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Friends don’t let friends buy BAC

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(Update Feb 5) It appears BoA CEO Ken Lewis bought additional 200,000 BAC shares yesterday (source: bloomberg).

(Original Feb 4) Today Bank of America stock (NYSE: BAC) fell below $5 the first time since 1990s. The company was in trouble earlier this month as the loss from Merrill Lynch turned out to be much bigger then originally thought. There are lots of talk about the potential nationalization, as the rumor also hit another big troubled bank, Citi group (NYSE: C). Some retail investors got excited about the “appears cheap” price, and they bought into the stock and hoped for a big profit in near future.

Don’t !!! Although the insiders of BoA, including its CEO Ken Lewis, bought a bunch of stocks on Jan 20 when the stock dropped under $6 briefly (and around the same time, JP Morgan CEO Jemy Dimon bought JPM stocks), the insider buy looked more like the “confidence showing stock buyback” nowadays. Note in the good old days, companies bought back stocks because they felt the stocks are really cheap. Nowadays many companies bought back stocks to prop up stock price, or to offset the excessive stock awards to its employees. This “Ken Lewis” smelled more like a show to me, just like the Obama’s blaming Wall Street excessive bonus (before he hand out another round of carrots to banks soon).

The Bank of America common stock, in my mind, is a short term long option whose outcome very much depends on how the US government wants to get in return for support. The government won’t let BoA fail, whether they create a bad bank or not. BoA is just too big to fail. But they can not get nothing for the support either. So the most likely outcome is common shareholder will get wiped out. Another thing, much technical, is mutual fund usually can not own bank stocks trading below $5. So the selling pressure will be there for at least a few more days.

With many solid companies stocks traded at reasonable or attractive price, why risk your hard earned money in the BAC?

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