ERICOPOLY

I believe this is why the stock is so low and why the options are so crazy cheap. People aren't expecting it to rally until the govt shares are sold, which will be a while. Thus the speculative traders don't want any piece of it. You have to be a marshmallow 'A+' student to want this one. But I want in. I will go with the warrants. They won't be spinning off any cash producing assets to shareholders for a while -- those assets provide a cushion to the rest of the unit. Takeover price won't be for less than 1.1x book, which provides a cushion for the warrants. I like it all the way around.

That's what I was thinking about when I ran the numbers and saw it's 64x leverage at roughly book value. I think the FFH $140 strike got to $2.05 on the morning of June 23, 2006, and that's about 68x leverage of book value. Unfortunately AIG isn't a crowded short -- it's the opposite with the govt selling.

Good point.

At $8 for the warrant, you need $125 to make 10x your money. And actually sounds quite attainable. Twice what the common purchased for $25 would return for the same $125 price. Incredible tax-deferral of gains. No taxes for 10 years. I am coming around to the warrants now -- love the fact that expiration is not really a concern for a heck of a long time. Can take a 10 yr vacation from trading anything at all, yet still have blisteringly good results.

The $45 strike 2013 call (just under book value) last went for 70 cents. That like 64x leverage at book value. I guess you could make 25x your money on that if the stock just goes back to 52 week high. I don't have a lot of certainty for an outcome like that, but it's interesting that for 1% of your money at risk pre-tax you have the chance of boosting your wealth by 25% pre-tax. I get that people are terrified of losing money, but if the other 99% is tied up in super safe govt bonds yielding more than 1% over that time then your chance of loss is actually zero. Or the $40 strike has an "ask" of $1.11. 21x your money at 52 week high.

The book claimed that Davis used the "maximum" amount of margin. Is the book right about that? If so he was perhaps just lucky to not get the right market that would force a liquidation.

Bank of America Corp., the biggest U.S. bank, said yesterday it had a $16.7 billion exposure to the five countries at the end of June, including loans and leases. This includes $15.2 billion of “non-sovereign” exposure, according to a quarterly report. The Charlotte, North Carolina-based lender purchased credit-default protection of $1.77 billion as a hedge against potential losses, according to the filing. http://www.businessweek.com/news/2011-08-05/citigroup-has-31-7-billion-gross-exposure-in-five-nations.html

Pay $8.17 for stock and sell warrant for $3.63. Net cash outlay of $4.54. $13.30 = 2.92 x $4.54. So maximum 200% return over 7.5 years. This is the same return as if the stock goes to $23.85 -- but the stock only needs to go to $13.30, so much more certainty. However, it's too conservative for me. You should be doing much better than tripling your money over 7.5 years at these prices. I'm considering the $10 strike call for $1.30. I mean, if it expires worthless you lose max of $1.30 -- but there will be decay on those warrants too -- perhaps as much at $1.30, perhaps less, perhaps more.

You pointed out earlier that a government can print money. So if nobody will renegotiate, everyone can still get repaid in full. They will never miss an interest payment involuntarily -- and that's where the credit rating downgrade comes from, the fact that people in government expressed the possibility of voluntarily defaulting as a lever used for political gain.

Yes, bankruptcy does exist for individuals if the lenders won't agree to renegotiate. Same for corps.

The government isn't bankrupt, it just is reluctant to cut it's spending. We can cut our defense budget down to Canada's size. We can make 72 the age of retirement with Social Security benefits. We can stop subsidizing interest costs on home purchases as a means of collecting more tax. At this point the spending hasn't been reduced yet. A person with $90k in debt and a $100,000 after-tax salary isn't bankrupt just because they spend $110,000 per year. They can live on $99k per year spending and reduce the debt by 1/2 over 40 years. To be bankrupt means that you go before a judge and after looking at your situation there is nothing to cut.

