BAC-WT - Bank of America Warrants

[FCharlie]

1 - Fear of the US government - it is quite unpredictable

2 - Fear of tapering - no one knows what will happen

3 - Fear of rising interest rate - bank will earn more, but there's fear economy will slow down and

 

We have not had a financial  melt down  like the one in 09 in recent memory and a lot of people are probably not comfortable with banks, etc.  They may be trading at these valuations for quite awhile.

 

 

This is one of the reasons I like BAC so much. We could have an entire decade where BAC trades below book value. Meanwhile, they could repurchase 35 million shares each month for that decade. When I do the calculations on where this stock could be in ten, twelve, fifteen years if this keeps up, it's mind boggling. BAC doesn't need to expand, acquire, or really do anything other than to continue operating, stay as efficient as possible, and churn out capital and buy back stock. No shooting for the stars necessary, but you can be rewarded as if you did.

[Sunrider]

Hiya

 

I seem to recall the judge taking a very very long time to rule on another case (BAC/MBI and then they settled) ... so is this an "imminent" catalyst? Do we have a well-founded idea of when there will be a ruling?

 

Thanks - C.

 

I think BACs next catalyst is any day now.  Once Judge Kapnik rules on this case that clears off the supposed successor liability angle.  I think BAC is undervalued as compared to itself, the general market, and Wells Fargo.  Just look at the list of comparables in that report.  BAC is the cheapest on nearly every metric - look at the whole list - some of those mid size banks are the size of the big five in Canada.

 

BAC is on its way to becoming the kind of bank WFC is, with the added caveat of Merrill Lynch in the fold.  There is no reason to suggest this wont happen.  Recall that Wells was once scorned just like BAC has been.  Companies with good management in a turn around situation often over compensate.  This is what happened at Wells into the 1990s and was fresh in the existing managements mind when 2007/2008 rolled around.  This is happening at BAC.  A whole generation of bankers there are going to always be more careful.  Eventually this should show up in earnings.

[constructive]

Do people actually like Moynihan as CEO? He is a lawyer who wandered into the C-suite, probably by being adept at internal politics. Dimon, Corbat, Stumpf, Blankfein, etc have more credible finance/risk management backgrounds.

[LC]

I think he's done a good job of streamlining the operations. Not the best in terms of capital allocation (not terrible either: there's something to be said for not screwing things up!), and I'm not sure how he will do at growing the business, though.

[fareastwarriors]

http://online.wsj.com/news/interactive/legaltab?ref=SB10001424052702303755504579208350707595282

 

neat graphic

[tng]

Do people actually like Moynihan as CEO? He is a lawyer who wandered into the C-suite, probably by being adept at internal politics. Dimon, Corbat, Stumpf, Blankfein, etc have more credible finance/risk management backgrounds.

 

He seemed to be the right guy at the time he took over. Legal issues were the number one thing to take care of when he took the CEO job, so having a lawyer be the CEO is actually not bad. He seems to be one step ahead of the other banks in doing many things. For example, he started settling a lot of lawsuits well before the other banks. The government is really hitting JPM up for money this year, but the books are closed on the majority of BAC's legal issues, and he got that out of the way at a time when the government still viewed BAC as weak. You don't want open lawsuits when they think you are posting record profits. Moynihan also started cost cutting well before the other big banks did. He seemed to understand the consequences of the new regulations better than most others.

 

I'm not sure if he is the right guy going forward in 2015 or 2016 when the legal issues are all settled and the bank is focusing solely on operations. When the interest rate environment becomes more favorable, he will have to grow the company. But so far, Moynihan has been pretty good (not buying back more stock and offering Buffett an excessively favorable terms in Buffett's investment are the only two things that I don't like).

[fareastwarriors]

Bank of America Stock May Break a New Barrier

 

http://online.barrons.com/article/SB50001424053111904253404579209882866696094.html?mod=BOL_da_spd

 

There might not be a free lunch in the stock market, but trading options on Bank of America comes close.

