Tuesday, July 19, 2011

MainePERS Can't Get Enough

Bank of America earlier this morning released its latest quarterly earnings report. "Earnings" may be a misnomer, as the company lost $8.8 billion in its second quarter. In case you just drove through a dead zone, let me repeat. Eight-point-eight BILLION. The company's earnings presentation appears here.

The slide to which we should pay particular attention is this one:

[click to enlarge]

The company is required by regulators to accumulate capital as a cushion against any future liquidity crisis similar to what occurred in 2008. As a "a systemically important financial institution" (SIFI), Bank of America must achieve a 9.5 percent ratio of capital to risk-weighted assets between 2013 and 2019. But as the chart above shows, the Tangible Common Equity Ratio actually contracted in Q2 to less than 5.9 percent. The company now expects a ratio of no more than 7 percent in 2013, which would still leave it $50 billion short of the Basel requirement.

According to Bloomberg, Oppenheimer & Co. analyst Chris Kotowski believes that Bank of America will be hoarding cash until at least 2016 to reach the 9.5 percent goal. That means no dividend increases for shareholders. In fact Kotowski does not rule out a share offering, which typically depresses the share price. “Bank of America’s capital position relative to peers creates dilution risk,” wrote Kotowski in a June 30 research note. “While we aren’t certain that an equity raise will actually happen, the risk is certainly there.”

The company's stock, which trades under the ticker symbol BAC, has been getting crushed. The stock price slid from $13.33 per share at the beginning of April to $10.96 at the end of June, a drop of 17.8 percent during the quarter. Managers of the MainePERS investment portfolio fell for the value trap and bought 63,358
more shares during that same period. As the quarter drew to a close, MainePERS held over 2.6 million shares. That's when Bank of America announced a $20.4-billion hit to its balance sheet. Talk about buyer's remorse.

The rout has continued into the third quarter. On Friday BAC traded briefly under $10, triggering the following playful headline at Zero Hedge:

Goodbye Teenage Wasteland: Bank Of America Pulls A Benjamin Button, Reenters Single Digits

By the close of trading on Friday, the stock recovered to precisely $10.00. With options expiration now out of the way, price support has vanished. Yesterday, the stock closed at $9.72, a level last seen in May 2009.

BAC, one-day chart (07-18-11)

This morning's earnings release did nothing to revive the stock, which has lost another 15 cents on the day. That means that BAC has lost 12.7 percent of its value just in the twelve trading days of July. For MainePERS, that is a loss of over $3.6 million, or $300,000 every day the market has been open this month. Does anyone know what KA-CHING sounds like when played backwards?

BAC, 6-month chart

Even the Vampire Squid, Goldman Sachs, is struggling. The investment bank's quarterly earnings report, also today, was not much better than Bank of America's. The Lex column at Financial Times sums up the industry's challenges this way:

If an interminable period of declining asset prices is the first Japan-like problem for US banks, the second is the effect of deleveraging on economic activity. Goldman Sachs, like any business, needs enthusiastic clients to make money. That underwriting revenues fell by a 10th versus last quarter, equities trading by a third, and fixed income, currency and commodity trading by twice that, suggests an increasingly nervous client base. Likewise, reversing the downward trend in net interest income at BofA (almost a $1bn less this quarter) and other banks will only be possible if an improving economy causes interest rates to start rising again.

Todd Harrison at Minyanville offers the chart below to illustrate how the banks (reflected in the BKX index, white line) are lagging the broader market (SPX in orange):

[click to enlarge]

Finally, just one more picture to show Bank of America (blue line) lagging its peers:

[click to enlarge]

BofA is the worst of a bad breed, and we Mainers own more of it now than we did three months ago. Let's raise our Shipyard Summer Ales to celebrate. Bottoms up.

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