(BAC) Archives

My Favorite Stock to Short

Troubled Bank of America (BAC) certainly earned its title as the premier Dog of the Dow last year. It managed an appalling 58% decline in 2011, the worst of any of the 30 Index stocks. It only managed to stay above the crucial $5 level by a hair?s breadth, below which many pension funds are barred from owning shares.

Since the beginning of this year, it has been the best performer, soaring 48% from $5.60 to $8.30. Will this eye-popping turnaround continue?

I think it is more likely that the enormous Lake Tahoe outside my window freezes into a gigantic mango smoothie.? Its credentials as a ?zombie? bank are as good as ever, and it will continue to play a leading role in the horror story our financial system has become.

(BAC) has become the poster boy for ?too big to manage?. The bank is still, by many measures, the largest in the US, with $2.3 trillion in assets, 288,000 employees, 5,900 branches, and 18,000 ATM?s. One out of two Americans are said to have an account at the North Carolina based institution. The $84 billion market cap company earned a penny a share last year, giving a price earnings multiple of a mind blowing 802.

The problem is that the company is so gargantuan that by the time information filters up to the top, it has become old, irrelevant, or even dangerous. It seems to want to plunge into every ?flavor of the day? strategy, which is always fatal for any organization that turns with the speed of a supertanker.

It plunged into proprietary trading in the early 2000?s, despite a woeful lack of talent to execute. Its 2007 purchase of Countrywide for $2 billion saddled it with a loan book so toxic that it still may not survive. It paid $50 billion for Merrill Lynch, when, if the positions were marked to market, it would have been worth only $1 or less.

Bank of America is a deer that can?t stay out of the headlights. Any online search about the company reveals a litany of problems, including mortgage fraud, robo signing, SEC sanctions and fines, municipal bond fraud, an ill-fated $5 debit card fee, and litigation up the wazoo. Oh, to be their outside counsel. Kaching!

The company recently announced disappointing earnings driven by falling revenues and rising costs. Their financial statement offered a panoply of special items, with prominent distressed assets sales used to cover losses. It is literally eating its seed corn to keep from starving to death. (BAC) attempted to pay a dividend in 2011, but that was nixed by the Federal Reserve due to its TARP obligations.

The size of the market that can meet their rising credit standards is shrinking dramatically, thanks to a 30 year long squeeze on the middle class. They might as well be a buggy whip manufacturer. The cost of regulation is skyrocketing. This is why I went on national TV last May and pounded the table to get viewers to sell it short at $13.50.

Despite the whopping great rally in the share price, they are trading at a big discount to book value, meaning that investors think the bank is still carrying large, unrealized loan losses on its books. Now Moody?s has threatened to downgrade the bank?s credit rating a couple of notches, which would increase its borrowing costs substantially. They are truly caught between a rock and a hard place.

I am not one of these glum guys who think that Bank of America will go bankrupt. That was a 2008 story. Don?t worry, your deposits are safe. It is far more likely to get broken up. First on the block will be Merrill Lynch, which is worth more today than in the dark days of four years ago. Think of it as (BAC)?s General Motors. Management is also making noises about withdrawing from Texas and other major markets.

There may be a time for a true national bank in the US, but that time is not now. Not when they play at being hedge funds on the side without the slightest idea of how to do so, and then blow up with your money inside, requiring taxpayer assistance. But there is a trade here for the nimble.

This is the really interesting part. Bank of America has become the favorite whipping boy of the high frequency traders. Because of them, its shares frequently accounted for 10% or more of NYSE volume last year. They have increased the volatility of these shares dramatically.? As a result, (BAC) is one of the highest beta large caps in the market.

What does this mean for the average punter working behind a PC (or Mac) at home? That a rapid 50% jump in shares is likely to be followed by a sudden 25% plunge. At this level, it has become the classic ?heads you win, tails I win 5X? situation if positioned appropriately.

The algorithms are lurking out there just waiting to pounce on this pitiful stock like a hungry leopard. Take a look at the chart below, and the setup is as clear as day. Despite an (SPX) that ground up to new highs nearly every day last week, (BAC) stock has begun rolling over like the Bismarck. Get a serious ?RISK OFF? day in global assets, and this thing could dive like a kamikaze.

No surprise then that (BAC) has become my favorite stock to sell short.

February 22, 2012/by DougD

Use Apple Timing to Short Bank of America Stock

Diary

There is a method to my madness.

It?s all about Apple (AAPL). A disproportionate share of the market volume has been pouring into Apple shares for the past two weeks. The higher it went, the more people wanted to buy. Just in the past week, the company has tacked on a staggering $75 billion in market capitalization. The action in the call options has been absolutely explosive.

The focus of the US stock market distilled down to not just a single sector, but a single stock. This kind of concentrated price action is a classic indicator of a market top. When Apple rolls over, the rest of the market will follow it down. Apple has pulled this off while virtually every other asset class is showing their own topping formations, including most other stocks, the euro, the yen, copper, gold, silver, and even the ags.

