Stock Traders Blog

Bank of the Ozarks is one of the banks I followed. It is a very small region bank comparing to Bank of America. You may read Bank of Ozarks business profile here if interested. I have long believe that Bank of Ozarks is one of the well managed banks that is financial is much healthier than its bigger peers. Bank of the Ozarks reported earning today. So lets see if that believe still holds and see if we can get some hint about the earning of Bank of America from Bank of the Ozarks.

It reported record earning $9,501,000 and $0.56 per share. 10.4% higher than the same period last year. Q1 2009 had profit of $9,286,000 so Q2 was a bit higher. I summarized what was the change compared to Q2 2008 or Q1 2009.

• Loans and leases were 0.7% declined from last year
  
• Deposits 7.6% declined from last year
  
• Total assets 3.6% declined from last year
  
• Common stockholders’ equity and Book value per common share increased about 23% from last year but slightly decline from Q1 because of an unfavorable change during the quarter in the Company’s mark-to-market adjustment for unrealized gains and losses on AFS investment securities.
  
• Net interest income for the second quarter of 2009 increased 28.2% but slightly declined from Q1 2009
  
• Non-interest income for the second quarter of 2009 increased 306.9% to $22,610,000 compared to $5,557,000 for the comparable quarter of 2008. Q1 Non-interest income was about $9,000,000. his large increase in non-interest income was primarily attributable to significant gains on sales of investment securities during the most recent quarter.
  
• Service charges on deposit accounts were $3,047,000. Q1 was about $2,800,000. 2.7% increase from last year
  
• Mortgage lending income was $1,096,000 in the second quarter of 2009. Q1 was about $900,000. 72.3% increase from last year
  
• Trust income was a record $751,000. Q1 was about $650,000. 19.4% increase from last year
  
• Net gains on investment securities and from sales of other assets were $16,487,000. It was $206,000 last year and about $4,000,000 in Q1 2009
• Non-interest expense for the second quarter of 2009 was $17,945,000. 33% increase from last years. It includes $1.3 million for the special assessment levied by the FDIC on all insured institutions. It was about $16,000,000 in Q1 2009
  
• Nonperforming assets as a percent of total assets increased to 1.37%. It was 0.59% as of June 30, 2008 and 1.17% as of March 31, 2009
  
• the Company’s provisions to the allowance for loan and lease losses totaled $21.1 million. It was $4.0 million last year and $10.6 million the first quarter of 2009.
  

The source of this data is from
businesswire Bank of the Ozarks, Inc. Announces Record Second Quarter 2009 Earnings

What I saw from this summary is that business was about the same from Q1 to Q2. Provisions to the allowance for loan and lease losses almost doubled form Q1 to Q2. However Non-interest income, mainly the gain on sale of investment securities and other assets was able to more than offset the provisions for loans loss.

I don’t see this earning report a good news because the record income was not generated from its day to day business. Loan loss provision has huge increase and it doesn’t look good for the next quarter with employment rising. However stock price of OZRK went up 2.4% after report come out.

I kind of think we will see the same on Bank of America. Like the analysis I did on this post, “Bank of America Earning Forecast and Financial Statement Analysis”. Business may not have significant improvement compare to Q1. Loan loss provision will be huge. Mark to Market change is not favorable. And Bank of America has to rely on gain on asset sale to show a profit and most likely this gain is not able to offset loan loss provision and MTM changes. So it will likely to show loss. Book value may slightly decrease from last quarter.

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 am confused about the difference between standard option and non-standard option. I originally thought that non-standard option was like European style option which could be exercised on expiration day only. If that was the case then the risk of writing this kind of option should be lower and the premium should be lower. But I found it is exactly the opposite. See the following July Bank of America options with strike price at $11. The premium for the non-standard option is a lot more. I was thinking selling the non-standard put option would make me a lot more money than the standard one.

