Friday, September 2, 2011

Island in the Stream

BAC, 3-month chart

For those long Bank of America stock, today's price action was troubling. BAC gapped down without retracing to Thursday's price range, creating an ominous chart pattern known to technical traders as an "island reversal." Such a reversal typically ushers in further downside. Notice in the chart above that there is a six-bar plateau to the far right that is completely detached from prices both before and after. That is the island.

The original gap up came on the news that Warren Buffett is lending $5 billion to Bank of America. Interpreting the infusion as a signal that it was safe to get back in the pool, investors did cannonballs, bidding the common stock up by 20%. So how has the news flow on BofA been since? Funny you should ask. First, the firm continued its fire sale of non-core assets, liquidating half its stake in China Construction Bank for $8.3 billion. So much for the CEO's earlier protestations that BofA already had plenty of cash.

Then it was announced that the FDIC is objecting to the pending BNY Mellon settlement, which, if approved by the courts, would obligate BofA to disgorge $8.5 billion for toxic mortgage-backed securities sold by its Countrywide division years ago. The FDIC's intervention may delay or even scuttle the deal. Or it may raise the price tag. While the CCB sale was sized just right for now, it won't be enough to cover a more expensive settlement.

Want more bad news? You got it. U.S. Bancorp is suing BofA over $1.75 billion worth of sour Countrywide mortgages. But that's chicken feed compared to the $58 billion sought by the Federal Housing Finance Agency for mortgage securities peddled to Fannie Mae and Freddie Mac by Bank of America and its no-good stepsons, Countrywide Financial and Merrill Lynch (both taken over during the last global financial crisis). The FHFA, playing no favorites, is going after other banks as well for a total of $200 billion. Today's stunning announcement may be the two-by-four that breaks the camel's back. At the very least it caused BAC to gap down, putting the finishing touch on the "island."

Uncle Warren could care less. He will get his six percent annually as long as BofA's lawyers can drag things out. Owners of the common need to realize that his interests are not aligned with theirs. Once a common shareholder himself, Buffett sold his stake, only to come back as a vampire with first claim on the company's earnings.

Small comfort: BofA is not alone.

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