ERICOPOLY

I started the 'BAC Leverage' thread when people complained that the BAC warrants thread wasn't for discussing leverage. Oh, okay, maybe I'm not being that funny. But if I start talking about warrants again here on the warrants thread I'm sure I'll get more complaints. Read that thread and it should answer the questions. There is a lot of discussion about how there are two components to pricing in the option -- one is the difference between $20 and strike (in your example), and the other is the one that is affected by many things, including how far the current stock price is from the strike price. Anyways, I think you can get a lot of insight just from staring at this table: http://finance.yahoo.com/q/op?s=BAC&m=2016-01 You can see for example how a put option is a higher percentage of the stock price when the stock is nearer the strike price, but puts struck at prices that are further away from the current stock price get cheaper (expressed as a percentage of their respective strike prices). So in short, to answer your question the calls will be priced the same way as the stock rises to $20. Every call effectively is logically the same as having the benefit of owning a leveraged common share (without a dividend) and with a put embedded within it (so the leverage is non-recourse). Well, it's the synthetic equivalent of that logic. Anyways, if you have another question bring it up on the BAC leverage thread or somebody is going to complain again about discussing leverage on a thread about warrants :D

Something else which may be making large banks less exciting this morning. Although, I personally welcome it if it reduces the chance of banks (any banks) getting themselves into a liquidity pinch... when that happens it tends to drag the whole sector down. Fed Proposes Stricter Liquidity Rules: http://online.wsj.com/news/articles/SB10001424052702304682504579155373347681400?mod=WSJ_hps_LEFTTopStories Thursday's proposal is just one of several requirements the Fed is considering to improve the ability of large banks to withstand market shocks. Fed officials signaled they are considering some form of regulatory charge tied to a bank's reliance on short-term wholesale funding, an issue Mr. Tarullo and others have raised repeatedly in speeches and other presentations. Under the proposal, the Fed wants banks to be holding enough assets to meet 80% of the so-called "liquidity coverage ratio" by Jan. 1, 2015 and to fully implement the requirement by 2017. That's a faster timeline than outlined in Basel, which wouldn't require banks to meet the full requirement until 2019. For banks that rely on short-term borrowing to fund their operations, such requirements could force them to keep more safe assets on hand that could serve as sources of cash if the short-term funding sources dried up, Mr. Sweet said. For banks that rely more on traditional deposits, the requirement may be less onerous.

I thought the same thing when I first read that. My guess is that the $850M amount is the face value of the RMBS. The original Justice Department press release headline is Department of Justice Sues Bank of America for Defrauding Investors in Connection with Sale of Over $850 Million of Residential Mortgage-Backed Securities. My guess is actual losses are $131M or even less. Justice probably wants a repurchase of the bonds, so that their headline can read that they extracted $850 from BAC.....it's all optics. They lost $131M on the portion of the bonds that were deemed "materially defective". The also lost money on the rest of the bonds. So if the bank is to compensate them for losses on even the "good" bonds (without material defects), then (in my opinion) they are seeking excess damages. It seems like more than just optics in terms of the losses that BofA is being asked to incur, although optics do play an additional role if they are asking for all of the bonds to be repurchased and not solely looking for compensation on losses.

That's strange. The Justice Department wants Countrywide/BAC to pay $845 million even though the government says that only $131.2 million of loans were materially defective. The Injustice Department? http://wallstcheatsheet.com/stocks/the-jurys-in-bank-of-america-is-guilty.html/?ref=YF The Justice Department has said it is seeking a penalty equal to either Fannie Mae and Freddie Mac’s losses or the defendants’ gain — whichever amount was greater — and it has estimated the “gross loss” on the toxic loans was $848.2 million while the “net loss,” or the amount due to the portion of the loans that the government said were materially defective, amounted to $131.2 million.

I think you could simulate this effect of imputed capital gains taxes by raising an individual's income tax rate every time he switches employers (if his new pay is greater than the initial pay at the prior employer).

