Wednesday, January 11, 2012

BAC From the Dead?

BAC, 6-month chart

You can see it, without squinting even. Bank of America's common stock (ticker symbol: BAC) has risen in price per share by nearly one-third since mid-December. Last Thursday's up-thrust on heavy volume (over a half-billion shares traded out of ten billion outstanding) was a technical signal to just go long, baby. Pension-fund managers and Congress critters everywhere are breathing sighs of relief. The bottom, they hope, is in.

If BofA actually had a viable business model, with neither legacy liabilities nor regulatory repression, I would be buying the shares with both hands myself. But it doesn't, and I won't. Let me suggest instead that this is a heaven-sent opportunity to divest. This is actually the fourth such opportunity in the past thirteen months, starting with the Santa Claus rally of 2010 and running through the Saint Warren rally, the Big Bazooka rally, and now the Dow Dog rally. That's right, traders are piling into the worst performer of the 30 Dow Jones Industrials in 2011 (when BAC was down 58%) according to the knee-jerk, brain-dead theory that such a dog deserves a dead-cat bounce. Although they won't call it a dead-cat bounce. They'll call it a reversion to the mean, as if there were some sort of mathematical inevitability to it.

When I do the math, I still see declining organic revenues, ballooning legal liabilities, and unquantifiable derivatives exposure. BofA may have a random profitable quarter in the near future, but only through divestitures, draconian cost-cutting, and courtroom dallying. One suspects from the power of the recent rally that short-sellers are covering. But the scalloped pattern in the chart above shows that the shorts do re-load, kicking off another scoop down in price. Each rally high is lower than the one prior.

JP Morgan Chase reports Q4 earnings on Friday, and the other banks will follow next week. Let us see if the news is sold. "Friday the 13th will live up to its name when it comes to bank earnings," bank analyst Mike Mayo tells Bloomberg. "You're going to see all sorts of revenue and margin pressure."

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