 

With the stock recently crossing $15, Wall Street's favorite parlor game of betting that Bank of America (ticker: BAC) will advance to the next whole number is raging yet again.

 

Investors are once more buying upside calls in large numbers in anticipation the bank's stock rises above $16.

 

The January $16 calls traded more than 15,000 contracts Tuesday amid a wave of bullish trading. Nearly 200,000 calls traded in the first two hours of the session, according to Trade Alert, an options analytical service. The keystone trade was the purchase of 15,000 January $16 calls for 25 cents when the stock was at $15.23.

 

The January $16 call trade attracted a lot of attention and not just because almost 50,000 calls traded by day's end. The trade marked a continuation of the previous week's bullish enthusiasm, when an investor bought 125,000 January $17 calls that expire in 2015 for 79 cents. Henry Schwartz, Trade Alert's president, notes those 2015 calls are already up 30%, or $3 million.

 

The whole-number trade has been popular ever since Bank of America began clawing its way back from the edge of the abyss with which it flirted during the financial crisis. The strategy is simple, and buying upside bullish calls in anticipation the stock rises from $8, to $9, to $10 and so on has proved to be a winner more often than not. And even when the trade has been a loser, the pain is eased by the fact that the calls usually trade for 50 cents or less.

 

The January $15 calls bought in late October, for example, are now trading at 65 cents, up 124% from their 29-cent purchase price. (See The Striking Price, "Bank of America Stock: How to Profit as It Rises," Oct. 24.)

 

The game is on again, and it is hard to see how the past will not be prologue as Bank of America once more pushes deeper into record-trading territory. The banking sector is showing signs, yet again, of being a favored sector as it becomes increasingly clear bank stocks are shaking off the woes of the financial crisis.

[blainehodder]

Of course, the same was true with calls on Apple...  until it wasn't. Or anything that is going up for that matter.  There is no free lunch.  BAC is very cheap compared to underlying earnings power.  Cheap stocks are likely to outperform (which often implies a mispricing of the options), but the assumption that trading incremental short term whole number calls is somehow a low risk strategy seems aggressive. 

 

And even when the trade has been a loser, the pain is eased by the fact that the calls usually trade for 50 cents or less

 

This is quite questionable to me.

 

That said, I am long some incremental short term calls  :)

[fareastwarriors]

http://www.bloomberg.com/news/2013-11-21/bofa-argues-it-shouldn-t-pay-penalty-in-countrywide-case.html

 

 

BofA Argues It Shouldn’t Pay Penalty in Countrywide Case

[BRK7]

http://news.yahoo.com/approval-8-5-billion-bofa-settlement-judges-hands-000545849--sector.html

 

 

Approval of $8.5 billion BofA settlement in judge's hands

 

[fareastwarriors]

not sure how insigtful this is but

 

Brian Moynihan, chief executive officer of Bank of America Corp., Richard Davis, chief executive officer of U.S. Bancorp, and William Demchak, chief executive officer of PNC Financial Services Group Inc., participate in a panel discussion about the U.S. financial industry and bank regulation.

 

 

video...

http://www.bloomberg.com/video/moynihan-davis-demchak-on-u-s-banks-regulation-hSCEDi~ZS468o~9AcU~jyg.html

[wescobrk]

15 percent move and up to twenty percent almost within 2 weeks! 15.72 in after hours trading.

Only about 28 percent roughly from book.

Anyone feeling a bit nervous with the fast advance?

[Uccmal]

15 percent move and up to twenty percent almost within 2 weeks! 15.72 in after hours trading.

Only about 28 percent roughly from book.

Anyone feeling a bit nervous with the fast advance?

 

yep

[portfoolio]

The stock closed at 14.95 on August 1. It is up 5% in about four months since then.

 

On August 1 the S&P 500 closed at 1,706.87. Today it closed at 1,795.85. It is up .... about 5% since then.

 

This is a terrifying situation! How could BAC go up THAT much?

 

Silliness.