Well I did some research and found I was wrong. Look at the following when I open up the JUL 11 PUT OPTION. It says “Non-Standard Option | $13.71 cash in lieu of shares, 85 Shares of BAC”..

This non-standard option is a result of Merger between Bank of America and Merrill Lynch. This non-standard option was originally Merrill Lynch option. Since the merge or acquisition between Bank of America and Merrill Lynch was 0.8595 shares of Bank of America common stock for each Merrill Lynch common share, a Merrill Lynch option contract (100 shares) became Bank of America option contract with 85.95 shares. Because the fraction share can not be traded Bank of America use cash to pay Merrill Lynch share holder during the merger. And the $13.71 cash reflected the fraction share conversion.

If you sell this put options, yes you could collect a lot more than selling standard one, but when the buyer exercise the put option and sell you BAC shares they only need to deliver 85 shares of BAC plus $13.71 cash to you to fulfill the contract. So yes you get a lot more upfront by selling them but you take the risk of getting a lot less when the put option contract is fulfilled. Risk and return are always proportionate

Looks like Epena is on technical analysis. See her comment on Baidu. No offensive but I don’t completely believe in technical analysis and I don’t rely on technical analysis to do any of my trades. My take on technical analysis is that it will just work 50-50. Because I think any well known stock trading theory is self-destructive. It only works when I am the only one understand it and use it. When many people understand it and use it it will become ineffective. Since technical analysis is well known strategy I don’t think it will work. But if anyone use technical analysis find it works let us know here. Let’s see what the odd is.

I have a silly theory. That is the stock price movement is the weighted average result of tarders’ sentiment on a stock. The weighted factor is the money held in traders’ hand. Let’s say Baidu if the number of bearish and bullish traders on Baidu are equal and they are holding the same amount of trading power then stock price should not move. However if the bearish side of the traders hold a larger position than the bullish side then price will be pushed downward. On the opposite when bullish traders hold a bigger trading position then price will be pushed upward. Simply put price movement is to achieve new balance of the bulls and bears. What we do is to find the imbalance between the bulls and bears and take advantage of it. It would be like guessing the mood of a group of people. I usually make a trade based on the price level, its previous movement and what is happening on the company, the industry and the economy. I don’t usually look at graph.

Take Baidu again. I think it will get close to 300 in a couple weeks and then it will come back and stay around 290 till next earning release. It went up today simply because Goldman Sachs upgraded it otherwise it should back down to $270 level. Goldman Sachs has a lot of power on Baidu and it can easily turn bears into bulls.

I guess I babble too much on my theory. But let’s put it on if you have another one

I just got a comment in my mail box. I am glad that I frequently get positive comments regarding this blog not long after I started it. I wish the commentator good luck. Please don’t be offended because I quoted your lines here.

I like reading your blog, keep it up please! I am day trader like you and, boy, most of your trades is basically a copy of what I do I lost big on WFC, won little on BOF but lost it all and 10 times more, so decided to leave bank stocks alone. Switch to Scottrade if you want to save on commission, they charge $7 over $10 at TD Ameritrade. And Scottrade is lightning fast compared to Etrade or TD. The downside is Scottrade often doesn’t have shares available for shorting so I keep Etrade account for short positions.

I am pleased when I read honest opinion and one of the motive that I started this blog is that I want to see honest opinion instead of reading most of the craps on Yahoo stock message board. I wish to build a community for stock traders for any experience level so that we can we can share analytical thoughts, train each other and share the joy of gain and the pain of lost honestly. One of the purposes of the blog is to promote discipline in trades for me and defying my gambling mind. But I believe it will apply to all traders and investors as well. Discipline is key.

I was kind of curious when I saw the following comment and wondered what SKF was

SKF turns out to be a ticker for an Exchange Traded fund called UltraShort Financials ProShares. Take a look at its profile on yahoo.

