If veteran investor and commentator Jim Rogers is to be believed, 2012 could be the last opportunity for Bank of America (NYSE:BAC) to strengthen its balance sheet through subtraction with sales of Countrywide and Merrill Lynch. After all, asset sales are nothing new to BofA. To raise much-needed capital, it sold off a slew of holdings during 2011, including its stake in China Construction Bank (PINK:CICHY).
None, however, were sold at the peak of last year’s market in the spring. That was also when mortgage-backed securities (MBS) — which have so bedeviled Countrywide, and thus Bank of America — were selling at higher than book. Bill Gross of Pimco and others are now predicting that the Federal Reserve will initiate a third round of quantitative easing, QE3, in the spring with a focus on MBS to assist the still-struggling U.S. real estate market. If that comes to pass, the value of Countrywide and its toxic assets will likely rise.
The situation is the same with Merrill Lynch. As with Countrywide, the time to have sold Merrill was last spring, when mergers and acquisitions were proceeding at a record pace, robust investment banking fees were being booked and brokerage commission income was healthy. At that time, BofA was trading in the $15 range.
Due to the market decline from the eurozone crisis, the attractiveness of Merrill Lynch diminished, and Bank of America has fallen by over 50%.
But with Regions Financial (NYSE:RF) reportedly close to selling brokerage unit Morgan Keegan to Raymond James Financial (NYSE:RJF) for $900 million, the value of Merrill Lynch should be peaking again. For the new year, the Standard & Poor’s 500 index is up 2.7% so far, and brokerage house stocks are rising along with it. As noted by Adam Shell in a recent article in USA Today, financial markets have a history of bouncing back from flat years such as 2011.
Bank of America is already demonstrating this, up more than 20% over the last month. Indeed, Hilary Kramer recently predicted in an article on InvestorPlace.com that Bank of America would double in 2012 and be trading at $12 a share this year.
While the markets are starting the year off strong, in a recent interview, Jim Rogers warned that there was a “100% chance of a new financial crisis.” The major difference is that it will be much worse than the one in 2008, he claims. In addition, Rogers also stated that the U.S. would be hit very hard by the new crisis. For that reason, he’s short American stocks.
Considering that the stock market rally since spring 2009 has been fueled by liquidity from the Federal Reserve, it lends credence to Rogers’ bearish position. Under Chairman Ben Bernanke, the Fed’s balance sheet has been inflated from around $700 billion in mid-2007 to around $3 trillion now.
If the U.S. economy were mending as it normally does after a recession, there would have been no need for QE2 and certainly no need for QE3. But the foundations of the financial system are still weak, with no help from Europe, which directly threatens Bank of America.
If a new financial crisis does transpire, BofA is in no condition to survive. Its profit margin is a negative 1.97%, and the debt-to-equity ratio is 3.21. In addition, the least valuable units of BofA in a meltdown will be Countrywide and Merrill Lynch. Now, when market values are rising, is the time for Bank of America to sell these two assets at the best price to prepare for the worst in the future.