Stock Traders Blog

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 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.

I post on Yahoo message board yesterday that BAC would advance together with other big banks today. It didn’t happen although other big banks like JP Morgan, Wells Fargo and US Bank Corp were indeed bid up by investors. Their closing price on last trading were proven to be attractive to many investors. They opened higher even before the better than expected consumer sentiment news.

However there was too much selling pressure on Bank of America. I lost patient and unloaded 2000 shares at $11.05 and unloaded another 2000 share at $11.10. In the mid of the day after I sold all my BAC shares its price ever went up above $11.20. I regret I sold but felt I took the right move when I saw how it closed. It seemed to me investors were not buying into the upgrades on Bank of America and they all viewed it as an opportunity to sell. The idea of more than 500 million new shares offered at $10 was not so easy to be digested in a few days. I thought about the scenario that people were going to take profit tomorrow on other big banks following today’s big run and decided not to keep BAC. The chance that Bank of America going further down tomorrow would be big

I did some trades back and forth on US Bank Corp after I sold Bank of America and at the end I maintained 300 shares of short position on USB which I entered at $19.04. I felt a run up of 6.5% was too much and I hope it will retreat a bit when it opens tomorrow morning. At the end of the day my account was up $133.84. It is really not an exciting day.

Added at 3:20PM
I looked at Bank of America’s price and thought it might be a good idea to buy some shares. So I bought 600 share of BAC at $10.94. I am thinking tomorrow if the banking sector tanks I will add some more BAC and take profit on USB. If the banking sector continue to advance I don’t think BAC will be left out again. We will see tomorrow.

Account Balance Change: +$133.84

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

For the past few weeks I almost always playing on short position of the bank stocks because I believed the recent banks run up was too much and being on the short side had more chance to make money. I was right most of the time except the Well Fargo bet which caused me to lost more than nine thousand dollars. Now the Federal Reserve has presented to the market some reality and the world market retreated. I feel that maybe a buying opportunity and here is what I think.

There are still many market participants that are not convinced by the Fed and they are more buying into the view that the banks problem is behind us. They may also see it as a buying opportunity. It is the second down day after the Fed released it minutes. People hope the market will go up tomorrow.

The average offering price of Bank of America’s new shares was $10.77. From the past two days’ trading I saw the market hope to trade it at a price close to $12. Even today when the DOW dropped 1.5% its price only went down a little bit at close and it was traded higher in after market. In fact it was traded above yesterday’s closing price most of the time today.

I don’t plan to hold Bank of America for a long time. If a big sell off is coming I don’t think it will come tomorrow. There are no data released tomorrow. It doesn’t seem that the world market will be over reacting fallowing US market’s drop. I feel it is kind of save to hold BAC till tomorrow or maybe a bit longer.

I took a big long position in banks and I didn’t feel I am gambling. I am 80% sure I will make some profit of the position I have today. I shorted 2000 shares of BAC in the morning at about $11.85 but I covered it too early at about $11.75. Close to the end of the day I bought 2000 shares of BAC at about $11.45 and 1000 Share of USB at about $17.99. My account balance is up almost $200 when calculated using the closing price

Account Balance Change: +$195.35