No Moss

Last Thursday Was the Bottom - It's Time to Get Back in

Bank of America is a stock I've owned at various times over the last two years. I have generally made money with the stock, the last time buying 200 at 39.xx and 100 at 19, then selling out at 36, and I was lucky to get out at the one-time return to the 30s. I recently bought again at $12.90, hoping that the dividend will hold at 1.28. This is a stock which got out of subprime in 2002 or so. Ken Lewis is a very good retail banker, but he may have overreached with Countrywide and Merrill Lynch, but at $12.90, or even under $15, the stock is just too cheap to pass up. This stock will never be in the teens again, in my opinion. Buy now and keep it forever, it's just too big to fail. It has a huge investment in China Construction Bank, and that will be an incredible investment when normalcy returns to Chinese stock prices.

What little I know about water transport stocks scares me, and that is volatile prices, spot markets, and ship inventories. Good dividends when times are good, though.

Oil? Well, anybody that doesn't believe oil will come back is crazy. The bottom we are seeing here has delayed people solving the problem of oil dependency, so we're no better off than we were before. Demand is down now, but will return when things perk up a bit, and any sign of shortage lures investors and hedgers into the market. I mean, a barrel could be $100 in March--it's just that volatile.

Bank of America: Bank on This Opportunity

I sold my modest position in BAC today. I liked BAC up until the Merrill Lynch acquisition, and until they annouced that they might be (read that will be) cutting their dividend. Merrill Lynch does indeed involve risk, and risk of the worst kind. It's a company where the biggest assets go home at 5:00 (or at least sometime) at night.

Will those hotshots last a year with Ken Lewis, whose determined to bring expenses down? Probably not. He'll be left with a name, and probably not to much to show for his expense other than a pretty good stream of income from the remaining clients and the asset management business.

I loved the Countrywide deal, incidentally. The losses will work out, the mortgages originations will increase, and that mortgage servicing business in an underestimated jewel.

Merrill--a hugely bad fit. Ken Lewis has already proved he doesn't like or know how to run a brokerage business or an investment bank.

Buyouts and Shakeups: How the Financial World Is Changing

The role of the GSEs made them incredibly vulnerable. Although they have been saved, it's unlikely that they will resume their role as freely as before, meaning that commercial banks will take up more of the "burden" of mortgage lending. Without mortgage guarantees, money will be tighter and loans will have higher standards and bigger down payments. Securitization will be reduced. The clear beneficiaries of this will be commercial banks, who have large deposit bases to use as a source of loans (in the absence of securitization).

Homes will be harder to finance, but worthy borrowers will still be able to get a home loan. Savings rates will go up as people save for down payments, home prices will stabilize to modest appreciation, dampening the rampant speculation that made them so unafforadable in the first place. HELOCs will be reduced as equity climbs more slowly. Things will return, for a time at least, so a slower, more stable pace.

Securities will replace homes as the investment vehicle of choice, and the stock market will go up.

It's not a new world, we're just going to rearrange things a bit.

What B of A Gets by Passing on Lehman & Gobbling Up Merrill

Bryanz, it's the .86 (actually .8595) shares of BAC as the date of the actual sale, which I gather will be sometime in the first quarter of next year.

The events of last weekend revealed that we're running out of options for shotgun marriages. Federal officials believed that both Lehman and Merrill were going bad, and the only suitor they could find for an unassisted buyout was Ken Lewis for Merrill. Actually, the Fed probably offerred something to BAC, perhaps down the road.

Who do you think will be interested in Goldman Sachs and Morgan Stanley? And who can afford them?

BofA's Lewis Is Still Making Deals, But Now Aiming for Distressed Assets

Well, I grudgingly like the deal for Merrill. Ken Lewis wants three things from Merrill, i.e., increased deposits (MER's deposit-gathering arms are classified as a thrift and an ILC), relationships with wealthy individuals (MER has that in spades), and a chance to use BAC's access to cheap cash to get the easy money that will be available when investment banks start handling M&As and similar transactions again.

Traditional banking doesn't allow BAC much room for growth, since BAC will be well over the 10% deposit threshold with the MER purchase. BAC will get deposit growth by offering loans and services that are tied to a BAC bank account.

On the other side of credit excesses and unemployment growth is a future of better credit quality, a normal yield curve, and a pent-up demand for homes, cars, and stuff in general.

What's the BofA / Merrill Synergy?

Well, I'm not quite ready to give up on all this so quickly. The thing that Ken Lewis is looking at is keeping Merrill intact and reasonably happy. Lehman employees are wiped out, in terms of both morale and finances. Merrill employees are breathing a sigh of relief and gratitude. This will help immensely in merging the two cultures, which are quite different.

