The ONLY Way to Profit From Recent Bank Earnings Results

Bank of America recently reported earnings of $0.28/share, or $4.8 billion. That’s good news, right?

Except, this number is net of all of those pesky one-time adjustments…

I mean, they are just one time after all, so why even count them? There’s nothing wrong with ignoring the little detail that Bank of America took an $800 million hit for litigation expense related to the poorly conceived takeover of Countrywide. Why dwell on the negative? We should be happy that the bank took back $1.8 billion in loan loss reserves because housing is out of the woods, right?

Hmmm…

Maybe things aren’t all sunshine and roses like the bank wants us to believe.

The reality is, there is only one positive thing to take away from Bank of America’s recent earnings results. That is: at least the auditors who oversee the bank’s finances and reported earnings are putting their degrees in creative writing to good use.

Of course, that doesn’t help investors at all.

No. If you want to turn the slew of bank earnings reports into profit, you must see the real picture that is Bank of America or Citibank… or any of the brethren lenders who still carry huge liabilities on their books. And the first step towards seeing what’s really in front of you is this: ignore the hype and mainstream media.

Don’t Listen to the Banks or Mainstream Media

Instead, review the banks’ reports – with all of the adjustments – and ask the hard questions like, “What lies ahead?”

Are the billions of dollars in first and second mortgages on their books all going to pay off? Of course not.

Will Bank of America be able to refinance its own bonds, $34 billion of which come due this year? Unless bailed out, probably not.

Will the Fed keep interest rates ridiculously low, making long-term lending a risky proposition? Well… we have Bernanke’s promise to keep rates low until 2014… so that’s another negative.

Will housing remain sluggish, thereby keeping one of the biggest profit centers of banking off the table? Absolutely. The housing market still has another 30% before it reaches bottom. We know this because there is a useful piece of information to know about bubbles. That is, they often reset to prices below the point where the bubble began.

This, my friends, is the reality banks face. It’s nasty. It’s painful. It’s unavoidable.

Bank of America has a lot of pain in front of it. The legacy of Countrywide is not going away. Home Equity Lines of Credit (HELOCs) are dying quickly, while first mortgages are dying more slowly. The one area that has kept Bank of America afloat is the profit center of Merrill Lynch, as the trading and investment-related profits of the firm remain positive.

Sure, Bank of America shares have been on a meteoric rise this year, as investors breathed a sigh of relief over banks in general. They believed the hype about stated earnings both for the 4th quarter of 2011 and now the 1st quarter of 2012. But we see the reality, not the fantasy the banks would have everyone believe. We believe the likes of Bank of America are ripe for a fall.

In fact, we forecast a similar fate for most of the investing universe, which is why our Boom & Bust portfolio positions are set to profit as the markets roll over.

Know this: the ship is headed into dangerous waters. Don’t be sucked into bank stocks or the market in general just because some share prices have enjoyed gains over the past few months…

If you want to profit from the banks’ latest earnings report, get ready to sell short.


Rodney

P.S. Trying to convince you that banks are safe and stable is just one of the three lies you’re being forced to swallow right now. These are lies that could significantly hamper your ability to survive and prosper in the years ahead. Harry tells you about the other two lies here.

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Categories: Economy

About Author

Rodney Johnson works closely with Harry Dent to study how people spend their money as they go through predictable stages of life, how that spending drives our economy and how you can use this information to invest successfully in any market. Rodney began his career in financial services on Wall Street in the 1980s with Thomson McKinnon and then Prudential Securities. He started working on projects with Harry in the mid-1990s. He’s a regular guest on several radio programs such as America’s Wealth Management, Savvy Investor Radio, and has been featured on CNBC, Fox News and Fox Business’s “America’s Nightly Scorecard, where he discusses economic trends ranging from the price of oil to the direction of the U.S. economy. He holds degrees from Georgetown University and Southern Methodist University.