$2 Million Bet That Bank Of America Will Be $4 By November

Will BAC be at $4 by November? We don't know. But someone just made a $2 million bet that this is precisely what will happen. Minutes ago, 54k $4 BAC November Puts were purchased at $0.37. The total price: $2 million. Will this event occur? Like we said, we don't know, but it sure looks far more realistic than Paulson's bet that BAC will trade at $30 by the end of the year.

Why Gold Might Hit $5,000 Within Two Months

My firm has written often over the past couple of months comparing historical price movements with current developments.

To show you a few:

• Gold Headed To $5,000 per Ounce?
• Silver 2006 vs Silver Today, Does It Look Familiar?
• USD-JPY: Let The Crash Begin

To make the comparisons easier, I developed an indicator for the Prorealtime Charting software, which allows me to “go back in time”.

The first article showed us that it’s possible that gold could explode towards $5,000 over the next couple of months. Let’s have a look at the chart. (All charts created with Prorealtime.)


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But since anything is possible, let's look at this further: What could cause gold to explode?

Think about a total loss of confidence in currencies, especially the US Dollar.

As the second graph (below) shows, the US dollar is headed for a crash against the JPY. We have already seen part of that crash, but then suddenly the Bank of Japan intervened and the price shot up. However, interventions don’t work (except for the very short term) in our opinion, and right now, the USDJPY is already back around its lows, despite the interventions.


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So yes, gold could explode to $5,000. Especially if we would get a complete loss of confidence in the US dollar.

However, when you cross the street, you don’t just look at one side if a big truck is coming. The same goes for investing. One should always consider different views. Therefore, we compared the gold price today with the price movement of early 2006 to early 2008 in the chart below:


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We all know what happened with gold in 2008. It dropped from as high as $1,033 to as low as $681, as all assets were liquidated in order to obtain cash. We were experiencing a really big credit crunch.

As gold and stocks sold off in 2008, gold stocks were hit even harder than gold. If the comparison of gold now vs. 2008 would hold, then what should we expect from gold stocks? Well, the chart below has the answer.


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What would happen to silver? Exactly. The same as in 2008: a huge sell-off.


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Now I can already hear you say, “Hey, what about stocks?”

Yes dear readers, stocks also follow a similar pattern, as shown by the price action of the German DAX index.


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One last thought: Why is Mr. Paulson’s biggest holding the SPDR Gold ETF (GLD)? He doesn’t own that many gold stocks, but still, he is uberbullish about gold. If he really thinks gold will trade at $4,000, then why doesn’t he load up on gold mining stocks?

Maybe he thinks gold and gold stocks will completely disconnect, with gold going through the roof, while gold stocks tank just like the general markets? That trend might have already been developing over the last couple of months, as gold is at an all-time high, while gold stocks are still trading at levels where gold was trading about $500 lower.

Time to Bet on Bank of America

Shares of the giant bank are down 46% this year, thanks to the housing mess and worries about a global slowdown. At their current level, that's all priced in and more.

Investors pulled their money out of Bank of America with both hands last week, driving the stock to its lowest level since March 2009, as concerns about a slowing economy rattled the banking industry, and lingering losses from loans it made during the housing bubble raised fears that the bank would need to raise additional capital.

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timates and they're worth $14.70.

The bank has made some progress in cleaning up after the housing meltdown. It has bolstered reserves on its $939 billion loan portfolio to $37 billion. If loan performance doesn't get worse—a big if in many investors' minds—the bank won't have to increase those reserves and a major drag on earnings over the past few years will disappear.
Bank of America (ticker: BAC) has also improved its liquidity and its capital, with $400 billion of cash and liquid assets on hand and $1 trillion in deposits. The bank's earnings power was apparent in its second quarter results. Outside the residential mortgage area, the bank's businesses generated roughly $6 billion of net income, and each enjoyed lower provisions for credit losses.

