You surely have read, seen and heard all about Mr. Buffett’s investment in Bank of America (BAC), announced pre-market today (more on that timing later).
You likely did not see the BofA/Merrill Lynch research note published Wednesday downgrading the banking sector, reducing third quarter earnings estimates and lowering longer-term stock price objectives for its major rivals.
Irony piled upon irony as BofA management welcomes Mr. Buffett with open arms while in effect trashing the earnings prospects of its industry and its competitors
BofA has been under fire for every conceivable misstep in the banking industry and seen its stock more than cut in half over the past year, closing Wednesday at $6.99 (actually up +10.9% on a "world is not ending for BAC" research note from influential analyst Meredith Whitney). It is well off earlier highs but still up nicely today, trading $7.80ish as I write this.
In the report, BAC/Merrill cited "magnified seasonal decline for the major banks in the 3rd quarter due to heightened volatility, which has been particularly difficult to manage following the S&P U.S. debt downgrade".
They see potential catalysts to reverse the situation as:
- Germany and France proposing viable solutions to contain Euro-debt issues
- European bank funding concerns abate
- Resolution to U.S. mortgage litigation (they are at epicenter of this)
- Improved macroeconomic indicators, suggesting recession less likely
(Genius stuff here and surely worth the three analysts combined salaries...I love the catchy title also, "Lowering EPS, PO's; Bumpy Road Ahead")
In any event, they have knocked down 3rd qtr. EPS as follows:
- GS: $1.25 from $3.05 (!)
MS: $0.44 from $0.49
- JPM: $1.07 from $1.30
- C: $0.83 from $0.94
One has to wonder how they would assess their own earnings expectations, but we'll never know, will we?
On the Buffett timing issue, it is interesting that it comes at this particular point in time, quickly following “upgrades” by influential analysts Dick Bove and Meredith Whitney, right before Bernanke’s Jackson Hole address and during a period when Pres. Obama is looking to every quarter for some positive news. One cannot help but think back to Buffett’s investments in General Electric, Goldman Sachs, and others back in the depths of the financial crisis, which were seen as many as an overt “Support America (and Obama)” orchestrated move. Buffett himself said later they were “a bet on the U.S. economy and the government team in place.”
Of course, he might just have seen extreme value with BAC making 52-week lows and wanted to pull the trigger as soon as possible. Do not forget however that the BAC deal he took was not one that the average investor can replicate and it took some time for the GS move to play out in his favor. The GE arrangement is still working out but undoubtedly will benefit Mr. Buffett handsomely over the long run…and I would not bet against this one either. But that is no reason to simply run out and buy BAC unless you have some other good rationale.
Good Trading!
David W. (aka The Underground Trader)
Bank of America - Last 12 Month
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