BAC

[squiffy]

Bank of America is at something like a 5-6 year high. The last time it was at a 3-4 year high in late 98, it really took a dive. Bank stocks tend to be cyclical as we know, which is why their PE ratios rarely get to YAHOO or STARBUCKS type levels.

If BAC has trouble integrating FleetBoston (unfortunately I think they integrated well with NationsBank or vice versa) and if mortgage profits start to drop (they already have) as interest rates rise, perhaps BAC is a good 2-year leap PUT candidate.

Any thoughts? History suggests that Banks should tank. The question is. Which high flying bank will give the most tank? Over the next 2 years. Probably the bank with the most exposure to mortgage profits. Or some bank with huge 3rd world loans that won't be repaid.

It would be nice to identify the highest flyer with the worst portfolio and future earnings prospects.

[plj8624]

As I stated in a previous post, it appears I am taking the opposite side of your trade /images/graemlins/smile.gif

I bought BAC after the Fleet merger announcement on the theory that even though they overpaid for Fleet, at 10 times trailing earnings they were just too cheap. They also pay a nice dividend.

[squiffy]

One analysis I read attributes the 1998 drop in BAC to the merger with NationsBank. Actually NationsBank bought BAC then "became" BAC. So NationsBank merger seems to have been successful, but apparently led to a huge one year loss due to reorganization costs. Most mergers are bad. But a bank with bank merger, if handled right produces long term economies of scales and benefits. So 5 years from now BAC will be great. One year from now the reorganization costs of FleetBoston merger may wreak havoc on BAC's share price, if history repeats itself.

It's possible that as interest rates rise and home sales decline that lost revenue from mortgages will be compensated for by increased business loans. Still, the conventional wisdom is that Banks tend to do poorly in rising interest rate environments. Even if they still make decent profits, the problem is that large mutual funds start to move their money out to the next sector. The question is whether after 3-4 record years or earnings, BAC can really expect to make a 5th record year, given the costs of the FleetBoston merger and the decline in mortgage revenues. A close call. But I would say BAC should be substantially lower over the next year to year and a half. THough, it may still have some upside to 90 before then, as was the case with CFC. CFC should show a declining stock price long term. Though, as of 12/16/03 there were still a few last puffs left in the butt of the cigarette on the way down.

I will need to check into BAC's PE. Some sites list it as higher than 10. Bank stocks being cyclical tend to have lower PEs than other stocks. So a PE of 10 for a bank, traditionally, I would think, is really not that attractive, especially coming off several record earning years that are less and less likely to be repeated.

I think you are right. There were problems with loans to Russia and there was a downturn in the Asian economy at some point. Don't remember if that was mid 1998.

Another problem with banks is that when they are making record earnings and have access to oodles of cheap capital, they have tremendous incentive to loan it out, even to people or nations unlikely to pay it back. So this is another reason for the boom and bust cycles in major banks. When money is plentiful and credit is cheap, they tend to make too many bad loans while competing with other banks for customers, trying to put their savings to work. Short-term looks great on the balance sheet. Long term bad for profits if the loans are not repaid and have to be written off.

You can only pay high dividends if you actually continue to make high profits.

I hope BAC goes up a lot to say 90 or 100, at which point I will try to buy PUTS.

I should probably sell my CFC puts on the next time CFC drops and look at PUTS on MTG and CFC.

Also, if BAC dropped due to nonperforming loans to Russia in 1998, that would not explain the nearly identical drop in MTG in mid 1998. MTG initiates or insures mortages (I forget which). They don't make loans to Russia.

[squiffy]

Yes, historically, PE of 10 or 11 really doesn't look like a super bargain for BAC. It's cyclical, like an auto company or homebuilder, so PE won't get too high.

[squiffy]

Article with some quibbles about difficulty of integrating the computer network for a nationwide banking system. I think it's a bit overdone, but still, I think there are short-term costs to a merger that one cannot ignore.

http://www.baselinemag.com/article2/0%2C3959%2C1405159%2C00.asp?kc=BARSS02129TX1K00005 33

[plj8624]

All good points. I bought the BAC on the big drop in stock price following the Fleet merger announcement. They overpaid for Fleet, no question but I think they will do well long term. Large banks tend to do pretty well over the long haul. Look at Citigroup a couple years ago; p/e fell to 10 on concerns about bad loans, the collapsing economy, etc. I bought some in the 30's and unfortunately sold it way too soon for a small gain. I don't want to make the same mistake with BAC, although I will take a hard look at selling if it gets to 90 or 100.