To The Moon

Last Fri, 15 July, according to $Bank of America(BAC)$ strategist - “risky assets (like stocks) are heating up, with investors pouring cash into US market as inflation appears to be in “retreat “.

Last week alone, $11.6 Billion have been pumped into the stock market, signaling that traders are growing bullish on risk assets as cooling inflation seems to be keeping pace, month on month.

The “rally” mentality carried into Mon, 17 July trading (see below):

• DJIA: +0.22% (76.32 to 34,585.35)

• S&P 500: +0.39 (+17.37 to 4,522.79).

• Nasdaq: +0.93% (+131.25 to 14,244.95). Nasdaq more than redeemed itself from last Fri performance.

Mega cap banks - $Bank of America(BAC)$ and $Morgan Stanley(MS)$ will be reporting their earnings before trading starts on Tue, 18 July.

Like JP Morgan, I am certain that both banks have scrubbed their respective earnings report to ensure no negative overtone or undertone, will appear anywhere in the presentation notes.

If one combs thru the presentation notes with a fine-tooth comb, for sure one would be able to find “playdown” on some of the data.

Barron’s has already predicated that BofA’s massive bond losses to the tune of $100 Billion will be tucked away in some supplement or annex, away from the main press release.

Incidentally, the massive bond “paper” losses have been covered in depth by The Financial Times in its 29 June 2023 post (see below).

• In essence, it was a case of “bad decision” made 3 years ago in 2020, a time when interest rate was virtually zero percent.

• BofA has pumped majority of $670 Billion (during pandemic-era, savers’ deposit) inflows into debt markets at a time when bonds traded at historically high prices and low yields.

• Silicon Valley Bank (SVB) adopted the same strategy except that it did not have sufficient cash unlike BofA and the March 2023 bank run torpedoed SVB.

• 3 years on, with yields risen and bond prices fallen, BofA’s portfolio value has plunged.

• According to FDIC data, BofA’s losses accounted for one-fifth or 20% of the $515 Billion “paper” losses in the securities portfolio amongst US’s nearly 4,600 banks as of end Q1 2023.

• According to Dick Bove, Chief strategist at Oden Capital, {a boutique broker} - if one were to scrutinize BofA's balance sheet, a “messy” reveal ensures.

“Bad” investment decision could worsen if:

• The Fed raises interest rates further or > 2 more times (as socialized)

• If the credit quality of its borrowers deteriorates.

My 2 Cents Point Of View:

• If BofA manages cover & concealment well, market might just be willing to be taken for a ride.

• This is because US market wants a rally.

• Regardless of whether the veterans are aware of the “paper” loss or choose to turn a blind eye.

• The “paper” loss portfolio consists of highly rated government-backed securities that are likely to be paid back (eventually) when the underlying loans mature.

• BofA just have to suck it up and bear with the “lost” opportunity costs.

After, BpfA is the #2 Bank by Market Cap and it has fared well in the Fed’s recently concluded Annual stress tests.

• Do you think BofA will hand in a “stellar” set of Q2 earnings today?

• Do you think US market rally will continue into the 2nd day of trading?

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