Bank Of America And The Big Denial

May.25.14 | About: Bank of (BAC)


Bank of America has glaring issues that investors in the stock refuse to face up to.

Maybe I have the answer as to why the stock is selling at such a steep discount to book value.

I will reiterate what has turned out to be a true prognostication: BAC is dead money.

"Just when I thought I was out... they pull me back in." Michael Corleone, Godfather Part 3, 1990.

I have always found this movie line to be very compelling, and it really pertains to my writing about Bank of America (NYSE:BAC) here on Seeking Alpha. I had decided that I had enough with the risks for investors in BAC stock, and I had said my piece and now let the chips fall as they may. Of course, here I am, after one positive article after another by those folks who simply seem to brush off serious issues that continue to plague the stock.

At first, I admitted that I was wrong that the stock was dead money when I first opined about it in this article back in October of 2013. The share price back then was $14.13. While in the interim between then and now, the share price jumped to over $18.00/per share, it now sells for $14.71 for a gain of about 4% in seven months, or a little more than 2 full quarters. An investor could have been holding shares of AT&T (NYSE:T) and received 10% just in dividends during the same time frame. That is not really the point however.

Investors looking for strong capital appreciation refuse to accept the fact that this stock will be held back for an extended period of time to where I will once again re-iterate; it is dead money.

We All Know The Issues Surrounding The Stock

I am not going to get into the details that have been spoken of ad nausea that keeps the share price down, but I will give a bullet point overview to jog your memory a bit.

  • The Department of Justice has not settled with BAC as of now, and the dollar amount that BAC will have to pay for the mortgage mess is still debatable. Uncertainty is NOT an investors friend.
  • The $4 billion accounting "error" has put the skids on both the share repurchase plans, as well as the dividend increase by BAC. We have no way of knowing what the Fed will allow BAC to do now. My guess is that this issue will linger until at least the next stress test.
  • The mortgage lending business has stalled and Bank of America has not been keen on making these loans anyway. This source of income is simply dying on the vine for BAC.
  • Interest rates have simply not co-operated in a fashion that BAC cares to extend itself towards lending when the spread is not enough to warrant the risks at this point, and BAC can make greater margins by playing "small ball banking", and only accept favorable loans for them, not those who need loans.
  • The share price continues to sell for a steep discount to book value, even though market pundits have been using this metric as the most compelling reason to buy the stock. If the stock had been more purchased than sold, it would be either at, or maybe above the book value, but it is not and I see absolutely no signs of that fact changing anytime soon.
  • The negative sentiment that has followed BAC around, since the financial crises, is still directly overhead with current issues, as well as future unknowns such as the civil liability case brought by Providence Rhode Island regarding high frequency trading. If this winds up being found for the plaintiff, the share price could plummet just from the anticipation of the floodgates opening from other civil cases of the same kind. I would not bet against this.

Ok, enough of rehashing what bulls like to call "old news", already factored into the declining share price. Let's take a peek at a few new fresh opinions, and not by any analyst that I pointed out in this article, and this article.

While Mike Mayo of CLSA has had a sell rating on the stock, after the annual shareholder meeting he had some very unkind remarks about BAC and cut his earnings estimates for 2014 from $1.00 to $.55/share.

More strikingly, Mayo had this to say:

...based on the bank only having $2.4 billion on reserve for an estimated $8 billion mortgage-backed securities settlement with the Department of Justice. The bank's action reflects "poor governance, including a missing comp committee head, different time frames in financial charts and a meeting that ended before all questions were taken, not to mention a chairman who seems to us like a figurehead," said the analyst. Mayo criticized the bank for letting the CEO Brian Moynihan run the entire shareholder meeting, while chairman Chad Holliday only gave a few "mostly nonresponsive answers."

Are These Newer Reports To Be Ignored, Or Could They Be More Reasons For The Discount To Book Value?

My fellow author hit the nail on the head with his otherwise bullish article on BAC.

First off, we need to understand just how detrimental the mortgage problem is at BAC. In the three months that were reported, BAC produced $10.8 billion of first mortgages and refinancing combined. This seems like a lot, until you realize that last year in the same quarter, BAC produced $25 billion in first mortgages and refinancing combined. In other words, mortgage production was more than cut in half in the first quarter of this year. Ouch.

