Which Banks Will Pay?
I said yesterday that it was tough to imagine Bank of America (NYSE:BAC) reporting good numbers this morning. And sure enough, Bank of America didn’t report good numbers.
In fact, BofA reported really bad numbers. At least that’s how I see a $1.4 billion quarterly loss. Apparently I’m in the minority, though, because BofA stock is up slightly this morning. But I think I can shed some light on why BofA isn’t getting hammered today.
To achieve its $1.2 billion loss, Bank of America wrote down as much value as it could. It wrote down $2 billion in value for its mortgage unit, otherwise known as Countrywide.
As an aside, that has to be one of the worst acquisitions in business history. It has to be up there with Daimler buying Chrysler or Time Warner taking on AoL. I bet the Chinese group that bought GM’s Hummer division is in the running, too.
BofA valued Countrywide at $4 billion. I don’t know the specific number, but Countrywide has cost a lot more than that. All told, the mortgage unit formerly known as Countrywide lost $4.97 billion in the fourth quarter.
And you wonder why former CEO Ken Lewis got fired. That Lewis’ severance was worth $125 million is, ummm, something.
*****Anyway, I suspect that Bank of America is holding up fairly well on the assumption that all the write-offs it took last quarter will mean fewer write-offs in future quarters. And who knows, maybe that means one of those quarters will be profitable!
All kidding aside, I really wonder how quarterly result from BofA and Citigroup (NYSE:C) will play before the “dividend committee.” It’s tough to imagine these two getting the green light.
JP Morgan (NYSE:JPM), on the other hand, looks like the best choice to get approval for dividends. If you want a financial stock, JP is probably the one right now.
*****I received an email from Michael G. that works as a segue:
I just read you daily comments and though interesting, there were no real directions as what to do now. I was stopped out of 60% of my account do I go back in now or wait?
I’m sure Daily Profit readers have noticed that I have been talking about a correction for stock prices over the last few weeks. And Wednesday’s action could well have been the start of a corrective move for stock prices.
Recall that Apple (Nasdaq:AAPL) and IBM (NYSE:IBM) reported blowout earnings Tuesday night. IBM is still holding its Wednesday morning gains. But Apple gapped higher and has been trending lower ever since.
To me, this is important. Apple’s numbers were just ridiculously good. Why would anyone sell the stock? Sure, there’s Steve Jobs health issues. But frankly, that doesn’t cut it when you look at Apple’s valuation and growth.
We could also take a look at what happened to F5 Networks (Nasdaq:FFIV). The company missed revenues by less than $2 million, lowered guidance a little, and got slammed for 20% or so, with the stock losing $30 a share on huge volume.
F5 has been one of the hottest stocks of the last year because it helps companies manage data traffic, which is huge business now that handheld Internet devices have exploded onto the scene.
My point here is that the sell-off that started Wednesday was lead by some of the strongest momentum stocks. That, in my opinion, is a warning sign. Not that the economy is about to tank or anything like that. Just that the institutional money is moving out of popular stocks and taking profits.
*****Now granted, today is January options expiration. And some of the red we’re seeing on the Nasdaq is a result of options.
But I don’t think that means it’s all clear after today.
The parallels between the correction that may be brewing right now and the one we got last year are amazing. Last year, stocks started selling off the day after IBM reported. Same thing happened this year.
Last year, China was part of the backdrop for the correction. Slower growth from China was expected to affect global demand, so investors sold stock. Right now, inflation in China (and Brazil, and England, etc.) is part of the macro picture. And even though it hasn’t appeared as a major catalyst, it may yet. Corrections have a way of seeking out bearish news to justify the selling.
Oil has sold off, gold has sold off, commodities are down. Top performing sectors today are energy, telecom and utilities. Two of these sectors are defensive, which tells us that institutional money is seeking out stocks with very reliable earnings. And that doesn’t bode well for the momentum trades.
*****I know many investors don’t like to hear it, but the stock market really is all about momentum. Great valuations are worthless if no one is buying the stock.
We can also observe that momentum tends to rotate around the sectors of the market. Energy stocks might get hot, then it’s tech, then commodities
And so on.
But one thing that’s very clear is that once momentum leaves a sector, it doesn’t usually return quickly.
*****So my answer to Michael is: I think you should wait before re-loading the stocks where you’ve been stopped out. If you were stopped out over the last couple of weeks, you’ve no doubt made some good money. I see no reason to put your gains at risk by jumping back in before we see if this correction has legs.
Last year, the S&P 500 sold off 9%, from a high of 1,147 on January 20, 2010, to 1,044 on February 5, 2010. A similar decline this year would target 1,205 on the S&P 500.
Arial","sans-serif";">Of course, if we do see good old fashioned correction, we would be poised for a very nice Spring rally.
Last year, the S&P 500 went on a phenomenal rally from the February 5 low, gaining 16.7% to 1,219 on April 26, 2010.
I hope that helps…