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Recent Price	$7.19
52-week change	-45%
Revenue 2011E (bil)	$90.2
EPS 2011E	-$0.25
EPS 2012E	$1.47
Tangible shareholder equity (bil)	$128
Tangible equity/share	$12.65
Current Yield	0.6%
E=Estimate. Source: Thomson Reuters

But the good news has been overshadowed by the bad: the European debt crisis, a chaotic stock market and fears about global growth, which pushed U.S. Treasury yields down. That's to say nothing of the heap of lawsuits stemming from the mortgage mess.
Low interest rates are hurting net interest income at all banks. And a faltering global economy could mean the industry underwrites fewer securities, trades less, makes fewer loans and facse higher-than-expected loan losses.
Matt O'Connor, an analyst at Deutsche Bank wrote in a note last week that his $1.35 earnings estimate for Bank of America in 2012 could fall by 47 cents and his $1.75 estimate for '13 could be too high by 96 cents. Betsy Graseck, Morgan Stanley's bank analyst, lowered her 2011 earnings estimate by six cents, to 76 cents a share and her 2012 estimate by 29 cents, to $1.53 a share. She lopped her bullish target price by $2, to $15.

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Dan Picasso for Barron's

 Concerns also flared over a report last week that claimed the bank may have to lift its reserves dramatically to offset new problems with its residential mortgage portfolio. BofA's consumer real estate division racked up a $14.5 billion loss in the last quarter, hurt by a $12.8 billion increase in the representations and warranties provision. Reps and warranties basically promise investors in mortgages that the bank did its job in correctly underwriting the loan.

"At the end of the second quarter, Bank of America had approximately $18 billion to cover the recently announced $8.5 billion settlement with Bank of New York Mellon and other future representation and warranties repurchase liabilities," a spokesman wrote in an e-mail. Still, the firm has said it may have to boost provisions by up to $5 billion more.

Now for the Good News

Bank of America's businesses are growing smartly, but housing bubble loans are still dragging it down.

Business Segment	Net Income Q2 2011 (mil)	Chg From  Q2 2010
Deposits	$430	-36%
Card Services	2,035	146
Wealth & Investing	506	54
Commercial Banking	1,381	69
Banking & Markets	1,558	73
Consumer Real-Estate Svcs.	-14,520	NA
Source: Company reports

SOME THINK THAT NUMBER could go a lot higher. Last week Compass Point Research & Trading published a report estimating that BofA would have to boost reserves by another $25.7 billion. That's the most extreme estimate so far, and Bank officials disputed it hotly.
Ironically, the shares may have already priced in Compass Point's worst case scenario, which has BAC boosting reserves by $44 billion. Once that reserve increase is adjusted for taxes and divided by the bank's huge share base of more than 10 billion shares, tangible book value would be reduced by roughly $2.50 a share. That would still leave $10 a share in tangible book, estimates John McDonald, a Sanford C. Bernstein Research analyst. He has a $13 price target on the stock.
The other thing weighing on shares is a lack of confidence in Bank of America's ability to meet an increase in regulatory capital requirements by 2019 through retained earnings and the sale of assets. Under Basel 3, the bank's tier 1 ratio needs to be 3.5% in 2013.

The Bottom Line

A slew of bad news hammered Bank of America's shares to their lowest level since March 2009. Under even the most bearish scenario, they look cheap. Why they could rise 35%.

The bank's goal is to have a ratio of 6.75% to 7% by 2013 and to exceed capital requirements in all periods without raising equity. But the market is acting as if it needs to raise equity now to meet the requirements and be competitive with rivals like JPMorgan (JPM).
CEO Brian Moynihan failed to convince investors on a conference call last week that the bank had turned things around. But with tons of bad news priced into the stock, a few quiescent quarters may be all it takes to lift the shares out of their funk.

