Double Your Money

The yield on Greek 1-year debt passed 100% this a.m.

Step right up. Getchy'ur Greek one-year bonds for half price. Double your money in just one year!

The only catch: Greece must avoid defaulting on its sovereign debt before the bonds mature. Wanna bet?

[update 09-14-11:]

The yield on the same debt touched 148% hours ago. Can you hear me NOW?

Two days later.

Quote for the Week, Sept. 11-17, 2011

An independent is a guy who wants to take the politics out of politics.

--Adlai Stevenson

[click to enlarge]

"Eurozone Fixed-Income Stresses Worsen"

by Howard Simons, Minyanville

[excerpt:]

"Another indicator flashing red is the term structure of zero-coupon implied volatility. These levels have blown so far past the 2008-2009 highs that those readings look perfectly normal on the chart [above]. The two-year Schatz’ (German note) volatility has increased furthest and fastest as the market is convinced the present levels and very steep German yield curve are unstable.

Higher volatility means markets are less liquid and all parties involved have to pay higher costs to fix and hedge their credit commitments. Maybe someone, somewhere, believes paying high insurance costs on two-year money at levels considered untenably low is conducive to economic growth. I do not and have not, and the macroeconomic track record since 2008 supports my skepticism.

Most of the time entrance into a new war prompts people to ask a question along the lines of, 'Is this another Vietnam?' We have been asking whether the current markets are another 2008. No; it is different in many ways but it is worse in others. Until these eurozone credit market stresses are reduced, we are still in trouble."

Complete article viewable here.

Queue It Up

Shot in Maine.

Dazzling photography.

Trailer here.

A Silver Bullet for the Ailing U.S. Economy?

[click to enlarge]

Home refinancings have not responded to lower interest rates.

"Streamlined Refinancings for Up to 30 Million Borrowers"

by Alan Boyce, Glenn Hubbard, and Chris Mayer

[excerpt:]

"[T]hese mortgage-market frictions are slowing the economic recovery by limiting the benefits of low interest rates for household spending. Unable to refinance their mortgages the way corporations have been able to refinance their debt, consumers are left with weak balance sheets and mortgage payments often above of the cost of renting, contributing to excessive delinquencies and foreclosures. These constraints on refinancing have a disproportionate impact on middle-class borrowers with origination balances under $200,000 and poorer credit and whose employment opportunities have been hit especially hard by the recession....

[Under our plan] we expect mortgage payments to fall by about $70 billion, benefitting about 25 million borrowers...This plan would function like a long-lasting tax cut for these families. Empirical evidence suggests that consumers spend a larger portion of permanent increases in income than temporary increases....

The housing market benefits in many ways. Lower mortgage payments reduce future defaults, helping to stabilize house prices for all homeowners, whether or not they have a GSE/FHA/VA mortgage. The good new about refinancing may help improve consumer confidence, further benefitting the housing market. House prices may start to go up, leaving fewer borrowers underwater, starting a virtuous cycle."

We see who will benefit, but who will pay? That would be investors in vintage residential mortgage-backed securities (RMBS), who would have to accept massive prepayments of loans made during the height of the housing bubble. But shed no tears for those investors, who, according to Boyce et al., "understood and accepted the callable nature of mortgage interest-rate risk...[and] have received an unanticipated windfall from the extremely slow refinancing rates...at the expense of existing homeowners."

Complete paper viewable here.

Quote for the Week, Sept. 4-10, 2011

When a man's best friend is his dog, that dog has a problem.
Edward Abbey

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.

Jobs Initiative Coming--Just In Time!

Thanks, as always, to Calculated Risk for this one.

President Barack Obama will be speechifying before Congress next Thursday night on how to create more jobs in the United States. He had originally asked for Wednesday, but Republicans said that an intramural debate scheduled for that night was more important. Barry typically deferred. Anyway, what's the rush? Over 8 million workers have lost their jobs since the Greater Depression started in 2008. They have waited almost four years. They can wait one more day.

