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Stock Ideas Investors Daily Edge Back Door Into China
Stock Ideas Investors Daily Edge Back Door Into China 
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| Back Door Into China |
| Saturday, 21 June 2008 | ||||||||
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You’re going to have to use your imagination here. Sunday was my wedding anniversary. I shredded my right hamstring on Sunday night. So, you might understand why sitting is not my most optimal pose this week. That means butt-in-the-chair time is at a premium for me this week… a week in which I am obligated to write the July issue of my Asia Business & Investing newsletter. But, despite the searing pain, I think I may have come up with an interesting backdoor China play for you. It’s one that could payoff this coming autumn. It involves Bank of America (NYSE:BAC), which is out of favor right now because it’s buying the mess that is Countrywide Financial. But, there are three things going on with Bank of America that merit your attention. One is that Countrywide has a huge amount of losses that haven't been realized yet. As in, not recognized on its books. So, even though Bank of America is set to spend $4 billion to buy Countrywide, it will get to use a proportion of Countrywide’s loses as tax write offs each year for the first five years after the merger. Then, it gets to use the rest of those loses starting in year six. If one of my most trusted sources can be believed, this will likely turn into more than $500 million in tax savings for Bank of America during the next five years and a ton more after that. Now, Bank of America has pored over Countrywide’s books, so you can be certain it thinks it will make money – generate more revenues – on the deal. So, a tax benefit that could exceed $1 billion during the next seven years or so is simply gravy.
But, that doesn’t mean that’s not a crappy way to treat Americans. After all, Bank of America knows it can book losses on money it never lent in order to generate huge tax write offs over a number of years. And, yes, I know that if Countrywide were allowed to simply vanish, it would never have paid those taxes.s Still, no one in Washington has the balls to stand up to Bank of America on this one… or even repair a corporate tax scheme that is tilted in favor of its biggest campaign donors. So, this deal is kinda like a 1950’s movie. Bank of America gets Beulah Bondi to do the cooking and the cleaning while it cuddles up to Donna Reed each night. That’s a wonderful life. But, since you’re stuck with this slimy deal, you may as well profit on it. Today, Bank of America trades around $27, a dramatic fall from the $50 range it traded in last fall. In fact, it dipped to a new 52-week low on Thursday… as it seems to do every day of late. But, BAC pays a massive dividend… in the neighborhood of 8.4%, or about $2.56 a share. And there’s more. Bank of America also owns about 20 billion shares of China Construction Bank (0939.HK), which, by the way, is up 171% in one of my Asia Business & Investing portfolios. That massive 20-billion-share stake means Bank of America owns about $15 billion of the CCB’s market value. The first sizable piece of that $15 billion becomes marketable in October. BAC will sell part of it. When it does, it'll have a big profit. That will allow it to offset some losses and help pay for the Countrywide deal. Even better, the CCB stake should allow BAC to preserve its huge dividend. That will be an important milestone in a badly bruised sector that has seen Citigroup, Wachovia and KeyCorp as the latest of at least 16 financial firms to cut dividends this year. Cash on hand is also key for banks right now. It’s why so many have cut dividends. That means, selling some of its massive stake in CCB is not just important to BAC’s tasty dividend payout, but it should also give Bank of America some breathing room in order to move forward on a pace that should allow its shares to rebound sharply over the next 18 months. So, as speculations go, I think this one could be as sweet as it gets. Hey, my butt is sore and my hammy is screaming. I need a break so I can get back to the newsletter. See you next Saturday. Have a great weekend. Your aching editor, Andy Disclosure: Though neither Lynn nor I own shares in Countrywide or Bank of America, our home mortgage is with Countrywide Financial. Countrywide, in fact, still holds the mortgage. It didn’t sell it. Also, neither Lynn nor I have any banking business with Bank of America. Our locally owned bank may be a tad inconvenient but its service is stunningly good. P.S. To let me know what you thought of today's article, send an e-mail to: This e-mail address is being protected from spam bots, you need JavaScript enabled to view it
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