Nifty hits 15-month low, ends below 5K on global turmoil

After a few days of relative calm, Indian equity benchmarks closed with enormous cuts, with the NSE Nifty closing at below 5000 for the first-time since June 2010. It was a complete free-fall on Dalal Street on Wednesday, spooked by fears of stammering recovery in the European and US economies after debt crisis.
The 50-share NSE Nifty touched new 52-week intra-day low of 4,932.15, before closing down 112 points at 4,944. The 30-share BSE Sensex fell 371 points, to end at 16,469.79.
On the global front, European markets like France's CAC, Germany's DAX, Britain's FTSE were down 2-3.5%. The Dow Jones futures tumbled 173 points. Major Asian markets like Hang Seng, Shanghai and Nikkei closed down 1-1.6%.
Experts feel that one should learn to live with the pain as the bleeding is going to last long now. Stephen Roach, non-executive chairman of Morgan Stanley Asia said that Euro zone crisis is far from over and may see further adjustments in global equity markets.
Morgan Stanley has cut global GDP growth forecasts to 3.9% and 3.8% in 2011 and 2012 respectively. Roach further warned that both the US and Euro are hovering close to recession.
For India, Roach said, further rate hikes by RBI remains an overhang.
Likewise, Dipan Mehta, Member BSE & NSE too said the central problem with India was inflation and interest rates. He doesn't see any major change in the stance of the Reserve Bank.
"The market could see even lower levels, which cannot be ruled out," he added.
Meanwhile, Deven Choksey, MD of KR Choksey Shrs & Securities Pvt. Ltd said, "Most worried factor in the mind of investors and foreign investors is that this freedom from corruption, which is going to continue for longer period of time. That means the government's attention would be moving away from taking any policy reform decisions and that would significantly affect the progress of the economy going forward."
"The participation from retail investor is absolutely thin but the fund investors are also remaining cautious, generating cash in the portfolio," Choksey added.
Shares of technology, financial and metal companies saw sharp crack with the respective indices falling 2.5-4%.
Shares of technology, financial and metal companies saw major cracks with the respective indices falling 2.5-4%.
Banking majors ICICI Bank and Axis Bank lost 5% each. Largecaps like TCS, SBI, Infosys, Wipro, HDFC, Sterlite, Tata Motors, PNB and Hindalco were down 3-4.5%.
Reliance Infrastructure and HCL Tech were biggest losers on Nifty, falling over 6%. Reliance Industries, L&T and Bharti Airtel slipped 1-2%.
Beaten down infra major DLF, however, bucked the trend today rising 3% on short covering. Hero Motocorp, Reliance Communications, Jaiprakash Associates and ACC were other gainers.
Meanwhile, mid- and small-caps continued to take huge beating with respective BSE indices falling 2-2.6%.
Market breadth was pathetic; about 6 share slipped in red for every one share in green. Total traded turnover was more than Rs 1.6 lakh crore

SEC may have destroyed documents, senator says Grassley: Agency may have got rid of Goldman, Madoff documents

“From what I’ve seen, it looks as if the SEC might have sanctioned some level of case-related document destruction,” said Sen. Chuck Grassley, Republican of Iowa, in a letter to the agency’s chairman, Mary Schapiro.

Sen. Chuck Grassley

“It doesn’t make sense that an agency responsible for investigations would want to get rid of potential evidence. If these charges are true, the agency needs to explain why it destroyed documents, how many documents it destroyed over what timeframe, and to what extent its actions were consistent with the law.”

Agency staff “destroyed over 9,000 files” related to preliminary agency investigations, according to a letter sent in July to Grassley, the top Republican on the Senate Judiciary Committee, and obtained by MarketWatch.

The allegations were made by SEC enforcement attorney, Darcy Flynn, in a letter to Grassley. Flynn is a current employee, and according to the letter, received a bonus for his past year’s work.

Flynn alleges the SEC destroyed files related to matters being examined in important cases such as Bernard Madoff and a $50 billion Ponzi scheme he operated as well as an investigation involving Goldman Sachs Group Inc. GS -0.04%   trading in American International Group credit-default swaps in 2009.

Flynn also alleged that the agency destroyed documents and information collected for preliminary investigations at Wells Fargo & Co. WFC +1.34% , Bank of America Corp. BAC -0.27% , Citigroup C +0.03%  , Credit Suisse CS +0.38%  , Deutsche Bank DB +0.79%  Morgan Stanley MS -0.12%  and the now-bankrupt Lehman Brothers.

