Banks desperately want to see interest rates move higher, but rates have been coming down after the early part of the year and it has been tough for banks to make money.
Almost everyone agrees, the Federal Reserve created pro-bank environments that rivaled anything we might have otherwise imagined by keeping Target Rate near zero in recent years. That allows banks to borrow at almost nothing, and then turn around and lend at a much higher rate.
Some onlookers might find it funny that the banks are not happy borrowing near zero, but it can certainly crimp margins if the loans they make are near zero too; the interesting part is, they are not.
Loans in the open market may not be expensive, but banks are capturing almost the entire differential, they are doing it in a very pro-banking environment (even with Dodd Frank), but some Banks continue to struggle mightily.
The FOMC is also now debating higher rates, but the bond market is not signaling any action. This can adversely affect banks, especially the expensive ones, and one of the most vulnerable seems to be Bank of America Corp (BAC)
Bank of America shares trade at a whopping 19x earnings, indicative of a company that has been growing handsomely, but that is not what has been happening. In fact, Bank of America's EPS results are very concerning, and investors are rightfully worried.
As shown in the chart above, the EPS results at BAC have turned negative for the first time since 2009, but even with that discounted, there has been no-growth since 2010. EPS trends have be flat (neutral), while, in addition, revenue has declined substantially over the past few years. For example, revenue was almost $32B in Q1 2010, and four years later, in Q1 2014 Revenue was $22.7B.
Therefore, not only has EPS gone nowhere, but revenue has declined, and now EPS is negative for the first time since 2009, but the stock still has a 19x multiple. There is a valuation problem here.
In addition, there are reasons to be concerned on a technical level as well. BAC recently tested longer term support as that is defined in our real time trading report for BAC, and although the stock has not broken support, the risks are high. If BAC breaks our longer term support level, multiple contractions will almost surely become a reality, and the stock could fall to where it was at the end of 2012.
Our fundamental evaluation plus our technical analysis of the stock tells us to respect support, and to prepare for material declines if support breaks. Also, given the fact that Net Real Stimulus is now negative according to our macroeconomic assessments, there may be liquidity concerns to boot.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: By Thomas H. Kee Jr. for Stock Traders Daily and neither receives compensation from the publicly traded companies listed herein for writing this article.