charts - when BOA turns it will be a good time to consider shorting the stock.

Disclosure: None.

Comments

[apppro:]

When an entire market sells off because some option traders are manipulating the U.S. dollar in order to manipulate stocks and commodities ALL just for short term gains, well we ALL need to step back and self-reflect on what we are doing.
Just watch CNBS for a few minutes and if all those pundits don’t make you sick, then I’m not sure what will. Even if you don’t watch it, you get deluged with press releases claiming that egocentric media pigs are declaring another Armageddon and do it all while they laugh in your face. What is wrong with all of us? We waterboarded our financial institutions into oblivion and now we are destroying what little is left of our own psyche. Yesterday’s economic news was not all that bad. Some was actually good, but only because it wasn’t ‘greater’ then what some people had hypothesized the markets sold off 200+ points. This is wrong and must end.

Revised Tax Rules:
1. Capital gains under <6 months - 55% tax on capital gains
2. Capital gains 6 > 12 months - 45% tax on capital gains
3. Capital gains 1 > 2 years - 35% tax on capital gains
4. Capital gains 2 > 5 years - 18% tax on capital gains
5. Capital gains 5+ years - 5% tax on capital gains
6. Most critical of all — Institute a capital gains tax of 55% on ALL short sales not directly tied to a long buy by a licensed hedge fund. I'm tired of paying for the pure shorts 3rd vacation home.

Oct 02 07:22 AM

[RVH:]

Well, the run up of BoA from $4 to $17 was fun, but I agree, I unloaded at $16 a few weeks ago. I don't think they'll tank, but I don't think they'll see $30 for a LONG time.

Oct 02 08:23 AM

[LIVE FREE O...:]

Wow, that was a lot of dialogue.

It short, we are not experiencing Armageddon, but we are in a depression. The gov't and MSM have misinformed, manipulated and generally abstained from any possible responsible & honorable action for the past 9 months.

I could provide all kinds of data that the gov't & MSM have been ignoring but it is time to get real. "U6" (real unemployment) sits at approximately 17.5% and is on its way to 20% unemployment. This is a depression.

Had we not had the silly "cash for clunkers" there would have been no positive "3rd quarter numbers" and thus no basis for, "we are out of recession". All the while we are hearing of a "jobless" recovery.....so many oxymorons...so little time.

As many of us have known since March, there never were any green shoots. The market is not forgiving and the market rise was powerful. Unfortunately, unsubstantiated powerful market highs (when "popped") will lead to vicious swift market downturns.

Here comes reality and a really solid economics lesson.


On Oct 02 07:22 AM apppro wrote:

> When an entire market sells off because some option traders are manipulating
> the U.S. dollar in order to manipulate stocks and commodities ALL
> just for short term gains, well we ALL need to step back and self-reflect
> on what we are doing.
> Just watch CNBS for a few minutes and if all those pundits don’t
> make you sick, then I’m not sure what will. Even if you don’t watch
> it, you get deluged with press releases claiming that egocentric
> media pigs are declaring another Armageddon and do it all while they
> laugh in your face. What is wrong with all of us? We waterboarded
> our financial institutions into oblivion and now we are destroying
> what little is left of our own psyche. Yesterday’s economic news
> was not all that bad. Some was actually good, but only because it
> wasn’t ‘greater’ then what some people had hypothesized the markets
> sold off 200+ points. This is wrong and must end.
>
> Revised Tax Rules:
> 1. Capital gains under <6 months - 55% tax on capital gains
> 2. Capital gains 6 > 12 months - 45% tax on capital gains
> 3. Capital gains 1 > 2 years - 35% tax on capital gains
> 4. Capital gains 2 > 5 years - 18% tax on capital gains
> 5. Capital gains 5+ years - 5% tax on capital gains
> 6. Most critical of all — Institute a capital gains tax of 55% on
> ALL short sales not directly tied to a long buy by a licensed hedge
> fund. I'm tired of paying for the pure shorts 3rd vacation home.

Oct 02 09:31 AM

[LIVE FREE O...:]

Wow, that was a lot of dialogue.

It short, we are not experiencing Armageddon, but we are in a depression. The gov't and MSM have misinformed, manipulated and generally abstained from any possible responsible & honorable action for the past 9 months.

I could provide all kinds of data that the gov't & MSM have been ignoring but it is time to get real. "U6" (real unemployment) sits at approximately 17.5% and is on its way to 20% unemployment. This is a depression.

Had we not had the silly "cash for clunkers" there would have been no positive "3rd quarter numbers" and thus no basis for, "we are out of recession". All the while we are hearing of a "jobless" recovery.....so many oxymorons...so little time.

As many of us have known since March, there never were any green shoots. The market is not forgiving and the market rise was powerful. Unfortunately, unsubstantiated powerful market highs (when "popped") will lead to vicious swift market downturns.

Here comes reality and a really solid economics lesson.


