Bank Of America: To Buy Or Not To Buy

| About: Bank of (BAC)

Summary

We are constantly reminded on SA of what a buy BAC is; fundamentally, yes, but is it?

What about other banks?

Is there a systemic problem with the financial sector?

The articles on SA advocating buying Bank of America (NYSE:BAC) are prolific since it bottomed on February 11th - with the rest of the banks and the broad market indices. Don Dion, who had been bearish on BAC said that given the sharp decline in the first month of 2016 to $13, it was now a value play, and I was on a similar track but looked for an $11 handle low. It bottomed out with a single print of $10.99 on February 11th, and rallied from there (the last time I saw an entire market reverse on a single day was 3/11/09). However, the choppy decline with several opening gaps, predominantly to the downside, put major resistance way up at $14! That rally ended with another single print of $14.03 on 3/21/09 - a one month wonder!

This means the range can be defined from $11-$14, with formidable resistance above. In fact, to be out of the woods the stock needs a close above $14.20, to be meaningful. Since peaking we have seen three lower highs and lower lows, a troubling sign, especially with Wednesday's low of $13.26. While researching this article I saw a post last night by Markos Kaminis (Bank of America And The Big Bad Fed) which suggests (again) that this is the time to buy BAC. I had been researching this article over the past week and saw a definite link to tie into.

My work had been on how BAC performed relative to the sector, and I then extended it to the broad market. Here is how the big banks fared in Q1:

Bank/Index

Low 2/11 -% change

Last - % change

BAC

-38%

-19%

C

-35%

-18%

JPM

-19%

-9%

WFC

-17%

-9%

Click to enlarge

Note that BAC and Citi (NYSE:C) not only declined the worst but came back the least, yet all are 'bounces' of about 50% from the lows. In the next table I extend it to the regionals, USBank (NYSE:USB), PNC Corporation (NYSE:PNC) and Huntington Bancorp (NASDAQ:HBAN), as well as two smaller banks that Don Dion recommended as an alternative to the larger banks, Berkshire Hills Bancorp (NYSE:BHLB) and Blue Hills Bancorp (NASDAQ:BHBK):

USB

-12%

-4%

PNC

-17%

-10%

HBAN

-27%

-13%

BHLB

-13%

-7%

BHBK (L 2/19)

-13%

-8%

Click to enlarge

Again with the exception of USB, the 'bounce' was about the same 50%, with the exception of USB which recovered two-thirds of the first month decline. Note also that USB, BHLB, and BHBK, all declined far less than the big banks. Could this be due to a slow-growth economy which normally favors smaller regional and community banks? Let's compare the Keefe Bruyette Big Bank Index Fund (NYSEARCA:KBWB) with their regional index fund (NYSEARCA:KBWR), followed by the major indices:

KBWB Big Bks

-19%

-7%

KBWR Regional

-16%

-4%

Dow Ind.

-11%

2%

S&P 500

-5%

1%

Nasdaq Comp

-8%

6%

NDQ 100

-13%

7%

Russell 2000

-13%

1%

Click to enlarge

Note that both of the Index Funds suffered substantially less declines and while the recovery was similar, their losses are minimal in comparison. But what is more significant is that the major indices, the worst having been down 13%, have all rebounded into positive territory. Stop and think about this for a minute.

Does this mean that the banking sector is performing worse due to the fact that in a slow growth economy there is less loan demand and thus more concern over earnings growth? I believe it does since the worst performers rely much more on large negotiable CDs and while the costs are not significantly higher on a historical basis, earnings growth from here will be much harder to achieve. As for the 'big bad Fed', it is doing what it has to do. I believe it is quite possible we will have just one more 25 basis point tightening this year, but no more than two with the latter coming in late November or December as occurred in 2015. Fed Chair Janet Yellen, on Wednesday implied that growth is not significant enough to warrant more increases without impacting the (fragile - my word), economy.

Would I buy BAC here? No. It is troubling to see that it's the worst performer ytd along with C. Furthermore, while USB has done the best of the larger banks, why risk a surprise when you can buy KBWB, or better still KBWR. Isn't performance what Alpha is all about? Despite the talk of stock buybacks (which only help in the short run), even increasing the dividend will not make either of these stocks attractive relative to rest.

Lastly, let's look at the Beta's of the stocks relative to the S&P 500:

Bank

Beta

BAC

1.74

C

2

JPM

1.62

USB

0.77

WFC

0.9

PNC

0.93

HBAN

1.18

Click to enlarge

Note that thus far this year the Betas have been pretty accurate on the way down, on the upside not so much. This too suggests a systemic condition affecting the banks. Beta's are not available for the two smaller banks or for the bank stock indices. KBWB has holdings of all of the above banks which comprise about 45% of the portfolio. USB, PNC, and HBAN due to their size are included here rather than the regional fund but I still regard them as regionals since they are not true money center banks and therefore not as volatile as the biggest banks which is reflected in the Beta's of the first three.

I concur with Mr. Kaminis that BAC could climb back to $18 - in fact, ever since bottoming at $3 on 2/11/09 the relevant trading range has been from…$11-18. Thus the closer to $11 BAC goes the more attractive it becomes but $14 should be the limit for the foreseeable future.

There is one more area of concern for the big banks: U.S. Treasuries. We have seen heavy selling of treasury's by the central banks of both Asia and Europe, but what you may not be aware of is that it is foreign and domestic hedge funds that are 'sopping them up'. Total U.S. government bonds outstanding total $13 trillion. Hedge funds now own $1.3 trillion or 10% of the available supply. They have been taking advantage of the 5% decline in the 10-year note price this year. But what happens when they begin to sell? I believe they see them as a 'safe harbor' at a time of net redemptions and poor returns over the past year. That is liquidity that could have been in the stock market.

There is one more concern: remember when George Soros' fund shorting British Gilts gave him the moniker "the man who broke the Bank of England." In his case, he telegraphed openly what he was doing and why…this time we don't know…we just don't know.

Disclosure: I am/we are long BHLB.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Due to timeliness of article posted last night on BAC I would like to fast-track this