I could not have said it better myself. Of course the bull case is that BAC is making money hand over fist elsewhere and it might not matter that much.

Another issue is that aside from Warren Buffet who received the sweetest of sweetheart deals by buying warrants at around $7.00 to be converted into common shares by 2021, plus he receives a 6% dividend while he waits! Who would not have taken that deal? Many here would have mortgaged their fingernails for that deal. However, other "smarter money" has been selling OUT of BAC, and not looking back.

Soros Fund Management LLC sold out of holdings in several banking giants in the first quarter, including J.P. Morgan Chase(JPM), Bank of America and Citigroup (C) .....Investors who manage more than $100 million are required to disclose most securities holdings within a month and a half of the end of a quarter. The filings give the public a relatively fresh look at the portfolios of well-known investors. The fourth-quarter deadline was Friday.

Anyone who thinks George Soros does not know what HE is doing, has another "think" coming. Of course the bulls can ignore Soros' move and shrug it off as ancient history also. I will not however.

On top of some smart money fleeing, insiders have NOT been exactly rushing to buy BAC shares at such at an attractively discounted price either. Actually, insiders have been dumping shares at a rather alarming rate!

Net Share Purchase Activity
Click to enlarge
Insider Purchases - Last 6 Months
Shares Trans
Purchases 40,000 2
Sales 580,734 1
Net Shares Purchased
(540,734) 3
Total Insider Shares Held 3.05M N/A
% Net Shares Purchased
(15.2%) N/A
Click to enlarge
Click to enlarge
Net Institutional Purchases - Prior Qtr to Latest Qtr
Net Shares Purchased
% Change in Institutional Shares Held (3.19%)
Click to enlarge
Click to enlarge
Data provided by Thomson Financial
Click to enlarge

191 million shares sold by insiders and institutions in 6 months will raise my eyebrow as much as it did Josh Arnold, once again, in his article about this subject. Josh calls this puzzling. I call it a huge indication of what those in the know think about the very stock that they are using shareholder dollars to buy back! Ignore this little tid-bit if you care to as well.

Now this article by the NY Post is interesting in more ways than one. First, what is the NY Post doing writing about a bank? Second, tying BAC to ANY drug cartel, for ANY reason, should send a few shivers down the spine of the staunchest bulls of Bank of America. Why? Perhaps reading this will at least make you think beyond the "old news".:

Mexican drug cartels could be taking advantage of lax oversight at Bank of America and Charles Schwab to launder their money, prompting a bank regulator probe.

The Securities and Exchange Commission is investigating whether the two financial firms didn't look into their clients' connections to drug money, according to a Reuters report.

Whoa, another bank regulator probe? How long will this take? Where will this lead? I have no idea, but if the New York Post Is covering this with front page news, you can bet your BAC stock that the paper will ride this news for all its worth. Care to ignore this little gem?

Finally I found this small report on something that might be insignificant in most cases. Except for the fact that when you add this little pile of poo on top of everything else, it makes one wonder whether there is complete incompetence within management, or just another little error like the $ billion dollar accounting mistake?

Bank of America represented Zale in the transaction. At the time of its retention, Bank of America advised Zale that it had "limited prior relationships and no conflicts with Signet."

But Bank of America apparently delivered an unsolicited presentation to Signet on Oct. 7, 2013, in which it promoted an acquisition of Zale by Signet at a price range of $17 to $21 a share. This was the day after the first day that Signet reached out to Zale about an acquisition. A member of the Bank of America team that made that presentation was also subsequently on Bank of America's Zale team.

No conflict of interest? Whoops, yes BAC, there was/is. Will this instill confidence in this portion of the banks business?

Now, you can choose to shrug all of these facts off and scream bloody murder about how much I have an emotional issue with BAC, which is hogwash of course. OR, you can finally open one eyeball up and see that maybe, just maybe, these are the very reasons the stock is so cheap, and will remain so for an extended period of time, in my opinion of course.

The Bottom Line

Why bother with this stock at all? If just one of these issues were to hit Apple (NASDAQ:AAPL) there would be a major "iWar" or something. Alas, it is all about BAC, which is so below book value that nobody can see the forest from the trees.

Disclaimer: The opinions of the author are not recommendations to either buy or sell any security. Please remember to do your own research prior to making any investment decisions.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I am considering shorting BAC at some point.