ERICOPOLY

I think they've spent $6b on preferred retirement this year. Plus $2b on buybacks. Plus legal settlements above reserves, and now they suggest they've got another $5b of potential legal expenses above reserves yet to come. Then they've got $3b still to spend on buybacks for Q3, Q4, and Q1. So that's: $6b+$2b+$5b+$3b. That's $16b. Next year let's hope they can concentrate that same $16b on the buybacks.

Let me answer by saying that I wouldn't have this bias against the warrants if I believed the stock to be fully valued. You see, I believe the earnings will improve over the next 18 months. For that reason, I believe the stock will rise materially. Therefore, I believe I will be able to roll my puts at much cheaper cost of leverage. I don't believe paying 10% per year to be absurd if the stock is going to remain at $14 for all 5 years. But that's just the thing, I don't believe that. Rather, I believe it will appreciate by an outsized amount. It doesn't mean that Black Scholes is wrong, because it's just using the current stock as input. But if the current stock price is wrong, then you know the saying... "garbage in, garbage out".

Lack of dividend at MKL is a positive. The FFH dividend for example would cost me about 75 bps of compounding (lost to the tax collector). Over time that adds up. Destroys 7.7% of the investment after 10 years.

One other thing. Australia only respects "employer sponsored" plans. So if you were planning to quit your job, roll the money to an IRA, and then move to Australia... be careful. They treat an "employee sponsored" plan the same as an Australian Superannuation Fund (their version 401k), but they consider IRA accounts to be a "Foreign Investment Fund". Other countries may do the same. So if you plan on remaining in the US, you don't need to care about that. But if you think you might leave the US later on, put some thought into it first. Also, it appears you can't roll a Roth IRA back to a 401k, but you can do it with a Regular IRA. See, I've trapped myself. I can't get my RothIRA assets back into a 401k -- so I can't go to Australia.

BAC common: $14.15 A warrant: $6 14.15 - 6 = 8.15 8.15 * 1.1 * 1.1 * 1.1 * 1.1 * 1.1 = 13.12 (strike is 13.30) So the leverage in the warrant is back to roughly 10% annualized cost of leverage it looks like. I was wondering what would happen if the common were to appreciate by 15% over the next year. It seems like the warrant would gain 20% if the cost of leverage is still 10% a year from now. However if the cost of leverage slips to 8%, then the warrant would only gain 12% (less than the common). I doubt the cost of leverage will remain at 10% if the stock rises to $16. That $13.30 put becomes more and more meaningless when it offers little protection from a fall -- and the higher the stock is above strike, the larger the fall (and thus the less value of the $13.30 put). That's basically the argument for skewness -- a put at $12 protects you from a 40% fall when the stock is at strike, but when the stock is at $20, it does nothing to protect from 40% fall. So that's why the cost of leverage declines as the stock rises (if anyone was still wondering :))

Let's say tax rate is 30%. 5-8 billion pretax settlement would cost them 3.5-5.6 billion after-tax. 11.5 billion fully diluted shares, so it's: 30 cents per share to 48 cents per share That's how much the share price should drop for this settlement alone. Except they've already reserved for a chunk of it. How much have they reserved? Maybe they've reserved for 50% -- in which case the stock should be dropping 15 cents to 24 cents. I don't know, any guess?

None at the present.

How about this to ease your concern: 1) Quit Job 2) Open Fidelity "self-employed 401k" -- perhaps you become a self-employed handy man for a few months between jobs 3) Roll your employee 401k assets (and perhaps other IRA accounts as well) to the new self-employed 401k. 4) start new job at new employer There, now you have it all in a 401k, not in an IRA Ah... there's a catch for solo-401k plans: If your savings are in a 401(k) account, they are protected from all forms of creditor judgments, including bankruptcy, says Kyle Brown, a retirement counsel with Watson Wyatt Worldwide in Arlington, Va. Solo 401(k)s, however, don't necessarily have the same protections as other 401(k) plans; in some states, solo 401(k)s are protected from creditors, but in others they aren't. http://online.wsj.com/news/articles/SB124181801239401917 Some states give good protection to IRAs (others don't): Other states, such as Texas, Arizona and Washington, protect virtually everything inside an IRA from creditors. In Arizona, for example, only contributions made within the last 120 days can be subject to creditors' claims in a bankruptcy. http://www.latimes.com/la-ira-story3,0,6977190.story#axzz2j51AkHYR