My chief worry that is the source of all this grumbling about taxes is being able to invest conservatively while keeping up with inflation. Let's say I have a bond earning 4% and I get taxed at 46% rate (in California). Hmm... I only have 2.16% after tax. That's roughly a return of 0% after inflation. So that's the first reason why I believe fixed income should be taxed at a lower rate than earned income. Because of this 0% real return, I must invest in shares of businesses that steadily grow their earnings. Compare that to your earned income as an employee. You have a salary that rises every now and then to adjust for inflation. The rise in the present value of your future earnings is a form of imputed capital gain. Just like if I own shares of BAC, if they raise earnings steadily over time the shares will rise. There is a capital gain there associated with the rise in earnings. Same for the wage earner -- the present value of his future earnings stream rises as he is given wage increases. Thus, the capital gains tax could be abolished to put wage earners on a level playing field with investors. People are calling capital gains "income", but they are not recognizing that when their own wages go up the same type of "income" is occurring (if you took the present value of all future earnings and expressed it as a capital value). Do you want to be assessed a special "income" tax on the imputed value of your future earnings stream whenever you switch from one employer to the next? Because that's pretty much exactly what happens when I switch from BAC into WFC. So pretty much everyone (except for investors) is enjoying tax-free capital gains, in a sense. Granted, I know Buffett throws off this argument a bit because he has opted for capital gains in lieu of taxable dividends, but there is some component of capital gains that is strictly due to the steady rise in earnings over time. Investors are in the unique position of owing a tax when they switch from one income source to the next, even when the "gain" is merely the present value of the increase in earnings. But employees never get hit with that when they change jobs -- however they too have a increase in present value of future earnings. Okay, this was a little tongue in cheek but I think there is a point to be made about the capital gains tax. It's not really a "gain" -- when you pay the tax you are losing a share of a future earnings stream -- and often it's just an inflationary rise in future earnings and thus not really a gain at all.

I'm not a tax expert but here is something that might be relevant: http://www.tradelogsoftware.com/trader-taxes/wash-sales/when-short-selling-stocks Therefore, if you cover, or buy back, your short sale shares at a loss and then sell short the same stock again within the 30 day period, you have a wash sale, and the loss becomes part of your future cost basis when you finally cover the short. This is a bit different in the sense that a sale has triggered the wash sale rather than a purchase. It seems reasonable that when short-selling a put (your scenario), the same logic would apply.

Don't temp me to switch my money into Berkshire shares that don't pay a dividend. I would have no income at all. Then I could qualify for a subsidy. I think it would perhaps (I haven't checked) then only cost me the $50-$70 that you quoted. I thought it might be more like $100 a month, but perhaps your $50-$70 figure is accurate. I don't know. But hell yes I need a subsidy! I mean "no income" is "no income", right? You are poor if you have no income, right? http://www.pbs.org/newshour/rundown/2013/09/will-you-qualify-for-an-obamacare-subsidy.html The law bases eligibility on household income. What does that include? It is income, not assets. The value of a house, stocks or bank accounts is not taken into consideration. Household income starts with adjusted gross income -- a number people can find on their tax returns.

It wasn't as bad as the tool estimated. Today I enrolled my family of four for $671.86 per month. This is for the Bronze 60 HSA PPO through Anthem.

Of course, it could also be cheaper if the stock moved down below strike (not just up above it) -- basically, the further away from strike price, the cheaper to roll (whether that be significantly above or below strike) Look for example at the prices expressed as a percentage of strike. The closer the strike is to the current stock price, the more expensive the put is (expressed as a percentage of strike price). 2016 puts: $8 strike for 33 cents (4.125%) $10 strike for 67 cents (6.7%) $12 strike for 124 cents (10.33%) Right, so let's say the stock rises by $4 from present levels. Maybe the $12 strike will fall to just 4% of strike (similar to how the $8's are priced today). So there is more art to this than simply time decay and volatility -- if you think the stock price will pop around March, it might pay off to delay your rolling until then.

The folks who shorted TSLA could be doing tax-loss buying.

