We will be paying extra attention to the money center banks of Bank of America Corp. (NYSE: BAC), Citigroup Inc. (NYSE: C), and Wells Fargo & Co. (NYSE: WFC); and then there are the “bankless bank holding companies” of Goldman Sachs Group Inc. (NYSE: GS) and Morgan Stanley (NYSE: MS) to consider as rival trading outfits.  Then there is also American Express Co. (NYSE: AXP) with much of the same client base as Chase Banks and then the more mainstream Capital One Financial Corporation (NYSE: COF) to consider as well. On the trust bank side and fiduciary side, there is Bank of New York Mellon Corporation (NYSE: BK) and State Street Corporation (NYSE: STT).

We have added in color on each group as well as shown trading ranges, implied price targets, and the implied discounts to the stated book values.

J.P. Morgan Chase & Co. (NYSE: JPM) is the best of the large diversified money center banks to most investors and it still trades at 0.76-times its stated book value.  The stock is at $36.35, the 52-week range is $27.85 to $48.36, and the consensus analyst price target objective is $46.29. Thomson Reuters has estimates of $0.91 EPS and $23.05 billion in revenues for the quarter.  Keep in mind that estimates have ticked lower almost each week during the last quarter.

Bank of America Corp. (NYSE: BAC) was recently listed as being at well under 0.5-times book value, but the stock has been the top performing DJIA stock.  With shares at $6.87, the 52-week range is $4.92 to $15.31. The consensus target is $9.02.

Citigroup Inc. (NYSE: C) was recently about 0.52-times stated book value. Shares are trading around $31.27 with a 52-week range of $21.40 to $51.50 and the consensus price target is $41.98.

Wells Fargo & Co. (NYSE: WFC) was recently trading at 1.1-times book value, making Warren Buffett’s favorite bank stock the only of the money center banks not at a discount to its stated book value.  That is partly because the new trading rules and regulations are believed to have the least impact on it out of the money center banks.  Shares are trading around $29.62 with a 52-week range of $22.58 to $34.25 and the consensus price target is $32.37.

Goldman Sachs Group Inc. (NYSE: GS) trades at about 0.7-times its stated book value and some now expect a loss when it reports earnings.  At $99.76, the 52-week range is $84.27 to $175.34 and the consensus price target is $128.80.

Morgan Stanley (NYSE: MS) trades at a steep discount even to Goldman Sachs with a price/book ratio of only about 0.52-times stated book.  Shares trade at $17.10 and the 52-week trading range is $11.58 to $31.04.  The consensus price target is currently about $21.80.

American Express Co. (NYSE: AXP) is not at a discount to book value at all at 3.19-times book value because it is classified in such a different manner.  Shares are trading at $48.95, the 52-week range is $41.30 to $53.80, and the consensus price target is $56.63.

Capital One Financial Corporation (NYSE: COF) may not be accurate on book because of the acquisitions and changes there.  It is stated as being 0.75-times its stated book value.  Shares trade at $47.71, the 52-week range is $35.94 to $56.26, and the consensus price target is $56.85.

Bank of New York Mellon Corporation (NYSE: BK) trades at 0.77-times its stated book value at the custodial and fiduciary bank. Shares are at $21.50, the 52-week range is $17.10 to $32.50, and it has a price target of $25.33.

State Street Corporation (NYSE: STT) is at a premium of 1.08-times its stated book value for the custodial bank.  State Street;s stock is at $43.05, its 52-week range is $29.86 to $50.26, and the consensus price target is $47.36.

Price-to-book and price-to-earnings data provided by Finviz.com, consensus price target (mean target) provided by Thomson Reuters.

Many estimates have been trimmed by analysts of late for the banks and financials.  We still expect modest credit metric improvements in most of the big banks and more importantly expect improvements in customer credit metrics to have improved again.  The difference this quarter is that there should be a tick up in loan demand actually being met by the banks, but don’t expect any huge gains there.

Before you get too excited about the discounts to book value, this may still be more of a ceiling rather than a floor.  Cash may have to be paid out in settlements, carrying cash balances yields literally nothing, and many banking operations remain in a state of muted flux.