1) Roll your current 401k to Fidelity (or wherever you want your IRA). 2) Then at your new company, invest the 401k in bond income funds. 3) Use you IRA at Fidelity to buy a few deep-in-the-money call options. Just enough leverage to offset what you've got building in the new employer 401k plan. This way, you make income in one account, and it offsets the cost of the leverage in the IRA. Hopefully your stock picking will be good and the IRA will grow much faster than the 401k builds up. Eric, if someone is young, wouldn't they still be better off (long term) just investing directly into the market? It's not like you can use the 401k income generated from the bonds to do much else besides reinvest (unless your plan allows in-service distributions). Sure, but I have my doubts that he'll ever spend more than roughly 5-10 years at a given company before moving on to the next one. Let's say I'm right -- then whenever he moves employers he rolls the 401k to the IRA.

1) Roll your current 401k to Fidelity (or wherever you want your IRA). 2) Then at your new company, invest the 401k in bond income funds. 3) Use you IRA at Fidelity to buy a few deep-in-the-money call options. Just enough leverage to offset what you've got building in the new employer 401k plan. This way, you make income in one account, and it offsets the cost of the leverage in the IRA. Hopefully your stock picking will be good and the IRA will grow much faster than the 401k builds up.

The yield is 7%, but you make a capital gain of 3% if the price of almonds (along with the cost of producing them) rise by 3%. So that would be a 10% return (7% real plus 3% nominal).

I use options for mostly two different reasons. Depends on the scenario. 1) Swapping risk I went 100% long BAC using $5 strike calls when it was in the mid-$5 range. I paid for those calls by writing puts on other names. So I had 100% notional downside in other names, 100% notional upside in BAC. That was what I called a Frankenfund. I had all the upside of being "all in" BAC, but absolute zero downside risk from BAC. I wanted to understand that the European banks weren't going to collapse like dominoes -- the news at the time was tense and I was susceptible to some of the rumors of what could happen to BAC in that scenario. 2) Still talking about the BAC situation, later after LTRO and other signs that the crisis was easing, I bought back some of those puts and used the money to add BAC warrants. Then I was 2x notional levered. So basically, when I use options it typically has absolutely nothing to do with the reasons you mentioned.

Or alternatively (instead of writing a $15 call) you just take delivery and buy puts to replace your $5 strike embedded put. A 2016 $5 strike put costs only 8 cents. It's practically free. So your total cost becomes something like $2.08 for a 4 year call. The leverage for the first two years was expensive, but the average cost is roughly 1/2 as much after considering how cheap it is for rolling the position to the 2016 put. So was the $2 premium for a $5 strike call expensive after all? It's a little muddy.

I haven't read the book. What does he consider to be an underpriced option? Does he give an explanation about how to arrive at what he deems the "fair" price in order to determine what "overpriced" is? So far I've observed that when WFC or BAC options are trading at their peak premium it has been the best time to purchase them. These moments have happened when the market is scared about something and the common stock is depressed. As investor worries are eased, the stock jumps. BAC for example had a $2 premium for at-the-money $5 strike January 2014 call options in December 2011. That was 40% of strike, which seems expensive. But this happened at a time when the stock was soon going to rise by quite a bit. As the stock rose, the premiums for at-the-money options didn't go down on an absolute basis. Take for example today's $15 strike 2016 call. It's been almost two years since December 2013, but nearly-at-the-money call options are still $2. Okay, $2 is not 40% of $15, but neither is it a reasonably high probability for the stock to triple from here over the next two years. You get what you pay for. So you could have got in at $5 for the $2 premium, then today you could be exercising them (near expiration) and writing the at-the-money call to recover the premium. So you recover your lost premium and lose the next two years of further appreciation. But remember you were able to only put a 40% initial down-payment for shares that have now tripled to $15. So you had a lot less risk on the table to begin with. So is that an overvalued option? I guess I wonder what his criteria is.

