I covered my 2000 shares of shorted Bank of America yesterday at $13.30 only to realize it dropped half a dollar more today. Half a dollar a share is translated into $1,000 lost. That means if I still keep the 2000 shares shorted BAC I would recoup almost all my lost. As I mentioned in my previous post my average price on the shorted position was $12.50. If you read my previous post I almost increased 2000 shares of shorted position on BAC when it was at $13.20. If I did that the average price would be at $12.75 and I would able to recoup all my lost today. The only thing is that I have to hold the shorted position for four days. If I increased my shorted position the day before yesterday on BAC at $13.70 which was the closing price that day (I had thought about that). My average would be $13.10 and I could make a very nice profit today.
I know there are too many IFs. Every time when I looked back at my lost I became a very sophisticated programmer making a lot of complex IF statements. I think this run up on BAC and the last one I experienced on Wells Fargo tell us something in common. If a stock runs up too fast and out paces its peers by 15% percent or more not because of fundamental changes and not because of the sentiment of the whole sector then it is doom to retreat. Of course to someone who shorted at $13.70 the day before yesterday there was a lot of luck for them because no one can predict the NY Empire Manufacturing Index drop so much yesterday.
So much so for retrospection. I made some profit today and became a holder of Bank America again at a much higher price. As you know I bought it at $12.06 last week only to sold it too fast. I bought 1000 shares of Bank of America closing to end of the market at $12.76. I made a lot of trades today. I brought MGM in pre-market and sold it for a small profit. I sold my Western Refining position for a small profit. I bought BAC at $12.99 and sold it at $13.10 before I bought it again at closing. At the end My account was up $309.78. The value of put position I am holding drop a bit. Excluding that the trades I did today net more than $400 profit. I expect I will eventually collect all the proceed from selling the puts. If I don’t trade for the rest of the week my account should still be up $400 by the end of the week and I should get back above my initial capital level which is $30,000.
Hopefully the data is good tomorrow and I can make some profit on BAC. BAC’s trading range this week will determine the common share price Bank of America uses to convert its prefer shares. I believe there will be great opportunity to make profit. I believe it is very likely that BAC’s price will trade above the conversion price right after it is announced (June 23rd) and before the final conversion deadline which is June 24th.So I will watch out and keep an estimate of the conversion price. I believe the investment banks will Jag up BAC price large enough to attract prefer share holder to tender their shares for conversion after the conversion price announcement.
Lets see if this is correct
Account Balance Change: $309.78
When I find comments on yahoo stock board compelling I tend to remember them and see if they can prove itself true down the road. Here is one I found
I think Financials just want to stay afloat until the second quarter so they can hide behind their inflated earnings. But they will have to show their hand within the next two to three weeks or so to offer investors some guidance. If that guidance is cloudy, I believe financials will sell off before the 2Q earnings come out in Mid-July onwards.
I expect the 2Q earning statements to be very confusing and investors might take some time to digest them as they try to determine what are true profits and what profits obtained from the mark to market accounting rules. If investors do quickly react to the ‘positive’ news and jump in , financials will go up until investors wake up and notice they have been duped or have misinterpreted the earnings and will sell off.
Point is financials are not going to be truly profitable for a long while. Call me a short if you want but these are facts. Credit defaults are on the rise, foreclosures are on the rise, job losses continues and now interest rates and gas prices are on the rise.
Original is from this thread:
http://messages.finance.yahoo.com/Stocks_%28A_to_Z%29/Stocks_B/threadview?m=tm&bn=1903&tid=1025357&mid=1025357&tof=-1&rt=2&frt=2&off=1
I tend to believe what it says here as the accounting rule changes really smog the finanical picture of the Banks. As I mentioned before the only indicator that the banks are back to normal is that they start increasing dividend payment. I guess that is still one or two quarters away for the banks that are able to repay TRAP.
I recall one of the small banks that I trade on OZRK. It seem to me a very well managed bank. It recently come down a lot because of a real estate loan went bad. But looks like its resistent is at $20 ~ $21. I want to remind myself that its current price may be a good entry point. But again the volumn on this stock is quite low.
