Stock Traders Blog

I came across a blog post that talked about foreign currency trading basics. The following is a quote from the post that I found extremely helpful.

“Abandon all notions of getting rich quick. Because of leverage and due to the fact that even a broken clock is correct twice a day, the FOREX market can give you the illusion of being able to make a huge amount of money quickly. The market can randomly reward you for bad trading behavior. Until you execute your bad trading habit one too many times and the account proceeds to blow up. Capital preservation is critical simply because you need enough time to be able to discover those “bad trading habits.” Go slow. Preserve your capital. Learn the fundamentals. Achieve consistency.”

I found that if I replace the word “FOREX” with “STOCK” then it perfectly describes what I have learned from my past couple months of stock trading experience. It is a very concise summary of my “Stock Trading Lesson Learned” Category”. I couldn’t agree with this more. I guess FOREX trading 101 equals to stock trading 101.

Yesterday I was planning to sell PCX and DRYS today so that my account could be up above my initial capital. I saw this opportunity in early morning but I didn’t act on it. I was expecting more. Actually news already pointed out early morning that oil was continue dropping., It made sense that it would put pressure on energy stocks however I didn’t pay attention to it. I kept expecting a 4% bounce backup on PCX after yesterday’s almost 10% drop. It certainly wouldn’t happen when oil was continue dropping. I just didn’t sense the connection between oil price and energy issues. That’s definitely another lesson learned.

There is always ups and downs in a trading day and there is always opportunity to make profit. To train myself to make more right decisions than wrong is the purpose of the “Stock Trading Lesson Learned” category. I also watched Baidu today I wanted to trade on its call options and I set an order to buy its Jul 280 Call at $6. The price was set too low however. My account was down almost $300 at today’s closing price

Account Balance 20090707

Account Balance Changes: -$272.80

In my preview post I quoted some Meredith Whitney’s opion. She says she is most comfortable with stock valuations close to tangible book per share levels. So I did a comparison of price and tangible book values for the too-big-to-fail banks and sorted them by the closeness of their price to tangible book value. Citi Group is The closest one followed by FITB and BAC. Is that mean Bank of America is worth to buy? In the group of banks she mentioned Citi group and Bank of America have the lowest price compared to their tangible book values. And she opt out Citi Group as a choice. So seems to me BAC was the one she recommended

Tangible book value and price information is collected from Forbes Public Company Financial Ratios

I came across some of the old articles that talked about Meredith Whitney, Goldman Sachs analyst Richard Ramsden and Second Curve Capitals Analyst Tom Brown’s opinion on Bank of America last August. After reading them I find Meredith Whitney is admirable but Richard Ramsden and Tom Brown are laughable.

Bank Of America (BAC) A-OK, Says Goldman: No Capital Needed

Wachovia (WB) and BOFA (BAC) Have Bottomed; Meredith Whitney Missed Boat

Maybe you will feel the same after reading them. Whoever was able to predict this financial meltdown was basically seen as hero in the financial community. Meredith Whitney was right last year and I tends to believe she is going to be right again because she has more power now and her call will effect the sentiment of the market. She just updated her view on financial sector. I quote some her lines here to remind myself of her opionion.

We believe we are on the onset of changes impacting the mortgage market that could meaningfully influence earnings of the banks over the near to medium term. Accelerations in loan modifications will materially change how loss reserves are measured, which will result in lower loss provisioning and higher earnings over the near term

the U.S. government increased allocated incentives to mortgage companies by a fifth to modify home mortgages, while total incentives to servicers now stand at $18 billion and could climb higher. This is not the only incentive to banks. Modifications “cure” past dues and shift delinquent loans to current loans. As banks’ loss provisions are based upon past due or delinquent loans loss provisions will decline as modifications rise.

The clear risk here is timing as current recidivism rates range 22-46% on modified loans. Banks may take advantage of a timing arbitrage, which could benefit near-term earnings

“As we continue to believe the bank sector faces numerous challenges, we are most comfortable with stock valuations close to tangible book per share levels,” Whitney said. Pointing to Bank of America, JPMorgan Chase, Wells Fargo and Citigroup, she expects future increases in tangible book value, except for Citigroup.

Last night when future was down more then 80 points I was expecting the stock market to drop at least 100 points at close today. So I took profit when I saw opportunity. I sold BEAT and USB at a profit. I traded on FAS but lost a little bit. At market close when I saw the DOW was up 40 some points and some of the hard hit stocks didn’t bounce back I couldn’t withstand the temptation and bought a couple of them. I bought PCX (Patriot Coal) and DRYS (Dry Ship). I think if the DOW tomorrow can remain unchanged or up a little then PCX and DRYS may rebound nicely. I didn’t buy a lot though. I am still bearish on the market with the earning season coming. The following are the transactions today.

Transactions 20090706

My account was up about $100 at closing price. I believe at some point tomorrow I will have the opportunity to sell all my position to make a profit and my account can be up above $30,000 which was my initial capital.

