Tuesday, January 11, 2011

Setting the table?

This morning Morgan Stanley(MS) issued a "tactical" idea for Bank of America(BAC) (Hat tip to StockBox), urging you to load up on the shares NOW!! 

Last week MS registered a new structured note, a three year 10% to 12% Contingent Income Auto-Callable Note due January 25, 2013 based on the Performance of the Common Stock of Bank of America Corporation. I detailed the workings of the nefarious plan investment hereAs I mentioned in my post, the investment being sold is a play on the coming volatility in BAC stock, with MS "winning" if the volatility in BAC stock price increases beyond a certain range.

That's why I found this "tactical idea" funny, as I thought MS was plotting to benefit from BAC's downfall. But, according to this call, MS actually thinks BAC is good for a 60 day pump rise in the stock price. This, then is probably ACT ONE in that volatility play.

Wait I forgot, investment banking departments have impregnable force fields known as Chinese walls that are meant to reduce collusion and conflict of interest issues. So obviously, the research department would not have a clue what structured derivatives dept was doing........
what was i thinking?

Perhaps, I read the prospectus wrong, yeah you know what, my bad, I read it wrong. That investment looks a sure bet, get stuck in..! 

Or maybe, just maybe they just needed a little stock "boost" before the deal closes on Jan 25th. Count 60 days, first reset day is April 22nd, that leaves a 30 day window for........? 
I'm not a cynic...... much. I know what I think, but the name of this game is think and analyze for yourself.

Happy Trading.

On to the good stuff:

Morgan Stanley: Buy Bank of America Now
From MS:

BAC.N, Bank of America ($14.40) /Research Tactical Idea

We believe the share price will rise in absolute terms over the next 60 days. Prior positive RTI recently expired with catalysts materializing of lower reps/warranties losses than market priced in. With BAC trading below book and the cheapest in our group, we see additional near-term upside because: 1) GSE settlement implications for non-agency losses (size and potential for settlement) and reduced reps/warranties tail risk; and 2) earnings release on Jan 21 where we could see NIM improving, credit continuing to improve and commentary around capital management. We estimate that there is about a 70% to 80% or "very likely" probability for the scenario. 

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