Their governments will print the money, so the future value of those dollars is "junk". Worse, as you point out there is an additional credit risk because they can't print money of their own. So if they get into a bind, they might only pay you 1/2 of the "junk" dollars owed to you. Best case, they repay 100% of the junk dollars owed to you, but that's no better than the govt bond, which is "junk". Thus, if all sovereign long bonds are "junk", then ALL long debt is "junk" as well. It would be odd if there were AAA corporate bonds denominated in US dollars but the US govt bonds were junk for the reason of long term debasement. You'd have banks only able to hold high amounts of corporate bonds and very little govt "junk" bonds. The world would be turned upside down! At least in the govt bond scenario, you are certain to get back 100% of the dollar units, however valuable they may be. In both cases, govt and corp, the dollar units have equal value.

Then all long term corporate debt should be junk as well. That doesn't provide a means for differentiating the ones that will only repay 50 cents on the dollar from the ones who will repay 100 cents on the dollar. What the dollar will actually buy you is another discussion altogether.

I know what you are saying, I'm just undecided if this is the right form of leverage compared to what else is out there. Those $5 2013 calls are only $4. That's 2x leverage, already in the money. So when you take delivery, you then buy more $5 strike puts to replace the old ones (they ought to be very, very cheap) or just move the strike up on the put to lock in gains as you go (the only way out of the warrant is going to be selling it and paying tax, unless you want to buy more puts in addition to the cost of the leverage you have already paid). Those calls only cost you 80 cents of premium ($9 break even point less the $8.20 stock price). Once you take delivery on the shares you can buy more puts with the dividend, moving the strike up. Compare that 80 cents to what the leverage in the warrants will really cost, which is actually about $9 if held to maturity ($8 stock price + $9 cost gets you to $3.70+$13.30). This is written from the point of view that it's nearly a certainty the stock is over $17 in 7.5 years -- opinions vary of course. Yes, the calls only last 1.5 years versus 7.5 years for the warrants, but can one argue that's worth paying 11.25x more for the leverage (9 = 11.25x.80)? If you believe the stock will be over $17 at settlement of the warrants (I do), then it really will cost you $9 per share for the price of having leverage. Yes, the leverage in the calls won't cost 80 cents for the entire 7.5 years, as they expire in 1.5 years. But for that remaining 6 years after taking delivery on the shares the cost of buying replacement puts will be very inexpensive. Imagine for example what a $5 strike LEAP put will cost you when the stock is $20? A hell of a lot less than the present 70 cent quotation is my bet -- probably only 10 cents or something, and you'll just use some dividend to buy it. So after 6 more years, I'd be amazed if the leverage of the calls cost a total amounting to as much as 20% of what you have to pay for the privilege of leverage in the warrants. Chances are just high that most of the gains in the stock will happen in the next 4 years, and I doubt the calls route will cost much more than a $1 in total for the leverage in that time frame. If the $5 put can be replaced today for 70 cents when the stock is at $8, what will it cost when the stock is at $20? Warrants will do better if stock is less than $8.75 in 18 months (actually, that number assumes the warrant is still worth $3.75 in 18 months despite decay). What does your gut tell you about the stock price in 18 months? If you are that terrified that it will be less than $8.75, then I guess that's why it seems okay to pay so much for the leverage in the warrant? Perhaps paying 8x as much for the leverage? Is less than $8.75 in 18 months really what is worrying us and is that why we hold the warrants and not the $5 strike call. There are other strikes of course, like the 2013 $10 call for $1.30. I'm just not going to spend the time to run this line of thinking on more than one strike. EDIT: Granted, I forget to mention the margin interest costs after taking delivery on the shares. Interest rates might be a lot higher, perhaps. You could be paying that for a while after 2013 settlement date.