I thought it was awesome when, in 2008, he went long MBIA and dismissed Bill Ackman who was short MBIA. Whitman said the following: “MBIA is being victimized by an apparently well organized bear raid headed by William Ackman of Pershing Square Capital Management,” Mr. Whitman wrote. “Ackman believes the bond insurer model does not work because the insureds are able to buy an AAA rating so cheaply,” Mr. Whitman wrote. “The facts are that bond insurance is one of the more profitable P&C businesses.” Bill Ackman is a “slick salesman who does not know much about insurance and certainly doesn’t know much about restructuring secure debt” Boy did he ever eat crow! There's a story about it here: http://www.valuewalk.com/2013/08/marty-whitman-classics-and-mbia-battle-vs-ackman/

Of course you never see articles that say that income is masked due to rising loan loss reserves. It's a cycle. Provisioning goes up during times of crisis and goes down as the crisis passes. You mean you never saw this one? Big Banks Are Exaggerating the Extent of Their Losses With 'Reserve' Cash Or maybe this one from January 2009: Big Banks Are Hiding Their Profits With 'Reserve' Cash

No worries, this drove me a little insane when I was thinking about it a few months ago. It wasn't until I looked at a few examples, like the ones you posted, that it finally clicked for me. The interesting thing is that it takes a dramatic change (e.g., a 10-1 split) to really have to figure it out. Previously, I thought the BAC A warrants would end up where you get 1.2 shares for $10 (following my previous example with 1.2 warrant shares and $10 strike), but now I'm pretty sure it is $12 for the 1.2 shares, since it is expressed in "per share" metrics. I'm relatively certain it's $12. This is just a dividend reinvestment plan.

Eric, I just ran across this company's website. EOS Energy. They don't mention residential on that page, but their smallest "commercial and industrial" units sound perfect for what you are looking for. They say Here's a presentation where they talk about grid storage, electric vehicle applications, as well as residential applications like what you are looking for. http://www.eosenergystorage.com/wp-content/uploads/2013/04/Eos-Public-Presentation-2013-02-11.pdf The only problem is that it looks like none of these systems are shipping just yet. 2014 for the grid-scale systems and 2015 for the smaller systems. That's pretty cool, finally a cost estimate. Thanks. So they figure it will cost 12.5 cents per kWh to own their system. So if I buy the electricity at night for 9 cents, store it in the battery for an added 12.5 cents, and release it at noon for 47 cents, then I'm saving 25.5 cents. That's a 46% reduction in price of electricity with their system.

The government is finally punishing these banksters for purchasing Bear Stearns at the urging of these regulators. It is about time. How much longer can these strong players that didn't get themselves in trouble be allowed to get away with helping their government?

The Fed hasn't even unwound QE yet. Listen, if it only costs 60 basis points for the $18 put by Jan 2015, and another 50 bps for the margin at current Fed base rates, what are the odds that the Fed is going to move the base rate up by 190 bps soon... and the later they raise the rate, the less likely the blended average Fed base rate increase over the two year period will be 190 bps.

A few questions: How much income are they making from their bond portfolio at the moment By what spread are they beating the market short position at the moment How much underwriting profit are they generating Do value oriented investors hold it and will they still hold it in a market collapse when bargains emerge everywhere?

That's why I brought it up actually. You've built a criteria that it needs to be low dividend paying. But that's just for calls. I had to point out that the dividend is irrelevant if you instead go the puts+"portfolio margin" route. Your criteria was less than 3% total cost for the leverage. Under that criteria, I pointed out that WFC qualifies under the puts approach but not under the calls approach. "Leap options strategy" -- puts are LEAPS too.

In fact (at IB margin rates), you can go long WFC common with 2015 $37 strike put for the same "cost of leverage" as the 2015 $18 WFC deep-in-the-money call. Leveraging up with no downside below $37 at the same cost as taking on downside all the way down to $18. It looks convincing to me which strategy to follow.

I just wanted to point out that the WFC $18 put is only 11 cents, costing only 60 bps. 60 bps for the put versus 670 bps for the call. A difference of 610 bps. I know, I know, we're ignoring the cost of margin -- the put strategy assumes you've borrowed on portfolio margin to purchase the common stock. Okay, so IB charges anywhere from 50 bps to 140 bps for margin interest. 610 bps difference is far greater than the worst-case IB margin rate of 140 bps. Well, not "worst case" -- the Fed might aggressively raise the base rate over the next 12 months, and pigs might fly backwards. But, using best case margin pricing, the put strategy costs only 110 bps. Versus 670 bps for the call strategy. So sometimes the put+margin strategy is much, much, much better (cost wise) than buying deep-in-the-money calls. Plus, Wells Fargo will probably hike the dividend again -- costing even more for the calls.

Not quite as good as it first looks though. The $18 strike 2015 Wells Fargo looks cheaper before one contemplates the cost of missing the dividend. I mean, you are missing a $1.20 dividend and you are only effectively borrowing $18. So that's like 6.7% cost just from the missed dividend. Borrowing $18 means you miss the entire $1.20.