What did Buffett see in the 'clearance-style sell-off' of Bank of America?

Buffett is once again selling shares of American banks.

According to the latest filing submitted to the SEC by Berkshire Hathaway, between July 30 and August 1, Berkshire sold 19.22 million shares of Bank of America, cashing out approximately $780 million.

Since mid-July, this is the fourth time Buffett has sold Bank of America shares, reducing his holdings for 12 consecutive trading days. The three previous reductions were as follows:

Between July 25-29, Berkshire reduced its holdings by approximately 18.41 million shares of Bank of America;

Between July 22-24, Berkshire reduced its holdings by nearly 19 million shares of Bank of America;

Between July 17-19, Berkshire reduced its holdings by 33.89 million shares of Bank of America.

After four rounds of selling, Buffett has sold a total of 90 million shares of Bank of America, cashing out approximately $3.8 billion. Currently, Berkshire still holds 942 million shares of Bank of America, making it the largest shareholder. Based on a share price of $39.5, the holding is valued at approximately $37.2 billion.

Why is Buffett continuously clearing out Bank of America?

As Berkshire releases its financial reports, Buffett has been consistently reducing his holdings in bank stocks, leading some to believe that the "Oracle of Omaha" is starting to worry about an overheated bull market.

Bill Stone, Chief Investment Officer of Glenview Trust, believes that nothing is more sensitive to the economy than banks, and investors are now more concerned about a slowdown or recession in the U.S. economy. Perhaps Buffett feels the danger and is starting to adopt a contrarian investment approach.

After all, Buffett's reasons for selling off positions each time are very sufficient. Last time, he sold part of his Apple holdings to avoid taxes reasonably. Some analysts point out that Buffett may be selling Bank of America shares for the following reasons:

Firstly, Buffett may be raising more cash for his successor.

Although Buffett remains sharp at the age of almost 94, it is undeniable that he is nearing the end of his career. At the shareholders' meeting in May, Buffett also mentioned the issue of his successor and expressed his hope that after he steps down, he can give the successor more flexibility. If Berkshire's cash is tied up in his late-stage investments, it may limit the successor's operating space.

This also explains why Buffett has been raising a large amount of cash recently.

Berkshire's cash reserves reached a record $189 billion in the first quarter, and after operations such as selling Apple and Bank of America, the current cash reserves may be close to $200 billion. Buffett stated at the shareholders' meeting:

We really want to spend this money, but unless we think (a company) is doing something with very little risk and can make us a lot of money, we won't spend it. This is not to say that I am resisting investment, it's just that many so-called investments are not attractive.

In addition, due to the surge in government bond yields over the past two years, Buffett's huge cash holdings can still generate high returns even through investing in short-term risk-free government bonds. For example, the current yield on a three-month government bond is 5.333%, far higher than Bank of America's current dividend yield of 2.24% If Berkshire Hathaway were to invest all of its $200 billion in cash in government bonds, it could generate approximately $10 billion in annual income.

Secondly, the corporate tax rate in the United States may increase in the future. Buffett's reduction of holdings in U.S. banks may be a preparation for potential tax changes.

Buffett mentioned at the shareholders' meeting that the U.S. corporate tax rate has decreased from 35% in previous years to 21%, but these tax relief policies may expire next year.

Analysts point out that once the corporate tax rate returns to 35%, even if Apple's revenue level remains the same, Apple's valuation will increase from the current 35x P/E ratio to 42.5x P/E ratio. Although the 15x P/E ratio of U.S. banks is much lower than Apple's, it is also close to the highest point in the past seven years, which may be one of the reasons Buffett chose to sell at this time.

Thirdly, Buffett may be disappointed with the large unrealized losses of U.S. banks.

Despite having a certain competitive advantage (as they can charge lower deposit rates than other banks), the net interest income of U.S. banks also declined in the most recent quarter, as customers moved funds to higher-yielding derivatives or banks with higher deposit rates.

Furthermore, U.S. banks have invested a large amount of cash in long-term government-guaranteed mortgage-backed securities when interest rates were low, and the value of these securities significantly decreased after interest rates rose. As of March 31 this year, U.S. banks had unrealized losses of $109 billion, leading by a large margin in the U.S. banking industry. Although these losses are on paper, these investment portfolios take a long time to mature, during which U.S. banks missed the opportunity to allocate these funds to higher-yielding government bonds, which may have left Buffett dissatisfied.

In conclusion, these reasons may collectively contribute to Buffett reducing his holdings in U.S. banks. In the future, Berkshire Hathaway may continue to reduce its holdings in more U.S. bank stocks