Account Balance 20090706

Today I focus on a couple news related to Bank of America. First is “BofA’s bad loans up 10% in 2Q”. I think this is the news that caused BAC tanked today. Second is “Whitney’s New Take On Modified Loans”. Meredith Whitney thinks that with the held of regulation and government incentive loan modification will soar and that will lower loan loss reserve which will benefit banks in near term. I don’t know how this two factors will play out in Bank of America’s second quarter income. I remain cautionary on Bank stocks. Bank of America ever dropped below $12 this morning and quickly bounce back. I was busy on something else and didn’t get this opportunity.

Account Balance Changes: +$118.29

As you know I like participating discussion on yahoo stock message board. I usually post on the stocks I traded on and use screen name StockTradersBlog. Yesterday I wrote a post “Bank of America Earning Forecast and Financial Statement Analysis”. I have to remind you that I am a blogger and a stock day trader with lousy trading returns. So my analysis by no means has any investing grade quality.

I originally believe BAC will report very good earning in the second quarter. But Citi Group said that BAC would report loss and lowered its target price. I was basically trying my best to do my own earning analysis to see whether Citi Group’s opinion was going to be right. I put the link on BAC board in hope to test my analysis. I hope to see some counter arguments. But very disappointed I didn’t see any and I was called spamming by some assumably traders that are long on BAC shares.

Nowadays investment firms upgrade and downgrade stocks without any quantitative analysis showing to public to support their opinion. It is no different then telling you this stock should go up and you should buy or that stock should go down and you should sell. I personally believe this kind of practice is obscene. The only thing this kind of practice can achieve is stock price manipulation. I think it is better to be written into law that when investment firms upgrade or downgrade stocks they have to support that with numbers (quantitative analysis) and they have to give the source of the numbers and other information they use to support their arguments.

That is called fair and that way investor can make truly informed decision based on how they see the facts instead of blindly following investment firms’ opinion. But I guess putting that in regulation is a nightmare for investment firms because that will make them lose earning power. Their earning power to a large extend is deprived from their abilities to influence stock price using one sentence and I think this is not right.

Last quarter Bank of America earned 4.2 billion. That was before paying 1.4 billion prefer stock dividend including 0.4 billion paid to the US government. After paying prefer dividend earning was 2.8 Billion. Diluted earning per share was $0.44. There were about 6.4 billion common shares outstanding last quarter.

In second quarter there were about 1.45 billion new shares issued as a result of secondary offering and prefer to common share conversion. Suppose second quarter earning is the same as the first quarter diluted earning per share will be $0.36 with 7.85 billion common shares outstanding. That is P/E at 8.8 with current price at $12.60. It should be cheap and it worth to buy if Bank of America can generate 2.8 billion profit every quarter going forward. The Question is whether the earning shown in first quarter is sustainable. If the earning is sustainable given a P/E of 13 BAC should worth $18.72.

Prefer Share Dividend:
News was just released that BAC paid 0.7 billion dividend to government that was more than the 0.4 billion in first quarter. But this quarter BAC has less prefer shares so I expect there is no substantial change on prefer dividend payout.

Gain on Sale of Asset:
Gain on sale of China Construction Bank stake this quarter is expected to be 2 billion and it is about the same as last quarter.

Given the same earning for the rest of Bank of America’s operation lets consider three major factors that may cause major earning change: FDIC charges, marking to market value of Merrill lynch debt, and provision of loan loss.

FDIC Charges:
I remember JPM has 0.7 billion charged by FDIC and I believe BAC will be charged by around the same amount.

Marking to Market Change of Merrill Lynch Debt:
First quarter’s earning included gain of $2.2 billion pre-tax FVO positive adjustment on Merrill Lynch structured notes. That was because the marking to market adjustment on values of Merrill Lynch debt at a time when the debt was traded at substantial discount because our financial system was on the verge of collapse. This quarter the value of this debt will not go down so the 2.2 billions of gain will disappear. In fact the value of Merrill Lynch debt will be trading higher because the system is stabilized. That will incur a marking to market loss. Citi Group analyst Keith Horowitz predicted that loss is amount to 2 billion. So this single factor can cause Bank of America’s earning in second quarter 4 billions lower than the first quarter.

Provision of Loan Loss:
This is where Bank of America can do the trick. Last quarter loan loss provision was 13 billions. Many analysts believe that wasn’t enough. With unemployment rate higher and credit quality continue to deteriorate I expect provision for loan loss will increase. Let’s say increase by 5%. That is 0.65 billion.

So Bank of America’s second quarter earning is expected to be 5.35 (0.7 + 4 + 0.65) billions lower then the first quarter. And it will turn into 4.2 – 5.35 = -1.15 billion loss. That is -$0.12 per share with 7.85 billion common shares. You may think the expectation of loss is already built into current price.

So what is Bank of America’s earning beyond second quarter? FDIC charge shouldn’t be there and it shouldn’t be a factor in the third quarter. Suppose Merrill Lynch debt value will not change then 2 billions of gain is not there but there won’t be 2 billions of loss either so third quarter earning should be 2 billions lower compare to the first quarter given everything else not mentioned here is the same. That is 2.8 - 2 = 0.8 billion for common share. But again loan loss provision is the focus. Loan loss provision jumped from 8.5 billions in Q4 2008 to 13.4 billions in Q1 2009. It could go down or go up several billions depends on the economy and BAC’s earning can fluctuate in a wide range. I am not optimistic. US Bank executives mentioned that it will build up loan loss reserve for the rest of the year. I believe BAC needs to do so either. And that means loan loss provision will continue to increase even though Keith Horowitz predicted loan loss provision will be peak in second quarter. If that is the case BAC might be making zero profit for the rest of the year.