When Canada lost its AAA rating in April 1993, for instance, the country's stocks gained more than 15% in the subsequent year. The Tokyo stock market climbed more than 25% in the 12 months after Moody's downgraded Japan in November 1998. http://money.cnn.com/2011/08/06/pf/sp_rating_money.moneymag/index.htm?iid=Lead

OMG! I didn't realize it was that bad! :D

In one of my posts above I wrote "including dividends" in the $24 price. Later I may have forgotten to repeat those words. So if you want to plug in $3.50 for the accumulated dividends, then you have: $20.5 - $9.8 warrant strike = $10.70. So that's exactly the same $10.70 value of the warrant as in my prior computation. I feel that the warrant will most likely outperform the common, but I still feel like the breaking even point ought to be lower. Perhaps the warrant is just less liquid, and somebody really wants to own them, so they've fallen less sharply than the common as of late (the common fell more than the leveraged warrant the past couple of days). It could be partly that, or it could be rising volatility premium as well. A substantial price component in the warrant must be the time value, and the time value didn't change much in just two days of course.

At $24 in January 2019, the warrant is worth $10.70. That's a gain of 2.95x the $3.63 price paid for the warrant at today's close. My point is that $24 is roughly the price where the warrant and the common stock have an equal gain. Anything less than that and you have an opportunity cost versus the plain vanilla common. I'm just a little surprised that the break-even point between the two is so high.

Common is $8.17, warrant is $3.63. $24 - $13.30 = $10.70. $10.70 = 2.95 x $3.63 $8.17 * 2.95 = $24.10 $24 is roughly $24.10. So this is why I said what I said -- that the break-even point between the common and the warrant is $24. You need better than a 200% return from BAC by Jan 2019 or else you'd have been smarter to buy the common instead of going with the warrant. I own the warrants, but I paid $3.75 today. I have had some trouble (buyers remorse) understanding why the getting even point is so high. Paulson estimated about $27 per share value for BAC. If you grow that at 7% for the next 7.5 years, we get to $45. There are perhaps reasons why the market won't go that high though. I don't know. I have to admit I like warrant for the tax shelter on the dividend :D I'm committed to reducing my taxes.

$24 (including dividends) is the point where the BAC warrants outshine the common (based on today's closing prices for each -- $8.17 for the common and $3.63 for the warrant). Shouldn't the warrants be cheaper than this?

The small cap 3x bull fund trades under TNA.

I find that when the options settle I sometimes want to hold onto the shares. So if (instead of getting the calls) I buy puts to hedge vanilla shares, I can take a tax loss on the puts at expiry. Earlier this year I did buy some IWM $120 strike puts and then wrote the covered $80 strike put when it was at-the-money. Today I bought back that covered put for a tax loss and bought some shares in a few different companies. Hopefully the shares I bought today wind up beating the IWM $120 strike puts that I continue to hold. The gain thus far on the $120 strike puts far exceeds the loss I took purchasing the covered calls, and the tax loss is valuable given the gains I took on SSW earlier in the year. So I'm happy with how this worked out. Best thing to happen now is a huge sustained rally so that I can take a tax loss on the IWM puts I still hold.

http://money.cnn.com/quote/quote.html?symb=GE red, green, red, green, red, ...

I've been to Oregon, California and Nevada -- I bought one of the Sprinter van RV conversions that Roadtrek makes. The past two weeks on the road. I was active a lot on this board back in April/May/June when I couldn't walk following a foot&ankle surgery. Now I can get around much better, so I've been out doing other things. How do you like your Roadtrek? We've been thinking of one. It's basically what we expected, but quality could be higher. From day one the sensors in the fresh water tanks have not worked -- never reads full even when spilling over, and reads empty when still 2/3 full! Some of the stuff is poorly put together -- things have come unglued, one of the cabinets doesn't latch. Can't they build them better at that price? What the hell are they doing with glue?

I've been to Oregon, California and Nevada -- I bought one of the Sprinter van RV conversions that Roadtrek makes. The past two weeks on the road. I was active a lot on this board back in April/May/June when I couldn't walk following a foot&ankle surgery. Now I can get around much better, so I've been out doing other things.