BAC-WT - Bank of America Warrants

[jay21]

Taking an insurer and saying it's 3x levered is sort of misleading -- major cat losses can hurt just like investments can. 

 

Well, that would be float gathered at an underwriting loss, right? But what if year after year you have gathered it at an underwriting profit? Would you compare that to equity?

 

giofranchi

 

Not necessarily.  You can book a 90 CR and then have a cat loss and revise to a 99 CR.  It was profitable underwriting, but the readjustment probably hurt you.

 

Well, jay, mine was a rhetorical question… of course you won’t compare that to equity… because it is not equity… exactly like deposits are not equity… even sticky deposits… in a deflationary scare or financial panic withdrawals will always hurt banks… the same way unexpected cat losses would hurt insurance companies… that’s why you should always be careful not to rely too much on what you don’t own, any form it takes!

 

giofranchi

 

If people are withdrawing, then they are not sticky.  The best deposit franchises have increased their deposits during this deflationary time.

 

Jay, all I am saying is that sticky deposits are not equity...

Equity = 1

Sticky deposits = 9

Debt = 0

Total assets = 10

If you do something stupid and your assets decrease 10% in value, you are bankrupt no matter how sticky deposits are.

Don't you agree? 

 

giofranchi

 

Disagree.

 

Banks were dead on a MTM basis.  Deposits helped recap them. 

[giofranchi]

Hi Gio

 

I would classify the TD piece as sensationalism to generate web traffic. Nothing more. All the banks are in the same boat - if you mark to market very large security portfolios that are sensitive to interest rate movements you'll see huge P&L volatility. It's helpful to remember that accounting rules are made for all firms, not just banks, and whilst MTM is economically sensible, it may lead to undesirable results for some businesses. By undesirable I mean that accountants actually do not want to estimate economic truth as such (or at least, originally that was less of an objective). You can also see that in provisioning rules that originally allowed more of an expected loss approach, then migrated to an incurred loss approach, and are now moving back to an expected loss approach under IFRS9 (forget what the equivalent US standard is called). It's easy to say that we'd like to have financial statements that reflect economic reality at the point of the statement but if you think about the complexities that need to be considered when estimating the value of illiquid instruments you can see why accountants have stepped back a bit from this.

 

So instead of reporting the swing in income it got moved into the OCI line (below the profit line, so to speak). You still have an effect on equity and you can still estimate economic reality, but you've taken the volatility out of the income line. Big gain? Don't know.

 

More importantly, and this is where I see this as sensationalism, it's not the swing you should be concerned with as such, but the quality of the underlying assets. The negative MTM from an increase in interest rates will amortise out over time as the securities approach maturity. As long as there is no default shareholders are no worse of over the full tenor of the portfolio. So the question I ask myself as a bank shareholder - am I happy with the interim volatility and do I believe the portfolio of securities is ultimately good enough quality?

 

One more thing - if you assume no defaults, wealth has actually been created (but that creation in terms of BV accretion) has been masked by the negative MTM.

 

Cheers - C.

 

Sunrider,

yours is a very good explanation! Thank you very much! :)

But, please, tell me: when you have total assets that are $2 trillion and 10 times equity, how could you really be sure about your judgment of their quality? And you must be sure practically about all of them! Because they are so much larger than your capital.

In the case you are not sure, you are left only with the assumption (hope?) they won’t default. Do I understand this correctly? I ask, because I am well aware it is not my game!

 

giofranchi

 

You would be correct here Gio!  The only thing I can say is that there is so much oversight on bank capital and quality, that there probably is pretty good judgment by the regulators from that perspective.  Any leveraged institution is risky, but I would say the U.S. banks after all of the recapitalization, oversight, reduction in risky assets and debt, could not be in much better position.  We do not know the quality of all of the underlying assets, but from a rational view, they must be multiples better today than in 2007!  Cheers!

 

Parsad,

You clearly know much better than I do! Anyway, I always have a very hard time to detach an investment from the person I am investing with... And I also have an hard time to understand how a single person like Mr. Buffett could oversee such an incredible ammount of money as BRK assets are worth today... Let alone $2 trillion managed by... Who? Hundreds of people I guess... BAC CEO surely is important and powerful, but probably is no WB and must oversee 8-9 times BRK assets... I know it is me and only me... But once something becomes so large, I always worry all its parts are too difficult to keep under control, and mistakes will be inevitably made, sooner or later...

But, hey!, BAC is rocking, so what do I really know?!

 

giofranchi

[giofranchi]

Taking an insurer and saying it's 3x levered is sort of misleading -- major cat losses can hurt just like investments can. 

 

Well, that would be float gathered at an underwriting loss, right? But what if year after year you have gathered it at an underwriting profit? Would you compare that to equity?

 

giofranchi

 

Not necessarily.  You can book a 90 CR and then have a cat loss and revise to a 99 CR.  It was profitable underwriting, but the readjustment probably hurt you.

 

Well, jay, mine was a rhetorical question… of course you won’t compare that to equity… because it is not equity… exactly like deposits are not equity… even sticky deposits… in a deflationary scare or financial panic withdrawals will always hurt banks… the same way unexpected cat losses would hurt insurance companies… that’s why you should always be careful not to rely too much on what you don’t own, any form it takes!