According this article Bank of America Announces Exchange Offer For Certain Series of Preferred Stock, the owner of certain Bank of America prefer share will have the choice to convert their shares into common shares by June 24, 2009
The number of shares of common stock issuable for each exchanged depositary share will be equal to this consideration amount divided by the average of the daily per share volume-weighted average price of Bank of America common stock for each of the five consecutive trading days ending on and including June 22, 2009 (the second business day prior to the scheduled expiration date of the exchange offer). Bank of America will announce this common stock average price no later than 9 a.m., New York City time, on June 23, 2009.
One of the conditions of the exchange offer that must be satisfied or waived is that the common stock average price be $10 or greater.
I am thinking starting tomorrow the price of BAC will take into effect for the prefer-to-common share conversion. For Bank of America share the coming five days is probably going to be a battle between the prefer and common share holder? I think the prefer share holder certainly want to push BAC price down so that their prefer shares can worth more common shares. I am not sure if that make sense. The big prefer shares holders may be very motivated to short Bank of America and bring the price level down
Dr Doom Roubini speaks out today. The following are some of the minutes of his speech.
- Those aren’t “green shoots”–they’re yellow weeds
- The crisis isn’t over, and everyone has become way too complacent
- We’ll be in recession for another 6-9 months
- The recovery after that will be weak
- Big risk of a double-dip
- Households aren’t deleveraging
- Oil could go to $200 just as economy starts to recover
- Real interest rates could spike, killing housing, etc.
- Concern about hyper-inflation
- All this could lead to “perfect storm” that will clip wings of economic and financial recovery
- So we need to stay focused on averting disaster before we redesign regulatory architecture.
See original here
So Roubini or Buffet who is going to be right? Buffet was very optimistic. He called for the stock market bottom last quarter when the Dow was at around 8000 and it later dropped to 6500. Roubini called for the financial melt down more than a year ealier and he was right. Buffet was onto banks and he was right too. For most part their views may not be contradicted with each other. For example their views on the risk of inflation. But their views on housing seem to be different. Buffet was optimistic on housing market going forward. Roubini’s view was kind of depressed. Who do you believe.
I am more on Roubini’s side on housing because I just don’t think housing price will go back to 2006 without a major raise in wage. Banks will not provide those exotic mortgages again. Housing price went crazy during 2005 and 2006 majorly because of those exotic mortgages. No money down, stated income, 110% finance and reverse mortgage. Those things are not easily coming back.
As for inflation some economist think it won’t come until consumer borrowing increase. But consumer borrowing is still decreasing so inflation will probably come eventually but not that early. However inflation expectation will built into commodity price before the economy recover. Roubini predict “Oil could go to $200 just as economy starts to recover” that is about 6 to 9 months later. So it is probably a good move to load up the oil share like CEO or PTR now.
Banks in a short time will run up because some of them will repay TRAP and no matter what it will be seen a positive sign for the sector. Anyway I just want to jog down some of the ideas I want to keep in mind going forward.
I make some profit today and I feel comfortable with it. I said I didn’t want to trade option but I trade again. I sold USB put again. Next weekend will be the expiration day let’s see if I can pocket the $450 bucks. I said I want to be on the long side of banks but I took the short side when BAC was above $12. I trade a couple times and make profit. Another thinking I change is that I don’t want trading cost get into my mind and affect my decision whether to close a position or not. As long as I can make money net of commission I don’t want to care about how much it is.
Account Balance Change: +$196.98
In a previous post that I discussed whether technical analysis worked in stock trading I mentioned that Baidu’s price was going up simply because its price target was raised by Goldman Sachs. Looking at Baidu’s price now it stands at $304. If I brought its shares at that time I should have made good profit buy now. I didn’t buy it because Baidu share was too expensive and I can not follow my guidelines if I trade Baidu’s share and it happened that I was considering whether I was wrong not following guidelines. Because of the hesitation I missed an obvious earning opportunity.