Fundamentally I don’t see stock price should appreciate but I believe BAC price will fluctuate between $9 and $15 base on outlook of the economy and how Bank of America report its loan loss provision going forward.

If loan loss provision trends down starting from Q3 then Bank of America may be able to generate 2.8 billions of profit quarter after quarter for at least 1 or 2 years. The number can be bigger if the other earning sources of Bank of America improve gradually. Looks like it all depends on the overall economy and Bank of America will have a beta higher then its peers meaning its earning and stock price will fluctuate in a wide range.

I feel I am a bit clear about what the market is going to go after writting this post. I feel the market recently turn bearish and worry about credit quality. I believe the finanical sector will pull the over all market lower after they report second quarter earning. Just my opinion we will probably see the DOW lower than 8000 in the comming weeks. Again credit quality and loan loss is the determining factors.

Reference:
http://newsroom.bankofamerica.com/index.php?s=43&item=8438
http://finapps.forbes.com/finapps/jsp/finance/compinfo/IncomeStatement.jsp?tkr=bac&period=qtr

I created a blog category called Stock Trading Summary. I will write post in that category to give a summary of my trading result for the past one or two months. I started this blog on May 13th, 2009 with $30,392.60 in my account. See my first post. I later on transferred out $1,427.25 on June 4th, 2009 so that I can have a fresh start with a whole account balance at $30,000.00. At that point my gain is $1,427.25 - $392.60 = $1034.65.

Starting on June 4th, 2009 with $30,000 in my account untill now I am in loss. My account balance at the end of today is $29,895.91. So this past month is very unproductive. All I did is ended up paying over a thousand dollars of trading commission. As you know one purpose of I starting this blog is to see whether day trading can provide sustainable income. The past two months of trading tells me it can not. But I am not giving up yet. As you can see I am still making a small profit since I started this blog.

Now I am treating my initial capital at $30,000 and I will NOT change that going forward. It is hard to say how much my account balance is going to be one or two years later and you may take a wild guess.

A video of Peter Schiff in Daily Show with Jon Stewart showed that people was having a good laugh at him when he predict he housing bubble a couple years ago. I originally have this video embedded here but it is no longer available.

I came across an article that was about Peter Schiff and his prediction of the housing bubble a couple years ago. He is now predicting the hyperinflation. Given the time frame of his prediction I would guess hyperinflation is going to come after two years. I am not trying to spread the bearish sentiment here. He could be wrong but I would like to keep this in mind.

Here is the article that is questioning the United States’ ability to pay back its national debt, “Can they pay it back”. The following is a quote from it which is originally from Peter Schiff.

The current recession, is only the beginning of a larger economic restructuring. The American economy has been destroyed by years of reckless spending and borrowing. And now, the U.S. government is so deeply in debt that at some point in the very near future, its lenders—namely China—are going to come to their senses and cut America off. “We can’t have one country that just borrows and one country that just consumes that’s supported by the rest of the world. It doesn’t work.” When this system collapses—and it inevitably must—inflation will run wild as the U.S. prints money to support its spending habit. Interest rates will jump and everyone will suffer. The real day of reckoning is still to come.

If I don’t remember wrong this is the third collection in my “Bear Thoughts” category. I don’t know why I don’t find any “Bull Thoughts” so far. Maybe subconsciously I am very bearish and I was very sensitive to bearish message. If you find any good article of bullish thoughts. Please let me know.

I paid 180 dollars of commission today. As you know I am using TDAmeritrade. Its stock trading commission is $10 per transaction. How did I get to that far? Well I thought trading option is also $10 per transaction. So I bought 100 contracts of Microsoft Jul 24 Call option at 0.32 per share and sold them at 0.36 or 0.37 per share. I thought I was able to net about $400 on that transaction. In fact I was only able to make about $230 on that.

MSFT option commission

It turns out that there is $0.75 commission per contract in addition to the 10 dollar transaction fee. I was trading 100 contracts so there was $150 extra commission in addition to the $10 transaction fee. That is a lot and that is something I didn’t know before I did this trade. It was lucky that I was still able to make money. A lesson learned from this is when dealing with option it is better to trading those options that prices are high. If you know any broker that offer low commission on option trading please let me know

It is a big down day. Unemployment number is not good. But my account was up thanks to the option trade. I am still holding 500 shares of Beat that I bought yesterday and at the end of the day I added 500 shares of USB (US Bank) at $17.13. I became more willing to take the long side. But I wish I shorted Bank of America this morning.

Acount Balance 20090702

Account Balance Changes: +$114.81

PS
I have to revise the gain today to +$94.81. Closing price of USB came in a bit late and it turns out to be 17.04 instead of 17.08.