On Oct 02 07:22 AM apppro wrote:

> When an entire market sells off because some option traders are manipulating
> the U.S. dollar in order to manipulate stocks and commodities ALL
> just for short term gains, well we ALL need to step back and self-reflect
> on what we are doing.
> Just watch CNBS for a few minutes and if all those pundits don’t
> make you sick, then I’m not sure what will. Even if you don’t watch
> it, you get deluged with press releases claiming that egocentric
> media pigs are declaring another Armageddon and do it all while they
> laugh in your face. What is wrong with all of us? We waterboarded
> our financial institutions into oblivion and now we are destroying
> what little is left of our own psyche. Yesterday’s economic news
> was not all that bad. Some was actually good, but only because it
> wasn’t ‘greater’ then what some people had hypothesized the markets
> sold off 200+ points. This is wrong and must end.
>
> Revised Tax Rules:
> 1. Capital gains under <6 months - 55% tax on capital gains
> 2. Capital gains 6 > 12 months - 45% tax on capital gains
> 3. Capital gains 1 > 2 years - 35% tax on capital gains
> 4. Capital gains 2 > 5 years - 18% tax on capital gains
> 5. Capital gains 5+ years - 5% tax on capital gains
> 6. Most critical of all — Institute a capital gains tax of 55% on
> ALL short sales not directly tied to a long buy by a licensed hedge
> fund. I'm tired of paying for the pure shorts 3rd vacation home.

Oct 02 09:31 AM

[truthteller:]

Good observation and discussion about fundamentals, indeed this bank has a lot of challenges, going forward. However, a lot of smart money says you're wrong about shorting, like Goldman and John Paulson (the guy who predicted this mess).

As reported by reuters:
"Goldman said it favors consumer-focused large banks, such as JPMorgan Chase & Co (JPM.N) and Bank of America Corp (BAC.N) over regional banks such as Western Alliance Bancorp (WAL.N) and Marshall & Ilsley Corp (MI.N), which are heavily focused on real estate." www.reuters.com/articl...

According to filings and reported on CNBC:
"Hedge fund manager John Paulson, who earned a fortune by betting against financial companies after foreseeing the credit crisis, bought a $2.7 billion stake in Bank of America and took stakes in other lenders during the second quarter, according to a regulatory filing."

www.cnbc.com/id/32392887

I think we are in a correction plain and simple, which means it become dicey to short, because the least little piece of good news could cause your options to be worthless!

Oct 02 09:35 AM

[waf76:]

i agree with truthteller, also if recovery takes longer, there will be new manipulations and one-offs to boost earnings in 2010. You think the manipulation is over? Might as well profit from it.

Oct 02 02:50 PM

[bbro:]

Nothing about loan loss reserves,chargeoffs,or pre provision earnings
nothing but words and pontifications....

Oct 03 06:10 AM

[multi007:]

Our country (USA) wont stand for your tax proposals. There is zero chance of this happening by November 2010 - if it is to happen, it must happen before Nov 2010. That is when the tied will turn and Democrats will loose their majority. If is does, the Repubs. will reverse anything the Dems did. This is why the Dems are trying to fast track health care reform. They KNOW they wont have the votes come next year, after many of them are fired.

Its the same thing with the Repubs. They didnt listen to the people and did what no one in the country wanted, and they got fired last year. So far, the Dems are on track to repeat this.
On Oct 02 07:22 AM apppro wrote:

> When an entire market sells off because some option traders are manipulating
> the U.S. dollar in order to manipulate stocks and commodities ALL
> just for short term gains, well we ALL need to step back and self-reflect
> on what we are doing.
> Just watch CNBS for a few minutes and if all those pundits don’t
> make you sick, then I’m not sure what will. Even if you don’t watch
> it, you get deluged with press releases claiming that egocentric
> media pigs are declaring another Armageddon and do it all while they
> laugh in your face. What is wrong with all of us? We waterboarded
> our financial institutions into oblivion and now we are destroying
> what little is left of our own psyche. Yesterday’s economic news
> was not all that bad. Some was actually good, but only because it
> wasn’t ‘greater’ then what some people had hypothesized the markets
> sold off 200+ points. This is wrong and must end.
>
> Revised Tax Rules:
> 1. Capital gains under <6 months - 55% tax on capital gains
> 2. Capital gains 6 > 12 months - 45% tax on capital gains
> 3. Capital gains 1 > 2 years - 35% tax on capital gains
> 4. Capital gains 2 > 5 years - 18% tax on capital gains
> 5. Capital gains 5+ years - 5% tax on capital gains
> 6. Most critical of all — Institute a capital gains tax of 55% on
> ALL short sales not directly tied to a long buy by a licensed hedge
> fund. I'm tired of paying for the pure shorts 3rd vacation home.

Oct 03 03:45 PM

[Swashbuckler:]

Probably many good reasons to short Bof A, but they weren't listed here. Not much depth to the article. I already knew the storyline to Oz...

Oct 03 04:32 PM