Lewis Leaving: Time To Short Bank of America?

Ding dong, the witch is dead...a familiar reprise to many of us of a certain age. The first witch to go was the wicked witch of the East - John Thain of Merrill Lynch. Now the wicked witch of the west - Ken Lewis - is gone. West? Bank of America was built in California, I needed to make this work somehow.

And Lewis leaving means it is time, once the charts are on your side, to short BOA.
Lewis, the second best cry baby among the bank CEOs (John Stumpf of Wells Fargo is in a class by himself), is leaving not because he wants to re-grow his beard or get out of the spotlight. He is leaving because the bank faces years, not quarters, of trouble ahead.

• A weakening balance sheet due to bad loans and more bad loans - more on that in another post.
• Continuing government ownership via TARP funds - I may be wrong but given their balance sheet issues, deteriorating loan quality and he size I do not see them getting permission to pay back their government money soon.
• Lawsuits and investigations related to Merrill Lynch bonuses and the Merrill Lynch acquisition.
• A future - one to twenty quarters - of declining or stagnant earnings, depending on how much they want to legally cook their books. In the real world, earnings will be troublesome for three to five years.
• A need to raise capital that puts the CEO in the spotlight answering too many of the wrong questions with the wrong answers.

These are all reasons to avoid the stock. Many investors - well, traders - have bought in, due to the charts and a consumer franchise second to none. That too is taking a hit. Up until six months ago I cold easily say BOA had the best customer service of any company I dealt with other than Amazon - I was and still am a BOA Premier Banking customer. I am leaving -- they kicked me out of the Premier Banking Program by form letter and assigned me to a Merrill Lynch broker, saying I cold stay in with a quarter of a million brokerage account and getting rid of my private banker for fifteen years. A Merrill Lynch broker is not the guy or gal you want to talk to when discussing mortgages or home equity lines of credit. Bad move, that - an indicator of things to come.

Why short the stock? Most big banks are getting by on government largesse and legal but bogus accounting - totally unfriendly and opaque to investors - and 2010 will see the end of one offs, such as mortgage refis and the sale of assets, that boost earnings. Real earnings, declining home values, more than 10% unemployment and the other parts of the Great Recession will take center stage. More home equity lines will default, more commercial mortgages, more regular mortgages, more credit cards - and this will hit the income statement as reserves are set aside. And for BOA, it will also hit the balance sheet as write downs increase, making it necessary and expensive to raise capital, diluting shareholders.

So, if you believe fundamentals eventually take over the movement of a stock, watch the charts - when BOA turns it will be a good time to consider shorting the stock.