Data released by the Bureau of Labor Statistics this morning could hardly have been less encouraging for the disemployed. According to the Establishment Survey, zero non-farm jobs were created in August. That is bad news for Obama, who will be out of a job himself if he keeps putting up goose eggs. Moreover, 58,000 jobs thought to have been created in June and July were, oops, canceled, dropping the three-month total to +105,000. Which means few employers besides McDonalds were hiring.

Numbers, numbers, who's got the numbers? The Household Survey says that non-agricultural jobs increased by 309,000 in August. But then again, the number of part-time jobs increased by 430,000. Do the math with me: the number of FULL-time jobs decreased by 121,000. Back to the Establishment Survey. Month over month, the average work week decreased by 0.1 hour, and average hourly earnings decreased (for the first time since January 2008) by three cents. Anyone else seeing workers getting squeezed?

Whatever plan the President has for unsqueezing, why has he waited two-and-a-half years into his term to reveal it?

'Dangerous for Society'

Paul Woolley,

interviewed by Der Spiegel:

"...the markets don't function properly.

Things are spinning out of control..."

[excerpt:]

"Only a fraternity of academic high priests connected to the finance markets is still speaking of efficient markets. Still each market participant is pursuing their own selfish interests. The market isn't reaching equilibrium -- it's falling into chaos....

The finance sector can -- and is -- growing until it overwhelms the economy. In good years the US finance industry cashes in on more than 40 percent of all corporate profits. In bad years they are saved by the taxpayers. The agents are doing a devilishly good job of developing innovative, complicated new products that people can't understand. It gives them the opportunity to earn excess returns and attract the best talent. While they are acting rationally, the result is a catastrophe."

Complete interview here.

Quote for the Week, August 28-Sept. 3, 2011

It is inaccurate to say that I hate everything. I am strongly in favor of common sense, common honesty, and common decency. This makes me forever ineligible for public office.
--H.L. Mencken

Loan Shark Descends on Bank of America

Berkshire Hathaway's Warren Buffett

The big news on Wall Street this morning is that gazillionaire Warren Buffett is investing $5 billion dollars in Bank of America. Like lemmings, pre-market traders are bidding up BAC's share price on the presumption that Buffett's blessing means the bottom is in. I remain on the other side of that trade and in fact view the momentary hype as one last opportunity for MainePERS to exit the stock before it crashes for good.

How quickly they forget. Just six months ago came the disclosure, through a filing with the SEC, that Buffett had sold all of his common stock in BofA by the end of 2010. It was a good thing for him that he did, as he was able to side-step a 48% slide in the stock price since January 1. Now Buffett is back for discounted merchandise. But why? The company is even more troubled now than it was on New Year's Eve, having just recorded a 20 billion-dollar hit to its balance sheet.

It turns out that it is not common stock that Buffett is buying, but preferred instead, which gives him seniority over common stockholders in the company's capital structure. Buffett will be getting a guaranteed 6% annual dividend (x $5 billion = $300 million from pre-tax profits) before common shareholders get their measly penny-a-share quarterly dividend, which is not guaranteed. As a sweetener, Buffett also gets warrants to buy up to 700 million shares of common stock at $7.14 a share at any time during the next ten years. Fully exercised, those options would give him 6.5 percent of the company.

This is a bad deal for Bank of America, which assumes a burdensome cost of capital in a zero-interest-rate environment. Management's credibility is now seriously undermined in the wake of assurances during a July 19 conference call with investment analysts that the company needed no additional capital. The usurious Buffett deal means that BofA not only needs capital, but cannot get it from public debt and equity markets. Concludes ZeroHedge: "The bank's only recourse was a private raise with a crony capitalist who is once again doubling down on the global ponzi."

Worst part is, the $5 billion is not nearly enough. The company's unmet liabilities are estimated in the tens of billions and may approach $200 billion. Buffett's intervention is like seeing a distressed swimmer being swept out to sea by a riptide and throwing him a...rubber duckie. And if Wily Warren loses his rubber duckie? No problem. Barack Obama, who worships the Oracle of Omaha, will buy him another one. Which, if that happens, will make me really mad.