This week I have been fly fishing in Oregon. Not a lot of technology out here to stay connected with. I noticed the $12 strike 2016 puts trading at only 58 cents premium to the 2015s. That's only about 5% annualized cost for the put alone. Not too bad. Best time to roll? Well, if the stock drops back down near the strike price then rolling will likely be significantly more expensive (volatility might be up too). If the stock goes up a buck or two over the next 3 months, the cost of rolling will go down. It's the skew-ness thing -- the further away the stock is versus the strike price, then generally the cheaper it is to roll. Back in March the average cost for these warrants was 13% for the entire term. Not only was the option cheaper out until 2015, but now the cost of rolling them out for another year is roughly 1/2 of what the warrants cost on average. It will continue to be this way if the stock keeps heading north. Thanks for the response. I think you are referring to rolling the same strike price to another year out, right? So you mean rolling $12 '15 calls to $12 '16? What if I was rolling $12 '15 calls to say, $15 '16 calls? The reason I was thinking of this was to increase the strike of the implied put, a strategy I think you referred to earlier in the thread. Didn't you say it was better to roll into whatever the ATM option is for this reason? Maybe I should just buy the stock and puts since they are cheap. I am hesitant though because it will eat up a lot of my capital... Not necessarily better to always be at-the-money when rolling. But certainly safer. And the $15 strike puts are now cheaper (annualized) than what people paid (annually) for embedded puts with $13.30 strike (the warrants). For the amount of money people were paying, they could instead be getting at-the-money strike adjustments when they roll the LEAPS. I don't want to roll my 2015s yet for a variety of reasons. 1) tax -- I'm presently in a blackout period due to wash sale rule 2) If I roll to the $15 strike I want the stock to be above $15 at the time (I believe otherwise I risk triggering a "constructive sale"). 3) I feel like the stock will be a couple of dollars higher in the spring -- I'd like to roll then to save money on the roll

I wonder. The big US financials have tax rates exceeding 30% on their US lending businesses. Imagine what it would mean for them if US corporate tax rate were 12%, as in Ireland.

Years ago they cut tax rate to zero for Muni bonds when they wanted the Muni interest rates to drop. They could make borrowing cheaper in other sectors if they went that route. The Fed buying bonds in an attempt to drop rates seems like a clumsier way of dropping mortgage rates than just cutting taxes on mortgage interest. I wonder how far rates would fall if the lenders didn't have to pay tax on the interest? Paying back 1/3 of your income in taxes is just as painful as not collecting interest from 1/3 of your borrowers. Perhaps it would spur lending as you could take on more risk if you didn't have to worry about losing 1/3 of the income to the government.

Australia has expanded for 20 years now without contraction. What is the record? Six years sounds like a lot unless you've already seen 20.

No, wait! I can agree with Packer that the bull market might go on for yet another while… but don’t tell me it has just started… please, look at the chart! It is 5 years now the market has gone nowhere but up… Isn’t that a good enough definition of a bull market? ;) giofranchi Well, you don’t want to make things too complicated, do you? … What you have written is what happens during “secular bear markets” … But do you really want to talk about that? If you do and care (but I am not sure!), 2009 as the end of the "secular bear market" is simply inconsistent with history, meaning what can be observed about “secular bear markets” of the past: 1) Inconsistent with the mean duration of “secular bear markets”: 9 years instead of 17 years. 2) Inconsistent with market valuations: in 2009 market valuations were still much higher than they were at other “secular bear market” bottoms. 3) Inconsistent with logic: in 2000 valuations were the highest ever reached, and the secular bull market just ending was one of the longest lived. Why then should we expect a shorter and a more benign “secular bear market”, instead of a longer and a tougher one? giofranchi Falling from the 5th floor of a building onto concrete ought to hurt more than falling from the 2nd floor onto concrete. Perhaps though, falling from the 5th floor of a building into a safety net doesn't hurt more than falling from a 2nd floor onto concrete. (we forgot to mention the policy responses)

This week I have been fly fishing in Oregon. Not a lot of technology out here to stay connected with. I noticed the $12 strike 2016 puts trading at only 58 cents premium to the 2015s. That's only about 5% annualized cost for the put alone. Not too bad. Best time to roll? Well, if the stock drops back down near the strike price then rolling will likely be significantly more expensive (volatility might be up too). If the stock goes up a buck or two over the next 3 months, the cost of rolling will go down. It's the skew-ness thing -- the further away the stock is versus the strike price, then generally the cheaper it is to roll. Back in March the average cost for these warrants was 13% for the entire term. Not only was the option cheaper out until 2015, but now the cost of rolling them out for another year is roughly 1/2 of what the warrants cost on average. It will continue to be this way if the stock keeps heading north.

LAS expenses dropped $100m but so did servicing revenue. Wash.

Hey wait a minute. There is no limit to how many 529 plans that are set up for you -- the only limit is that people can't make further contributions once your combined beneficiary total amounts to $300k account balance. So if my mother also set up an account for myself and an account for my wife, we could also contribute $140,000 to each of those plans. So on day one (without triggering gift taxes), each of us could be funded for $280,000 (combined $560,000). That's near enough to hitting the individual $300k limit that I'd consider it a success. Then there is my mother-in-law too -- we could have her setup accounts for us and just put the remaining 20k each into those accounts. So that's the entire 600k joint limit fully accounted for, clear of potential gift tax problems. Although I still could be wrong about that -- I'm not sure if the gift tax limit is considered for each account owner, or if it's just for the beneficiary. If it were for the account owner, then it would only be 140k for my father, 140k for my mother, and 140k for my mother-in-law. That's only 420 total. Hmm...

