ERICOPOLY

Based on the Fed's past language, they will only let them return what they expect in earnings, minus some money set aside for building capital ratios. So basically they won't allow the banks to get weaker (bias towards getting stronger), and will only object to returning all projected earnings if there is more work to be done. I don't know how they agree on what "projected earnings" will be. They are forward looking estimates.

And that is 100% the same issue as with the buybacks. So that noise just filters out and we are exactly as I described it. X equals X.

Tombgrt, I don't know if you are a shareholder or not, but for what its worth I about jumped thru the phone at DELL IR the day of the announcement. I'm sure Longleaf was just in pure shock. Longleaf can just use it's dividend to buy more shares. It should make little difference to them mathematically in terms of the compounding record of their fund.

To me it's a non-issue. Company buys shares -> shareholder sells offsetting position -> X amount of cash in hand Company pays dividend -> X amount of cash in hand X equals X. Only matters when taxes get involved.

I've been reading this thread today. It's interesting the thesis that the market is hammering DELL over Win8 adoption worries, when I see MSFT at nearly a 12 month high.

They could sell it to me for $1, and then I could put it in bankruptcy myself. The $1 would be lost, I would make up for that loss by the soaring price of my BAC shares. Given that this is such a good idea and yet nobody has done it yet... probably it isn't a viable option.

Earlier this year (back in April or so) there was a comment by Soros suggesting that the Euro (common currency) could be broken up in two more years without a financial crisis. He elaborated by saying the banks had been preparing for it for two years and were only about halfway through. BAC should see a lot of upside by 2015 if that's true.

The warrant holder also ends 2018 with a 29% increase in shares per warrant at a $10.29 strike (ignoring the $0.01 threshold). So the common holder starts with $8 and ends with +$12 in addition to whatever you did with the $5. The warrant holder starts with $3 and ends with +$15.56. Without the dividends, you arrive at +$12 for an $8 common purchaser versus +$6.70 for a $3 warrant purchaser. Ignoring taxes, it only works out better for the common if you can reinvest the dividends at a higher rate than what is provided by the strike adjustments. I just ran some quick conservative numbers and the warrants yield a 610% gain or a ROR of around 35%. The ROR on the DCF of the common and dividends (same assumptions) is about 28.5% (409% gain). For reference berkowitz mentioned a theoretical gain on the warrants of 592% in his Q2 commentary. I had the number of underlying warrants increasing to 1.21 and strike price of just under $11/shr. Some assumptions include dividends of $0.04/shr per qtr in 2013, ramping upward after. Return on TCE gradually increasing to 13% over the period and P/TBV gradually increasing to 1.6 times. Terminal share price is just over $30/shr and cumulative dividends of $4.5/shr over the warrant period. I never had the dividend rate over 50%. Some may think these are too conservative. It's likely a muddle through scenario. So that's a terminal share price of just over $30 a share for the warrant returning you a 610% gain. The common (dividends reinvested so that you have 1.21x shares) yield 400%. So 610% instead of 400%. The man with the warrants will have 40% more money at the end under those assumptions.

Let's say somebody bought the stock at $13.30 (same price as the warrants' initial strike price), and later the stock dropped to $8 per share at which dividends were paid (and reinvested in the stock). The investor would then have an average cost basis somewhere between $13.30 and $8. Now, with the warrants in the same scenario the adjusted strike (and adjusted shares) would wind up being the same as that of the average cost basis the common shareholder in my prior paragraph enjoys. I think -- please tell me if the calculations do not wind up the same. It depends on the price of the warrants. Do you mean that the dividend is issued at $8? So at an $0.80 dividend, you get 1.1X shares at $14.10, or $12.18/share. The warrant receives a strike reduction to $11.97 strike for 1.11X shares, or $10.78/share. I was looking for a logical way of thinking about them which isn't there. I thought it made sense and skipped the math -- well, I should be more rigorous before thinking out loud.

Let's say somebody bought the stock at $13.30 (same price as the warrants' initial strike price), and later the stock dropped to $8 per share at which dividends were paid (and reinvested in the stock). The investor would then have an average cost basis somewhere between $13.30 and $8. Now, with the warrants in the same scenario the adjusted strike (and adjusted shares) would wind up being the same as that of the average cost basis the common shareholder in my prior paragraph enjoys. I think -- please tell me if the calculations do not wind up the same.

Not just that, but a very well defined window in time so that your time decay was not a big deal for the duration of the thesis window. See, the 2014 BAC calls right now are not a case of "either they work out by this November or they don't".