Lastly, look for this to impact the wild triple-leverage ETF of the Direxion Financial Bull 3X Shares (NYSE: FAS), but watch the tracking error when the markets are not open.

JON C. OGG

Wells Fargo & Co. (NYSE: WFC) is up the least of the too big to fail banks because it has been considered the most stable of late as far as how its operations will hold up in the future compared to J.P. Morgan or BofA.  Wells Fargo stock is up “only” 7% so far since the close of 2011.  Still, we would not put much credence on that research note hoping for a CIT Group Inc. (NYSE: CIT) buyout by Wells Fargo even if CIT is up about 6% so far year to date.

News driving the banks is not so much that we named this one an undervalued DJIA component after our own metrics called for a 12% gain to 13,678 in the DJIA as the peak this year.  Today’s continued gains are simple and threefold.

First and most recently is that top CEO Jamie Dimon of J.P. Morgan Chase & Co. (NYSE: JPM) was discussing with CNBC’s Maria Bartoromo in an exclusive interview how banking will survive and that he hopes for fewer strings holding them back.  Whether or not that happens is something that is likely a 2013 story.

The ultimate boost is that it appears that all of the money center banks are going to pass the new stress tests.  That does not mean that they will have the ability to unilaterally boost dividends and buyback stock, but they might be able to get through the tests today without having to raise new capital.

The other issue helping to drive banking stocks is that the DOJ has been reportedly reaching out to many banks over a master settlement regarding mortgages.  That does not mean that other agencies and other judges will not keep up the fight (nor that they will not try to interrupt a settlement).  Still, one more effort to put the mortgage crisis behind us is a help. Some additional outliers are as follows: 

• Large proposed pre-packaged foreclosure sales to funds and buyers as rental properties;
• Huge discounts to book value;
• Possibility of interest rate help after 2012;
• Continued improvements in consumer credit metrics.
• Maybe the big help for BofA is that Jim Cramer keeps calling it a “SELL” on his shows.

To try to have a sector wrap in a nutshell still feels misplaced after how dismal 2011 was.  BofA was the worst performing DJIA stock by far.  That makes it little surprise that it would be the best performing stock in the first week of trading.  Still, the company has not issued any real news and it is up nearly 18% from the end of the year during only the sixth trading session of this year.  That is an impressive move regardless of how painful 2011 was.

JON C. OGG

Direxion Daily Financial Bull 3X Shares (NYSE: FAS) is proving that financials can still manage to rally with the market.  The move is up 9.% at $53.87, mostly erasing the damage of last week.

Market Vectors Russia ETF (NYSE: RSX) is a beneficiary if Europe’s woes may find a beginning of the end.  This ETF is up 5.8% at $29.12, and the triple-leveraged Direxion Daily Russia Bull 3X Shares (NYSE: RUSL) is up a whopping 17.1% at $40.39.

SPDR Barclays Capital High Yield Bond (NYSE: JNK) is winning as spreads of junk bonds (and investment grade) tighten over Treasuries.  These often act more like stocks than real treasury-tracking bonds, particularly when credit spreads are so wide.

SPDR Gold Shares (NYSE: GLD) proves yet again that it is not just tracking gold as the fear trade.  Gold is becoming a risk-asset again and now mat be more tied to the performance of the S&P 500 Index rather than as “the fear trade” which we were so used to seeing.

JON C. OGG

The big metric that many investors are going to note is book value, which was listed as $45.93 per share.  This is versus $44.77 one quarter ago and versus $42.29 a year earlier.  Please be advised that it was just yesterday that we discussed how book value at the big banks was going to act as a ceiling rather than as a floor. 

Without an adjustment for debt valuation, the investment banking department would have been in the red as that segment saw a 13% revenue drop.  Some additional figures were as follows:

• Basel I Tier 1 Common was $120 billion, ratio of 9.9%;
• Estimated Basel III Tier 1 Common ratio was 7.7%;
• Credit reserves at $29.0 billion;
• Loan loss coverage ratio was 3.74% of total loans.

The bank also repurchased $4.4 billion of common stock during the third quarter.  Shares closed at $33.20 yesterday and the stock is indicated down 1% at $32.81 and the 52-week trading range is $27.85 to $48.36.

