Bank of America's (BAC) stock has doubled from late last year on hopes that the worst of the problems are behind it, but in reality the bank remains teetering on a cliff.
A number of Merrill Lynch advisors with billion-dollar client bases are jumping ship feeling stymied by the levels and layers of bureaucracy at Bank of America.
The Merrill Lynch acquisition was supposed to provide a solid profit center to bolster the bank while it restructured core operations. The exodus of large teams signals problems within the structure.
The release of loan loss reserves along with one-time items more than covered net income, which underscores the weakness in core operations.
For example, in the fourth-quarter earnings report $0.12 came from a gain on the sale of Bank of America's stake in China Construction Bank and $0.07 came from loan loss reserve release, more than covering the $0.15 earned during the quarter.
The third-quarter 2011 earnings report saw $0.25 come from the sale of the stake in China Construction Bank, $0.12 from a Debt Valuation Adjustment, and $0.12 from loan loss reserve release. The $0.49 cents in these special items almost completely cover the $0.56 of reported earnings.
The transfer last year of derivative exposure from Merrill Lynch to a subsidiary backed by taxpayer deposits underscores the weakness in Bank of America operations.
Since the double bottom last year investors have realized an almost 100% gain on their shares. Given the risks to the core business and global macro environment investors should look to book those gains and walk away from the table. Until core operations can stand on their own without one-time items investors should avoid Bank of America's stock and look elsewhere for gains. As the European and Chinese slowdowns manifest themselves causing slower growth in the United States there is a good chance the recent loan loss reserve release is reversed in coming quarters.
Disclosure:While I am not short BAC stock I am short the broader market as a portion of my overall portfolio strategy.
