Thursday, February 1, 2018

Is Bank of America a safe stock? [BAC]

Yahoo has an article out today asking if Bank of America is a good stock to own right now.  Their conclusion is "So, if you are looking for a decent pick in a strong industry, consider Bank of America.,  Never mind the fact that it suddenly collapsed to $2.50 under the weight of its leveraged debt burden.  None of that matters anymore.  It's a whole new ballgame now that the fed has intervened in the economy and made everything bullet proof.  After all if we are unlikely to have another crash in our lifetimes like Yellen said then why not trust the banks?

Of course I do not have an emotional response for this.  I can simply respond with a model that suggests the entire move up from $2.5 to $32 was corrective and that a plunge is coming soon that could actually render BofA bankrupt.

Yes, I know, why listen to me and my models when we have Yahoo?  Well, where were they when I was modeling the collapse in GE shares long before it became a reality?  Answer: they were positive on GE, that's where.  They said it was a good investment when I was telling people a major peak was near and when the collapse came it would be dramatic.  No, really, read for yourself.

Just keep one thing in mind about the banks: they are all fractionally reserved which is another way of saying massive leverage.  So yes, when the credit is still available for cheap rates and nobody is walking away from their million dollar shoe box home, the profits look great.  But that can turn on a dime if the credit collapses.  Our federal reserve stepped in and stopped the last crash from taking place by amping up its balance sheet by 4 trillion dollars.  But now it is trying to unwind in order to get ready for the next collapse.  A shock absorber needs time to recover before the next pothole is hit and if it does not then all the force of the pothole strikes the vehicle.

Despite the smooth ride people are experiencing today, my model suggests that there are pot holes ahead.  You CANNOT intelligently look at earnings without understanding the leverage that was used to achieve them.

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