More Bad News For BAC

As you know, I established another short term trade in BAC (Jan. $6 Puts) in the Options Model Portfolio after making 30% last week on the same trade in a day. Today I didn't get the move I wanted (so far +3.73%) so I've held the position overnight.

Here's the bad news from Bloomberg...

MBIA Wins Judgment Ruling Against Countrywide

We all know who swallowed up Countrywide-BAC

Bank of America Corp. (BAC) lost a court fight against MBIA Inc. (MBI)over the hurdles the bond insurer will have to clear in a lawsuit seeking to force the bank to buy back faulty home loans made by its Countrywide Financial unit.

MBIA, which says it was duped into guaranteeing payment on Countrywide mortgage bonds, need only show the lender made misrepresentations about the loans backing the bonds, instead of having to prove they caused the losses the insurer is seeking to recover, New York state Judge Eileen Bransten said in a decision.

The ruling is among legal disputes with bond insurers and investors that “could significantly impact” the potential costs from loans made before the collapse of the U.S. housing market in 2008, Bank of America said in a regulatory filing in August.

So far we haven't seen a huge move in BAC, but 30 million MBIA shorts aren't sleeping well tonight.

Can you guess when the ruling came down? As you can see in AH (the 2 blue hash marks near the price scale) have MBI seeing additional gains.

Here's the BAC response...

I like the volume on the day and the last 10 minutes clearly gave up the hopium gains that MBIA would lose this battle.

This should have larger effects on BAC as far as precedent as they have lost multiple appeals. I wonder how Warren Buffet is feeling toward Obama since that faux-meeting in which Warren was advising Obama on the economy only to buy $5 billion in BAC the next day...uh, political favor gone wrong? And don't forget BAC's attitude at the time, "It's nice to have the cash, but we really don't need it", that is until they do, which they did and since have made plans to rase more cash.

For those of you who have been following my perspective on BAC over the last several months, the key event was BAC breaking $5.00 and returning a negative -60% on the year. BAC being one of most hedge fund top 5 holdings was bound to see strength in to the year end as funds like Paulson's Advantage Plus had a horrible year precisely because BAC was a top 5 holding. My logic has been ever since BAC broke the $5 line in the sand, the market would work hard to lift BAC in to year end to distribute/sell as much BAC as they could without crashing prices so when they issue 2012 Q1 prospectuses, they don't look as inept as they really were. Since BAC has played out exactly as expected since the break of $5.00, I think chances are good that the rest of my theory materializes and BAC one again heads below $5.00 and probably for the foreseeable future.

Here's the near term 3C event since the break of $5

The break saw a positive divergence, in my opinion this WAS NOT accumulation (it's too short for any real shares to be accumulated so this was not a cycle), but rather support to keep BAC from spiraling down and give funds a chance to sell in to some strength before the close of 2011. We saw distribution near $5.60 and 3C is leading negative right now in that same area. That's one nasty looking gap below today's prices.