ERICOPOLY

What do you mean by major mean reversion event? An annualized ROTE of 6.9% last quarter is far below the mean, but you seem to imply something other... A major mean reverting event might mean a yield curve that restores their profits. We're currently living in a phase that is far below the mean, and we're HOPING for a reversion to the mean. It's just not here yet. Mean bank profitability is WAYYYYY higher than this.

Imputed rent for a homeowner is tax-free income. It's hard to see why that would be ignored. I certainly don't put my head in the sand and pretend it isn't there, but there again I'm not a real estate instructor.

He would still qualify if his wife were a realtor. However it would not meet the "active" management test -- it would fall under "passive" criteria if he were to hire a professional manager. So that would would prevent him from deducting losses against earned income.

There is an exception for "Real Estate Professionals". They can deduct all expenses no matter what income level they're in. I took advantage of that when I was a software engineer... my spouse qualified as a "real estate professional", she was a full time realtor. It didn't even matter that the properties were in my name and I did all the property management -- we still got to deduct unlimited expenses without being limited by our income levels.

I paid $350 for my 2014-2015 skiing season pass at Bear Valley here in California. Skiing on those terms is dirt cheap. We went for two weeks after Christmas for about 10 days of skiing and that amounted to $35 per day for lift tickets. We have another week booked there for spring break, and that will only bring the average price paid down. Without a season pass, it's $65 a day.

My calculation gives the correct answer including the time value of interest paid up front. So if you use that method, it's one less thing to think about. Although this time around I forgot to mention the missing 1 cent per quarter (easy enough to add in expressed as a percentage of initial strike).

warrants? And preferred.

It's not less than 4%. It's more than 8%. You take today's stock price and subtract off today's warrant price. The remainder then compounds at what annualized rate for 4 years in order to reach the warrant strike price? That rate is in excess of 8% annualized. You must use today's warrant strike price -- the future dividend-adjusted warrant strike price is completely immaterial to the computation of cost of leverage in the warrant.

I got it for $6.90 on Dec 18th. Common was at $17.53. Common has declined 12.2% Warrant has declined 17.4% Warrant was leveraged 2.54x at the time, yet loss was only amplified by 1.42x. The "brake" is the rising put premium in the warrant. This brake becomes more effective as we get closer and closer to strike. It's now a 15.22% decline for the warrant. Versus a 13.3% decline for the common. 1.14x downside of the common, meanwhile it started off with 2.54x leverage! That's just plumb craziness.

Sorry to revisit this but I am starting to lose faith in the $2 EPS. Current earnings are running at $1.00 per year. Where is the $1 gap coming from? Asked myself a similar question: How long does it take to get there if you assume that low interest rates will prevail for say 5 years? It's hard to say, but the present market price suggests a bit less than $1 annually for 10 years and then $2 after that. Banks usually don't have that kind of a discount despite the risk always being there.

$1 per year is 6.93% return on tangible common equity. $2 is 13.86%. Hardly a lofty goal for a normalized environment years from now when they've regrown their loan books and the legacy issues are completely scrubbed off. It is recency bias to conclude that last quarter, last year, etc... was in any way indicative of what normalization looks like. Same with expectations for this year and next year. A hypothetical cumulative $5 earnings shortfall until we get there is exactly that... just a $5 earnings shortfall. It decreases the value of the shares by less than that amount due to the discounting of those earnings back to the present. That would get us to greater than $19 per share if 12x earnings. We've got approximately twice that discount today.

Sorry to revisit this but I am starting to lose faith in the $2 EPS. Current earnings are running at $1.00 per year. Where is the $1 gap coming from? normalized.

The $15 price is $9 below a 12x valuation on $2 normalized earnings. So it's like the market believes BAC will earn (on average) less than $1 a year for the first 9 years on the road to normalization. Or 7 years at an 11x valuation. Or 5 years at a 10x valuation. And that's not the extent of it (the discount is a lot larger than that if you account for the time value of money -- $1 shortfall in 5 years is worth a lot less than $1 today).

