Bank of America Corp (NYSE:BAC) has become the leader of the big banks in 2017, following the scandal at Wells Fargo & Co (NYSE:WFC) and BAC stock is up 70% in price over the last year.
But that has all been margin expansion and investors paying more for a static earnings flow. The bank’s net income for the March quarter, $4.8 billion, came in slightly below the $4.9 billion of net income achieved the previous September.
BofA investors keep expecting improvement, in other words, and the bank has yet to deliver. In some ways, the company is retreating — the bank has been laying off technology workers. Technology was how it expected to make more profit.
While our own analysts, like Vince Martin, predict the stock will soon return to bull mode, and Joseph Hargett thinks BAC stock can be a winner with a compliant Senate, I’m far less bullish.
Here’s why.
BAC Stock: Danger Ahead
The bank’s own Merrill Lynch analysts are sounding the alarm. One recently put out a note telling clients to “sell before it’s too late,” arguing that tech stocks are priced too high and the President’s agenda isn’t getting through Congress.
More disquieting should be the market’s reaction to last week’s Federal Reserve interest hike, and to other recent rate hikes.
The price of 10-year money has fallen after each of these hikes, and so has the price of BofA. While regulators say they’re moving to stem inflation, their actions are supporting deflation, a far more dangerous animal, and another Bank of America analyst said this week oil prices could continue to fall, below $40 per barrel.
The oilpatch is stuck in a vicious deflationary cycle, like farmers in the early 1930s. They must keep pumping oil to pay off past loans, and need higher prices, but the pumping cuts prices and makes it even harder to pay off the loans. If oil loans can’t be paid it’s going to hit bank balance sheets hard, making it hard to make other loans, even with regulators looking the other way.
Reading It Wrong
InvestorPlace contributor Bret Kenwell is right. Rate hikes are supposed to boost bank stocks by raising the cost of short-term lending and allowing banks to hike their margins.
James Brumley has also noted that despite the Fed’s moves, market interest rates, represented by the yields on 10-year and 30-year bonds, have been trending down. That is not what is supposed to happen when the Fed is raising rates.
My view is different. It’s less important to me whether a President’s agenda gets through Congress than whether the agenda makes any sense. Taking cops off the beat and laws off the books merely encourages dumb risks and new scandals. Handing money to investors when asset prices are skyrocketing also makes no sense, because it will just encourage speculators.
What’s needed are more things to invest in, not more money to invest with.
Bank of America Is Right
Congress is once again playing with the debt ceiling and the government could soon run out of cash, as taxpayers delay payments in anticipation of rate cuts.
Bank of America’s own analysts are telling you to be cautious, even though the bank itself is in the business of getting people to take on more risk. The bank’s own actions are those of an institution battening down the hatches, not preparing for a big pop in profits.
I think it makes more sense to watch what BofA is doing and saying, than to listen to the stock’s or market’s boosters. This is not a time for taking on more risk, even in BAC stock.
Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing, he owned no shares in companies mentioned in this article.