When I started my February 15 webinar at 12:00 noon EST, Apple was going gangbusters, up $15 to $525. By the time I finished, it had plunged $15, suggesting the short term top is in for the sizzling, innovative company. A rumor swept the market that Apple?s weighting in the NASDAQ would be diluted once again, which would be highly negative for the share price.

So am I going to sell short Apple stock? Heavens no! I love Steve Jobs? creation. I still think it will hit my long term target of $1,000 sooner than later. In fact, I just bought a new solid state MacBook Pro with all the specs maxed out and I am picking up my IPhone 4s on Friday.

Instead, I am going to use Apple as the signal for my cross market timing, and then short a stock I hate, Bank of America (BAC). This is one of the top performing stocks of 2012, soaring some 50%, in six weeks. Despite that move, it is still trading at a huge discount to book, meaning that traders think the company is lying through its teeth about the true extent of its loan losses.? Its shares are beating Apple by an almost 2:1 ratio this year, which has jumped only 28%. How perverse is that? The two companies are almost mirror images of each other. Think future versus past, booming versus broke, good versus evil, $525 versus $8.

The best run hedge funds use this type of cross market signaling all the time. I saw it constantly on the trading floor of Morgan Stanley. It is a great way to capture laggards and move into the highest beta names when a market reversal is imminent.

When I am in a selling mood, I want to sell the most expensive stock in the market that has had the most blistering recent gains. That describes (BAC) to a tee, which is nowhere near solving its structural problems and still has a declining real estate market to deal with.

I chose to buy puts on (BAC) instead of the (SPY) because you always get much greater volatility in individual names than an index has a whole. Look at (BAC)?s performance this year. A 7% rise in the (SPY) brought a 50% gain in (BAC). That kind of volatility works on the downside too. A single stock will outperform a basket every time. That?s how you maximize your bang per buck on the put options.

Check Out Bank Of America?s New Logo

February 15, 2012/by DougD

What?s Up With Gold?

Diary

Have you ever held a basketball underwater in a swimming pool and let go? It flies to the upside and pops you in the nose. That is exactly what gold is doing now. After the barbarous relic peaked at $1,922 on August 24, it traded like an absolute pig, giving up 20% in a matter of weeks. I managed to coin it with a couple of quick in and out trades in (GLD) puts, some doubling over a weekend. So much for the ?safe asset? theory.

You can thank hedge fund titan, John Paulsen, for the action. John gained international notoriety when he earned a $4 billion bonus after making huge bets against subprime loans going into the housing crash.

Since then, his touch has grown somewhat icy. He started out 2011 with a huge, bullish bet on US banks, a play, I confess, I never really understood. This was back when Bank of America (BAC) was trading at a lofty $14/share. As a hedge, he backed up these gargantuan positions with big holdings in gold, which quickly made him the largest owner of the ETF (GLD).

John?s P&L held up reasonably well during the first part of the year. As the banks faded, gold went from strength to strength, limiting his damage. That all changed on April 29 when global financial markets flipped into ?RISK OFF? mode and gold melted along with everything else. Its hedging capability proved to be nil. By August, John?s losses approached a near death 50%.

Needless to say, his investors failed to see the humor in the situation, and rumors of cataclysmic redemptions started sweeping the street. By implication, this could only mean large scale liquidation of the yellow metal. This was happening when the rest of the hedge fund industry was catching daily margin calls, forcing them to dump even more gold into a downward spiral, their best performing holding for the year. When the sushi hits the fan, you sell what you can, not what you want to. By the time the carnage ended, gold was down $392.

When the crying was over, Paulson had reduced his ownership in the ETF (GLD) from 31.5 million shares to 20.3 million. That?s a haircut of $1.76 billion of the shiny stuff. In the end, Paulson says he only suffered redemptions of 10% of his somewhat reduced funds, much lower than expected.

Gold actually anticipated the new ?RISK ON? trade by a week, bottoming on September 26. Since then it has behaved like a paper asset, tracking the S&P 500 almost tick for tick, adding a quick 19.6%. So, what?s up with gold?

As we approach yearend, the downward pressure of this redemption selling is waning, hence my basketball analogy. New bull arguments have also come to the fore. The contagion in Europe has prompted massive buying of all precious metals by panicky individuals, including silver (SLV), platinum (PPLT), palladium (PALL), and even neglected rhodium, with a collapse of the Euro imminent. And how will the ECB eventually end the crisis? With a continental TARP and quantitative easing, which we here in the US already know is hugely positive for gold prices.

How far will the gold get this time? The gold bugs say we?re going to break the old high and power on through to the inflation adjusted high at $2,300. I?m not so sure. I am not willing to bet the ranch here on an asset class that could plunge $1,000 going into the next recession, which could be just around the corner.

But there may be a trade here in precious metals space for the nimble. My pick has been to buy lagging silver, which offers much more bang per buck if the sector starts to build a head of steam. The white metal will not get hit with IMF gold sales, which are also a rumored part of any European bailout package.

November 15, 2011/by DougD

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