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Summary

  • BAC has been dragged into the headlines of Citigroup's MBS settlement with the DOJ.
  • BAC's settlement with the DOJ is one step closed to being behind the bank for good.
  • The bank still plans to offer a nickel dividend in its new capital allocation plan, but has curbed its buyback.
  • Bulls will do well to exercise some perspective and realize greener pastures are likely ahead for Moynihan and Buffett's Bank of America once MBS issues are resolved.

There certainly has been an awful lot of uncertainly around Bank of America (NYSE:BAC) lately. The Seeking Alpha bear index on the company is at the highest I've seen in since I've started following Bank of America. By that, I mean that sentiment on this site has turned from mostly bullish, to somewhat divided. I'm holding my ground and staying in the bullish camp amidst the uncertainty.

The phrase, "it's always darkest before dawn" comes to mind when I look at the sentiment behind the bank and its legal issues as of now.

As you can see, the bank hasn't been trading confidently over the span of the last six months; This comes as direct result of the bank having to retract their capital allocation plan a couple of months ago and the uncertainty that still looms behind the bank and a potential DOJ settlement for the mortgage backed securities issues of 07-08. Off 3.2% in the last there months, BAC still finds itself up to the tune of 16.7% in the last twelve months.

(click to enlarge)

The technicals don't look too tasty at the moment, with the short term DMA moving down through the long-term indicator. The bank seems to be finding some resistance in its 200DMA coupled with the $16 level. Support has been evident on the 50DMA in the last month.

This morning's news was that the bank shaved its buyback in its new capital allocation plan, but still plans to offer a nickel dividend. Seeking Alpha reported this morning:

  • The bank last March originally received Fed permission to boost its quarterly payout from $0.01 to $0.05 (along with a $4B buyback), but was forced to withdraw that plan after discovering it miscalculated capital levels.
  • Bank of America subsequently fixed the accounting issue and resubmitted a capital plan in May, and the WSJ reports the lender is requesting the same size dividend, though the buyback plan has been toned down.
  • For the bank - which has made boosting the dividend a top priority - the move projects to the Fed a sign of strength and that there are no more accounting cockroaches out there. For the Fed, its decision will establish a precedent for how these errors might be dealt with in the future.
  • All this is happening as pressure mounts for BofA to come to a settlement with the DOJ over mortgages, and word is Eric Holder has no interest in talking turkey with Brian Moynihan until their lieutenants get a lot closer to a final deal.

But it hasn't just been Bank of America that's been in the spotlight with regard to their DOJ settlement. The headlines have been more prominent than usual as Citigroup (NYSE:C) also finds itself close to paying a fine to settle a DOJ investigation into mortgage backed securities. Last we heard in news dated yesterday, Citi was throwing around a $7 billion number for a potential settlement. Bank of America's number is predicted to be significantly larger, with estimates ranging from $12 billion to $17 billion.

This uncertainty represents one of the last major humps that Bank of America is going to have to get over with regard to this litigation that has been plaguing it for the better part of almost 7 years now. BAC bulls are happy to see this issue heading out the door, while bears still contend that nothing has been settled yet and that settlement estimates for BAC have done nothing but grow in the last 6 months.

QTR is recommending a long term buy here for Bank of America, still. While my price targets near the $20 levels still seem achievable, I'm not sure we're going to see it in the very short term. I do believe that the revamped capital allocation plan that BAC has submitted and the eventual finalization of the DOJ case will lead the company to much greener pastures. Uncertainty surrounding the headlines for BAC and C, however, could contribute to some short term volatility in the name.

Most notably coming up is the bank's earnings, which are due July 16th before the market opens. Analyst estimates are calling for $0.29 EPS on revenues of $21.61 billion. Both figures are off from a year ago.

(click to enlarge - source Yahoo Finance)

Like nearly every other stock on the big board this morning, Bank of America is off slightly in pre-market trading as a result of the overseas mess that took place last night.

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