It has happened before. In 2008 Buffett bought preferred stakes in both Goldman Sachs and General Electric, after which the stocks crashed 67% and 42% respectively. It took the TARP bailout to rescue Buffett's investment then. "If history repeats," notes EuroPacific Capital's Peter Schiff wryly, "it's more likely the banking stocks are about to get hammered."

The story is going around that Buffett concocted the BofA scheme while sitting in the bathtub Wednesday morning. Would it not be fitting if he ended up taking a bath on this latest flyer?

[update 08-30-11:]

David Weidner at Marketwatch explains here how the Buffett deal gouges holders of BAC common.

And John Hussman has this to say:

Warren Buffett's $5 billion investment in Bank of America preferred stock last week was essentially a defense of the old guard. Buffet observed, "It's a vote of confidence, not only in Bank of America, but also in the country." Yes - to be specific, it's a vote of confidence that the country will bail out Bank of America in any future crisis. We should all hope that Buffett's investment is successful - provided there is no future crisis - and we should equally hope that Buffett loses the entire investment otherwise.

Bank of America Swaps Go Through the Roof

[click to enlarge]

Quick primer:

A credit default swap (CDS) is insurance bought by a lender to protect against a loan default. Say the CDS buyer is holding some sketchy corporate debt issued by a distressed company such as, oh, let's just pick one out of a hat, Bank of America! If said company goes down, the CDS holder can "swap" the defaulted bonds for their face value in cash. The price of the CDS is called the "spread." The higher the spread, the greater the perceived likelihood that a default will take place.

Earlier this morning Bank of America's five-year CDS spread, which has been steadily rising over the past several weeks, suddenly blew wider by another 25% (see chart above). Ominous for unprotected lenders. And shareholders.

If MainePERS portfolio managers have not dumped the stock by now, you may be seeing them soon at a pharmacy near you. Will there be meds enough for BAC's collapse?

From Yves Smith at www.nakedcapitalism.com:

"We are now seeing the downside to extend and pretend. Years of regulatory forbearance mean that investors know the marks on the balance sheet of a beast like Bank of America (and frankly all the other big banks) have a ton of air in them. And now that the economy is looking seriously wobbly and the odds of son of Credit Anstalt are well above zero, it means big banks are at real risk of getting seriously whacked in a major stress event. Worse, with Dodd Frank (supposedly) barring bailouts and Tea Partiers on an anti-bank, anti-Fed, anti-spending warpath, it might not be so easy for the authorities to rescue a big bank if a run started (not that I’m advocating a rescue, mind you, I’m looking at this from the vantage of a bank shareholder)....

Now normally, investors accept the unknowability of bank equity because they have some faith in the system. Does anyone have any confidence in the system now? Financial regulators have shown themselves to be incompetent and/or badly captured by banks. Earth to base: letting off bank management easy is bad for investors in the long run. Being an investor in an overly risky bank looks swell until it suddenly isn’t."

Complete commentary viewable here.

(B)ungee (A)ction (C)ontinues

Bank of America's stock price (4-day chart)

[click to enlarge]

So THAT'S what the ticker symbol stands for!

And now for the 4-year chart:

Down 88% and not done yet.

Same As the Old Boss

"George W. Obama?"

by David Bromwich

"The record shows impressive continuities between the two administrations, and nowhere more than in the policy of “force projection” in the Arab world. With one war half-ended in Iraq, but another doubled in size and stretching across borders in Afghanistan; with an expanded program of drone killings and black-ops assassinations,the latter glorified in special ceremonies of thanksgiving (as they never were under Bush); with the number of prisoners at Guantanamo having decreased, but some now slated for permanent detention; with the repeated invocation of “state secrets” to protect the government from charges of war crimes; with the Patriot Act renewed and its most dubious provisions left intact -- the Bush-Obama presidency has sufficient self-coherence to be considered a historical entity with a life of its own."

Complete article viewable here.

