Why is Bank of America (NYSE:BAC) Stock Rising?
In light of the ongoing recession and continual bad economic news emerging from the Labor Department and Commerce Department, it’s definitely puzzling as to why Bank of America (NYSE:BAC) has become one of the investment darlings of Wall Street. There’s nothing happening to justify the confidence in the stock to warrant its surge in stock price since the beginning of the year, which now stands at about 8.4 percent.
Many of those writing on this odd phenomenon cite the love affair analysts and hedge funds are having with Bank of America, by pointing out they feel they are best positioned of all the banks to participate in the economic recovery. Of course there is no economic recovery yet, as we’ll get into in a little while, but supposedly that’s the underlying reason for optimism in the company.
Considering the huge exposure they still have to residential mortgages and re-sets this year, this doesn’t make sense even if there was in fact a real and sustainable recovery. Only Wells Fargo (NYSE:WFC) has close to as much exposure as Bank of America does to mortgage re-sets, and they haven’t been performing near as well – as far as stock price goes - as Bank of America, even though BofA has taken almost as many hits as Goldman Sachs (NYSE:GS) from the press. Wells Fargo has largely been given a free ride in comparison.
Here’s four reasons I think Bank of America is going up in price, none of which I think can continue on for a long time.
Hopes of Recovery
As already mentioned, those investing in and/or touting Bank of America as a great company are seemingly basing it on nothing other than the illusion we’re in a recovery and they’re positioned well to participate in it.
The problem with that, other than there not being a recovery, is some of the other banks are positioned just as well, if not better, and they’re not going up at the rate of Bank of America is with their stock price.
Now here’s one that I’m sure is part of the overall picture, and that is what I call “investor talk.” In the industry it’s called something else, but I don’t want to confuse anyone. Basically this means those that have a stake in the company talk it up at any chance they get in order to create a lot of interest in it, and give the impression it’s a must for investing in. It’s an old but effective trick, and one I think is happening concerning Bank of America.
Even though we’re in a high regulatory atmosphere, the fact that investors are bidding up the stock reveals they don’t think it will have serious consequences on Bank of America, or possibly they think the worst is over concerning regulations.
It would also speak to the so-called Volcker Rule, which has almost zero chance of being passed.
Investment Banking Unit
Speaking of the Volcker Rule or reinstating Glass-Steagall, it looks like there’s no chance of that happening, as the investment unit of any bank would be an important part of looking forward at the future performance of a company.
While Bank of America is okay with investment banking, they aren’t as experienced as Goldman Sachs, Morgan Stanley (NYSE:MS) or others. So I wouldn’t think this would be what is making it happen.
It may be possible investors are looking at the investment banking unit of BofA as having a lot of potential to drive revenue and profits, and it could be part of the reason the stock is increasing in price.
The top two reasons I’ve mentioned above would seem to be the primary movers of Bank of America’s stock, with an economic recovery being at the top of the list.
As I mentioned though, there really isn’t a recovery, regardless of what some are asserting, and that was again reinforced by data released from the Labor Department and Commerce Department yesterday.
Now let’s look at the largely dubious numbers released on the performance of the economy last quarter, where it was stated it had grown at a 5.7 percent clip.
The problem is almost all of that was in relationship to replenishing inventory and equipment. It had nothing to do with growth, but just keeping things level for businesses. I’m not aware of anybody that disputes this, and even if they did they would be incorrect.
Yesterday’s numbers from the Commerce Department confirm this as equipment orders were down significantly in January, as were orders for durable goods.
Add to that the Labor Department announcing there were 20,000 new employees applying for unemployment benefits for the first time, and you see the idea the economy is growing is imaginary and not real.
So as this applies to Bank of America, it seems they’re enjoying a increase in the price of their stock based on the hype and hope that we’re in an economic recovery and their poised to benefit greatly from it. As you can see, this is largely untrue, and so it remains to be seen how long this growth will last as the numbers keep rolling out through the year.
Get Analysts' Upgrades and Downgrades via Email - Stay on top of analysts' coverage with Analyst Ratings Network's FREE daily email newsletter that provides a concise list of analysts' upgrades and downgrades. Click here to register now.