This has shares of Bank of America Corporation (NYSE: BAC) down 1.5%, Wells Fargo & Company (NYSE: WFC) indicated down 0.6%, and Citigroup, Inc. (NYSE: C) down 1.5% at $28.77 in pre-market trading with about two hours until the market opens.

The triple-leveraged Direxion Daily Financial Bull 3X Shares (NYSE: FAS) is trading down almost 3% at $12.28 this morning in the pre-market.

JON C. OGG

BofA owned a 10% stake in the bank and the value of that stake is estimated to be $17 billion. We noted two weeks ago that potential buyers could include the sovereign wealth funds of Qatar and Kuwait.  And this sale was rumored again late last week.  BofA did not reveal the buyers specifically, saying only that the sale was a “private transaction with a group of investors.” The sale is believed to have been done with sovereign wealth funds and institutions in the US, China, Malaysia, and the Middle East.

BofA is trying to boost the bank’s shares again as it bolsters its Tier 1 capital. CEO Brian Moynihan noted that the bank reduced its risk-weighted assets by $7.3 as a result of this sale. He also said that in the last month BofA’s asset sales generated about $5.8 billion in additional Tier 1 capital and reduced the bank’s risk-weighted assets by about $16.1 billion.

BofA made a nice profit on an investment of $3 billion for its full 10% stake at the time of the Chinese bank’s IPO in 2005. As a core investor, BofA agreed not to sell most of its 25.6 million shares until August 29th of this year.

BofA’s shares have risen more than 3.5% in the first half hour of trading this morning, to $8.04, in a 52-week range of $6.01-$15.31.

The SPDR Financial Select Sector Fund (NYSE: XLF) is up more than 2.5%, at $13.09, in a 52-week range of $11.81-$17.20. The Direxion Daily Financial Bull 3X Shares fund (NYSE: FAS) is up nearly 7%, at $14.69, in a 52-week range of $11.20-$34.29.

Paul Ausick

Now Reuters reports that an announcement may be coming as early as Monday on the sale of half of BofA’s stake in China Construction Bank to an unnamed buyer.  BofA owns a 10% stake in the bank and the value of that stake is estimated to be $17 billion. We noted two weeks ago that potential buyers could include the sovereign wealth funds of Qatar and Kuwait.

BofA is not commenting, of course, but raising another $8.5 billion could boost the bank’s shares again as it bolsters its capital. A report on CNBC, cited at Nasdaq.com, claimed that half of BofA’s stake would be sold to “a group of sovereign-wealth funds and institutions from the U.S., China, Malaysia and the Middle East.”  Final composition of the investor group is not yet known.

If BofA does sell, it will have made a nice profit on an investment of $3 billion for its full 10% stake at the time of the Chinese bank’s IPO in 2005. As a core investor, BofA agreed not to sell most of its 25.6 million shares until August 29th of this year.

BofA’s shares have risen nearly 2.5% again today, to $7.84, in a 52-week range of $6.01-$15.31. The stock has also traded more than 300 million shares as of about 2 pm this afternoon.

The SPDR Financial Select Sector Fund (NYSE: XLF) is up more than 1.3%, at $12.83, in a 52-week range of $11.81-$17.20. The Direxion Daily Financial Bull 3X Shares fund (NYSE: FAS) is up more than 4%, at $13.90, in a 52-week range of $8.72-$34.29.

Paul Ausick

Several features of perception against reality were cited.  The stronger noted that BofA sentiment has grown increasingly negative in the past few weeks, an understatement considering the 40% decline in BofA’s stock price versus a 15% S&P price drop.  It also noted an inversion of the credit default swap curve as well.

The report called it prudent for management to address concerns in the credit market.  Further noted is that this equity and credit market pressure has hit a point that is increasingly hard for management to ignore.  The report also noted that this could increase the chances of a credit-positive development, such as a capital raise.

It was back on April 18 when J.P. Morgan cut the rating on BofA to Underweight.  At the time, the CDS spread was 137 basis points, but it was 445 basis points on last look.  J.P. Morgan noted that Citigroup Inc. (NYSE: C) has a mere 170 basis point CDS at last look.  Despite this, J.P.Morgan said that it no longer makes sense to remain at “Underweight” even with mortgage expenses there and while a relative capital shortfall remain.  Earlier this month that capital shortfall was called $12 billion under a base case of Basel III, and the bear case suggested a $25 billion capital shortfall.