Quote for the Week, August 21-27, 2011

I don't want to achieve immortality through my work. I want to achieve it through not dying.
--Woody Allen

You're Outta Here!

BofA CEO Brian Moynihan gives Canadian cards the thumb.

Bank of America announced yesterday the sale of its MBNA-branded Canadian credit-card portfolio to TD Bank Group for $8.5 billion. This is the latest in a series of divestitures as the firm exits its entire international credit-card business. It must have been a painful decision for BofA's CEO, Brian Moynihan. Credit-card lending has been a relative bright spot for the company, which has suffered staggering losses in recent quarters. But regulators must be satisfied, and the move will help the company comply with enhanced capital requirements being phased in over the remainder of the decade.

Investors are running, not walking, from Bank of America. Recent filings with the SEC have revealed that two of the world's best-known hedge-fund managers, David Tepper and John Paulson, shed substantial stakes in BofA during the second quarter. Tepper's Appaloosa Management L.P. sold 7.2 million shares in Q2, this after ditching 8 million shares in Q1. The 10 million shares remaining are less than a third of what Tepper held at the beginning of 2010. Paulson's axe was even heavier. He sold 63.2 million shares in Q2, or more than half of what he held when the quarter began. That is some serious dumpage.

So who was on the other side bidding? Why, MainePERS, of course, scooping up 63,358 shares during the same three months. They must know something that the rest of us do not.

[update 08-21-11:]

Christopher Whalen suggests that Bank of America should be headed toward receivership. Owners of the company's common stock would be at the bottom of the food chain in any subsequent workout. The conversion of debt to equity would severely dilute shareholders:

"Once the FDIC is in control of BAC, the process will then proceed like a typical bankruptcy, with the operating units continuing to do business in the normal course. For consumers and business customers, the situation at BAC will be mostly the same. But for investors and especially creditors, the situation will be far from normal.

In a Dodd-Frank resolution, the creditors of BAC will have an opportunity to file claims, much as with any failed bank. Unlike a bankruptcy, however, the FDIC will make all depositors of the subsidiary banks whole before considering claims of creditors of the parent, a significant difference investors ought to consider. Most important, however, will be the process of converting debt to equity in the restructured BAC, providing the resources to absorb losses, fund continuing operations and restructure."

[update 08-23-11:]

Henry Blodget estimates that Bank of America will need to raise at least $100 billion, and perhaps as much as $200 billion, of new capital to survive. If true, existing shareholders will get hosed. With a water cannon. Memo to MainePERS: an umbrella will do no good.

Grief To Those Who Deserve It

"Two One-Way Lanes on the Road to Ruin"

by John Hussman, Ph.D.

[excerpt:]

"Presently, we should not judge policy actions by their ability to punish saving, indiscriminately promote spending, relieve fear by making bad debt whole, or promote credit for its own sake. Instead, we should judge each policy action by its ability to reallocate resources toward productive uses, and to accelerate the restructuring of hopelessly bad debt that was carelessly extended in the first place. Many "standard" elements of economic policy can be crafted toward these ends, including infrastructure spending, R&D credits, unemployment compensation, funding of NIH and other basic research, and so on. Restructuring mortgage debt by using Treasury to administer, but not subsidize, property appreciation rights would also be helpful. By contrast, it is disastrously misguided to defend holders of bad debt, to distort financial markets, and to obstruct rather than facilitate the restructuring of excessive debt burdens.

...[the nation's economic] policies operate primarily for the benefit of banks and bondholders who made reckless and unproductive loans. To use Schumpeter's words, our public policy now operates 'in their interest and for their purposes.' It is the insistence of policy makers on making these bad loans whole, instead of restructuring the obligations, that is at the heart of our prolonged economic slump.

Undoubtedly, borrowers are also responsible for the losses, but it is always the lender and the investor who is responsible for judging the risk and character of the businesses and individuals to whom they extend credit. As Schumpeter noted 'The entrepreneur is never the risk bearer. The one who gives credit comes to grief if the undertaking fails.' When investors and lenders stop being mindful of risk, believing that somebody else will bail out the loss, the misallocation of resources does violence to the entire economic system."

