Bank of America Corp: A Beached Whale

Bank of America (BAC) reported earnings today that modestly exceeded analyst consensus estimates. However, as we noted in April (Shulmaven: Winter Comes to the Bank Stocks), BAC was suffering from huge embedded mark-to-market losses on its held to maturity securities holdings which amounted to $108 billion at yearend 2022. Today BAC reported those losses, as of the end of the third quarter, increased to $132 billion on a cost basis of $603 billion, not chump change.

The bank also reported that its tangible book value per share was $23.79. The $132 billion in embedded losses amounts to $16.35/share. Thus the true tangible book value would be a meagre $7.44/share. With BAC stock trading this morning at $27.15, it is being valued at a very pricey 3.6X "true" tangible book value. To me this means, that unless interest rates fall dramatically, BAC's share price will be weighed down for years.

Moody's Lowers the Boom on the Bank Stocks

 Moody's finally acknowledged what most of us new last April that the banks were in a world of hurt. ( See: Shulmaven: Winter Comes to the Bank Stocks ) Last night Moody's downgraded 10 banks including Commerce Bancshares and M&T Bank, put 6 under review including BNY-Mellon, Cullen Frost, Truist Financial and U.S. Bancorp  and placed 11 banks with a negative outlook including PNC and Fifth Third. The rationale for the downgrades was based upon high funding costs, asset risk in commercial real estate, underwater securities holdings and potentially  higher capital requirements. The ratings agency neglected to mention higher FDIC premiums. Moody's also neglected to note that the day will soon come when the Federal Reserve introduces a high inflation scenario in its annual stress test. 

The bottom line here is that the banking crisis engendered by the failure of Silicon Valley Bank and First Republic Bank is far from over with that credit standards will continue to tighten. What will ultimately be needed is a re-equitization of the banking system with its concomitant dilution. The one saving grace is that just like the defense industry's "last supper" hosted by Secretary of Defense William Perry in 1993 which signaled a consolidation of that industry, we now have Secretary of the Treasury Janet Yellen urging the regional and community banks to merge. The anti-merger FTC Chair Lina Khan will stay out of the way.

Has the Recession Arrived?

Has the long forecasted recession arrived? My answer is YES. Here is why:

* The banking system is crippled with huge mark-to-market losses on securities held to maturity. (See: Shulmaven: Winter Comes to the Bank Stocks) Further the loan losses associated with bad commercial real loans have yet to be recognized. Hence lending is being curtailed across a broad front of borrowers.

* New claims for unemployment insurance reached an 18 month high last week at 264,000. The labor market is nowhere near as strong as it was.

* The price of copper made a new low for the year at $3.72/pound down 14% from its January high. This is the metal with a Ph.D. in economics, although as my friend John Lipsky always reminds me it is from the Universidad de Cattolica de Chile. 

* The stock market has gone nowhere over the past two years with nominal stock prices down 1% and real stock prices down 14%. Hence the consumption fuel coming from the wealth effect has evaporated.

* First quarter consumption was flattered by an 8% increase in Social Security payments, obviously not to be repeated for the balance of the year.

* Although real GDP is likely to to be up in the second quarter because of a modest swing in inventories, real final sales will decline and that will set the stage for a decline in both final sales and the overall GDP in the third quarter.

* Because inflation will remain sticky, the Fed will need a significant move up in the unemployment rate before pivoting to a lower interest rate regime. Thus the Fed policy would allow for a mild contraction in the economy.