The letter goes into particular detail about Deutsche Bank, the former employer of current SEC enforcement chief Robert Khuzami as well as former enforcement chiefs Gary Lynch and Richard Walker.

The allegations that the SEC destroyed documents were first reported by the Rolling Stone magazine in a report Wednesday.

An SEC spokesman did not return a request for comment. However, according to the Rolling Stone article, the SEC told the National Archives and Records Administration that the commission “is not aware of any specific instances of the destruction of records from any other MUI.”

The SEC added that it “cannot say with certainty that no such documents have been destroyed over the past 17 years.” Read Grassley's letter to the SEC

Flynn’s lawyer, Gary Aguirre, was a former SEC attorney. Aguirre was fired in September 2005 as he was investigating allegations of insider trading at the major hedge fund Pequot Capital Management.

At the time, the SEC said Aguirre had personality conflicts with other staff attorneys, was reticent to be supervised and did not follow the agency’s chain of command.

Ronald D. Orol is a MarketWatch reporter, based in Washington.

German growth nearly grinds to a halt

Germany’s economic growth nearly ground to a halt in the second quarter, highlighting fears that the so-called Wirtschaftswunder in Europe’s largest economy may be coming to an end.

Gross domestic product rose 0.1% in the April-June quarter from the preceding three months, the German statistics institute reported Tuesday, citing seasonally adjusted data. The figures mark a sharp slowdown after German GDP expanded 1.3% in the first quarter.

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Euroview: SNB should think twice about franc peg

Pegging the franc against the euro might create more problems for the SNB than it solves.

“The German economy, accustomed to success, is unable to decouple from slowing global economic growth,” said Joerg Kraemer, chief economist at Commerzbank AG, in a note.

He lowered his forecast for German growth in 2011 to 3% from 3.4% previously.

Carsten Brzeski from ING Bank said the German performance “should not be considered a disappointment but rather a growth normalization“ after the stellar performance in the first quarter and given several external shocks such as the Japanese earthquake in March, the rise in oil prices and the U.S. economic slowdown.

“While German politicians are currently racking their brains on the pros and cons of common eurobonds, the luxury of having an economy running at `wonder’ speed is fading away,” Brzeski said in a note.

Reuters

German Chancellor Angela Merkel (right) welcomes France's President Nicolas Sarkozy before talks in Berlin in July.

The poor performance by Germany, combined with zero growth registered by France in the second quarter, contributed to a weak showing for the 17-nation euro zone.

The euro area’s GDP rose 0.2% in the second quarter from the preceding three months, after growing 0.8% in the first quarter, Eurostat said Tuesday. Growth in Spain and Italy was 0.2% and 0.3%, respectively.

Belgium and Austria were among the very few euro-zone nations that displayed some economic strength in the second quarter, with their GDPs growing 0.7% and 1%, respectively.

Tuesday’s data come as German Chancellor Angela Merkel is due to meet French President Nicolas Sarkozy in Paris later to discuss the euro-zone debt crisis.

The euro slipped 0.4% to $1.4385 ahead of the meeting.

Coutesy :Polya Lesova is chief of MarketWatch’s London bureau. (MarketWatch Inc.)

Google to buy Motorola Mobility for $12.5 billion

Google Inc.agreed to acquire Motorola Mobility Holdings Inc. for about $12.5 billion, a move that would make Google more competitive in the mobile-computing market.

The deal, which comes just eight months after the split of Motorola Inc., would give Google control of Motorola Mobility's attractive patent portfolio after the Internet giant recently missed out on a bid for Nortel Networks Corp.'s (NRTLQ) portfolio. Google, which owns the fast-growing Android operating system used in millions of mobile phones, has a thin portfolio of wireless and telecommunications patents.

Motorola Mobility shares soared 60% to $39.24 premarket, approaching the offer price of $40 a share, which is a 63% premium to Friday close. Google shares were down 3.2% to $546.50 premarket.

