Thirteen years ago Bank of America (NYSE: BAC) was floundering beneath the mountain of debt it accrued during the financial crisis.
The bank was struggling to digest its $4 billion acquisition of Countrywide Financial. And it was overwhelmed by liabilities and costs related to the 2008 subprime mortgage crisis that had tanked the global economy.
That’s when Warren Buffett came riding to the rescue.
The Oracle of Omaha put $5 billion into BofA exploiting a stock that had lost 90% of its value — falling from a peak of $54 per share in 2006 to less than $6 per share in a five-year span.
Sitting here today, with BAC at $40 per share, it’s clear that the bet was another monumental win for Warren Buffett. So who would blame him for reaping his rewards?
Over the past few months, Buffett’s Berkshire Hathaway (NYSE: BRK.A, BRK.B) — itself up about 500% since 2011 — has been quietly unwinding its stake in America’s second-largest bank. It sold almost $10 billion of BAC stock in the third quarter and another $140 million in the first two days of October, trimming its stake from 13% to 10%.
This shouldn’t come as a surprise, given the current macro environment — one in which interest rates are falling. Conventionally, lower interest rates have a negative impact on banks’ earnings, as they lower the amount they earn on interest.{Macro}
That’s bad news for the Wall Street titans releasing earnings this week, including Bank of America.
BofA is expected to post quarterly earnings of $0.78 per share, which would be a 13% drop from last year. Revenue is expected to decline 0.7%, to a little north of $25 billion.
That contrasts with a 1% increase in revenue in the second quarter — though BofA also reported a 6% decline in earnings three months ago. And indeed, the stock’s returns have also trailed those of its peers over the past few years.
And that was with favorable Fed policy. Of course, dwindling interest rates alone wouldn’t be enough to tank bank shares. But it would make them more vulnerable to a potential recession.
Now, as it currently stands, the economy is in fine shape. The rate of inflation has been suppressed from its post-pandemic highs. Employment figures are immaculate. And GDP expanded by a robust 3% in the second quarter.
However, there have been a few signs of weakness — a storm cloud or two in otherwise clear skies, especially for banks.
Notably, consumer credit delinquency hit its highest level in 12 years — almost 11% — in the second quarter, according to the NY Fed. Auto loans were especially problematic, as delinquencies topped 4%.
That’s another hallmark of rising interest rates as borrowing costs increase. And while the rate of inflation has moderated, prices for everyday goods and big-ticket items like cars and houses are higher than they’ve ever been,
It’s no surprise then that Americans are having to go further into debt to buy these things. Hence another increase in overall household debt, which edged up 0.6% in the second quarter.
It almost goes without saying that borrowing is good for banks — but only if they get their money back with interest, and with a cushy amount of interest, at that. But in this case, falling interest rates and rising delinquencies are a potentially toxic cocktail.
Given that, it’s no surprise Warren Buffett and Berkshire Hathaway are taking their gains. Again, things are pretty peachy right now (America’s debt burden notwithstanding), but Lord knows what our country will even look like after the November election.
Meanwhile, the stock market is at a record high, so the getting is unquestionably good. And Warren Buffett has made himself a legend by selling high and buying low.
That’s what he’s doing here. And Bank of America is the perfect patsy to unload.
Fight on,
Jason Simpkins
Simpkins is the founder and editor of Secret Stock Files, an investment service that focuses on companies with assets — tangible resources and products that can hold and appreciate in value. He covers mining companies, energy companies, defense contractors, dividend payers, commodities, staples, legacies and more…
In 2023 he joined The Wealth Advisory team as a defense market analyst where he reviews and recommends new military and government opportunities that come across his radar, especially those that spin-off healthy, growing income streams. For more on Jason, check out his editor’s page.
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