What Sent Bank of America Lower Today

Investors in Bank of America (NYSE: BAC  ) are well versed when it comes to the volatility rollercoaster. With a beta of 1.78, shares in the nation's second largest bank by assets are theoretically 78% more volatile than, say, the S&P 500 (SNPINDEX: ^GSPC  ) . Indeed, on any given day, shares of the nation's second largest lender are typically either up or down by a minimum of 1%.

For this reason, as well as the massive opportunity ahead for B of A, it's nearly impossible for many of the bank's shareholders to ignore the daily fluctuations. What follows, in turn, is glance at the factors keeping its shares depressed today.

How bankers are like teenagers
Given their reputation and presumed sophistication, you may be surprised to hear that banks, and particularly those of the Wall Street variety, share many characteristics with the prototypical American teenager. They're irresponsible, lack maturity and discipline, and are incapable of looking beyond short-term gains despite the severity of longer-term consequences -- and the latter is particularly true when the downside impacts others.

But more to the point, their stock prices often move in unison. At present, three out of the nation's four largest banks are trading lower. JPMorgan Chase (NYSE: JPM  ) is down 0.13%, Wells Fargo (NYSE: WFC  ) is off by 0.14%, and B of A, true to form, is off a more significant 0.9%. The only one trading up is Citigroup (NYSE: C  ) , which is higher by 0.38%.

The impetus for the general decline appears to be a function of two things. First, earlier today, Europe's largest bank by assets, Deutsche Bank, posted an unexpectedly massive 2.17-billion-euro loss in the fourth quarter of last year. While the bank said that its underlying business was improving, it was nevertheless obliged to record a number of charge offs.

It's well known at this point that Deutsche Bank is one of several lenders both in Europe and here in the United States -- I told you they travel in packs -- that are under investigation for rigging benchmark interest rates such as the London interbank offered rate, or LIBOR. Not to belabor the point, but I also pointed out that bankers are not infrequently incapable of looking beyond short-term gains despite longer-term consequences. Of the 2.17 billion euro loss, in turn, roughly half is related to litigation.

The other half concerns unrelated legal and regulatory matters as well as losses from businesses that it bought before 2003 -- including, accordingly to The Wall Street Journal, Bankers Trust and a U.S. mutual-fund business Scudder Investments -- and impaired investments.

The second impetus for the today's declines among bank stocks relates to the broader economy. It was announced yesterday that the United States economy is in much worse position than many economists had previously thought -- imagine that!

According to data from the Commerce Department, domestic output contracted in the fourth quarter of 2012 for the first time since the most actuate stages of financial crisis subsided. While the decline was by a marginal 0.1%, the consensus forecast had called for an expansion of 1%. And beyond the surprise, it showed that the recovery has, at least temporarily, ground to a screeching halt -- though, to be fair, much of the decline was associated with decreased military spending by the federal government.

Added to this, earlier in the week, it was reported that consumer sentiment has fallen to the lowest level since 2011. Among other measures, The Conference Board's index of consumer confidence fell to 58.6 in January, down from 66.7 last December. As I said at the time:

Although this may not seem as relevant to a bank as, say, a retail store, nothing could be further from the truth. For the past five years, lenders like JPMorgan, Wells Fargo, and B of A have all sought to improve the quality of their loan portfolios, which have suffered since the financial crisis. The improvement won't occur, however, until overall consumer spending and thus employment and housing values pick up, all of which are driven in large part by the level of consumer confidence.

With these two factors in mind, in turn, it should be really no surprise that shares in many of the nation's largest banks are suffering today.

Do you want to learn more about Bank of America?
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  • Report this Comment On January 31, 2013, at 2:59 PM, Geoffy4T wrote:

    Sorry, guys - you missed the MOST IMPORTANT reason BAC is down today - a report that Sen. Elizabeth Warren has requested access to the files concerning the foreclosure settlement agreement with the government.

    If Elizabeth Warren is involved, it's bound to be bad for [any] business !!

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