Rochedale’s Dick Bove has also defended Bank of America today, but where he differs with J.P. Morgan is that he thinks BofA can handily cover its liabilities.  Bloomberg even has a video of this. Bizjournals.com has also run reports showing that Jefferies believes a new $50 billion is needed.  The FDIC has also just freshly shown that sector-wide banking metrics are still improving.

Back to J.P.Morgan… The research this morning notes that asset sales and the possible settlement approvals and capital raising.  J.P. Morgan has also gone on to say that the current challenges are solvable and said that the current valuations appear to reflect irrationality rather than reality in the issues at BofA.

Now, there is some housekeeping to address.  There have been some loose and so far completely unfounded rumors out there that J.P. Morgan could actually somehow acquire BofA.  The mere thought of this is so out of line with public sentiment and would require so many exceptions to banking law (the 10% deposit threshold is just the start) that this seems almost silly.  In this crazy world, the one admission to make is that anything may technically be possible.  In fact, aliens could arrive for an intergalactic media conference any day now.

If the regulators really think that BofA is healthier than the public perception and healthier than this stock is indicating, maybe they should just announce the approval for the bank to start paying a higher dividend.  That is very unlikely today, but by the take of yours truly it is more possible than any J.P.Morgan-BofA rumors other than that the healthier bank has issued research defending the weaker money center bank.

Another rumor may be more of a philosophical discussion rather than a rumor, and it has been ongoing.  Brian Moynihan has said how much he regrets his predecessor taking over Countrywide, and Countrywide is the source of 95% or more of today’s issues.  The discussion now that should be taking place is how BofA could throw in the towel and bankrupt the unit.  It would be a real mess, and frankly it may challenge many aspects of corporate and banking law.

Keep in mind that the prior book value of $12.65 per share that BofA reported last month is no longer relevant.  What it is may just be a guess now, but the market has voted that the prior stated value is far lower after write downs and more.  Bank of America shares are down 2% at $6.29 on the day.  The triple-leveraged Direxion Daily Financial Bull 3X Shares (NYSE: FAS) has all of these and other big financial stocks in there as components and its shares are up 5% at $12.28 or so on last look.

JON C. OGG

Reuters reported that the bank is in negotiations to sell half of its $17 billion investment in the China Construction Bank (CCB) to the investment arms of the governments of Qatar and Kuwait. BofA’s shares in CCB are locked up until August 29th, after which the bank is free to sell some or all of its investment. It is believed that the bank needs an infusion of about $50 billion in cash to meet new capital requirements.

BofA has not commented on the report other than to say that the bank intends to continue its “important long-term alliance with CCB.” The bank has already sold its warrant rights to acquire more shares of CCB.

The bank has also sold its servicing rights to some 400,000 residential mortgage loans to Fannie Mae for $500 million. The total value of the portfolio is $73 billion, but what BofA gave up was only the right to collect the loans, not the entire portfolio itself. According to Forbes, the delinquency rate on the loans is 13%, and more than 50% are loans made on homes in troubled US real-estate markets.

Fannie Mae could well have overpaid for the collection rights, according to Forbes. If that’s the case, then BofA just received a small bailout package of sorts, from a federally-backed agency that is itself receiving billions in bailout funds. And for a portfolio that is losing value at a rapid pace.

The possible bankruptcy filing for Countrywide may be a case of closing the barn door after the horses have all left the stable. BofA took a charge of more than $20 billion last quarter to account for losses from Countrywide. AIG is suing the bank for $10 billion for losses primarily on the Countrywide loans.

A post on the Dealbook blog at the New York Times provides details on what BofA actually owns and doesn’t own of Countrywide’s assets and liabilities.  The short version is that even if BofA does file for bankruptcy on its Countrywide unit, the bank “still has residual exposure to Countrywide in a bankruptcy and a hefty litigation bill to fight off such claims.”