 

giofranchi

 

If people are withdrawing, then they are not sticky.  The best deposit franchises have increased their deposits during this deflationary time.

 

Jay, all I am saying is that sticky deposits are not equity...

Equity = 1

Sticky deposits = 9

Debt = 0

Total assets = 10

If you do something stupid and your assets decrease 10% in value, you are bankrupt no matter how sticky deposits are.

Don't you agree? 

 

giofranchi

 

Disagree.

 

Banks were dead on a MTM basis.  Deposits helped recap them.

 

I thought depositors and bond holders weren't touched... Instead, I thought tax payers money had recapitalized banks...

 

giofranchi

[ERICOPOLY]

Taking an insurer and saying it's 3x levered is sort of misleading -- major cat losses can hurt just like investments can. 

 

Well, that would be float gathered at an underwriting loss, right? But what if year after year you have gathered it at an underwriting profit? Would you compare that to equity?

 

giofranchi

 

Not necessarily.  You can book a 90 CR and then have a cat loss and revise to a 99 CR.  It was profitable underwriting, but the readjustment probably hurt you.

 

Well, jay, mine was a rhetorical question… of course you won’t compare that to equity… because it is not equity… exactly like deposits are not equity… even sticky deposits… in a deflationary scare or financial panic withdrawals will always hurt banks… the same way unexpected cat losses would hurt insurance companies… that’s why you should always be careful not to rely too much on what you don’t own, any form it takes!

 

giofranchi

 

If people are withdrawing, then they are not sticky.  The best deposit franchises have increased their deposits during this deflationary time.

 

Jay, all I am saying is that sticky deposits are not equity...

Equity = 1

Sticky deposits = 9

Debt = 0

Total assets = 10

If you do something stupid and your assets decrease 10% in value, you are bankrupt no matter how sticky deposits are.

Don't you agree? 

 

giofranchi

 

Disagree.

 

Banks were dead on a MTM basis.  Deposits helped recap them.

 

I thought depositors and bond holders weren't touched... Instead, I thought tax payers money had recapitalized banks...

 

giofranchi

 

Well, if you really want to get into end-of-banks scenarios, then it would have been interesting to see how the FFH CDS portfolio would have faired if the big banks weren't saved.  At the same time, AIG would have failed and insurers would have gone down in a reinsurance daisy chain.  Fairfax had a lot of reinsurance recoverables at the time.

[Parsad]

Hi Gio

 

I would classify the TD piece as sensationalism to generate web traffic. Nothing more. All the banks are in the same boat - if you mark to market very large security portfolios that are sensitive to interest rate movements you'll see huge P&L volatility. It's helpful to remember that accounting rules are made for all firms, not just banks, and whilst MTM is economically sensible, it may lead to undesirable results for some businesses. By undesirable I mean that accountants actually do not want to estimate economic truth as such (or at least, originally that was less of an objective). You can also see that in provisioning rules that originally allowed more of an expected loss approach, then migrated to an incurred loss approach, and are now moving back to an expected loss approach under IFRS9 (forget what the equivalent US standard is called). It's easy to say that we'd like to have financial statements that reflect economic reality at the point of the statement but if you think about the complexities that need to be considered when estimating the value of illiquid instruments you can see why accountants have stepped back a bit from this.

 

So instead of reporting the swing in income it got moved into the OCI line (below the profit line, so to speak). You still have an effect on equity and you can still estimate economic reality, but you've taken the volatility out of the income line. Big gain? Don't know.

 

More importantly, and this is where I see this as sensationalism, it's not the swing you should be concerned with as such, but the quality of the underlying assets. The negative MTM from an increase in interest rates will amortise out over time as the securities approach maturity. As long as there is no default shareholders are no worse of over the full tenor of the portfolio. So the question I ask myself as a bank shareholder - am I happy with the interim volatility and do I believe the portfolio of securities is ultimately good enough quality?

 

One more thing - if you assume no defaults, wealth has actually been created (but that creation in terms of BV accretion) has been masked by the negative MTM.

 

Cheers - C.

 

Sunrider,

yours is a very good explanation! Thank you very much! :)

But, please, tell me: when you have total assets that are $2 trillion and 10 times equity, how could you really be sure about your judgment of their quality? And you must be sure practically about all of them! Because they are so much larger than your capital.

In the case you are not sure, you are left only with the assumption (hope?) they won’t default. Do I understand this correctly? I ask, because I am well aware it is not my game!

 

giofranchi

 

You would be correct here Gio!  The only thing I can say is that there is so much oversight on bank capital and quality, that there probably is pretty good judgment by the regulators from that perspective.  Any leveraged institution is risky, but I would say the U.S. banks after all of the recapitalization, oversight, reduction in risky assets and debt, could not be in much better position.  We do not know the quality of all of the underlying assets, but from a rational view, they must be multiples better today than in 2007!  Cheers!

