Shareholders Bail Out of BofA

After surging 26% during Monday s 500-point surge, investors backed out of Bank of America (BAC) on Tuesday, sending shares down as much as 9%. A little bit of profit taking was in store following those big gains. But the bigger culprit for the pullback was concern over the details of the Treasury s $1 trillion rescue plan for the financial-services industry that critics say may help alleviate problems with toxic securities but won t fix problems with bad loans.

Bank of America and Citigroup (C) are seen as the most precariously positioned major banks, and shares of both have seen months of volatile swings amid questions about their capitalization and management decisions. Tuesday s reaction to the plan highlights skepticism over the Treasury s Legacy Loan program, which would provide financing to private investors to buy up so-called toxic loans.

While the market was receptive to a plan to ease purchases of securities, financial industry experts say the loan sales plan doesn t address the fundamental issue of pricing. That s a problem for BofA, which in a recent Securities and Exchange Commission filing said the value of its loans now could be as much as $44 billion lower than their book value.

There s general agreement that banks will remain very reluctant to sell loans at lower than their book value, says Richard Staite, an analyst at Atlantic Equities. The big issue is what would compel banks to sell those loans. On the loan side of the plan it s very hard to see that sellers and investors are going to agree on a correct price.

Virtually no banks have written down their loan portfolios to levels that might lead to transactions, Rochdale Securities analyst Richard Bove wrote Monday. Therefore, the new program is too one sided. It offers significant benefits to the buyers but limited incentive to the sellers.

Bove wrote that securities write-downs have been a bigger problem than loan writedowns over the past year. The Treasury plan, then, remains a significant step forward, but still has room for improvement as it goes forward.

Bottom Line: Hold
The Treasury plan isn t a clear-cut solution for BofA, but it provides a bit more stability for a risky stock in a risky sector.

Unfriendly Skies

Shares of United Airlines parent UAL (UAUA) had a shaky descent Tuesday after an international trade group expanded its forecast for sharp declines for the airline industry in 2009.

The International Air Transport Association on Tuesday said the global recession would cause losses of $4.7 billion this year, nearly double its $2.5 billion projected loss issued in December. The IATA report also predicted severe declines in the Asia Pacific, Europe and Latin America regions, all of which United serves. (The company has been scaling back the number of flights in those areas.)

The state of the airline industry today is grim, the trade association s director general and CEO, Giovanni Bisignani, said in a prepared statement. Demand has deteriorated much more rapidly with the economic slowdown than could have been anticipated even a few months ago.

The report follows United s recent Securities and Exchange Commission filing, which on Friday said the carrier expected traffic to drop 14% for the first quarter of the year. While it estimated lower than expected fuel costs of $2.10 a gallon, it said revenue will decline between 12% and 13% for the first three months of the year.

United s filing on Friday projected a greater decline in revenue per average seat mile (RASM) than its competitors, Avondale Partners analyst Bob McAdoo wrote. Considering deep capacity cuts, the magnitude of RASM weakness is a bit surprising, he wrote. It would appear that the revenue environment has deteriorated since January, just like it has for the rest of the legacy carriers.

Bottom Line: Hold
Any investor still holding this stock knows it won t take off until the economy improves, and the IATA report indicates a longer-than-expected delay.

Williams-Sonoma Gains, Despite Profit Drop

Shares of Williams-Sonoma (WSM) rose Tuesday even though the upscale kitchenware retailer, also home to furnishings chains Pottery Barn and West Elm, said its profits severely decreased in the most recently closed quarter.

The San Francisco-headquartered company said it made $12.2 million on $1 billion revenue, down from $124 million on $1.4 billion during the same period last year. The retailer said earnings were hurt by falling sales and costs associated with the layoffs of 1,400 employees, the breaking of some leases and the writing down of the value of some underperforming stores.

Chairman and CEO Howard Lester said Tuesday the company responded as best it could to a recession that prompted a 22% drop in same-store sales for the quarter ended Feb. 1.

While our fourth-quarter results were better than expected due to increased promotional activity and tighter expense controls, our ability to drive increased traffic in this difficult economic environment proved to be a significant challenge, he said.

The company also provided guidance. It expects a loss of 20 to 23 cents a share for the fiscal first quarter.

Joan Storms, an analyst at Wedbush Morgan, wrote Monday that Williams-Sonoma was doing what it could in a bleak retail environment.

Investors should recognize management is executing well on several fronts, including aggressive inventory management and driving supply chain and advertising efficiencies, she wrote. Holiday season was at the high end of expectations, indicating that management has regained visibility on business trends. We believe guidance appropriately assumes a deteriorating macro environment extending into 2009.

Bottom Line: Hold
The strength of the brands Williams-Sonoma owns will endure despite consumer spending slowing to a trickle. However, recovery isn t yet on the table.