 

(As I've been telling people for months on StockTwits, the break of $15 is very similar to the break of $10. If you see the pattern of trading before the break of $10, you can see how closely it mirrors what happened before $15 broke. You can also see how the stock reacted after the break of $10 and it is doing something very similar now. The stock went to $11 (10% increase) almost immediately and NEVER RETRACED. A 10% move from 15 would be $16.50.

 

There is also a great deal of similarity with the run from 12.11 to $15. That was a $3 move. We just saw a low of 13.80. $3 from there is 16.80. Good luck all.)

[ERICOPOLY]

It trades at 11.5x times forward 2014 net income estimates of $1.34, which of course are on the light side because of the DTA which brings it up to about $1.90 per share.

 

That's a 40% discount to the S&P500 market multiple of 19. 

 

So while taking that big risk from the lofty valuation in 2014, for the following year you are left with merely $1.59 consensus net income estimates for 2015, which with the DTA amounts to roughly $2.27.  Of course, that $1.59 is only 18.6% above the prior year's earnings, and if all we're doing is compounding at 18.6% we should definitely sell it now.

 

Then, in 2016 the consensus is for $1.81 net income, which only gives a further 13.8%.  Once again, if you are only making 13.8% you should certainly sell out.

 

Oh wait... those are just the capital gains!  Doh, silly me... I forgot that the $1.90 earned with DTA help in 2014, and the similar $2.27 earned in 2015 are excess capital that can fuel further shareholder gains.  My bad.

 

Let's wrap that all up now:  For 2014, 18.6% of $15.50 is $2.88 in capital gains with the additional $1.90 in earnings.  Hmm... only $4.78 per share in gains.  Just not good enough for me, that's only 30.8% return over today's closing price of $15.50.  I'm used to much higher returns, so for sure I don't want to own this.

 

For 2015, 13.8% of $18.285 is only $2.52, which when added to $2.27 earned (with DTA) comes out to only $4.79.  This would be another 25% year in 2015 after the 30.8% return in 2014.

 

And all that does is keep the stock trading at 11.5x forward earnings for the next two years -- same multiple as today.

 

Yep, yep, scary scary stuff  ;)

 

[wescobrk]

Eric,

I agree with the numbers but with those of us that are still below a million and want to earn as much as possible, I'm going to sell a big chunk at 16. I just don't see it going much higher until we get to ccar or after the first taper pullback.

If I had your captial I would just sit back but I need to be more enterprising to get to my goals.

I may be wrong but north of 16.50 before march looks like a stretch.

Good luck to everyone if I'm wildly wrong and it shoots straight past it in the next 6 weeks.

[ERICOPOLY]

It's hard to say what it should trade at.  The majority of analysts think they'll bring in $1.90 next year and $2.27 the year after.  Then in 2016, $1.80 (without using a DTA) -- and presumably more than $1.80 for every year beyond.

 

So just a stupid 10x forward multiple on the lowest of those years (in a 19x p/e market) gets you to $18.  And 10x seems pretty low.  You could run to $21.60 on a 12x P/E -- that's not exactly unusual valuation.

 

Of course, this is just as obvious as I type this and yet the stock is only at $15.50  ???

[Mikenhe]

Eric - are you trying to use logic to show what the market will value the share price at - silly you!

 

 

and don't forget all those massive share buybacks!!!

[ERICOPOLY]

The first two brave analysts are giving a "consensus" of $1.80 a share for 2016.  That's $21.60 per share at 12x earning.

 

We all think they will generate more than $2 per share in capital in 2014 and 2015, on average.  That takes you up to $25.60+ in 24 months.

 

So that's a 64% gain, and really perhaps since this is so fricken obvious the market front-loads the bulk of those gains?

 

Or you could say the stock is worth $21 right now because you only have to knock 60 cents off of the $21.60 figure (40 cents for 2014 and 20 cents for 2015, according to Bernstein estimates).  And then you could argue that the DTA will go towards paying more settlements.