Interesting stuff. So how much of your portfolio did you put into these options? A very large % I assume, since it was enough to help you retire. At what price did you end up selling the option? This is interesting because I was just looking at AIG 2014 $50 calls, which are selling for about $1.50. I'm wondering what you think of them? 17 months till expiration, and the strike is $10 below current per share book value. If BVPS is $80 by then, as some people predict, and the stock sells for 1.0x, then these options would make out very well. But this is all coming from a beginner, so I'd be curious to know what you think of it. I had varying strikes. I kept adding to the $140s as they dropped in price, but I had some $70 strike 2009 calls too, just so that my break-even point wasn't so high if we got all the way to expiration. I had every dollar I could find invested in them. I was not allowed to allocate my 401k to them because it was in an employer plan. But essentially it was 100% of my taxable account and IRAs, and that amounted to about 50% of my total net worth at the time (including estimated real estate estate equity). My 401k was about 20% of my net worth, with real estate equity making up the other 30%. I don't have any comment on the AIG options idea. I'm not using very much notional leverage anymore -- I think you need to reach a certain escape velocity to leave the atmosphere, but then at a certain point it doesn't take much fuel to remain in orbit. Forgot to answer your question: I started selling as FFH approached $160, to cut down on the leverage. It's hard to suddenly come into that much money and remain calm, I wish I had held on longer.

It depends on the stock price relative to the strike price. Ericopoly's point is that you would be better off simply reinvesting a dividend into the stock price if it's below the strike. I am sort of leaning towards retracting my stance on that because of the fact that the depth of the warrant adjustment depends on the dividend yield at the time that the dividend is distributed. This is done to make sure the warrant holder in some sense fully captures the gain in intrinsic value per initially allocated dollar (at time of first warrant or common purchase) that the common stock holder enjoys. But anyways, some of you guys still believe that it matters at what price a buyback occurs vs paying a cash dividend instead (I actually don't believe it makes any difference whatsoever, not to me anyway) so I wanted to point out that if you go the warrant path you might be twisting in your chairs and gnashing your teeth to see that your dividend is being plowed back into the stock at prices that aren't considered cheap anymore. You see, since it matters what the yield is at the time of the warrant adjustment, if the common shares recover in price to some sort of fully valued level then you will be effectively stuck with a dividend that gets reinvested in fully valued shares. Anyhow, perhaps by then you would like to just sell and move on, but the leverage in the warrant and the tax implications might tempt you to want to hold on despite relatively full valuation. Maybe not.

The warrant is a vehicle where your dividend effectively gets reinvested in the stock no matter what the price. It's somewhat like an option with a built in DRIP that you can't opt out of.

Well, in both cases you wind up with 1/7 more ownership. In the case of the dividend: you still have a market value of $8 with your $1 reinvested in the stock and price at $7. However if the stock goes up to $8 again you are sitting on a gain even if you exclude the capital gain on your reinvested dividend. So that's why the warrant has both the strike adjustment as well as the increase in share conversion. The warrant too should benefit from just the stock going back to a pre-dividend price without counting the capital gain from the increase in share conversion. So this aspect of the warrants is not too good to be true. The common has essentially the same benefit. I find it makes them easier to compare to one another, because we can think of the cost of the warrant as the cost of the leverage, without worrying about how the cost of the leverage changes depending on when dividends get paid and potentially reinvested etc... The part that's "too good" is the fact that the dividends are being essentially reinvested without the drag of taxation (and that dividends normally count against regular options holders), and that these are long term contracts that aren't available otherwise (once the TARP warrants expire, it isn't likely that we'll find long term leverage like this again). I can compare the cost of the leverage in the warrants against the cost of financing the leverage through other means (such as margin), but margin is quite scary in quantity and has market swing risks that the warrants don't carry.

Prior to the dividend, the common stock holder had roughly a $2 per share theoretical earning power at 1% ROA. Now it has been increased by 1/7, so he now has $2.28 per share (I don't literally mean "per share" given that I'm adding the 1/7 to the original shares) of theoretical earning power. So he is not in a similar situation to before. From a market value standpoint on the day of the dividend, if it's trading at $7 then yes it still adds up to $8. The change will be more obvious to see when the stock is trading a 10x 1% ROA -- perhaps many years from now.

And when common gets the $0.50, they have to reinvest at the market price. Warrant holders are reinvested at strike, mwahahaha (the benefit of this is reduced because the adjustment is %, not $ for $.) Yes you're right. The common is the real winner if the stock stays really low for years and years and they pay a high dividend (and you have a low dividend tax rate).

