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Bank Of America: A Good Buy Despite The Scrutiny

May 25, 2014 | About:
FinanceGuru

FinanceGuru

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After its earnings, Bank of America (BAC) has traded a bit cautiously. However, this is on the heels of 35% gains for the mega-bank that it has posted over the past year. The company remains to the upside 4.6% for 2014 thus far. The stock's technical trend continues to be preserved, and it'll likely break out above the 50DMA in the coming weeks, again, using that as support.

The major story hitting the headlines on Wall Street over the past few months has been high-frequency trading. Michael Lewis' book has been promoted and has people questioning and wondering whether our evil computer overlords are taking advantage of the system by using strategies that move stock prices based on speculation, as opposed to fundamentals. HFT allows traders to make many small trades in just a fraction of the time it takes you to pull up a Sears (SHLD) chart and realize that the chain isn't going to be winning "retailer of the year" anytime soon.

While there are some good points against HFT - especially having to do with the volatility that it can sometimes blindly add to, I'd argue that we must accept computers as part of trading going forward, potentially with regulations set forth.

Unless you have a growth story like an Amazon (AMZN) or a Tesla (TSLA), trading is at some point going to be roped in by the fundamentals of the underlying security. Common sense eventually prevails over fear.

With regards to Bank of America, the headline amongst the HFT headlines the other day was that the bank was being sued by the city of Providence, RI over its trading tactics.

Bloomberg reported:

Bank of America Corp. and the New York Stock Exchange were among dozens of exchanges, brokerages and traders sued over high-frequency trading by the city of Providence, Rhode Island, over claims they rigged securities markets to divert billions of dollars from buyers and sellers of shares.

Scrutiny of high-frequency trading and whether it gives some investors unfair advantage intensified this year amid government probes and the March 31 publication of "Flash Boys" by Michael Lewis. The lawsuit filed yesterday is one of the first by an institutional investor since U.S. Attorney General Eric Holder in March promised Congress a full investigation into whether high-frequency traders violated laws against trading on inside information.

One defendant in Providence's complaint, Virtu Financial Inc., a high-frequency trader that delayed its initial public offering, has received inquiries from the office of New York's attorney general, Eric Schneiderman, according to a person familiar with the matter. Schneiderman announced last month that he's investigating high-frequency traders.

The Federal Bureau of Investigation has said it's looking into whether firms that engage in high-speed trades get an improper jump on other investors by using information about their trading to make profits.

This reminded me of a headline I remember reading about years ago. First, their stock is the target of HFT traders, now its the bank themselves engaging in it:

Does anybody even remember over what that story first broke? I don't really.

And I really don't think this litigation (or future litigation over the next couple of years) will have an adverse effect on the company. Unless gross negligence is found specifically by BAC, they're just employing the same style of trading as the rest of the world. The facts are, if you get in behind a stock before its run-up - or you get short before it has walked down - it's not preventing you from making money.

For instance, remember the flash crash from years ago? Check that link for the YouTube video of CNBC commentary of the day. It was surely a nerve wracking day for many "buy and hold" investors. It was also a lesson that "buy and hold" all the time may not be the best idea.

The Dow plummeted 10% almost instantly, definitely the result of some major bonehead computing move somewhere, or some trader who dropped his pastrami on rye sandwich into the DVD drive of one of the supercomputers on the trading floor. It was chaos for a little while, then things returned to normal.

My question to you is, if you were the guy who bought P&G (PG) for 25% off its normal price right before the stock eventually rebounded on the same day to its pre-crash levels, would you be upset about the crash? Additionally, if you were positioned short and hedged somehow and covered on the crash, how would you feel about it? Major chaos, or significant money making opportunity? If this were an upwards "crash," people would have looked at it a little differently, I assure you.

The point is that this isn't a "prevent the market from going down" issue, it's an issue where, if traders learn the right way how to hedge and how to make money in a down market, there's theoretically not much to fear. We can trump all potential future technology issues by informing traders of what drives an underlying security and the different ways they can position themselves.

Bank of America should know best - they're spearheading the virtual ATM movement and focusing on automation to improve efficiency. We can't stop technology from developing; the best we can do is try to regulate it somehow (likely through regulating the exchanges a bit more). But, for now, this style of litigation for BAC (which is likely a can of corn compared to the 07-08 litigation) isn't something that worries me at all.


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