 

Parsad,

You clearly know much better than I do! Anyway, I always have a very hard time to detach an investment from the person I am investing with... And I also have an hard time to understand how a single person like Mr. Buffett could oversee such an incredible ammount of money as BRK assets are worth today... Let alone $2 trillion managed by... Who? Hundreds of people I guess... BAC CEO surely is important and powerful, but probably is no WB and must oversee 8-9 times BRK assets... I know it is me and only me... But once something becomes so large, I always worry all its parts are too difficult to keep under control, and mistakes will be inevitably made, sooner or later...

But, hey!, BAC is rocking, so what do I really know?!

 

giofranchi

 

Hi Gio,

 

That's where prudent risk management comes in.  When we originally invested in BAC almost 3 years ago, we made it about 12% of the fund.  If we had not pared the position down as it went up, it would make about 50% of the fund.  But it doesn't.  It makes up roughly the same 12%, because we averaged out and the fund is substantially larger.  Yes, we left money on the table but it was the prudent thing to do.  Cheers!

[JBird]

That's where prudent risk management comes in.  When we originally invested in BAC almost 3 years ago, we made it about 12% of the fund.  If we had not pared the position down as it went up, it would make about 50% of the fund.  But it doesn't.  It makes up roughly the same 12%, because we averaged out and the fund is substantially larger.  Yes, we left money on the table but it was the prudent thing to do.  Cheers!

 

Could you explain why it was prudent? I assume that at a 12% position you still find it undervalued.

[xazp]

Taxpayers have made tens of billions of dollars from the banks.  Here's a list of all the bailouts and what was paid back.

http://projects.propublica.org/bailout/list

 

BAC - $4.5Bn profit

C- $13Bn profit

JPM - $1.3Bn profit

WFC - $2.3bn profit

 

It's really been a "government bailout" :P.  The banks have been very profitable for the Government, it's Fannie, Freddie and the autos that you can complain about. 

 

 

 

I thought depositors and bond holders weren't touched... Instead, I thought tax payers money had recapitalized banks...

 

giofranchi

[Parsad]

That's where prudent risk management comes in.  When we originally invested in BAC almost 3 years ago, we made it about 12% of the fund.  If we had not pared the position down as it went up, it would make about 50% of the fund.  But it doesn't.  It makes up roughly the same 12%, because we averaged out and the fund is substantially larger.  Yes, we left money on the table but it was the prudent thing to do.  Cheers!

 

Could you explain why it was prudent? I assume that at a 12% position you still find it undervalued.

 

It's cheap relative to its peers but not on an absolute basis as an investment.  There is a big difference between a distressed bank selling at 0.35 of tangible book and a bank selling at 1.1 times tangible book.  If you think the returns going forward for both would be the same, you would be horribly mistaken.  Cheers!

[kmukul]

I think the ball is rolling full speed now, we have cramer talking about it and indian newspapers reporting the earnings of bank of america, http://timesofindia.indiatimes.com/business/international-business/Bank-of-Americas-Q2-earnings-soar-70-per-cent/articleshow/21122455.cms

more money is going to come in and now time to party and sell is coming.. Thanks a lot everyone here.

[PlanMaestro]

Wealth management: cross selling boon > Is the herd thundering?

http://www.moneycontrol.com/news/wire-news/wealth-management-cross-selling-boon_921576.html

[portfoolio]

I think the ball is rolling full speed now

 

I'm a pretty long time lurker and a new poster here. I post on Stocktwits a lot...

 

I'm surprised by all of the negativity on this board. The ball is just starting to roll and there is all of this weird complaining when management is executing on all of its plans just as promised. The rapidly improving housing market is actually making them achieve many of their goals ahead of schedule.

 

For instance, I'm quite sure that the company is limited in the amount of buybacks it can do per quarter. Probably, they are required to demonstrate good quarterly earnings before they are allowed to initiate the repurchase. Complaining that they only bought back $1 billion of stock so far isn't a fair criticism. They are limited by the Fed in what they can do. Remember, the Fed was very upset with banks which continued to repurchase shares even as the financial crisis deepened.

 

There is also the argument that  now that the stock is trading above TBV, it is not going to deliver the kinds of returns it did in the past. This is a board for discussion of BAC-WT. Even if the stock is up 3x from the $5 bottom, BAC-WT is up less than 3x from its bottom. However, if the common doubles, going to $30 over the next few years, BAC-WT will triple from here. So I don't see the logic there. Also, the risk of holding BAC-WT and common shares is so so so much less than it was when the stock was at $5, I think the risk-reward now is actually much better. Similar reward for FAR less risk.

 

Of course there is still substantial risk, but the company was able to resolve most of its outstanding large legal issues. It's also been able to meet capital requirements (this is the biggest issue of all). The housing market has recovered substantially allowing the company to resolve many of its legacy issues already and hastening the complete resolution of those issues. They have been paying down substantial amounts of long-term debt and have begun repurchasing common and preferred shares.

 

Compare this situation to when the stock was trading at $5, and you're living in a different world. Even if we only have a 2x rise in BAC-WT in the next two years instead of a 2.5x rise we've seen so far, the risk is so much lower, it's a better investment today than it was then.

