What has changed in the last two weeks is Europe.  Two weeks ago it was not expected that France was going to suddenly issue a citizen-wide veto of the austerity measures.  Now that Sarkozy has effectively lost to Hollande in French elections, France is taking a socialist step and is effectively boycotting its austerity measures.

The move in France followed an inability for the Dutch to reach a budgetary agreement, and now we have Spain back in trouble.  To add insult to injury, the new Greek politicos are just wanting to break the agreed-to austerity measures that allowed it to avoid default (as if you should be surprised there!).  Now we have Ireland even calling anti-austerity sounds with an implied return of Sinn Fein in the public.

So, back to bonds… The 10-Year Treasury Note is now yielding 1.81%.  If you go back and review the charts, the 1.80% acted as a yield floor in February of 2012 and in December of 2011.  In September and October of 2011 the floor was closer to 1.70% as an absolute low, but when that came off the 10-year note yield rose 30 basis points in just over a week. The 10-Year note was yielding 2.20% as recently as April 5, 2012 and had risen to 2.40% as recently as March 20, 2012 (after having risen 40 basis points in just 9 trading sessions).

Now we have a 30-Year Treasury “Long Bond” yield back at almost 3%.  For the “Long Bond” yields to be back at the real lows it has to drop to about 2.90% and ultimately about 2.80% as the floor in September, October, and again in December of 2012. The 30-Year yield was at 3.40% as recently as April 4, 2012.

Credit Suisse just lowered its S&P 500 target to 1,450 from 1,470 this morning and it has increased the odds that both Greece leaves the Euro and also that the Euro could dissolve entirely.

iShares Barclays 20+ Year Treasury Bond (AMEX: TLT) has risen almost $10.00 per share since March 20, 2012 and that shows just how much interest has been there from what are normally equity investors who are preferring to Buy exchange-traded Treasury debt products.  Its yield is currently about 2.85%.

Junk bonds have lost their luster again, and it was only a week or so ago that the index was hitting a new high.  SPDR Barclays Capital High Yield Bond (AMEX: JNK) recently peaked above $40.00 and it is now at $39.50.  Investors have also turned away from the high-payout MLP sector as the JPMorgan Alerian MLP Index ETN (AMEX: AMJ) product recently peaked at almost $42.00 and it is now under $38.70 despite what is a high ‘yield equivalent’ for investors.

The banking sector surged in the first quarter but it has pulled back substantially.  The Financial Select Sector SPDR (AMEX: XLF) peaked at $16.20 and it is now down at almost $14.90 for what is getting closer to a 10% correction.  The highly volatile and leveraged Direxion Daily Financial Bull 3X Shares (AMEX: FAS) peaked around $110.00 per share at the end of March and start of April and it is now challenging the $94.00 price.  Banks and financials are back out of favor, mostly due to fears about Europe dragging them down.

The real question is whether or not this is the signal of the next recession or whether this is a trade for the “Sell in May and go away!” theme that investors are more worried about.  All growth indicators from non-farm payrolls, purchasing managers, and manufacturing and services activity readings are pointing so far to what is just slower and slower growth.

In the United States, Q1-2012 GDP was up at only +2.2% as government spending was down by 3% in the quarter.  Europe is in all but a deep ‘official recession’ per most of its latest economic reports.  The growth in China and Brazil has seen a tempering throughout this year as well, with other key emerging markets like India and others in South America still seeing slower and slower growth.

The good news against the recession argument is that economists after the last earnings season still seem to be calling for positive growth in U.S. GDP in the second quarter at least as of now.  If that holds true and if the U.S. can avoid getting pulled down by Europe, then perhaps the U.S. will avoid an official recession even if this current growth is rather pathetic.  We also have an election and it is a near certainty that both Presidential candidates are likely going to say whatever they can get away with to win the election in November.

If Q2 does not show negative on the GDP front in the United States, then technically no recession can be declared until early in 2013.  That would coincide with what Ben Bernanke has warned about the financial cliff facing the United States at the end of 2012 and it is when the new tax structure takes place.

The market is definitely voicing concern here.  Is that a recession warning?  It depends upon your own outlook and upon your own interpretations.  It must also be noted that the current drop in stock prices is getting to be where stocks are getting close to ‘oversold’ on the short-term charts even if the fundamentals are of concern.