The stock price at time of dividend impacts how many shares 1 warrant entitles you to at the strike price. The lower the stock price at the time of the dividend, the more shares you can purchase with the warrant at the strike price (which adjusts lower with the dividend). So you get the right to buy more shares at a lower strike. A double win. Reason for this (my thoughts): Out in the real world a common stock holder gets his dividend and reinvests it in the stock -- he can get more shares of stock when the price is low, versus when the price is high. So common stock holders would have a distinct advantage over the warrants if they got a lot of dividends when the stock is low. So the warrant provision equalizes it. See last paragraph of page S-28: http://www.sec.gov/Archives/edgar/data/70858/000119312510044940/d424b7.htm quoting: The number of warrant shares will be increased to the number obtained by multiplying the number of warrant shares issuable upon exercise of a warrant immediately prior to such adjustment by the quotient of (a) the exercise price in effect immediately prior to the distribution giving rise to this adjustment divided by (b) the new exercise price as determined in accordance with the immediately preceding sentence. saying it a different way, when the stock price is low, the dividend yield is high, giving the common stock holder an attractive return (or at least more attractive than other dividend plays), so the warrant gets a similar advantage. Were the stock to trade at 50 cents and the dividend were also 50 cents, then the common stock holder could take the 50 cents and buy another share. So the common stock holder would now have 2 shares, vs the warrant holder stuck with his one share. So that scenario (without the share count adjustment) would take the shine off of the warrant. Thus, the warrant has the adjustment for number of shares so that there is no such situation where a low stock price opportunity puts the warrant holder at a disadvantage to the common..

The stock price at time of dividend impacts how many shares 1 warrant entitles you to at the strike price. The lower the stock price at the time of the dividend, the more shares you can purchase with the warrant at the strike price (which adjusts lower with the dividend). So you get the right to buy more shares at a lower strike. A double win. Reason for this (my thoughts): Out in the real world a common stock holder gets his dividend and reinvests it in the stock -- he can get more shares of stock when the price is low, versus when the price is high. So common stock holders would have a distinct advantage over the warrants if they got a lot of dividends when the stock is low. So the warrant provision equalizes it. See last paragraph of page S-28: http://www.sec.gov/Archives/edgar/data/70858/000119312510044940/d424b7.htm quoting: The number of warrant shares will be increased to the number obtained by multiplying the number of warrant shares issuable upon exercise of a warrant immediately prior to such adjustment by the quotient of (a) the exercise price in effect immediately prior to the distribution giving rise to this adjustment divided by (b) the new exercise price as determined in accordance with the immediately preceding sentence.

This was my first ever options purchase. DengyuTheNugget worked at Microsoft as did I, and I pointed him in the direction of this board and started telling him about FFH. He then quickly talked me into buying the options instead of the common. I had to go and figure out how to enable options trading in my account. What a good time to learn about options!

The Nobel Prize winners claim that stock prices reflect the data available to the market. In this case, the data was fraudulent and the market price reflected the lies being spread through the media. For example, in June 2006 the stock dropped 10% in one day on rumors that Prem was leaving the country with shareholders' money in hand. So basically if you thought Prem was honest then you had an edge. The 2008 $140 strike calls were priced at $2 a share on June 23rd, 2006. That was roughly book value per share at the time. So that gave you about a 70x leverage on book value. Oh, then there was the hurricane thing... in 2005 they lost a lot of money and it was blamed on KRW, but really they lost a bit more from the runoff division that year than they did from the hurricanes. OdysseyRe reduced their wind exposure by 25% after the hurricanes. The March 2006 annual letter to shareholders claimed that they believed runoff would approach breakeven in 2006. So if you trusted Prem, it was a good bet. The hurricane season is typically over by then end of October, which still gives you 15 months before options expiry. And on June 23rd you could pay just $2 per share for the Jan 2008 $140 strike calls, and $140 strike being roughly book value at the time, a very good chance that you'll at least be able to recover your $2 per share even if there were a repeat of KRW. The stock was just so depressed already, it was almost as if the repeat of KRW had already happened. Plus the short interest was huge -- something like 25% or so. They would cover it stands to reason.

Here is where the shares are coming from (without naked short selling thrown in): a shareholder is "long" and his broker lends the share to short #1 the valid share is sold by short #1 and delivered to a new long shareholder the new long shareholder gets the share delivered and his broker lends it to short #2 short #2 sells it and it is delivered to a new long shareholder the new long shareholder gets the share delivered and his broker lends it to short #3 short #3 sells it and it gets delivered to a new long shareholder. the new long shareholder gets the share delivered and his broker lends it to short #4 etc... etc... etc...

That is a difference, yes. However the similarity that attracted the law's attention is that they are both unsafe. Another unsafe product that people want is cocaine. One of the key reasons why it is dangerous is that it is addictive, as is tobacco. I agree that there is a double standard, and I reason that smokers brought it on themselves by literally fouling the air that others have a right to enjoy.

That is a difference, yes. However the similarity that attracted the law's attention is that they are both unsafe. Another unsafe product that people want is cocaine. One of the key reasons why it is dangerous is that it is addictive, as is tobacco.

I often here of products completely blocked from the market when they are proven to cause cancer. Not marketed in a plain package, but blocked entirely. Asbestos products in a plain package?