[gokou3]

Insight: A new wave of U.S. mortgage trouble threatens

http://www.reuters.com/article/2013/11/26/us-usa-mortgages-homeequity-insight-idUSBRE9AP05J20131126

 

At Bank of America, around $8 billion in outstanding home equity balances will reset before 2015 and another $57 billion will reset afterwards but it is unclear which years will have the highest number of resets. JPMorgan Chase said in an October regulatory filing that $9 billion will reset before 2015 and after 2017 and another $22 billion will reset in the intervening years.

 

Bank of America said that 9 percent of its outstanding home equity lines of credit that have reset were not performing. That kind of a figure would likely be manageable for big banks. But if home equity delinquencies rise to subprime-mortgage-like levels, it could spell trouble.

 

I think the purported losses related to home equity over the next few years will be small relative to the current market cap discount to book value, but this could induce a temporary share price drop i.e. buying opportunity.

[xazp]

I only skimmed the article, but they missed a pretty key data point: the reserves for the HELOCs.  It's not a question whether they will lose money or not.  It's whether they'll lose more or less than their reserves.  Don't necessarily assume reserves are low, as BAC in general has been lowering reserves over time. 

 

They have about $91Bn of HELOCs outstanding, $4.3Bn in reserves.  Average LTV's are low at 75%, and average FICOs are high at 744.  About a third of their LTVs are above 90%. 

 

Given that information, I really can't tell you if they are low or high in their reserves.  But if they exactly hit their reserves, they won't take any more losses, and that seems like kind of a big point that the article either misses or glosses over. 

 

 

 

 

 

 

Insight: A new wave of U.S. mortgage trouble threatens

http://www.reuters.com/article/2013/11/26/us-usa-mortgages-homeequity-insight-idUSBRE9AP05J20131126

 

At Bank of America, around $8 billion in outstanding home equity balances will reset before 2015 and another $57 billion will reset afterwards but it is unclear which years will have the highest number of resets. JPMorgan Chase said in an October regulatory filing that $9 billion will reset before 2015 and after 2017 and another $22 billion will reset in the intervening years.

 

Bank of America said that 9 percent of its outstanding home equity lines of credit that have reset were not performing. That kind of a figure would likely be manageable for big banks. But if home equity delinquencies rise to subprime-mortgage-like levels, it could spell trouble.

 

I think the purported losses related to home equity over the next few years will be small relative to the current market cap discount to book value, but this could induce a temporary share price drop i.e. buying opportunity.

[nkp007]

Warrants closed today at $6.66. If that's not a signal to switch to the common, I don't know what is...

 

Market closed

$6.66

Change

+0.09 +1.37%

Volume

992,379

Nov 26, 2013, 3:59 p.m.

Quotes are delayed by 20 min

Previous close

$ 6.57

Day low

Day high

$6.50

$6.67

[ourkid8]

Why would you say that?

 

Warrants closed today at $6.66. If that's not a signal to switch to the common, I don't know what is...

[fareastwarriors]

sign of the devil?

[Uccmal]

Eric,

I agree with the numbers but with those of us that are still below a million and want to earn as much as possible, I'm going to sell a big chunk at 16. I just don't see it going much higher until we get to ccar or after the first taper pullback.

If I had your captial I would just sit back but I need to be more enterprising to get to my goals.

I may be wrong but north of 16.50 before march looks like a stretch.

Good luck to everyone if I'm wildly wrong and it shoots straight past it in the next 6 weeks.

 

I dont ever advise anyone on how to invest, except that they should save money. 

 

But my take, with a little bit of psychology is:

1) The market front loads future earnings into a stock - Eric alluded to this.  Therefore $20.00 may be closer than we believe.

2) Value stocks often recover and then continue to outperform for years after - See David Dreman "Contrarian Investment Strategies" for data on this.

 

I have a huge number of in the money Leaps for 2015 and 2016.  To push the tax man into next year I have bought short term puts that cover my entire Leap and warrant position.  I actually have more puts than Leaps + Options right now.  I am planning on selling near worthless Jan. 2014 puts just before Christmas to offset the gains from this year.

 

 

The article on Helocs is just alarmist at this point.  This is a company that has lost tens of billions over the last few years on bad debt.  We know the actual losses, if not already reserved, will come in at a minute fraction of face value.