The part that I'm pretty sure about is that you don't pay the 10% penalty on non-qualified withdrawals if the account was inherited. However, the gains in the account are still taxed as income. But in my case I don't have a regular IRA -- only a Roth IRA. So if I accumulate some gains in a 529 plan and pull out a little bit each year, the tax rate will be low assuming I do this late in life when I have no other source of taxable income (like when I'm just drawing from the 529 plan and my RothIRA as my only remaining liquid funds).. When I converted my IRA to RothIRA I did 100% of the entire account -- I figured I might go back to work one day and contribute again to an IRA. But this 529 plan is perhaps the "IRA" now. Then again, I don't have to spend it on myself. If I wind up having grandkids, I can always assign it to their 529 accounts. And if I don't, my kids could always inherit mine. Or once they've gone to college and significantly drawn down their own plans, I could then gift a portion of my account to their account each year. Hmmm... so much to think about. But one of the things I'm not at all certain of is whether I can fund the account with the entire $300,000 right away without triggering gift taxes -- I believe I would be able to since I would in a way be just giving the money to myself (I'm the beneficiary). But then again, he's the owner and as owner of the account he could change the beneficiary to himself I suppose, which would be a weird way of me funding his education account without gift taxes. So I'm not sure. But I'm fairly sure that I could fund it with at least $140k right away -- my wife and I can each put in $14,000 a year without triggering any gift taxes, and you are allowed to put in the first 5 years on day one. So $14,000 each going into this account per year for 5 years, meaning I could put $140k into it on day one. Plus, we could also set up an account for my wife to inherit. That's another $140,000 minimum on day one. Together, $280,000 on day one. Potentially, we could be looking at $600,000 on day one with both accounts combined (not sure about that gift tax situation).

Okay, now I'm thinking clearer... Step 1) have my father establish a Vanguard 529 account for me. He is the account owner, I am the "student" beneficiary Step 2) establish myself as the "successor owner" of the account in the event of his death Step 3) I fund the account with $300,000 maximum right away (I believe I'm allowed to contribute that account without triggering gift taxes because I'm the beneficiary. But I'm not certain about that -- it's just what I believe to be true. So it's invested tax-deferred, and when he passes I can then leave the funds in there throughout my lifetime. Anything I spend the money on will not incur the 10% penalty, because I inherited the account (the exemption is for inherited accounts). There, that sounds like a pretty good plan.

Yes. However, it's my after-tax account intrinsic value that matters to me. So whether or not buyback itself adds intrinsic value isn't the final answer -- what also matters is if it doesn't destroy as much intrinsic value for the account as taxable dividends do.

Why are vices criminalized? This is ridiculous IMO. It's funny -- in Australia prostitution is legal but hard core pornography is not. They have a nice clean society. Here, we make prostitution illegal and it's not like it goes away anyhow. So if the goal is to get rid of prostitution we should obviously rethink that, because it's not going away.

They might change the rules, yes. But until that happens I can pick up some tax-deferred compounding. And you know, maybe when the rules change it looks like this: "You cannot make any new contributions to tax-deferred vehicles if you already have a combined balance in excess of $1 million". So, maybe you get as much as you can as fast as you can into such plans. Too hard to say. But it seems unlikely that paying taxes every year on bond income is a better plan.

Regarding the trading limitations. I know, that one trade per year thing stinks. But I figure I can put on offsetting hedges in my taxable account when the market is high. The cost of the hedges will be a tax write-off. So the investments are in the tax-advantaged accounts, and the hedges are in the taxable account. I'm basically just figuring on borrowing the funds from my portfolio margin account, hedging the loan with puts, and depositing the loan in the 529 plan. Thus I generate these tax losses that won't really be losses (offset by gains in the 529 plan). And since I won't be trading the 529 plan, wash sale rules won't apply. Once the puts expire, I will have some losses to offset some gains for selling down my BAC position (and that pays down the margin loan). I want to eventually get a big cushion of money in some less volatile stuff for my sanity -- but things like bonds are a non-starter for tax reasons unless I can do it tax-deferred. Also, does anyone know if creditors can raid 529 plans?