 

As far as the "ball rolling" already, this party hasn't even started yet. If the company can earn $.50/share, that could be enough to send it to $30 if financials get truly hot. Certainly $25/share is a real possibility. If the company is earning $.32/share now, and you can't foresee $.50 sometime in 2014 with an improving economy, then you shouldn't be investing in financials ever because you must not believe that running a bank isn't a potentially profitable business.

 

One thing has been lost in all of this is the fact that the Merrill-Lynch acquisition was actually a good one. That acquisition makes the company more valuable, in many ways, than it was pre-crisis. So, a few years from now, if the economy does reasonably well, and all of the legacy issues are truly past the company, I don't see why it can't be trading well above $30.

 

As far as near-term considerations go, once the stock pierces $15 there really isn't much stopping it from going to $20. A few analysts are bullish the stock but their price targets are still low and they are few and far between. Once they start pumping up 2014 earnings estimates, the trip to $20 could be a very short one. If the $8.5 billion settlement is approved, we could see a jump to $17/$18 overnight.

 

In sum, I think this is one of the best times to own the stock/warrants/options. Risk is lower and the potential for outstanding gains are still there. If you can find a better investment, more power to you, but all I see so far with BAC is a management team executing its plan quarter after quarter. They obviously think the stock is going to $30+. They are running the company so that it will reach that organically based on its deposit base and current business. It's a conservative strategy but they know that a conservative strategy will deliver huge returns to shareholders.

 

Anyway, that's my take. I want to thank you all again for the informative posts in the past. I think this board has veered away from that a bit. The latest earnings conference call was unreal, the management team was almost giddy with excitement about how well things are going. The housing market is doing better-than-expected. That is the real issue that needs to be followed closely on this board, not nonsense articles by "Tyler Durden".

 

For the housing market, I recommend calculatedriskblog.com 

[jay21]

I think the ball is rolling full speed now

 

I'm a pretty long time lurker and a new poster here. I post on Stocktwits a lot...

 

I'm surprised by all of the negativity on this board. The ball is just starting to roll and there is all of this weird complaining when management is executing on all of its plans just as promised. The rapidly improving housing market is actually making them achieve many of their goals ahead of schedule.

 

For instance, I'm quite sure that the company is limited in the amount of buybacks it can do per quarter. Probably, they are required to demonstrate good quarterly earnings before they are allowed to initiate the repurchase. Complaining that they only bought back $1 billion of stock so far isn't a fair criticism. They are limited by the Fed in what they can do. Remember, the Fed was very upset with banks which continued to repurchase shares even as the financial crisis deepened.

 

There is also the argument that  now that the stock is trading above TBV, it is not going to deliver the kinds of returns it did in the past. This is a board for discussion of BAC-WT. Even if the stock is up 3x from the $5 bottom, BAC-WT is up less than 3x from its bottom. However, if the common doubles, going to $30 over the next few years, BAC-WT will triple from here. So I don't see the logic there. Also, the risk of holding BAC-WT and common shares is so so so much less than it was when the stock was at $5, I think the risk-reward now is actually much better. Similar reward for FAR less risk.

 

Of course there is still substantial risk, but the company was able to resolve most of its outstanding large legal issues. It's also been able to meet capital requirements (this is the biggest issue of all). The housing market has recovered substantially allowing the company to resolve many of its legacy issues already and hastening the complete resolution of those issues. They have been paying down substantial amounts of long-term debt and have begun repurchasing common and preferred shares.

 

Compare this situation to when the stock was trading at $5, and you're living in a different world. Even if we only have a 2x rise in BAC-WT in the next two years instead of a 2.5x rise we've seen so far, the risk is so much lower, it's a better investment today than it was then.

 

As far as the "ball rolling" already, this party hasn't even started yet. If the company can earn $.50/share, that could be enough to send it to $30 if financials get truly hot. Certainly $25/share is a real possibility. If the company is earning $.32/share now, and you can't foresee $.50 sometime in 2014 with an improving economy, then you shouldn't be investing in financials ever because you must not believe that running a bank isn't a potentially profitable business.

 

One thing has been lost in all of this is the fact that the Merrill-Lynch acquisition was actually a good one. That acquisition makes the company more valuable, in many ways, than it was pre-crisis. So, a few years from now, if the economy does reasonably well, and all of the legacy issues are truly past the company, I don't see why it can't be trading well above $30.

 

As far as near-term considerations go, once the stock pierces $15 there really isn't much stopping it from going to $20. A few analysts are bullish the stock but their price targets are still low and they are few and far between. Once they start pumping up 2014 earnings estimates, the trip to $20 could be a very short one. If the $8.5 billion settlement is approved, we could see a jump to $17/$18 overnight.

 

In sum, I think this is one of the best times to own the stock/warrants/options. Risk is lower and the potential for outstanding gains are still there. If you can find a better investment, more power to you, but all I see so far with BAC is a management team executing its plan quarter after quarter. They obviously think the stock is going to $30+. They are running the company so that it will reach that organically based on its deposit base and current business. It's a conservative strategy but they know that a conservative strategy will deliver huge returns to shareholders.