Rates Go Down, and So Do Bank of America’s Earnings http://blogs.wsj.com/moneybeat/2015/01/15/rates-go-down-and-so-do-bank-of-americas-earnings/?mod=yahoo_hs More prepayment options embedded in MBS are in the money, thanks to the drop in 10Y Treasury yield. "Rates fell significantly during the fourth quarter – the yield on the 10-year Treasury note declined by about 0.3 percentage points during the period. Such a decline, among other things, prompts more people to want to pre-pay or refinance their mortgages, to take advantage of the lower rates." "Bank of America has already been hurt by low rates. Its net-interest-margin, a bank profitability metric often correlated to higher long-term rates, fell to 2.18% in the fourth quarter from 2.44% a year ago." I thought the decline in NIM was due to what they posted on page 3 of their presentation today: $0.6B negative market-related adjustments to net interest income driven by the acceleration of bond premium amortization on debt securities due to lower long-term rates

A few years? I'll take that at face and say it means three years... How much do you expect that to hurt their annual earnings? Then just multiply by 3. Right, so let's say it drags down earnings by 50 cents a year (I'm just making it up, not running the math). 0.50x3, so the discount should be roughly $1.50. Alright, so if you thought it was worth 12x earnings, and you thought the normalized earnings were $2, then... 12x2 = $24. Then knock 1.50 off it.... So then it's worth roughly $22.50 today in that case. Approximately, because I made up the 50 cents a year earnings shortfall and I also am not adjusting the 1.50 per year for the time value of money (so I'm overstating the discount).

I got it for $6.90 on Dec 18th. Common was at $17.53. Common has declined 12.2% Warrant has declined 17.4% Warrant was leveraged 2.54x at the time, yet loss was only amplified by 1.42x. The "brake" is the rising put premium in the warrant. This brake becomes more effective as we get closer and closer to strike.

And today the premium in the warrant is rising -- it's having a better day than the common! Or it was temporarily at least. Put it this way, it's not taking the hit that is "warranted". The warrant is about 2.7x leverage! It's down 4.36% versus 4.1% for the common. It would be down 11% if accounting for the leverage and without the embedded put.

Come on guys, they are trading at a high multiple to earnings, which is what you all wanted.

I like the warrants for two reasons. 1. The cost of leverage isn't all that high 2. The value of the embedded put would increase if the stock pulled back towards strike. This would help soften the blow. The problem two years ago wasn't just the high cost of leverage, it was also the expectation that the value of the embedded put would be decimated if the uncertainty was lifted and the stock rallied. That decimation caused (at one point today) all of the gains of the last two years to be wiped out. It traded down to $5.64 today which is the level of March 2013 when the stock was at $12.

So it's just like Florida, which is also a full-recourse mortgage locale. Yet Florida had a large decline. I think it was one of the hardest hit US markets. Would the US decline have been less severe if the entire country was full-recourse, just like Florida? I can't see what to make of the full-recourse aspect if Florida was one of the hardest hit states.

The warrants were at $2 when the stock was at $5. The common actually has outperformed the warrants since then.

It is roughly 33% tax rate for capital gains in the US. The highest rate in the entire world. Except in the areas outside of California. I sure hope they can stop the dominos of communism from spreading here. Hit the pinata and grab the candy that falls out.

I've seen this mentioned here and in the BAC leverage thread (which I'm 10 pages into...but it's tens of pages long), but I haven't read the explanation yet: why do you say there's a put included in the warrants? Because of the time value/implicit volatility residue that props up its value even when it's out of the money? Thanks for the insights on the topic of leverage! A warrant is a call option issued by the company. What is it other than the synthetic marriage of the common stock with a put?

You can't copy Tiger woods. Try as you might, you can't just copy his swing and get the same score as him. Investing is different. You can cheat over Buffett's shoulder or just buy stock in his holding company and earn the same returns as him.

Do tanks really run on gasoline? I've always assumed they ran on diesel, like large industrial engines. It would certainly be more efficient... The gas turbine engine is quiet.