The synergies are there, in terms of giving BAC an affluent customer base, increasing deposits, and crossmarketing. And Merrill has enormous talent on its payroll, and a huge, valuable brokerage business.

Countrywide: Potential Short Squeeze in the Offing

I have a small position in BAC that is, of course, under water. I'm also skeptical about the short-term wisdom of buying CFC. That said, I think the long-term prospects for BAC are excellent. They are focusing on being a retail bank, and I think that will be rewarded.

In the long run, the CFC purchase will be accretive to business, increasiong the bank's revenue from mortgage originations and mortgage servicing, but more importantly, funneling new mortgage loan business into BAC, with new bank accounts following. I mean, you'll get some sort of discount from BAC if you have your bank account there. Bank deposits = cheap money plus additional service revenue.

It's one way to get around that 10% cap.

Absorbing CFC would seem to require either selling some of that China Construction Bank stock, further diluting BAC stock, or cutting the dividend. We'll know the results of all this by year end, after we get a couple of quarters of writeoffs behind us.

Who knows, the economy could come riding to the rescue and make Ken Lewis look like a genius. Stranger things have happened.

Are Countrywide Shares Worthless?

Well, I had thought, long ago, that this was a pretty good deal. I underestimated the seriousness of the credit crisis. I think BAC has two options now. One is to offer the $1-2 per share that would be better than nothing for shareholders. The other is to let the thing go into bankruptcy and pick up the assets, like the servicing business and the loan portfolio, at fair market value.

That's obvious, of course. My question is, would they have the rights to the assets if the company went bankrupt, or would they have to bid competitively to get them?

And, am I missing an option?

BTW, kurt walter, that was hilarious!

It's Not a Crisis, But a Chaotic Calamity

Gee, I feel like it's the end of the world, Mr. Inger. Must be a market bottom. Yeah, it's a big problem. We have a big economy. Therefore, we have big problems, along with big successes. Our economy is shifting as we react to a changing global landscape.

Get used to it. We'll wring out the excesses and then real estate in California will go back to being impossibly overpriced, or maybe, hopefully, just a little bit less than impossibly.

It's not the end of the world, or even of the Republic. Greed took over for a while. As usually, the perps got a few handslaps, a few heads rolled, a few big guys lost a bundle. Mostly, the public lost, either directly or by bailouts.

But life will go on. The ship is still sailing, maybe a little bit slower right now. But we're scraping off a lot of barnacles, and we'll go faster in a little while.

Unregulated mortgage brokers? Bad idea. Hedge funds with leverage and black box "quant" machines? Why did we think those would work longer than someone's big paycheck? CDOs in banks' hands but not on the books? Real bad idea. 30-1 leverage at investments banks? Even worse. It was greed, OK? Billion dollar paychecks for hedge fund managers, bonuses and kudos on Wall Street and in bank board rooms for taking too much risk. We are scraping those barnacles off. They'll be back, but for the time being they're being scraped off.

We'll do a lot better when we have actually have to work for a living. And Mr. Cayne can go back to playing bridge.

Time to Short Financial Stocks - Starting with BofA

Yeah, I'm wondering why you'd short BAC. It has more pain in store, but it'll make money from the Visa IPO, and it has made a ton from its investment in China Construction Bank.

The risks involved in shorting BAC include finding a bottom in home prices and their raising their dividend. Both are possible by the end of the year, the dividend increase pretty much a foregone conclusion in my mind. The mother of all risks would be Congress lifting the cap on deposits, which would be a huge lift for BofA.

The stock is sitting at about 55% of its Morningstar fair value ($70).

BofA's Countrywide Purchase is a Huge Mistake

I think West_S got it. Everybody is pointing to this thing like BAC bought a loan portfolio. They bought a franchise. Now there's no question that the franchise is damaged. It's best money-maker, the subprime loan business (Full Spectrum unit at CFC) is history. There are suits against CFC, and the ability to place loans with Freddie Mac and Fannie Mae is seized up right now. However, the business of writing mortgages gets you points, placement fees, and loan servicing fees. It makes money, and it makes pretty good money in a normal market, which the mortgage will be in a year or two.

The loan portfolio at CFC, including the stuff held for resale, is not great stuff, but you've got a lot of negative goodwill (that's what happens when you buy for less than book value) to write it off against. S&P estimated a writeoff of 1% of the loan portfolio in 2008.

Ken Lewis wanted this company. He got it for what one writer on this web site characterized as a rounding error on BAC's books.

He wanted to reduce his dependence on investment banking, which he doesn't understand, and increase his footprint in retail banking, which he understands far better than you and I. BAC is a little clumsy, but so is your average 500 pound gorilla.