 

Anyway, that's my take. I want to thank you all again for the informative posts in the past. I think this board has veered away from that a bit. The latest earnings conference call was unreal, the management team was almost giddy with excitement about how well things are going. The housing market is doing better-than-expected. That is the real issue that needs to be followed closely on this board, not nonsense articles by "Tyler Durden".

 

For the housing market, I recommend calculatedriskblog.com

 

Good post; I agree with a lot of this.

 

However, I think the bet on the company at $5ish is fundamentally different than at TBV.  At 5, you were betting on survival.  At TBV, you are betting that it can be very profitable.  Some people have a deflation slant and may not believe that housing will continue to rebound.  Other people may not feel confident about their ability to analyze the future profitability of the bank.

 

Also, I don't think anyone took the Durden article seriously.

[ERICOPOLY]

I think the ball is rolling full speed now

 

I'm a pretty long time lurker and a new poster here. I post on Stocktwits a lot...

 

I'm surprised by all of the negativity on this board. The ball is just starting to roll and there is all of this weird complaining when management is executing on all of its plans just as promised. The rapidly improving housing market is actually making them achieve many of their goals ahead of schedule.

 

For instance, I'm quite sure that the company is limited in the amount of buybacks it can do per quarter. Probably, they are required to demonstrate good quarterly earnings before they are allowed to initiate the repurchase. Complaining that they only bought back $1 billion of stock so far isn't a fair criticism. They are limited by the Fed in what they can do. Remember, the Fed was very upset with banks which continued to repurchase shares even as the financial crisis deepened.

 

There is also the argument that  now that the stock is trading above TBV, it is not going to deliver the kinds of returns it did in the past. This is a board for discussion of BAC-WT. Even if the stock is up 3x from the $5 bottom, BAC-WT is up less than 3x from its bottom. However, if the common doubles, going to $30 over the next few years, BAC-WT will triple from here. So I don't see the logic there. Also, the risk of holding BAC-WT and common shares is so so so much less than it was when the stock was at $5, I think the risk-reward now is actually much better. Similar reward for FAR less risk.

 

Of course there is still substantial risk, but the company was able to resolve most of its outstanding large legal issues. It's also been able to meet capital requirements (this is the biggest issue of all). The housing market has recovered substantially allowing the company to resolve many of its legacy issues already and hastening the complete resolution of those issues. They have been paying down substantial amounts of long-term debt and have begun repurchasing common and preferred shares.

 

Compare this situation to when the stock was trading at $5, and you're living in a different world. Even if we only have a 2x rise in BAC-WT in the next two years instead of a 2.5x rise we've seen so far, the risk is so much lower, it's a better investment today than it was then.

 

As far as the "ball rolling" already, this party hasn't even started yet. If the company can earn $.50/share, that could be enough to send it to $30 if financials get truly hot. Certainly $25/share is a real possibility. If the company is earning $.32/share now, and you can't foresee $.50 sometime in 2014 with an improving economy, then you shouldn't be investing in financials ever because you must not believe that running a bank isn't a potentially profitable business.

 

One thing has been lost in all of this is the fact that the Merrill-Lynch acquisition was actually a good one. That acquisition makes the company more valuable, in many ways, than it was pre-crisis. So, a few years from now, if the economy does reasonably well, and all of the legacy issues are truly past the company, I don't see why it can't be trading well above $30.

 

As far as near-term considerations go, once the stock pierces $15 there really isn't much stopping it from going to $20. A few analysts are bullish the stock but their price targets are still low and they are few and far between. Once they start pumping up 2014 earnings estimates, the trip to $20 could be a very short one. If the $8.5 billion settlement is approved, we could see a jump to $17/$18 overnight.

 

In sum, I think this is one of the best times to own the stock/warrants/options. Risk is lower and the potential for outstanding gains are still there. If you can find a better investment, more power to you, but all I see so far with BAC is a management team executing its plan quarter after quarter. They obviously think the stock is going to $30+. They are running the company so that it will reach that organically based on its deposit base and current business. It's a conservative strategy but they know that a conservative strategy will deliver huge returns to shareholders.

 

Anyway, that's my take. I want to thank you all again for the informative posts in the past. I think this board has veered away from that a bit. The latest earnings conference call was unreal, the management team was almost giddy with excitement about how well things are going. The housing market is doing better-than-expected. That is the real issue that needs to be followed closely on this board, not nonsense articles by "Tyler Durden".

 

For the housing market, I recommend calculatedriskblog.com

 

There needs to be a way for board members to register with their local pub.  Then you could click the "buy this guy a drink" button next to his post.

 

And if you can figure out how to implement that, you can make it a link for all message boards and you can earn a commission on every drink sold.

[jay21]

Bearish article on banks on the Economist:  http://www.economist.com/news/finance-and-economics/21581993-world-low-growth-risk-aversion-and-regulatory-uncertainty-triumph-low

 

"Consumers continue to shed debt; companies carry ever more cash. Banks’ pre-provision revenue growth is muted (see chart 1), and there has been no recovery in loan growth of the sort seen after previous recessions (see chart 2). This is so unusual that it may be unprecedented, says Michael Mayo, an analyst at CSLA, a securities firm, and it hardly suggests a good prognosis for the banking system. He predicts that the current decade will show the worst revenue growth for banks since the 1930s. Pricing and margins will inevitably tighten as a result."