Goldman Sachs was the major underwriter helping Baidu go public five years ago. Its opinion has been a major driving force behind the ups and downs of this stock. Next earning will be big because it is a good chance for the analyst to play a big game. Baidu’s valuation at this level is supper high compare to many other stocks. If Baidu miss analyst expectation it can trigger a streak of downgrades and Baidu’s price could be pushed back to $220 level. If they beat expectation the stock may go up a bit say 10% to around $330 and still analyst other than Goldman Sachs will downgrade it using the excuse of high evaluation. I am thinking may be I should watch out for any shorting opportunity after the next earning report.
There is still a long way to go though.
The other day I post a message on Yahoo stock message board to asked suggestions on what direction I should take going forward with regard to the 4000 thousand shares of Bank of America I bought. The average share price I get in is at $11.25. So it is under water and I didn’t know what will happen on next Tuesday. A few person on the board have suggested that I sell call options while I am waiting for the stock price to bounce back. Frankly I never traded options and I have always considered options were something I should never touch. But the suggestions really interested me. It is not the first time I hear that. As you can see Bob’s on comment on this post Wells Fargo Is Over Valued at $25.70
I’m a long term holder and will own it for the next 5 years or more. I see this as an opportunity to sell options against the stock. I recently sold June 28 calls @ 1.60 and I am willing to risk having some shares called away at 28.
So I have study the options trading procedure in my stock trading account. The minute I finished the study I felt it open up my eyes and I felt I have missed out some big big earning opportunities for the past 10 year when I was a long term holder of some of the stocks. But I really have doubt and I need some help to clearing them out.
Bank of America Jun Options Chain
I look at Bank of America’s June 20th call options. See the above picture.The bid pice of Jun 20th call option with stick price at $12 has a premium iof $0.61. My question is If I sell 40 this contracts (40 X 100 share per contact = 4000 shares) I can net 4000 X $0.61 = $2,440 doesn’t matter where BAC stock price is heading next Tuesday. Am I right?
My next question is if some time in the next few weeks before the option expiration day Jun 20th BAC’s price come above $12 then someone who purchased my calls will exercise the calls and pay me $12 per share for my 4,000 share. Am I right? When the buyer exercise the calls I can make 4,000 X ($12-$11.25)=$3,000. So if I decided to hold the $4,000 share potentially I can make $5,440 before Jun 20th but I can make $2,440 for sure. Am I right?
My third question is if I decide to hold past June 20th and I sold 40 contract of this calls. Do I need to do anything to close the option position. If the buyers do exercise the options to buy my shares do I need to do anything?
Thank you very much for help me out.
The following is the reasoning behind Bank of America’s upgrade by Goldman Sachs and Morgan Stanley which is posted in yahoo message board by a person named Perry, screen name tothemoon8. It seems to me it is from a professional analyst’s mind and I found it is quite convincing. Of course I buy into his view because I am holding 4000 shares of BAC. The strange thing I feel is I should’ve read it from news release of Goldman Sachs or Morgan Stanley instead of from Yahoo message board. Anyhow it found it help me firming my mind. I will certainly hold.
BofA, according to Barrons, orchestrated a brilliant stock sale to raise the capital that was mandated by the FEDS. Apparently a tremendous number of mutual funds and hedge funds were interested in the offer which required a minimum of 1 million shares purchased and BofA sold these shares off the market so that it does not disturb the stock price. Next, they rejected the stock issues to any funds that had shorted BofA in the past year (call it a pay back if you will) and last they require the purchasers to hold the stocks for a substantial amount of time.
According to Goldman and Barrons BofA’s stock offerings will conclude and finalize by the end of today. By next week BofA will announce that it has raised over $25 Billion from it’s stock offerings and asset sales which with the earnings that they have ear marked will close the gap to their $35 Billion capital requirments. Here are some interesting facts:
1) When BofA took over Merryl they also inherited 51% of BlackRock Group which manages over $1.3 TRILLION in assets. Imagine the fees collected annually on this amount.