Entire commentary viewable here.

Quote for the Week, August 14-20, 2011

Owners of capital will stimulate the working class to buy more and more expensive goods, houses and technology, pushing them to take more and more expensive credits, until their debt becomes unbearable. The unpaid debt will lead to bankruptcy of banks, which will have to be nationalized, and the State will have to take the road which will eventually lead to communism.
--Karl Marx, 1867

Bank(ruptcy) of America

From ZeroHedge:

Bank of America Defaults Risk Soars To Highest Since June 2009,

Jumps By 10% Overnight

posted here.

Also in the news this morning, AIG is suing Bank of America for $10 billion. Bank of America's stock is off another 7+% in pre-market trading. Reminder: Maine state employees and taxpayers are invested to the tune of 2.6 million shares.

Scroll down for more on the BofA disaster.

[update, noon:]

Here Comes TARP 2:

Bank Of America Implodes, At $6.87,

BAC CDS Up 20% To 260 bps As Bankruptcy Contemplated

More at ZeroHedge.

[update, 4 p.m.:]

BAC gaps down,
MainePERS loses another $4.3 M.

U.S. Loses an 'A'

U.S. Treasury bonds: triple-A no more

"America Makes the Cut:

So What Happens Next?"

Brandon Smith, Alt-Market.com

[excerpt:]

"Ratings agencies were not alone in the creation of the derivatives bubble. The private Federal Reserve artificially lowered interest rates and flooded the markets with cheap fiat. International banks used this fast money to create the easy mortgage groundswell and the derivatives poison that was fed it into the system. Ratings agencies went along with the scam and graded the worthless securities as AAA. The federal government and the SEC allowed all of this to take place by purposely ignoring the crime and refusing to apply existing regulations in investigating the fraud.

The Bottom line? You CANNOT create an economic crisis like the one we face today without collusion between big business, government, regulatory bodies, and ratings agencies. The Obama Administration is well aware of this, and the attacks on S&P are nothing more than a show. S&P is not to blame for the downgrade this past weekend. They are ALL to blame."

Complete article viewable here.

Quote for the Week, August 7-13, 2011

It is when power is wedded to chronic fear that it becomes formidable.

--Eric Hoffer

Ticket To Ride

Bank of America stock sinks to a new 52-week low.

(08-04-11)

[graph from ZeroHedge]

MainePERS beneficiaries took a piggyBAC ride down today, along with all other pensioners long the stock market. The Dow was down 500 points, or over 4%. Bank of America's common stock slid even faster, off over 7%.

Let's do the math, shall we? MainePERS holds 2.6 million shares (after adding to its stake in Q2). Multiply that times 73 cents per share, today's price chop. That gives us $1.9 million lost since 9:30 this morning. Gone. Vaporized.

And we pay the portfolio managers how much?

[update 08-05-11:]

Another day, another $1.7 million. Look (out) below:

BAC, 3-month chart

The nosedive comes after the company's latest 10-Q filing with the Securities & Exchange Commission late yesterday. If you click on the link, you will find over 200 pages, most of it repetitive boilerplate. Of particular interest is management's discussion of future risks to the company and, by extension, to investors (yeah, YOU, MainePERS), risks that were neither eliminated by prior settlements nor fully provisioned in the company's Q2 financial disclosure. Some choice nuggets:

• The company's experience with the GSEs (e.g. Fannie Mae, Freddie Mac) "continues to evolve," which, fully and precisely translated, means they have our nuts in a vise and they are tightening. "The recent FNMA announcement regarding mortgage insurance rescissions, cancellations and claim denials could result in increased repurchase requests from FNMA that exceed the repurchase requests contemplated by the estimated liability" [emphasis added]. The company's exposure? "It is not possible to reasonably estimate..." yada-yada. In other words, the sky's the limit. Page 179.
• Non-GSE exposure keeps growing as well. "We currently estimate that the range of possible loss related to non-GSE representations and warranties could be up to $5 billion over existing accruals at June 30, 2011." At least they put a number to this one, subject of course to later revision. Page 219.
• The so-called BNY Mellon settlement for $8.5 billion announced at the end of June is not a done deal. Court approval is still pending, and some of the parties want out. Or want more. "The Corporation's future representations and warranties losses could be substantially different than existing accruals...and consequently could have a materially adverse effect..." etc. etc. [company's emphasis]. Page 220.
• I especially like this one: "A downgrade in the U.S. Government's sovereign credit rating...could result in risks to the Corporation...[and] could impact our ability to obtain funding that is collateralized by affected instruments, as well as affecting the pricing of that funding...[Such action] could result in a significant adverse impact to the Corporation" [company's emphasis]. Right on cue, Standard & Poor's tonight downgraded its triple-A rating for U.S. debt to AA+ and attached a negative outlook warning of further cuts. First time in history. The cost of banking business just went up. Page 221.
• Market risk in the mortgage sector: "For each one percent change in home prices, the liability for representations and warranties on unsettled GSE originations is estimated to be impacted by $125 million based on projected collateral losses and defect rates." Home prices are still declining. So the company's liability keeps on growing. Page 123.

Bottom line: hold the stock at your own risk.

Quote for the Week, July 31-August 6, 2011

Paranoia means having all the facts.

--William S. Burroughs

How To Liberate America

David Korten:

"Wall Street’s mega-banks lost interest in real investment and developed a new business model. They now specialize in charging excessive fees and usurious interest rates, providing leverage to speculators, speculating for their own accounts, luring the unwary into mortgages they cannot afford, bundling junk mortgages to sell them as triple-A securities, betting against the clients to whom they sell the overrated securities, extracting subsidies and bailouts from government, laundering money from drug and arms traders, and offshoring their profits to avoid taxes."

PDF report here.

Quote for the Week, July 24-30, 2011

We would rather be ruined than changed.
--W.H. Auden

The Sinkhole That Is Bank of America

Jonathan Weil,

"Curse the Geniuses Who Gave Us Bank of America"

[Bloomberg]

[update 07-22-11:]

From ZeroHedge:

Instead of $8.5 billion, Bank of America is actually on the hook for an amount that is at least 3 times greater if one uses proper impaired security valuation protocols...

Should the true extent of deterioration of Bank of America's books be revealed, then its market cap would be not $100 billion but some modest fraction thereof. In fact, even John Paulson, formerly the biggest believer in BAC has now washed his hands. And he doesn't give up (read: look foolish to the investment community) easily. Our advice is to have a chat with Jon Weil: after all he is the man who said to "Curse the geniuses who brought us this madness."

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.

Quote for the Week, July 17-23, 2011

Foreign aid might be defined as a transfer from poor people in rich countries to rich people in poor countries.
--Doug Casey

But Who's Counting?

Peru--Eight volunteers at Worthley Pond fanned out early this morning to count loons, part of Maine Audubon's annual statewide survey. Comparing notes after the observation period (7 to 7:30 a.m.), the counters determined that they had seen seven different loons--three in the upper bay, two in the narrows, and two in the lower bay.

By coincidence, at the same time that the Worthley eight were conducting their Loon Count, the resident loons were doing a Stupid Human Count. It got to be a contest, and the loons were winning. They dove here and resurfaced, seconds later, way over there. They congregated, then dispersed. They did everything in their considerable power to be double- and triple-counted. Something about fish-stocking benefits from the government. The soaring call of one, reverberating off the hillsides, sounded like more-than-one. The humans were doing head spins straight out of The Exorcist.

In the end, the humans are the ones who mail in the results. So what they say goes. And they say that Worthley Pond had its highest count ever, one more than last year. (Two days before the survey, the Associated Press ran this story about the loon census.)

As for loon habitat, what could be better than Trout Lake?

Quote for the Week, July 10-16, 2011

If a politician found he had cannibals among his constituents, he would promise them missionaries for dinner.
--H.L. Mencken