[portfoolio]

Bearish article on banks on the Economist:  http://www.economist.com/news/finance-and-economics/21581993-world-low-growth-risk-aversion-and-regulatory-uncertainty-triumph-low

 

"Consumers continue to shed debt; companies carry ever more cash. Banks’ pre-provision revenue growth is muted (see chart 1), and there has been no recovery in loan growth of the sort seen after previous recessions (see chart 2). This is so unusual that it may be unprecedented, says Michael Mayo, an analyst at CSLA, a securities firm, and it hardly suggests a good prognosis for the banking system. He predicts that the current decade will show the worst revenue growth for banks since the 1930s. Pricing and margins will inevitably tighten as a result."

 

This is a quote from Michael Mayo. He is not a hack. He is a paid manipulator of stocks. He has been wrong wrong wrong about BAC over and over again. His analysis isn't even analysis. It is just a smokescreen to push the agenda of his paymasters. I recommend researching his history before quoting him.

[portfoolio]

I'd like to make one more point about "value investing." In many ways, BAC at $5 wasn't a value play. It was a huge gamble on everything working out. It was a gamble that the economy would recover, and that Europe wouldn't implode, and that the regulatory situation would be manageable. Yes, it was selling at way below TBV, but there was a real and immediate risk that the company would have to dilute shares considerably to raise capital. During the heat of the crisis, there was real risk that the bank would be nationalized and equity holders completely wiped out.

 

Now that the stock is trading above TBV, and much of the lawsuit risk is gone, it is more of a true value play. The risk averse are slowly starting to consider piling into the stock. Once that happens, it may cease being a value play. But that doesn't mean that the ride is over. Then you can get some exuberance. You buy during the depressed, risky era, you hold through the value era, and you sell during exuberance. In terms of price, we are very, very far away from exuberance.

[Cardboard]

I just looked back at my notes that I wrote when I bought BAC in late December 2011 and there was no gamble at all with BAC at $5. It was a no brainer. The entire banking sector was up, only BAC was down due to unreasonable fear. This wasn't like early 2009 and they did not need any capital as Moynihan later admitted. They made a gift to Buffett and the stock still kept going down afterwards.

 

This was a true franchise on every street corner of America selling well below its true value and with plenty of capital if one was to forget about the noise made by Wall Street. Only one division was losing money or CRES. The goodwill test was already passed with no impairment. Liquidity and capital were up for the year and already above most big banks. Analysts were estimating $0.96 in adjusted EPS for 2012, not losses. Job cuts of 30,000 had been announced. The same $8.5 billion settlement being discussed today had been signed. The total European unhedged exposure was only $14.6 billion. It did not look like a distressed situation at all to me. I could not comprehend why it was trading so low vs the other big guys facing similar issues. The non-settled lawsuit risk was also grossly exaggerated.

 

Now, when you mention $30 and $50 stock prices, it is a very different proposition and keep in mind that it means a market cap of $350 billion and $590 billion respectively. This would be well above tangible and book value. You have to remember that these guys will also pay 50% of their earnings as dividends at some point, leaving not so much for buybacks. Done at higher prices combined with continued dilution via compensation and the market cap projection at the prices you mentioned is real.

 

While it is quite possible that BAC will reach $30, during 2014 sounds quite optimistic to me. JPM trades at 8.6 times earnings right now. I think that you need to answer these questions: what is so wrong with JPM to trade at this valuation and for the rest of the big banks to be in the 10 times range? Why is WFC not at 15 times earnings? If you are simply attaching a 15 times multiple to projected earnings of $2 without any consideration for the rest of the industry then it sounds to me like betting on some momentum developing for BAC alone. Investors will always make a comparison between them.

 

While I am not saying to sell all BAC positions, I think it is prudent to sell some stock once it becomes a really large part of the portfolio and where the calculated upside turns average: most of my stocks have the potential to double based on already visible earnings and assets. At this point, I would be tempted to replace all stock and warrants (don't have warrants anymore) with 2015 options. Much less capital employed and I could still get the benefit from the upside while deploying cash in some stocks that have no options. On the warrants, probably worthwhile to read the thread on BAC leverage.

 

Cardboard

[LC]

I agree with Cardboard here. I think when BAC was at $7 (when I discovered this thread!) there was much less risk of losing capital. For $7/share you were getting one of the largest national retail banking franchises, in one of the most developed and bank-friendly countries in the world. BAC was already out of the 2009 era, and the "risk" was how long it would take them to shore up all their legacy problems (Countrywide). Looking 10 years out, my note to myself was that "at some point people are going to want to buy homes again; at some point people are going to be walking into the Bank of America/Wells Fargo bank on the corner; at some point banks will return to a more conservative approach".

 

And the price was so cheap that you weren't taking a nominally large gamble. So while things are certainly better now, the question is "how long can these good times last?" and "how much of these 'good times' are already 'priced in'."

