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Steven Bauer
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My Biography: In 2001, I retired and now permanently reside in Mexico. After 5 years of managing my own affairs, I resumed my career in 2007 as a financial analyst / asset manager. My career began while in University as a – manual chartist for some wealthy Investors, who had a fancy math formula... More
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Investing Wisely
  • Bank Of America Valuation Suggests A Reality Check And Issues A Bearish Warning 0 comments
    Mar 17, 2013 10:41 AM | about stocks: JPM, QQQ, SPY, WFC, BAC

    A "Reality Check" is part of the process of Accurate Forecasting. You will never consistently profit in the stock market if you have incorrect expectations. Expectations come from the Media and Wall Street sources. Reality comes from Raw Data and long hours of Analytics. You have a choice of which one you choose to follow seeking profits. When the Fundamental Valuations do not support the current price and the Company, and its Industry Group are over-bought a Bearish Warning is worthy of a close and diligent watch. Forecasting is how I go about taking profits at or near a Bearish Inflection Point.

    Bank of America Corp. (BAC) has little to support the near double in price from an earnings perspective. The so-called recovery of earnings this past year drops off markedly in the coming few years. Quarterly earnings are up but flat throughout 2013.

    The Banking Industry Group is not setting any records. I have offered my Report Card below for JPMorgan Chase (JPM) and Wells Fargo (WFC).

    The Company is still haunted by the legacy of the 2008 financial crisis. Much cost cutting has and will be taking place, but the many unwanted assets are still producing declining revenues.

    Price History

    Bank of America's shares sold for over $47. in 2007. The highest it has been since was in 2007 when it reached $19. per share. The pop in price in 2009 was from a low of $2. to a high of $19 per share. That is unacceptable price performance for me and should be for you too. The 20-year chart (see below) tells this story best. You may want to ponder before taking new positions. My charts compare Bank of America with the SPDR S&P 500 ETF (SPY). I use this S&P ETF to provide an important perspective about a company that I am valuating. The first thing I look at is how Bank of America has tracked the I in bullish and bearish market time frames. The second thing is a statistical measure of percentage gain and loss during bullish and bearish market time frames. Trends are a very helpful and profitable tool when Investing Wisely.

    Current Valuation of Bank of America, (BAC)

    (click to enlarge)

    Current Report Card for Bank of America, and a Couple Peers

    (click to enlarge)

    Earnings Graphic for Bank of America

    (click to enlarge)

    Regarding the above chart, please note the following: The earnings per share remains well below the 2006 - 2007 levels. The P/E Ratio is way too high. The volume is diminishing over the years. These are not supportive facts to foster holding Bank of America in your portfolio.

    Financial Statements

    I have reviewed the company's income statement and balance sheet. I do not find anything to take issue with. There are many other companies with financials that present a better outlook.

    Technical Opinion

    It is clear from the below price charts that there are some longer-term problems with Bank of America. Technical indicators are in the process of breaking down. This is my initial warning that prices will be falling in the coming weeks / months and perhaps beyond.

    I use several indices in my focus to identify the ever cycling bullish and bearish inflection points. The New York Composite Index is represented well by the ETF, SPDR S&P 500 (SPY). The Nasdaq Composite Index is represented well by the ETF, PowerShares QQQ Trust (QQQ). In my work, the identification of bullish and bearish inflection points is of critical importance to produce consistent profitability. Because this is so critical, I also emphasize and use market "breadth" indices. Breadth does not have a tracking ETF; therefore, it was necessary to create my own excel charts. Go to: http://stockcharts.com/public/1616666 and have a look.

    These two indices, backed up with 'breadth,' is the foundation for my General Market technical analysis. An axiom for the general market says: "the direction (trend) of the general market has a 60% influence on security's profits or losses." The following two charts (short-term and long) include SPY, QQQ and two of the peer companies presented in this article. I hope you can understand why this analytic exercise is so important to my way of managing assets.

    Short-term Chart for Bank of America

    (click to enlarge)

    Long-term Chart for Bank of America

    (click to enlarge)

    My General Market opinion is that the fundamentals are over-valued; the technicals are over-bought, and the consensus opinion is way too bullish and interest rates are on the rise. I am currently a Bear because my valuations are convincingly negative, and we are in the beginning of a Bearish Cycle; it's just that simple!

    Further support for my guidance for the many Companies, the General Market can be read in my daily Instablog articles.

    Summary of Bank of America Corp.

    Currently, the above tables and charts present a clear and not-so-positive account of these three Banking Companies and the overall market indicators. It is a fact that, the stock market cycles endlessly both fundamentally and technically from bullish to bearish and then back to bullish again. Unfortunately, this is a pattern that is not well-understood or taken advantage of by most investors.

    Within this present bearish time frame, there is nothing (longer-term) wrong with these Companies. It is simple what happens when fundamentals and technicals turn bearish. And it is just the ever present "cycling effect" and the way the stock market works. I hope you understand and will continue to follow my work / analytics. It won't be long before I can offer you a bullish and up-beat forecast once again.

    General Conclusions

    I am bearish on both the world economies and the general market. My more recent Instablog postings are focused on securities that should not be currently held in your portfolio. Bank of America may just be one of those securities in the coming weeks. I suggest that it is vitally important for you to understand that holding cash during questionable time frames in the marketplace is a much wiser choice than holding your present positions. I can assure you that; this is definitely a "questionable" time frame!

    I invite you to read my daily InstaBlog missives. My focus is on Bellwether Companies, the Market, and occasionally select Sector or Industry Groups.

    Have fun, Investing Wisely.

    Dr. Steve

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.

    Themes: long-ideas Stocks: JPM, QQQ, SPY, WFC, BAC
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