Stock Traders Blog

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

Yesterday I was bold enough to vouch Bank of America’s stock price would rise today because future was up all last night and the sentiment on Bank of America is very bullish. But Oops! Citi group downgraded it and lower it price target. Bank of America stays at the same price while the DOW is up more than 170 points today.

Another report strikes me with an Oops. Michael Jackson is reported death in Los Angles. Just a few weeks ago his long expected concert in England was over subscribed like the shares of BAC. Man, you have to admit stock price and life are equally unpredictable and they are equally fragile.

Having said that I felt it is such a pity that Jackson’s life ended up like this. I knew about him and I was fascinating about his music when I was a teenager living far away from this country and hardly speak any English. He could’ve been the most influential figure in the world and his fame and wealth could’ve easily surpassed any other super stars like Salin Dyon, Micheal Jordon or Tiger Wood if he were able to manage his life well. My impression about him was handsome, energetic, dynamic and full of potential but he ended up as a weird, sick person in my mind. I have no doubt the lack of a decent family, friendship and mentor causing him to go a skew life path.

Going back to stock it is easily for us to go a skew path in trading too if there is no decent family, friendship and mentor that we can consult with and that may be a reason I run this Blog that I don’t even realized before. Feel free to drop a line if you have an opinion.

Yesterday I bet Bank of America would rise above $14 today. It is definitely not going to happen. Because Citi group’s Keith Horowitz just downgraded Bank of America and lower its price target. If it is not for the downgrade $14 today is not out of reach as the prefer to common share conversion of Bank of America is over subscribed and Bank of America has surpassed the government’s capital raising requirements as I expected.

Well I guess, Keith Horowitz the analysts at Citi Group who downgraded Bank of America must have work with some investment banks which took a short position on Bank of America yesterday. =) It is just a wild guess. I think for whatever reason the downgrade is stupid. It hurt the sector including Citi itself. If I were him I would at least postpone the downgrade tomorrow. That will make more sense evaluation wise. Because without it Bank of America will be above $13 today for sure and downgrading it tomorrow will absolutely shake the market and show the power his opinion.

Bank of America closed at the same price as yesterday. I am still holding it so there is no change on my account balance. I am kind of in waiting mode right now. I am waiting for BAC to bounce back so that I can recoup my loss and start trading again. I feel BAC may not be a good candidate to trade since it is kind of unpredictable to me. I feel USB is more predictable.

I am holding 2000 shares of Bank of America. Of course I am trying to rally the share holders of BAC and I post the following message on the BAC board on Yahoo.

If the conversion goes well and reach BAC’s capital raising target I believe BAC will run to $14 if data released tomorrow is not out of line. I bet on the data side a bit short of expectation will not affect BAC’s running up because the conversion price is at $12.75 as I remember. If capital raising target is met it will mean prefer share holders are bullish on BAC and it will trigger a big run up tomorrow.

If BAC announce that prefer share holders are not so enthusiastic about the conversion then longs like me will be in trouble. But I believe the investment banks will recommend prefer share holders tendering their prefer shares for conversion and I believe the chance of a successful conversion is high.

I am looking forward to seeing BAC above $14.00

http://messages.finance.yahoo.com/Stocks_(A_to_Z)/Stocks_B/threadview?m=tm&bn=1903&tid=1046900&mid=1046900&tof=1&frt=2

After I bought 1000 shares of BAC yesterday at $12.76 S&P downgraded 18 US Banks today. The news together with FedEx’s depressed earning report drag the market down. The Dow was down 30 points not long after opening. It came back up in positive territory later. Inflation was in check but it does seem to help. Bank of America dropped more than its peers. I feel I am getting slap on both side of my face. A couple days ago I lost more than a thousand dollars by shorting BAC. Now I lose again because I am buying BAC.

I think Bank of America dropped more than its peers for several reasons. First it rose substantially for the fast couple days. The higher it flies the harder it drops. This rule seems always apply. Option expiration this week also weight on price. The max pain for Bank of America June option is $11. There is a popular view that stock price will trend toward the max pain when option expiration is getting close. The view is based on that institutional traders will manipulate stock price toward max pain so that they can maximize the profit they get on writing options. Bank of America has other reason to go down because the trading price this week will determine the prefer share to common share conversion price. I believe Bank of American doesn’t want to set the price too high to dampen the conversion interest.