[Uccmal]

I'd like to make one more point about "value investing." In many ways, BAC at $5 wasn't a value play. It was a huge gamble on everything working out. It was a gamble that the economy would recover, and that Europe wouldn't implode, and that the regulatory situation would be manageable. Yes, it was selling at way below TBV, but there was a real and immediate risk that the company would have to dilute shares considerably to raise capital. During the heat of the crisis, there was real risk that the bank would be nationalized and equity holders completely wiped out.

 

Now that the stock is trading above TBV, and much of the lawsuit risk is gone, it is more of a true value play. The risk averse are slowly starting to consider piling into the stock. Once that happens, it may cease being a value play. But that doesn't mean that the ride is over. Then you can get some exuberance. You buy during the depressed, risky era, you hold through the value era, and you sell during exuberance. In terms of price, we are very, very far away from exuberance.

 

Hi Portfoolio,

 

I dont agree.  At $5.00 the peak of the crisis was 2.5 years in the review mirror.  The Buffett 5 B was in place.  They were midway through some of the big settlements.  The mortgage and housing crisis was receding.  It was one of the greatest steals of all time.

 

I also disagree on your statement about buybacks.  I have seen no indication this is being regulated by the fed on a Q basis.  I think its just not a priority.

 

As per Cardboards statement, The market cap has to get real high to reach $25 per share let alone higher.  I would say unprecedentedly high.  And they will be forced to pay out 50-60% of dividends. 

 

Now, since I am going to keep a portion of this until the next financial crisis starts to loom, and collect the dividends, I dont care if the stock reaches 25 or 30 so much.

 

In terms of value investing the very easiest money has been made on BAC.  The next stage will be a little less profitable (i.e: not a doubling) that we had from 7 to 14.

 

Otherwise, I enjoyed your posts. 

 

Al.

 

 

[Sunrider]

I'd like to make one more point about "value investing." In many ways, BAC at $5 wasn't a value play. It was a huge gamble on everything working out. It was a gamble that the economy would recover, and that Europe wouldn't implode, and that the regulatory situation would be manageable. Yes, it was selling at way below TBV, but there was a real and immediate risk that the company would have to dilute shares considerably to raise capital. During the heat of the crisis, there was real risk that the bank would be nationalized and equity holders completely wiped out.

 

Now that the stock is trading above TBV, and much of the lawsuit risk is gone, it is more of a true value play. The risk averse are slowly starting to consider piling into the stock. Once that happens, it may cease being a value play. But that doesn't mean that the ride is over. Then you can get some exuberance. You buy during the depressed, risky era, you hold through the value era, and you sell during exuberance. In terms of price, we are very, very far away from exuberance.

 

Look, I agree with your intentions but your facts aren't quite right. You could've bought BAC after the crisis for 5 - 7 for a looong time. So no risk of nationalisation. And the things you mentioned weren't the ones I bet on (with too little money) - economy turning around? Inevitable short of mankind disappearing. Europe not imploding? It kinda did but in any event BAC didn't have a whole of exposure anyway. Regulatory situation manageable ... well maybe but Laurel&Hardy (Dodd Frank) were on the table long before that.

 

What you did have to bet on, as someone else pointed out, is that the bank could earn its way out of the crap previous management did by deferring or settling legal issues (as Eric has been pounding the table).

 

I do hope you're right re 15 - 20 - 25 - 30.

 

C.

[portfoolio]

It's hard for me to reply to each of you one-by-one, so let me just try to answer all of the issues at once.

 

First of all, there is no question that they are limited in how much buyback they can do in each quarter. You can complain all day long, but they have to keep the Fed happy. They have to beg the Fed to let them do ANY buybacks, remember.

 

Second, I said "during the heat of the crisis" re: nationalization. There hasn't been a risk of that recently, and I didn't imply otherwise.

 

I was buying BAC heavily at $7, and I bought some at $5 too. I get what was going on at that time. I get that it was a good investment. But to suggest that there wasn't substantial risks at that time is just unreasonable. All the potential for good things was there, but the good things had not arrived yet. This is in stark contrast to today, where there is a done-deal settlement with FNMA, there is a done-deal settlement with MBIA, all capital requirements are met, delinquent loans are rapidly diminishing, the company has returned to solid profitability, etc. When Buffett made the deal, there was the widespread belief that the company might have to raise even more capital leading to dilution. That's why the company did the deal. You may hate the deal, but that was the widespread expectation at that time. Perhaps that wasn't a reasonable expectation, but it was the widespread belief. If you knew better, more power to you, but it was still an outstanding risk at the time.

 

Europe DID NOT implode. And it is naive to think that if Europe really did *implode*, BAC's "limited exposure" would have protected it. The stock dipped below $7 on Euro fears. If the Eurozone truly did break up, WHICH DID NOT HAPPEN AT ALL, all the financials would have been absolutely crushed. They might have bounced back over time, but it would have been a bloodbath of epic proportions. It also could have precipitated another global financial crisis that could have plunged the world into a deep recession. These were very real risks that were averted. The risks still exist, of course, but they are much less now.

 

As far as the market capitalization goes, remember this is not just Bank of America. This is Bank of America + Merrill Lynch. Any calculations or expectations have to recognize the fact that this a combined company now. Anyway, if the earnings are there, the share price will follow, regardless of the overall market capitalization. The "return to normal" scenario scenario the company offers is extremely rosy. $30/share will be a no-brainer in a normal interest rate environment with an economy that continues to improve. I am talking Mid-2015 here, but the market might anticipate that, and it could reach $30 by the end of 2014.

