It’s Wall Street’s Secret

Why Buffett Is Dumping Bank of America

Table of Contents

• Why Buffett Is Dumping Bank of America

• Three Things You Need To Know Now:

• And one more thing…

• In Case You Missed It…

• “Guys… how long until you fail?”

• It’s Wall Street’s Secret Why Buffett Is Dumping B …

Three Things You Need To Know Now:

1. Thank God for the Permian. Few people have any idea how much value has been generated for Americans from the shale oil and gas revolution. After being a large oil importer in the late 2000s (and after seeing oil spike to $150 per barrel), huge new production was enabled in the Permian and other shale basins with horizontal drilling and high-pressure fracking technologies. Today American exports are at a new record, of 2 million barrels per day. This economic miracle explains, more than anything else, America’s resilient currency and our growing per capita GDP, compared to our trading partners. It’s wonderfully ironic that we’ve become the world’s largest oil producer during the third Obama administration, as they’ve done everything possible to destroy oil and gas in America. Subscribers, don’t miss our latest Texas oil and gas recommendation. It’s like buying Saudi Arabia in 1960 (and also watch the video of a conversation I had with my friend Cactus about this company… see below). 

2. Speaking of hydrocarbons… anyone paying attention to coal? I haven’t seen a single media mention of this pretty incredible fact: The International Energy Agency (“IEA”) just boosted its coal demand outlook through 2030. Net zero? Lol. No, obviously we’re going to be burning a lot more coal in 2030 than we are today. The wonks tracking actual power-plant construction and usage now say coal demand will be 300 million tons higher in 2030 than they last estimated. Even so, that forecast still envisions a delusional 2% annual decline in coal demand. Much like global warming itself, these “forecasts” of doom never actually materialize in the real world. It’s hard to recall a situation in the world’s markets ever before when a physical necessity – like coal – has ever come to be completely ignored by investors. People will truly believe anything. 

3. Signs of a top… While Warren Buffett is dumping stocks and has now raised almost $300 billion, fully half of Berkshire Hathaway’s $600 billion in net assets, futures traders have amassed the largest position in equities, ever. Three guesses about how this turns out. Don’t say we didn’t warn you: it’s a bubble. 

And one more thing…

I recently sat down with my old friend Cactus Schroeder, my favorite Texan, who’s been neck-deep in the Texas oil scene for around 40 years, and Ross Hendricks, a senior analyst for The Big Secret on Wall Street. Together we talked through the details of a capital efficient land royalty company that’s (in my opinion) the best-kept secret in the Lone Star State.

If you’ve read our most recent Big Secret recommendation, it’s a stock you’ll recognize. And this conversation is a fantastic way to learn more about it. The full video is available for paid-up subscribers to watch here.

In Case You Missed It…

Yesterday in The Big Secret on Wall Street, we wrote about how the current rally in gold is different from those in the past (and how to take advantage of it)… 

On Wednesday, we released the full transcripts and videos of our second annual Porter & Co. Conference, where we hosted legendary futurist George Gilder… anonymous energy expert Doomberg (who remained incognito for his presentation)… Compounding Quality analyst Pieter Slegers… and had a panel of Porter & Co. analysts offering not-seen-elsewhere investment recommendations (in particular… an under-the-radar Australian mining-services company poised for a 486% return by 2030, from Big Secret analyst Ross Hendricks… and a penny biotech stock that Biotech Frontierseditor Erez Kalir holds in his personal portfolio that he believes has the potential for a 375x return in a year.)

It’s been a busy week… on Wednesday, we also launched Porter Stansberry’s Permanent Portfolio. More than 50 years ago, one of Porter’s most important mentors, Harry Browne, devised a revolutionary way of building a portfolio. His concept was to create a set of assets that were balanced, so that, no matter what might happen in the markets, the overall value of the portfolio would continue to increase. The concept was called The Permanent Portfolio.

Inspired by The Permanent Portfolio, Porter has added his own insight to the concept and created a system that works even better than Browne’s: 2x the returns without increasing the risk. It’s all here.

“Guys… how long until you fail?”

It’s Wall Street’s Secret
Why Buffett Is Dumping Bank of America

It’s no secret that Warren Buffett has been selling shares of Bank of America (BAC).