As a final reminder, stop kidding yourself about the notion of a double dip recession.  We have enjoyed close to three-years of positive economic growth.  If a recession comes again soon, it will just be ‘the next recession’ since a double dip recession has to occur with a couple or a few quarters of the prior recession.

JON C. OGG

The bank talked about negative valuation adjustments related to changes in the company’s credit spreads of $4.8 billion pretax, or $0.28 per share.  BofA also claims that its total net exposure is only $9.8 billion to Greece, Italy, Ireland, Portugal, and Spain.

A year ago the bank reported earnings of $2.0 billion, or $0.17 per share on revenue of $27.1 billion. The bank reported that if you were to exclude the valuation adjustments from both periods, revenue would have been down by about 3% to $27.3 billion in the first quarter.

Bank of America noted that it increased its Tier 1 common equity ratio by 92 basis points from the prior quarter and that its liquidity is at record levels. The bank’s Tier 1 Capital Ratio was 13.37% and its Tier 1 Common Equity Ratio was 10.78% at the end of the first quarter. The improvement in credit spreads results in a negative adjustment to earnings this quarter.

Today’s earnings results are difficult to measure by any real benchmark compared to other bank reports because of the items.  Still, the bank is talking about positive momentum being seen in its operations.  CEO Brian Moynihan said, “Our strategy is paying off: With the economy steadily improving and because of the work we have done to strengthen and simplify our company, we saw improved profitability in all of our businesses this quarter compared to the fourth quarter of last year.”

Bank of America reported that its stated book value is $19.83 per share, and its tangible book value was $12.87 per share.  The bank previously said that its tangible book value per share was $12.95 at December 31, 2011, compared to $12.98 at December 31, 2010. The stated book value per share was $20.09 at December 31, 2011, compared to $20.99 at December 31, 2010.

Bank of America shares are actually trading up over 5% at $9.17 or so in active pre-market trading this morning after closing at $8.92 on Wednesday.

The move is also lifting shares of the rival challenged money center bank of Citigroup, Inc. (NYSE: C) is up by 1.5%.  Even the wild and leveraged Direxion Daily Financial Bull 3X Shares (NYSE: FAS) is getting a boost.

JON C. OGG

In the Moody’s warning, Credit Suisse Group (NYSE: CS), Morgan Stanley (NYSE: MS), and UBS AG (NYSE: UBS) were put on notice that their credit ratings could be downgraded potentially by as many as three notches.  That is a very aggressive downgrade warning, and it now almost assures that a downgrade of one or two notches is almost certain.

Warnings of a two notch downgrade were handed out to Barclays PLC (NYSE: BCS), BNP Paribas, Credit Agricole, Deutsche Bank AG (NYSE: DB), Goldman Sachs Group Inc. (NYSE: GS) and HSBC Holdings PLC (NYSE: HBC). This seems to all but assure that at least a one notch downgrade could come on these.

Interestingly enough, Bank of America Corporation (NYSE: BAC) and Nomura Holdings, Inc. (NYSE: NMR) were “only” given warnings of a possible one notch downgrade.

Moody’s noted that these existing ratings just do not reflect the current market challenges.  Here are the pre-market trading indications on each, in New York trading indications:

• Credit Suisse Group (NYSE: CS) -0.7% at $25.36;
• Morgan Stanley (NYSE: MS) -2% at $18.58;
• UBS AG (NYSE: UBS) is down only $0.01 at $13.91;
• Barclays PLC (NYSE: BCS) is down 0.4% at $14.97;
• Deutsche Bank AG (NYSE: DB) is down 1.2% at $42.45;
• Goldman Sachs Group Inc. (NYSE: GS) is down 0.5% at $112.55;
• HSBC Holdings PLC (NYSE: HBC) is down 0.5% at $44.69;
• Bank of America Corporation (NYSE: BAC) is down 0.8% at $7.72.

Even the triple-leveraged Direxion Financial Bull 3X Shares (NYSE: FAS) is down ‘only’ 0.7% at $86.30 in the pre-market.

What is interesting here is that the move lower this morning is on the heels of major moves higher since the first of the year.  The downgrades seem assured on at least some level now, but the market is not really acting as though it is ready to panic.

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JON C. OGG

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