Apple And Bank Of America: The Market In Minature

Bank of America (NYSE: BAC) and Apple Inc. (NASDAQ: AAPL) are a nearly perfect cameo of where the stock market is now, and where it is likely to remain after earnings season.

Apple has topped $300 and is the second largest company in America by market capitalization. Bank of America is near a 52-week low at $12.60. The bank’s stock has not traded so low since 2009.

Apple’s position in Wall Street’s mind is not much different from that of IBM’s (NYSE: IBM). Each has terrific market share in its industry, spotless brands and reputations, and tremendous balance sheets and earnings. Apple and IBM have also been careful and strategically ingenious in their diversification programs. Apple was little more than an also-ran PC company ten years ago. Only a few years before that, IBM was still highly dependent on server and mainframe hardware and the licenses that went with them.

At present, Apple has used its brand umbrella to become the global leader in multimedia devices (the iPod), the provider of high-end consumer and small business PCs (the Mac), the presumptive favorite to win the smartphone wars (the iPhone), and the first-to-market tablet PC manufacturer (the iPad). It has also built a software and content moat around its hardware businesses with the iTunes and App Store – each the leader in its category. IBM has done the same. It has successfully diversified into software, services, consulting, and financial services to become the world’s leading tech conglomerate.

Bank of America’s position tells all there is to tell about the financial sector, making it a proxy for the issue facing its peers like Citigroup (NYSE: C) and Morgan Stanley (NYSE: MS).

BofA will be hamstrung by new bank regulations, which will restrict its institutional trading operations. The sell-off in Goldman Sachs’ shares demonstrates the market’s concern on this count. BofA also faces margin pressure arising from new consumer protection laws. The default rates on small business loans, commercial and residential real estate mortgages, and credit cards are no longer at the worst levels that were hit last year. Unfortunately, they are still at levels which will not allow large banks to stage strong earnings recoveries. The mortgage foreclosure fiasco has simply added another burden investors do not welcome.

The market has become bifurcated. It is filled with stocks in the middle of their trading ranges in the retail, airline, auto, energy, and telecom sectors. But, at the top and bottom of the market are the heads of a bar-bell: Apple and Bank of America.

Each stock has moved in a different position’s over the last decade and that is not likely to change any time soon.

Douglas A. McIntyre