These details are public: Berkshire Hathaway (BRK) has sold 260 million shares at an average price of $41, for proceeds of $10.6 billion. These sales reduce Berkshire’s stake in the bank to less than 10%, but Berkshire still owns more than $30 billion worth of the bank.

What nobody has figured out is whether Berkshire is going to dump its entire position. The even bigger secret is why Berkshire has sold almost all of its bank stocks since early 2020:

• Sold 100% of its 346 million shares in Wells Fargo

• Sold 100% of its 150 million shares in U.S. Bancorp 

• Sold 100% of its 60 million shares in JPMorgan Chase

• Sold 100% of its 12 million shares in Goldman Sachs 

In regard specifically to Bank of America, Berkshire invested $5 billion in the bank in 2011. This was one of the most famous “Buffett deals.” Berkshire bought preferred stock that paid a 5% dividend and gave Buffett the right (but not the obligation) to buy 700 million common shares at $7.14. Berkshire exercised its conversion rights in 2017. And then, in 2018 and 2019, Berkshire continued buying, adding another 300 million shares at prices in the high $20 range, worth approximately $8 billion. (Today Bank of America shares trade at around $43.) Thus, the total capital allocated into the bank was more than $10 billion, making Bank of America one of Buffett’s top three all-time largest investments.

This was a massive bet.

And, since July, Buffett has been selling as fast as the market will allow. But why? Berkshire, of course, will not comment. Neither will Bank of America.

What’s going on?

It would appear Buffett is getting out of the way of a $2 trillion hurricane that’s the most likely “pin” of the current bull market. 

And he’s not the only investor that knows what’s happening. Ray Dalio’s Bridgewater Associates (the largest hedge fund in the world) dumped over $100 million of Bank of America and virtually every bank stock in America, including: JP Morgan (JPM), Bank of America (BAC), Wells Fargo (WFC), Goldman Sachs (GS), Morgan Stanley (MS), Bank of Hawaii (BOH), PNC Financial (PNC), Citizens Financial (CFG), and Capital One Financial (COF). 

Looking at this enormous problem, Thomas Hoenig, the former president of the Kansas City Federal Reserve Bank for 20 years and the former vice chairman of the Federal Reserve, told The Wall Street Journal in March 2023 that he would ask banks: 

The banks (and our government) have done a good job confusing the public, which still has no idea how big this problem has become – or how much worse it’s about to get.

Here are the facts that no one else will tell you.

First, this problem is a direct result of the massive money-printing of the COVID bailouts. The $7 trillion in new money the government created during 2020 ended up as deposits in the biggest commercial banks. They had to invest these funds somewhere, and banking regulation heavily favors buying U.S. Treasury bonds and so-called “Agency” debt, which are backed by the U.S. Treasury.

To encourage banks to own U.S. Treasury bonds, the regulations consider these assets “risk free.” Banks that hold them are therefore allowed to be highly leveraged, according to the complicated “risk weighted” capital regulations put in place after the Global Financial Crisis, as part of the Dodd-Frank reforms, which were implemented ostensibly to improve the financial system’s accountability and transparency.

These regulations, though, completely ignore market reality – which is that any financial instrument with a fixed coupon (like a 20+ year Treasury bond) will have an extremely volatile market price. This can potentially inflict huge losses on the banks, and limit their liquidity during a bank run.

In short, by pretending that U.S. Treasury bonds are risk-free (when they’re not) the banks’ biggest assets – rather than being a bulwark against market volatility – have actually become the source of it!

Again, commenting on this situation, Mr. Hoenig explained:

Buffett, it turns out, is a “real” bank investor. But, as you can tell by Bank of America’s share price, most of the public is not. It’s also obvious that nobody in the mainstream media (or the major investment banks) have bothered to tell the public anything about the truly enormous scope of these problems.

Quoting from the St. Louis Fed’s Bank Capital Analysis report of June 30, 2022:

Let me make sure you understand what that means.

It means that fully one-third of the reserves of our biggest banks are deeply “underwater.” That is, the real market value of their assets has fallen because of rising interest rates. It was these soaring losses, which are ignored by the regulations, that led to the run on deposits in the spring of 2023 at Silicon Valley Bank, Signature Bank, and First Republic Bank.

