Monday, July 18, 2005

Bank of America (BAC) beat numbers but stock down, why?

Bank of America beat numbers handily this morning but the stock was down by almost 2%. Most people attributed this to sympathy trades as Citigroup missed their numbers as well. Yeah, but why? Did anyone bother to explain? Let me help:

First, BAC's technical picture (chart) has deteriorated since it peaked in late May. After the sell-off since the acquisition annoucements, it briefly rallied above its 200 moving average with light volume. Now, the bear on the stock is showing who really is the boss. Today earnings is merely a catalyst.

Second, fundamentally, the buy side is REALLY concerned about the acquisition of KRB (MBNA)(see my BLOG below when they first announced it). It is really late in the game to buy a credit card company especially they just did one big acquisition less than a year ago.

Third, now the concern has manifeasted itself from today Citigroup's and KRB's earnings. Narrowing of net interest margins is really eating into profits. What that means is that as FED is raising rates, long rates has not risen fast enough to compensate for the risks to underwrite the loans. As I have numerously point out about yield inversion (i.e. long rates are cheaper than short term rates SEE Posts below), this is exactly why I said it is really really late to buy a Credit Card company. The reason is yield inversion typically happens at the peak of the cyclical business cycle and it is predicting recession ahead. While credit quality still looks good, that is as good as it gets...and when credit quality goes bad which I expect as the business cycle heads south, BAC will have to contend with earnings implosion with the newly acquired company.

So has BAC traded down due to mere sympathy trade with Citigroup? Financial media will easily dismiss it as such because they REPORT on things but never done any HOMEWORK on it. If you don't believe me, look at the numbers that been reported and decide for yourself. The worst is that you don't agree with me, but at least you've done your homework.

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