The downgrade of Bank of America (BAC) this morning strikes me as ill-considered. When Citigroup (C) turned lukewarm on the name, I thought to myself that if you are a bull on the market and housing in general, you would have a hard time getting back into this one.
I have to admit that Bank of America is the worst of the worst -- the most poorly run of all the major financials. People may hate Goldman Sachs (GS) more, but that's born of jealousy more than incompetence. I also expect earnings in the near-term won't be anything to write home about.
So what is my main reservation? The same one I have about downgrading all the financials: they traded much higher when things were far worse, whether it was Italian bonds or U.S. housing prices.
One of the big issues I have with Bank of America more than any other bank, including Citigroup, is its balance sheet. For most of the last year, Bank of America bonds traded down. In fact, one of the issuances I followed traded down to $81. That bond has rallied to $94-$95 -- pretty darned terrific.
You take the franchise risk off the table and you can see that Bank of America should be able to trade higher.
Has it gone up too much this year?
I would argue that it should never have been down as much as it was -- it came down that much because of forced selling by funds caught on the wrong side.
I can see hopping off at $10-$11, where we first found out that the whole franchise's viability could be in doubt courtesy the worst corporate purchase ever: Countrywide.
But here? It's too early, even as I prefer JPMorgan (JPM), Wells Fargo (WFS), and U.S. Bancorp (USB) to BAC.
Now, let me tackle another issue: Morgan Stanley (MS). Doug Kass is shorting this one, which I can understand because it has had a big run off the bottom as it traded down to $11.
But it is also down 35% year over year, and its franchise is in much better shape than when it trades substantially higher. In fact, if you believe, as I do that we might be in a different, more positive market no longer dominated by macro cowboys, then you want to be in Morgan Stanley because of the Smith Barney catalyst.
To me Morgan Stanley, once thought of as hobbled by Europe, might actually be able to take advantage of the chaos there now and pick up some share and some big business.
It isn't my favorite -- at $37 JP Morgan seems too cheap vs. the whole group. But shorting it? For a trade, anything's possible. The trend is your friend on this one -- and the trend is higher, given all the good news ahead and the troughing of earnings in 2011.
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