Google will run Motorola Mobility as a separate business that will remain a licensee of Android. Google also said Android will remain an open platform.

Google expects to complete the transaction by early 2012, and it's been approved by the boards of both companies.

Most of the Motorola's revenue comes from smartphones and the company has been working to diversify its customer base to defend against the potential loss of Deutsche Telekom AG's (DTEGY, DTE.XE) T-Mobile USA, a key customer.

Activist investor Carl Icahn, who is the company's largest shareholder, had urged Motorola Mobility to explore options for its patent portfolio in the wake of the Nortel deal that attracted multiple bidders.

Following that defeat, Google had preliminary discussions with InterDigital Inc. (IDCC) about a possible acquisition of the wireless technology developer and licenser.

The smartphone and set-top box company split with its sister Motorola Solutions Inc. (MSI), which is focused on business and networking operations, at the beginning of the year. The separation made Motorola Mobility nimbler and more focused on its core operations, but it faces a highly competitive smartphone market, including a persistent threat from Apple Inc.'s (AAPL) iPhone.

Last month, Motorola reported a 28% rise in second-quarter revenue, thanks to strong tablet sales, but the device maker provided weak guidance for the current quarter because of delays in launching speedier 4G devices.

Meanwhile, Google's second-quarter earnings rose 36% on record revenue as the Internet giant experienced strength in its core search business and gained traction with its newer operations.

Courtesy: Marketwatch Inc.

Morgan Stanley Gets Downright Apocalyptic

Listening to David Greenlaw and/or Jim Caron as they strike out again, and again, and again, with delusions of economic grandure over US GDP and some historic 2s10s bull steepener which is never, ever coming, one would be left with the impression that Morgan Stanley has inherited the title of most permabullish sell side advisory from Deutsche Bank's economics department. Nothing could be further from the truth. Like any other bank, MS has perfectly hedged its rosy outlook by spoonfeeding its retail clients with the rosy view, while whispering the apocalypse case to its institutional clients (judging by last week's pummeling in MS stock, there is not that many of them left). Below we present the view of MS' equity strategy team under Adam Parker, who gives not only a distribution range for his year end S&P target (1004-1425), but a matrix specifying the probability outcome of either case. Bottom line, "while there is 18% upside to the year-end bull case and 16% downside to the year-end bear case, we assign a higher probability to our bear case than bull case, preventing us from becoming increasingly optimistic." When even Morgan Stanley tells you (or rather the whale clients who are now more than happy to sell into every low volume, retail driven rally) there is little to smile about, it is high time to look for the exits.

From Morgan Stanley:

One way to think about what is priced into the equity market today is to look at a range of forward EPS and price-to-forward earnings multiples (Exhibit 2). Forward earnings data have existed since 1976, and the historical median price-to-forward earnings multiple is 13.6x. If the bottom-up consensus estimate of $114 turns out to be achievable, and the median forward earnings estimate were applied to it, the market would trade at 1550. Our base case is 12x $103.2 in 2012 EPS, or 1238. We have boxed in a variety of scenarios close to what is being implied by today’s price, and what would be implied by our bear and bull cases. While it’s impossible to know for sure what combination of multiple and forward EPS is being digested, we do believe that the market is pricing in something close to 12x $100 dollars today.

We don’t think a recession is fully priced in, as market retrenchment is usually far more substantial in that case, recent jobs data did not imply a recession is imminent, and corporate profitability and estimates remain robust. We think management guidance and sell-side estimates must be reduced to believe a substantial buying opportunity is imminent. Secondly, we have always, and continue to assign a higher probability to the bear case than the bull case, and believe the recent price action increases the probability of the bear case. Poor price action, the S&P downgrade of US sovereign debt, and the exacerbation of recent problems in Europe likely decrease confidence and increase the probability of the bear case (Exhibit 3).

Said another way, while there is 18% upside to the year-end bull case and 16% downside to the year-end bear case, we assign a higher probability to our bear case than bull case, preventing us from becoming increasingly optimistic.