Shares of Bank of America are taking a run below $5, a critical price point that could trigger mass sell-offs by mutual funds and pension plans.
About 43 per cent of Bank of America shares are owned by institutional investors such as pensoin funds, endowments and mutual funds. Most institutional investors are prohibited by law or by their internal rules from owning stock worth less than $5.
Although we always smirk a bit when chartists talk about “support levels,” the Abe Lincoln support level is a serious matter. Not only does it trigger additional selling, it makes it more difficult for Bank of America’s shares to recover as institutional investors can’t start to buy again. Citigroup dipped below $5 bucks in November and briefly recovered. But in mid-January it tumbled back down below that level and never came back.
A part of the decline in Citi was probably triggered when fund managers sold off at the start of the first quarter of 2009. Typically, institutional fund managers don’t have to sell immediately when a stock drops below $5. They can wait until the end of the quarter. So even if Bank of America recovers, it may find tiself pummled again in April.
Bank of America’s market cap remains close to $30 billion, which was where Citigroup sat two weeks ago. Now Citi has a $19 billion market cap. Both are on the list of banks singled out by Barack Obama today as requiring special assistance above and beyond the TARP.
The talk among traders is that Bank of America may need as much as $90 billion in new common equity capital to support its gigantic balance sheet.