Bank of America's (NYSE:BAC) stock has withstood major negative headlines and other more substantive risks for the last few months quite well. I have been a huge supporter of the bank's stock over this period of time. Nevertheless, certain recent major developments have me thinking the stock is about to take a nose dive. In the following article, I will lay out my bear case for the stock.
The eurozone banking crisis rears its ugly head
The turmoil in global markets Thursday was caused by a major Portuguese lender missing an interest payment.
This immediately brought back painful memories regarding the whipsaw moves in global markets and U.S. banking stocks back in 2011. The downward spiral was due to the eurozone debt crisis. Thursday, every major stock index in Europe closed in the red and the U.S. markets opened sharply lower. Furthermore, safe haven plays such as gold (NYSEARCA:GLD) and silver (NYSEARCA:SLV) spiked. Even so, U.S. markets made a comeback late in the day. The flames of fear were extinguished by reports the issue was not systemic and most likely a one-off event. I'm not so sure I buy into this theory.
Where there is smoke, there is fire
The last time this issue arose, the same exact thing happened. First, there was one blimp on the radar screen, and then another and another. In the end, all global markets had major corrections. The sector hit the hardest was the banking sector. No bank was immune to the selling pressure. With all the other headwinds already stacked up against Bank of America, these new issues may just be the straws that break the camel's back, so to speak. I am no longer confident the risk of holding the stock is worth the reward, at this point. Furthermore, this is only the first of three major issues that just came to light. The second most harrowing dilemma is the recent foreboding news regarding the housing market.
The canary in the U.S. housing market coal mine
Lumber Liquidators Holdings (NYSE:LL) shares plummeted 22.34% after the company significantly lowered guidance for the year. The company went from forecasting same-store sales to be up 6.7% to being down 7.1%. According to the AP report:
"Shares of Lumber Liquidators fell nearly 20 percent Thursday, a day after the hardwood floor retailer cut its earnings outlook for the year and said fewer people are coming into its stores than expected."
This is not good news for the U.S. housing market, in my opinion. I think it may be a telltale sign that larger issues lie ahead for the U.S. housing market than many have forecasted. The housing market accounts for 18% of U.S. GDP. Furthermore, the mortgage loans generated are an essential part of Bank of America's earnings. This does not bode well for the stock, in my book. With earnings on the horizon, the bank may have to take a step back and lower earnings guidance going forward. Not good news. Finally, the straw that may just break Bank of America's back is the ever-flattening yield curve.
The last straw
The 10-2 Year Treasury Yield Spread is at 2.07%, compared to 2.11% the previous market day and 2.28% last year. Furthermore, the rate at which the spread is flattening has begun to accelerate. See chart below.
Banks make more money when the spread is wider. Moreover, a flattening yield curve is a sign future growth in the economy is waning and profits for big banks may be diminished. It's a double whammy of bad news, in essence, for big banks. Bank of America makes less money on each loan generated, in addition to the fact the bank makes less loans overall as well. It is not a pretty picture. This could very well spell the end of the stock's unending strength in recent weeks. Not to mention the fact that there are a plethora of other headwinds already present.
Other major headwinds
There have been so many headwinds banging against the stock in recent months, it's hard to wrap your head around them all. The top two biggies for me are the regulatory risk to earnings potential generated from the full implementation of the Dodd-Frank Bill and the ongoing litigation risk related to a massive DOJ law suit.
On top of all the above issues, the market looks like it's rolling over as we speak. Moreover, the market is at all-time highs just as geopolitical and macroeconomic risks appear to be spiking. With Japanese machine orders down 18%, European banking issues bubbling up, Greece and Portugal's debt interest rates spiking, Chinese export growth shrinking, and Israel seemingly about to go to war, I have nothing good to hang my hat on at this point.
The final nail in the coffin
The final nail in the coffin is the Fed's plans to stop QE in October. If you have any semblance of a memory, you should remember this was devastating to the markets the previous times QE was pulled. All these things taken together make me wary of staying long Bank of America going into earnings. I am not saying to short the stock, but I would step onto the side lines if I were long right now. I see a high probability you will get a chance to buy the shares back at a lower price in the near future. I look forward to hearing your thoughts in the comments section.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.