I have written some very positive articles on Bank of America (BAC) as well as some rather negative ones. I have never told anyone to dump their shares however, unless they wanted to put their hard earned money to work for them.
Bank of America pays a puny dividend to hold its shares as well. So, at this stage I am simply suggesting to avoid buying new, or adding more shares, of Bank of America.
The Chart Does Not Lie
With everyone ranting and raving that the book value was too cheap to ignore, it is clear that as the book value goes, so goes the share price. The same is true with interest rates but to a lesser extent for now. If interest rates and mortgage rates rise, the share price of BAC should rise because the spread will widen, giving the bank a better opportunity to grow profits. Of course that is if the discount to book keeps tightening.
Here is a chart that shows what I am saying:
Now, if you look closely, at the end of July of this year, the shares sold for a drop under $15.00. Today the share price closed at $15.23. So rather than pure dead money, the stock has been in a trading range for 5 months now. It is also eerily in lock step with the discount to book value. Which of course makes sense since they both determine each other's numbers.
It also appears that the share price bounced up when the book value dipped below .67, while stalling when it went above .77.
Now if I was day trading I might channel this stock and trade it around the edges so to speak. Since I am attempting to invest and not trade, then it still seems clear to me that the stock is stuck.
If you purchased shares at $15.00, and have held on through the downs and then the ups, you are sitting pretty much dead even....or dead money....now at $15.23.
The Headwinds Have Not Changed
I wrote this in my dead money article:
Bank of America, one of the nation's largest banks, was found liable of having sold defective mortgages, a jury decision that will be seen as a victory for the government in its aggressive effort to hold banks accountable for their role in the housing crisis.
Moreover, the jury also found a top manager at Bank of America's Countrywide Financial unit liable, pinning some - if not all - of the responsibility for the bad acts on an individual.
Countrywide, the troubled mortgage originator that Bank of America bought in 2008, has been a morass of problems. While the bank bought Countrywide for $4 billion in 2008, analysts say they believe it has so far already paid close to $50 billion in fines and settlements. In light of Wednesday's decision, that figure is likely to continue to rise.
While nothing major has happened as of yet, the winds are blowing in the liability direction again. Fellow author Don Dion further outlined the issues in this article.
The problems put Bank of America in the position of having to pay for the huge legal fees for a string of cases. As of September of 2013, legal costs have topped $20.1 billion over the last five years.
BAC also has had to pay $35.7 billion to purchase or set aside to later purchase a number of mortgages from investors who filed cases for misrepresenting the quality of these investments. Bank of America has been at the center of these cases, more so than other lenders, and this has taken its toll on the company's bottom line. A 2009 settlement of a Merrill Lynch shareholder suit cost them $2.43 billion. This year, BofA agreed to pay $1.7 billion to MBIA, a bond insurer that disputed responsibility for mortgage-backed securities. An $8.5 billion settlement is still hung up in the courts. The continuing problems have dropped the bank's price 50 percent since the mortgage crisis hit. Some experts warn that there is still more payments to come.
Being in the "center" of these issues has analysts scrambling to try and figure out how much many of the banks will be on the hook for, as this article states:
This month JPMorgan agreed to pay $13 billion to settle charges that it misrepresented the quality of mortgages it sold in these securities. Meanwhile, the legal wrangling over Bank of America's proposed settlement of $8.5 billion is yet to be completed. S&P now believes that more banks could be set to face extra payouts... "We estimate that the largest banks may need to pay out an additional $55 billion to $105 billion to settle mortgage-related issues," Stuart Plesser, a credit analyst at the ratings agency said in a press release... The banks included in the report are Bank of America, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley and Wells Fargo.
I am not pretending to know how much more Bank of America will need to pay, but having the Countrywide mess tied to its hip, I would say the amount will be significant. Not to mention the civil liabilities as they unfold.
It does not help the bank or the shareholders when reports such as this one hits the streets either.
Instead of helping homeowners as promised under agreements with the U.S. Treasury Department, Bank of America stalled them with repeated requests for paperwork and incorrect income calculations, according to nine former Urban Lending employees. Some borrowers were sent into foreclosure or pricier loan modifications padded with fees resulting from the delays.......
The Bottom Line
There are investors who have owned shares at such a low price that they have quadrupled their money if they have not sold from all time lows. Many have held on from the $5-10 range and are fine as well, if they take some profits. The shareholders who bought in at $14-$15 should be asking themselves if the money invested in Bank of America is working for them, or is it at risk of losses?
I will be watching that downward trend line for now and waiting for the dust to settle.
Disclaimer: The opinions of this author are not recommendations to either buy or sell any security. Please do your own research prior to making any investment decisions.