The investment seeks daily investment results, before fees and expenses, which correspond to twice the inverse of the daily performance of the Dow Jones U.S. Financial’s index. The fund normally invests 80% of assets in financial instruments with economic characteristics that should be inverse to those of the index. It may employ leveraged investment techniques in seeking its investment objective. The fund is non-diversified.

I had a good laugh when I read its profile and thought the fund was some kind of scam. Please don’t be offended if you love the fund. I just don’t see the reason of such fund’s existing. To my surprise its daily volume is huge. Some 40 million shares changed hand today and the price was at $42.94. I am very skeptical about the fund because the strategy it takes is to go against the market for sake of going against it. I mean as an investor I want to buy a fund that can make me money not to going against the market. That is whole point of buying a fund right?

Think it in another way probably the fund is intended to be a hedging tool and its intention is not to grow asset or make money for investors. Still I think there are plenty of hedging vehicles in the market nowadays which can be tailor to suit different hedging needs. Why would people trade this fund which performance will be twice the inverse of the daily performance of the Dow Jones U.S. Financial’s index. Let me know if you see a reason. Take a look at its performance yesterday. It was down 7% versus the DOW’s gain of 2.37%

Now it became crystal clear where those strong buys and upgrades come about. Bank of America issue 800 million new shares at $10 after the market close today. I guess they dare not to announce the offering the same day as the upgrade otherwise is will too obvious. Too bad the housing data give the bank share a big blow. Otherwise BAC shares could be manipulated well above $13.

I was angry because the rule of the game is never fair for small investor like me. I felt being played and cheated almost ten thousand dollar by those market manipulators. I feel shame of the government and the banks. The whole stress test, the spin on Bank of America’s capital short fall, the strong buys and the upgrades on Wells Fargo and BOAC are totally scam only to entice investors’ money. And they are even spinning on repaying the TRAP will hurt taxpayer. That is bull shit.

I have learned a big lesson out of it. Out of the angry I shorted Bank of America 2000 shares after market at $11.19 and $11.32 and cover all of them it at $11. My balance went up about $500 more. But it is no comparison to my ten thousand dollar lost.

I frequently asked myself these couple questions. Is trading stock equal to gambling? Are you an addicted gambler if you are tempted to trade stocks? I answer both questions, “NO”. These are the answers that I prefer. But I really don’t know whether I answer these questions based on my own bias.

I answer both questions based on a fact that I believe to be true. I already mentioned that in my blog mission. It is that when you are gambling you are always playing on the side that statistically the probability of losing money is always higher than the probability of winning money. You may win from time to time in gambling but if you are playing long enough or the number of times you play is large enough there is only one out come and that is you lost. That is how the casinos games are designed. Interestingly a lot of people keep playing in an attempt to win their money back. Casino will tell you who won a million but they won’t tell you who lost a million. It is a marketing effort to entice you to keep playing. People have no problem sharing their joy and victory with the public but they tend to keep the sadness and failure within their closest friends and family.

Theoretically there is one casino game that you can beat the dealer. And that game is black jack. There are all kinds of card counting strategy out there telling you how to beat the dealer. And those strategies have one common nature that is to identify a situation where the probability of wining is greater than losing and increase your bet accordingly. I believe the same applies to stock market. The stock market is emotional and it derails from reality from time to time. The more it derails the high the probability it will heading back toward the rational level. If we can identify those irrational price levels and take the right side then the chance of making money is higher then losing money. If we are always able to find the irrational level and trading on it long enough then we should be able to see substantial gain. With that said I am not saying you will make money on every trade. I mean if you are able to do that you will find you can win more and lost less.

Well I am just talking and I am trying to prove my point with my blog. Successful or not time will tell. Nevertheless the hard work lays in how to identify those irrational pricing. That is the critical part. In traditional financial theory those irrational price is not existing because the market is efficient enough to prevent them from appearing. That is so called the efficient market theory. In that theory no one is able to beat the market index in terms of return per risk. But we can see this market is far from efficient with all kinds of manipulation in place.