 

With the current interest rate environment and regulatory uncertainty, all of the banks are being valued less than they might otherwise be. If the economy continues improving and the regulatory environment stabilizes, banks will be trading at greater multiples. They will be able to return much much more capital to shareholders at that time which will help with valuations as well.

 

If you all know stocks which are almost sure doubles in the next three years, more power to you. I see BAC warrants as almost sure triples in the next three years with limited downside risk. The only downside risk is really systemic risk. If you have better investments on tap, good for you.

 

The funny thing is that most of the pooh-poohing I saw on this board started when the stock was trading at $13 still. Now it is near $15. So obviously short-term your prognostications weren't quite spot-on. We'll see what happens in the next six months and over the next few years.

 

I'm not trying to convince anyone or to get anyone to invest in BAC. I just want to share my views because I've found this board (and other boards) helpful in the past and I want to do my part and to encourage discussion. Like I said, if you have better investment opportunities, more power to you. I don't see anything better than this. I am *extremely* impressed with management, both with their strategy and their attitude to growth. They know they can make money hand-over-fist by keeping things simple and focusing on their core strengths. They have chosen that over mere size or market share, exiting businesses which offered greater risk and less reward. There have been a lot of complaints along the way about this, but it is based on a misunderstanding of the company's potential. I am super impressed.

 

 

[portfoolio]

Regarding market capitalization, according to Google Finance BAC is currently 158.51B and Wells Fargo is 236.19B. So if BAC reaches WFC's CURRENT capitalization, it will trade at $22. Why this is weird or unusual is beyond me. Why if the stock goes to $22 it can't go to $30 is also beyond me. Why if the stock reaches $30 it can't go to $40 or $50 in a few years is also beyond my understanding.

 

BAC + Merrill Lynch can make A LOT of money in a healthy economic environment. That will be reflected in the share price, regardless of the overall market capitalization. The company will trade for what it is worth. If they are extremely profitable and paying out huge dividends, which seems *likely* in 3-5 years, the stock price will reflect that.

 

Here is an old article that shows BAC and Merrill Lynch's capitalization. Together they were about 290 Billion. That's near the peak:

http://blogs.wsj.com/marketbeat/2007/11/05/erasing-120-billion-in-market-cap/

 

EDIT ADDITION:

 

Another way to look at it is book value. If BAC trades at a premium to book value comparable to WFC's today, it will trade at $32. [Correct me if I am missing something.] Why is this unlikely in the next 24 months?

[portfoolio]

While it is quite possible that BAC will reach $30, during 2014 sounds quite optimistic to me. JPM trades at 8.6 times earnings right now. I think that you need to answer these questions: what is so wrong with JPM to trade at this valuation and for the rest of the big banks to be in the 10 times range? Why is WFC not at 15 times earnings? If you are simply attaching a 15 times multiple to projected earnings of $2 without any consideration for the rest of the industry then it sounds to me like betting on some momentum developing for BAC alone. Investors will always make a comparison between them.

 

By the end of 2014, if the company is making $.50 a share per quarter, the stock will begin to price in earnings for 2015. What if 2015 earnings are projected to be $2.50/share for the year. at 12x, that is $30. Do you really think that $2.50/share is unlikely for 2015? Is 12x such an outrageous valuation?

[plato1976]

I think 20 is possible for next year, but call me a pessimist I doubt it will touch 30 in the next two years. but I hope you will be proven right

 

While it is quite possible that BAC will reach $30, during 2014 sounds quite optimistic to me. JPM trades at 8.6 times earnings right now. I think that you need to answer these questions: what is so wrong with JPM to trade at this valuation and for the rest of the big banks to be in the 10 times range? Why is WFC not at 15 times earnings? If you are simply attaching a 15 times multiple to projected earnings of $2 without any consideration for the rest of the industry then it sounds to me like betting on some momentum developing for BAC alone. Investors will always make a comparison between them.

 

By the end of 2014, if the company is making $.50 a share per quarter, the stock will begin to price in earnings for 2015. What if 2015 earnings are projected to be $2.50/share for the year. at 12x, that is $30. Do you really think that $2.50/share is unlikely for 2015? Is 12x such an outrageous valuation?

[Sunrider]

Regarding market capitalization, according to Google Finance BAC is currently 158.51B and Wells Fargo is 236.19B. So if BAC reaches WFC's CURRENT capitalization, it will trade at $22. Why this is weird or unusual is beyond me. Why if the stock goes to $22 it can't go to $30 is also beyond me. Why if the stock reaches $30 it can't go to $40 or $50 in a few years is also beyond my understanding.

 

 

Because for that to happen (not necessarily 22 but the comparison of moving equal to WFC that you speak of) BAC needs to be at least as profitable as WFC - and it won't get there by just new BAC I, II and wind-down of LAS/Litigation. For that they need to truly amp up revenue generation in the way that WFC has been able to.

 

I hope they will.