Bank of America and the Financial Stocks
Jan 20, 2009
Posted by Jody Eisenman | Filed under Uncategorized
Led by B of A, the financials are getting taken to the cleaners again today. As I write this around mid day, the money center bank index (as quoted on yahoo finance) is down about another 15% today alone. Bank of America’s balance sheet is in horrible shape. At yearend 2008, B of A was leveraged at an incredible 35/1 if you take out the TARP money. In addition, this does not even include the potential losses from the Merrill Lynch acquisition. B of A is now below 6. It was 32 three months ago. There is talk now in Washington about creating an “aggregator bank”, or an entity that would effectively nationalize some of the largest money center banks in this country. Under this scenario, it is unclear what, if anything, equity shareholders would own. As this problem (as discussed several times here) is endemic to the entire financial industry, investors are dumping almost all financial stocks here. State Street Capital is down almost 50%. Citi, which almost hit 6 last week, is trading near 3. Wells Fargo (which is buying Wachovia) has dropped from about 30 earlier this month to around 15. Where is the bottom? I don’t know, but I can’t see buying any financial stock (except for a short term trade) under this scenario. How can you buy these stocks when your equity could be severely diluted or even eliminated with the stroke of a pen from Washington?
As the financials are one of the bedrocks of our entire economic system, it is little wonder that the general market is following suit and dropping as well. The Dow has now slipped about 900 points, or 10% in the last nine trading sessions. Many analysts are finally waking up to the reality of the situation; namely, that we are in a severe recession combined with tremendous losses due to the incredible leverage employed by the banks. As such, stocks are becoming less and less attractive, as investors are having a hard time seeing much improvement anytime soon. I would continue to be cautious. If you do buy stocks, remember that this is more a trader’s market than anything else. Volatility continues to remain high, and the swings can be extreme.
