Dangerous Times Ahead for One of America’s Largest Banks
Wednesday, November 23rd, 2011
By Michael Lombardi, MBA for Profit Confidential
Back in October of 2009, I wrote a scathing editorial in the pages of PROFIT CONFIDENTIAL on my dislike for Bank of America Corporation (NYSE/BAC) stock (Why I Don’t Like the Bank Stocks). Back then, Bank of America stock was trading at $17.00; today it trades at $5.37. I still don’t like the stock.
The housing bubble has cost Bank of America about $40.0 billion so far. But its problems are far from over.
Firstly, Fannie Mae wants it to buy back some loans it sold to Fannie Mae, because Fannie says the loans have defects. If Bank of America doesn’t buy back the troubled mortgages, it could face penalties.
Secondly, regulators have taken a tough stance on the bank. Regulators want more action on the part of the bank to strengthen itself. If the bank doesn’t appease the regulators, it could face enforcement action or more penalties.
Thirdly, the executive offices at the bank have become a revolving door: two CFOs, two chief risk officers, and eight new directors in two years.
To add to their existing problems, the Federal Reserve just announced tough capital stress tests for the largest banks in America, including Bank of America. These tests are to try to prevent future failures from “shocks” to the system. I would say this is about a decade too late.
This pressure to keep capital means that no new dividends or buy-backs will be available for shareholders for a while. Do you want to keep your money tied to a firm that is under such strain and pressure?
Bank of America has consistently failed to live up to expectations. How many chances would you give a company? How much of your hard-earned money do you need to lose before you say enough is enough! Until the company shows investors that it has a plan and can stick to it, avoid the stock.
Bank of America is the second largest U.S. bank in terms of lending. If the government keeps tightening the strings at Bank of America, it could ultimately end up needing to bail out the bank. The bank is putting out fires, as opposed to focusing on operations. Bank of America’s balance sheet has been shored up by selling assets as opposed to expanding profits.
How about the long-term future? Bank of America has been selling assets to raise capital, including its ownership in China Construction Bank. There are several worries about these asset sales. For example, the assets are currently at depressed prices, so only someone desperate would want to dump their stake now.
Another question: just how bad a shape is Bank of America in if they keep selling and selling assets? The final question: where does this leave them for the future? If all of your growth assets are sold, what’s left? A stale, no-growth firm that appears to be desperate for cash.
Some may say this is a “cheap” stock, sitting just above $5.00. Don’t let the low price fool you. If this were such a good deal, why aren’t other smart investors buying? Because they’ve been selling, and continue to do so. Do you want to be the hero to try and hold this stock up all by yourself? I wouldn’t and I’m letting the price action tell me what to do; it’s saying “Stay away.”
So, let’s see; we have the upcoming stress tests in the beginning of 2012, negative profit margin, a heavy debt load, executives that keep shifting around, and a company tied completely to the U.S. economy, which is in bad shape and appears to be getting worse. Does this sound like a good investment idea?
The failure of Bank of America—to me, “failure” is the government bailing them out—is a possibility. It would be a catastrophe to already damaged American consumer confidence, but it could happen. At a stock price of $5.37 and falling, the market is telling us that this bank is in trouble.
Next Post: How the Catastrophic Events in Europe Will Affect Your InvestmentsPrevious Post: Guess Who’s Next on the Bailout List?
Tags: stock market, U.S. banks, U.S. economy
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Michael bought his first stock when he was 17 years old. He quickly saw $2,000 of savings from summer jobs turn into $1,000. Determined not to lose money again on a stock, Michael started researching the market intensely, reading every book he could find on the topic and taking every course he could afford. It didn’t take long for Michael to start making money with stocks, and that led Michael to launch a newsletter on the stock market. Today, Michael only employs the top market analysts and editors. Some of our recommendations have posted gains in excess of 500%! Michael has authored and published over one thousand articles on investment and money management. Along the way to building Lombardi Publishing Corporation, now with over one million customers in 141 countries, Michael became an active investor in real estate, art, precious metals and various businesses. Readers of the daily Profit Confidential e-letter are offered the benefit of the expertise Michael has gained in these sectors. Michael believes in successful stock picking as an important wealth accumulation tool. Married with two children, Michael received his Chartered Financial Planner designation from the Financial Planners Standards Council of Canada and his MBA from the Graduate Business School, Heriot-Watt University, Edinburgh, Scotland.Follow Michael and the latest from Profit Confidential on Twitter