2) BofA could easily say couple of years from today complete an IPO on Merryl again and hold 60% majority stake. This will make BofA and its shareholders an astounding stock price gain.
3) Over ONE THIRD of all daily ACH transactions completed in the U.S. goes through BofA.
4) As of today BofA has a nest egg of $178 BILLION for loan loss provisions and cash. When in the near future the economy turns around, unused loan loss provisions have to be accounted backward and be recognized as earnings… this is the event that will take the stock to $40 level and beyond. Which is why Goldman has now added BofA to their conviction buy list and Morgan Stanely upgraded BofA with a $32 price target.
5) BofA is still tracking a $38 Billion + quarterly revenue for this quarter which will net them between $3.5 to $5 Billion in income again which is massive by any standard. Why? They are borrowing money from the Fed at ZERO percent rate and lending it out at 500% to 600% profit. Also, the mark to market accounting rules all but gone, BofA and other banks get the breathing room to recognize the loss of some assets over the next few years as their earnings and income pick up momentum and off sets those book value losses.
It is from If you are longs check out this facts
Yesterday when I shorted 4000 share of Bank of America I was preparing to lost big because I thought Federal Reserve would play along with the banks and issue somewhat bullish meeting minutes to help the banks raising capital. I was wrong and I felt I was very lucky. I could easily lost several thousand dollar yesterday.
I guess the Fed looked at the reality and decided that it can not play along with the banks. The world is already very skeptical about the stress test result. The Fed just can push the limit further. If the Fed lost its credibility it will post serious damage to the market. I believe the banks’ problem is far from over. It is not over until one day they start declaring regular dividend again. By that time the banks evaluation will be based on the projected dividend stream. Right now the market just claim whatever price they think the banks worth. Price of Bank of American can go back and forth between $10 and $15.
In fact we can see the realty from the statistics no matter how the banks spin them. Our GDP was down more than expected last quarter, unemployment rate is higher, foreclosure is more, home price is still going down and consumer credit is still deteriorating. Former Fed chairman Greenspan has the following comments lately
There is still a very large unfunded capital requirement in the commercial banking system in the United States and that’s got to be funded.
Home prices will only start to stabilize once the liquidation rate of single-family homes has peaked. I don’t think we’re there yet.
until the price of homes flattens out we still have a very serious potential mortgage crisis
Things are definitely improved but not as rosy as the picture that Bank of America CEO painted
I posted on yahoo Well Fargo Stock board that the more I thought about the banks upgrading the more I felt it was a skim for the banks to upgrading each other so that they all can make money underwriting billions of new banking shares. There are still more to come after WFC and USB so they have to pump the market to finish their job. Once they are done they may manipulate the market downward. The recent bank rally and upgrade just show how easy the stock market can be manipulated. The government tries to manipulate it. Investment banks try to manipulate it. Big investors try to manipulate it.
Reply has it that event if what I say is true what chance do I have trying to fight the tide. I think no matter how irrational the market is it can not derail too far from reality isn’t it? I know I was wrong on taking a huge short position just two weeks ago. Now I am really tamped to fight the tide again. I really shouldn’t take more short position to make the same mistake again.
I think I should just wait and see how my current short position turns out to be at the end of this week.
News has it that Citi Bond Sale Shows Strength
This is the first time the financial institution has sought financing away from the protection of the Federal Deposit Insurance Corp.’s Temporary Liquidity Guarantee program begun in November. Demand was strong, with orders exceeding $6 billion, according to one person familiar with the deal.
I don’t feel surprise to see any of the 19 banks participating the stress test are able to sell bond without FDIC’s protection simply because the Fed chairman 
mentioned in the public that none of the 19 banks are allowed to fail. Why would anyone need FDIC’s protection when the Feb is standing behind? At the same time the government said that only banks that are able to sell debt without FDIC’s protection are able to repay TRAP. With this contradiction I am not sure if this a good news for for Citi group and the banking sector. Basically any of 19 banks that don’t need to raise capital will be allowed to repay TRAP it is a matter of whether they want to do so. And the ones that do so will certain stand out of the crowd.