BofA’s investors must find this all to be good news. In the time it took to write this, BofA’s shares rose nearly another 2%, for a gain early in the afternoon of more than 7%, to $7.26, in a 52-week range of $6.31-$15.31.

Financial Select Sector SPDR (NYSE: XLF) is up 4.5% at $12.74 and the Direxion Daily Financial Bull 3X Shares (NYSE: FAS) is up 11.5% at $13.92 with its triple-leverage.

Paul Ausick

• DJIA: 11,764.03 (-102.59; -0.86%)
• NASDAQ: 2,647.57 (-21.67; -0.81%)
• S&P500:    1,243.30 (-10.75; -0.86%)
• 30YR-T: 3.8050% (-0.114)
• 10YR-T: 2.5630% (-0.061)

Washington D.C. is responsible for this last wave of what probably locked the markets back into recession.  The debt and budget process actions were way too slow, were maddening to the public, and frankly gave businesses the last excuse needed to pull their hands off the buying buttons and hiring buttons.

The ProShares UltraShort 20+ Year Treasury (NYSE: TBT) hit a new 52-week low today, an extreme measure, as the Treasury yields challenged 3.80% on the 30-year and 2.50% on the 10-year.

ProShares UltraPro S&P500 (NYSE: UPRO), a 300% S&P 500 mover, has bounced a bit, but is still down over 2% at $65.55 after having traded under $64.00 briefly.  Direxion Daily Financial Bull 3X Shares (NYSE: FAS) has even briefly traded under $20.00 today before a recovery.

SPDR Gold Shares (NYSE: GLD) tracks the gold market and both hit a new high yet again. The SPDR Gold trust hit $162.86 today as gold was challenging $1,675.00 per ounce.  Even the iShares Silver Trust (NYSE: SLV) has risen back above the $40.00 death-trap line that has killed investors before.  Those shares are up 1.7% at $40.50 today.  These are feeling leveraged enough that we didn’t even dare use the leveraged metals ETFs.

Will an oversold bounce come?  It may be happening as this publishes.  The stock markets have now gone negative in 2011 and the losing streak will be nine consecutive days if today ends up in the red.  That would mark the longest losing streak in years and years for stocks.

The austerity measures will take out that much more from the economy.  The layoff waves have started all over again, GDP is anemic, Europe is trying to keep the PIIGS out of the slaughterhouse, Triple-A ratings are becoming mere token items, China and India keep slowing, austerity measures will drag, and on and on.

Now the big hope is that value buyers will step in or that a grossly oversold reading will bring on more buyers.  If you overlay the 2010 chart with the 2011 chart so far, this could end up being Financial Groundhog Day.

JON C. OGG

We consider this win a “less of a loss” for the likes of major institutions like J.P. Morgan Chase & Co. (NYSE: JPM), Bank of America Corporation (NYSE: BAC), Capital One Financial Corporation (NYSE: COF), and Citigroup Inc. (NYSE: C).  The large winners may in fact be none other than Visa Inc. (NYSE: V) and MasterCard Inc. (NYSE: MA) as they are only paid on a per transaction basis.

• J.P. Morgan Chase & Co. (NYSE: JPM) closed up unofficially by 2.3% at $40.45; shares are up 0.3% at $40.56 in the after-hours.
• Bank of America Corporation (NYSE: BAC) closed up unofficially by 2.95% at $11.14; shares are up 0.3% at $11.18 in the after-hours.
• Capital One Financial Corporation (NYSE: COF) closed up unofficially by 1.6% at $52.26; shares are actually down 0.3% at $52.26 in the after-hours.
• Citigroup Inc. (NYSE: C) closed up unofficially by 3.3% at $41.50; it was raised to Buy at Merrill Lynch today.
• Visa Inc. (NYSE: V) closed up unofficially by 15% at $86.57; shares are up 1% more at $86.57 in the after-hours.
• MasterCard Inc. (NYSE: MA) closed up unofficially by 11.3% at $309.70; shares are up 0.7% more at $311.85 in the after-hours.

Direxion Daily Financial Bull 3X Shares (NYSE: FAS) is the real winner on the day due to its triple-leverage as it closed up by 6.9% at $25.43 on the day.

JON C. OGG