But As I mentioned previously I expect BAC will rise after the conversion. That’s one of the reason I am still keeping it. In addition to BAC I also bought Patriot Coal Corporation (PCX) today. I bought it at $7.55 so I lost a few hundred dollars on this one too.

My account balance is not going anywhere one month after I setting up this blog. I really hope this blog can provide values other than entertainment. I don’t know where this blog will standard a few months later but I truly hope this is a long last endeavor.

My account balance stood at 28,807.69

Account Balance Changes: -$920.30

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.

It is the third day I hold the short position of Bank of America. I never hold a shorted position that long. The last record I held a short position was on Wells Fargo. I held it over the weekend for two trading days. I don’t feel comfortable holding short position for long as I know very well the potential lose being on the short side is unlimited.

I threw towel and took lose on Bank of America covering 2000 shares of short position at $13.30 and losing about $1600 on that trade. Frankly I was thinking about to go long on BAC today. Because I feel it still has momentum. Its price didn’t go down as much as many other finanical stocks today even after a big running up. Basically I dare not to be on the short side unless I find the price is extremely outrageous. It is the third big lose I got by being on the short side and I really don’t want that happen again. I was looking at a few stocks to long on. BAC, USB, WNR, and ATP. I am still holding a sold put position on USB and so I don’t want to long on it again. I want to see how the options work out on expiration day which is this weekend. If it works as expected then my account should go up $300.

WNR and ATP’s current price are all below their recent secondary offering prices and WNR even got an upgrade today. But WNR didn’t react positively so I decided to buy 1000 shares of WNR in hope that it will react to the upgrad tomorrow. If the market goes netural tomorrow I bet WNR will be back above $8.50. From the graph looks like the $8 is its support. Hopefully that will work out.

My account balance is currently below $30,000 which is my revised initial capital

Account Balance Change: +$700.12

Bank of America keep getting upgrades from analyst and its stock price keep going up. My lost keep increasing. I really don’t know what it is going to be like next Monday. Yesterday I regretted that didn’t short more at $13.20. Today I felt I was lucky that I didn’t do that. When Goldman Sachs and Morgan Stanley upgraded Bank of America their target price was too far out of line and nobody really believe into it. But it doesn’t matter what BOFA’s fair value is if the same view is repeated multiple times by different people then we find it is easy to believe into.

In other words this really tells us no body really understand how much Bank of America worth and no body really understand its book. We just know that the majority of the people looking at Bank of America and believe its price will go up and up. My lost increase about $1,300 more and my account balance is way below its initial value of $30,000. I believe a big pull back will happen sometime next week I just don’t know at at what price the pull back will happen. I feel the chance it going back to $12.50 is pretty small now.

Again it is the fault of taking short position in the first place.

Account Balance Change: -$1310.00

My Account was up about three hundred dollars. I sold VRSN at $19.37 at market open. I sold it too early. It ever went up to above $19.80. But as I mentioned in my previous post Verisign was down because of a pricing fixing law suite and I believe the law suite has a lot of merits. If it went down more I wouldn’t feel surprise. I am glad I make money on that deal.

I made some profit on trading Bank of America mostly by shorting it above $12.30 and covering it in $12.20 level. I feel Bank of America wanted to go up for another step however its peers (USB, WFC, JPM) didn’t want to. And that eventually drag Bank of America down. In fact Bank of America was ahead of its peers most of the day. At the end I was holding 1000 shares of Bank of America at $12.06. Bank of America was down really fast in the late session. When I set up the order to buy BAC at $12.06 I was thinking BAC was very strong during the day and if it went down to 12.06 it could quickly went back up. But it didn’t went backup and stayed closer to its peers.

I feel the upward expectation on Bank of America is still high and mostly it will open higher to $12.10 or above in pre-market tomorrow. If economic data released tomorrow is not too far out of line I think the bank sector should rebound a little. If all data beat expectation I feel Bank of America can jump ahead of other banks again. The gain shown on my account today included gains on the USB puts I did not close yet. I mean to hold it pass the expiration date which is next weekend and pocket the total proceed of $450. Excluding the gain on puts my profit was about $240.

Account Balance Change: +$343.09