These banks didn’t fail because they made bad loans. They failed because they owned long-dated Treasury bonds.

Total losses on those bank failures were $40 billion.

How in the hell did this happen? Mr. Hoenig explained:

To stem the run on the banking system, which threatened to spread and could have easily de-stabilized the entire system, the Federal Reserve created a new lending program, The Bank Term Funding Program, which offered loans of up to one year, against the banks bond holdings and lent at face value, rather than current market price. This made sure that the banks could meet redemption demands from depositors.

Loans under that program soared throughout 2023 and peaked in the spring of 2024, at over $160 billion. With the Feds handing out money, none of the big banks bothered to raise new equity to plug the holes in their balance sheets. To prod them along, in March of this year, the Fed announced no more loans would be made under the program. The outstanding balances on the program are plummeting, down to $66 billion currently.

But, oh no, interest rates are rising again! And, out of all the banks that took on that interest rate risk in the summer of 2020, nobody took more risk than Bank of America, which purchased more than $500 billion (!) of long-dated bonds in 2020.

Today, Bank of America reports it has $86 billion in unrecognized “mark to market” losses on that bond portfolio. The bank has tangible equity (that is, real equity) of $200 billion.

The end of the government’s Bank Term Funding Program will lead major banks, most notably Bank of America, to raise more capital.

And, if interest rates continue to rise, the bank runs we saw in the spring of 2023 will return – with Bank of America most at risk. With $2 trillion in deposits, its shareholders would, most likely, not survive a run on its deposits. Right now, the stock is trading at 15x earnings, which is in the top of its valuation range. Buffett is dumping.

If you want to hedge this bull market, we recommend shorting Bank of America shares.Another way to protect your portfolio, and your wealth, from the coming banking collapse (and run on the dollar, as I explained on Wednesday) is gold. In this video from last week, I discuss the prospects for gold with Marin Katusa, who is the world’s foremost expert on gold trading and who has contacts at the highest levels in the gold markets. There’s no better way to safeguard your wealth from the collapse of our currency… see what Marin says here.

Good investing,

Porter Stansberry
Stevenson, MD

P.S. There’s one arena of the market where Porter & Co. is lacking.

We had Partner Pass members at our annual conference last month asking about when we’re going to focus more on investing not just for capital appreciation… but for yield. 

After all, a lot of investors rely on income. And there’s a lot of overlap between Porter & Co.’s focus on investing in capital-efficient, world-beating companies at the right price… and dividend investing.

An underappreciated reality of investing is that dividends are critically important to overall market returns.

One study by S&P showed that from 1926 to 2023, dividends contributed 32% of the total long-term return in the S&P 500. 

And even that dramatically understates the real difference if you take into account compounding. If dividends are reinvested, instead of withdrawn, then the impact of dividends on total returns increases to a staggering 50% to 75% of total return (depending on the time period and market).

What’s more, a dividend yield that might seem like a rounding error at first can grow over time to be transformative. 

Consider Warren Buffett’s history with Coca-Cola (KO). He started buying shares in 1988, investing a total of $1.3 billion in the soft-drink maker over the next six years. Since then, Coke’s quarterly dividend payment has grown steadily, to more than 10 times its level back then.

That means that in 2024, Buffett’s Berkshire Hathaway (BRK) will receive total dividend payments of around $776 million from Coke. That’s equal to roughly a 60% annual yield on the initial investment… every single year.

In short: overlook dividends at your own risk. Because by choosing the right stock at the right time… dividends can be transformational to your wealth. 

I’m telling you all this because Pieter Slegers – the expert featured in Porter & Co.’s Spotlight this month – has just launched a new service called Compounding Dividends. 

His objective is to uncover the companies providing a reliable stream of dividend income… that are meanwhile growing at attractive rates that will simultaneously compound your capital. 

Pieter has put together an offer exclusively for Porter & Co. that’s only available through this link, and it gives you the chance to get a Founding Member package to Compounding Dividends for the price others pay for his basic membership. To take advantage of this offer, simply click here, select the “Annual” option, and then Pieter will manually upgrade you to the full Founding Member level.