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Why Bank of America Crashed and Burned This Week

By John Grgurich - Apr 19, 2013 at 12:44PM

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Thank Wall Street analysts and herd mentality.

As of Friday morning, Bank of America (BAC 2.32%) has lost 4.24% on the week. This epic drop came squarely on the heels of fairly solid first-quarter earnings. I'm a B of A bear, but even I can't figure out why investors reacted like they did.

The power of negative thinking
As B of A crashed and burned this week, it also took the rest of the big banks and the markets down with it:

  • Citigroup lost 0.90% so far.
  • JPMorgan Chase (JPM 1.73%) lost 2.75%.
  • Finally, Wells Fargo (WFC 3.35%) is down 0.68%

The markets all took it on the chin this week, as well, with the broader S&P 500 down 1.63%, the narrower Dow Jones Industrial Average down 1.82%, and the Nasdaq Composite down 2.15%.

Swing and a miss
For the first quarter, net income at B of A was up, revenue was up, and total deposits were up: that last one always being key at consumer-focused bank like B of A. And these aren't small accomplishments given the current economy and the current state of the banking sector.

JPMorgan Chase just reported a nearly 4% year-over-year drop in total revenue for the first quarter. At Wells Fargo, total revenue dropped 1.4%. For B of A to see rise in revenue of 5.5% year over year is impressive. So why did B of A investors run for the hills after earnings like this were announced on Wednesday morning?

The only explanation is that B of A missed Wall Street expectations. Analysts had predicted earnings per share of $0.22, and B of A's came in at $0.20. For two measly cents then, investors abandoned ship at B of A and took the rest of the big banks along with them. For good measure, the markets went down with the ship, too.

This is an absurd outcome of, all things considered, a good quarter for B of A. Analyst expectations are just that, expectations. Educated guesses at best. Random opinions at worst.

The good news is, the market seems to have gotten hold of itself: B of A stock is up 1.49% on the day. Maybe by the end of today, B of A investors will have gotten back some reasonable amount of the money they lost in this week's market panic.

As always, Fools, remember that you're in this for the long term. Although the share prices in your favorite companies may gyrate up and down on a short-term basis, your eye is on the far horizon. So long as the companies you're invested have solid fundamentals, and you still believe in their mission, have faith that your money is in the right place.

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Stocks Mentioned

Bank of America Corporation Stock Quote
Bank of America Corporation
$36.67 (2.32%) $0.83
JPMorgan Chase & Co. Stock Quote
JPMorgan Chase & Co.
$129.44 (1.73%) $2.20
Wells Fargo & Company Stock Quote
Wells Fargo & Company
$45.60 (3.35%) $1.48

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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