BAC-WT - Bank of America Warrants

[ERICOPOLY]

If you think a good bank can earn 1% on assets:

 

9/30/14

Assets: 2.1 trillion

 

1% earned: 21 billion

 

Shares outstanding: 10.5 billion

EPS: $2

 

warrants?

 

And preferred.

[prevalou]

If you think a good bank can earn 1% on assets:

 

9/30/14

Assets: 2.1 trillion

 

1% earned: 21 billion

 

Shares outstanding: 10.5 billion

EPS: $2

 

warrants?

 

And preferred.

 

 

and DTA

[CorpRaider]

The warrants are a no-brainer for me.  Assuming BAC can earn $2 per share before the warrants expire, you are looking at the minimum of $25 per share (more likely $30+ per share).  And the cost of leverage for the warrants is less than < 4% per year.  This is CHEAP.  It doesn't get any better than that.  I'll add more when my money is in my brokerage account.

 

I'm not sure how you get to 4% for cost of leverage. With dividends I get somewhere between 8-9%. Even the simplified "Greenblatt method" gets ~7% annualized without dividends or adjusting for paying the premium up front.

 

At $5.86 for warrants, and $15.38 for common I get $2.08 IV/$3.77 TV (or "interest").

 

$3.77/$13.30 strike = 28%

 

roughly 7% annualized, not including dividends or time value of paying interest up front.

 

Am I way off somehow?

 

You're right, it's 8%+ annualized, without factoring the dividend.  Of course all dividends in excess on one red cent per quarter are going to be adjusted w/r/t the A warrants, so without dividends is pretty close.

[finetrader]

Article that explain what happened to trading revenue in 4th quarter:

 

 

http://blogs.wsj.com/moneybeat/2015/01/15/bofa-citi-and-volatility-too-little-too-much-just-right/?mod=yahoo_hs

[ERICOPOLY]

roughly 7% annualized, not including dividends or time value of paying interest up front.

 

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).

 

[orthopa]

As investors we often suffer from recency bias as Eric highlighted. I am no exception. I find myself looking at interest rates and feel like they will never go back up also.  Often this point of extreme pessimism is right when things start to change. We will see what happens.

 

 

[orthopa]

Interesting piece on interest rates.

 

http://dealbook.nytimes.com/2015/01/06/soaring-bond-prices-may-sound-an-economic-warning/

[grasshopper]

Forgive me for asking this question again, but I am actually curious about this and nobody commented on this before.

 

BAC NIM are adversely affected by lower long-term bond yields and the main risk to our investments in the warrants or options of BAC is that  long term yields could remain lower than any of us expect....and we've all been waiting for a while now...

 

QE1, 2, and 3 were designed by the Fed to push down long term yields, and they did. Yields are still going down despite no more QE...probably because of problems in other countries...

 

The US economy is getting better...no doubt about it. 2014 was a good year.

 

The Fed has indicated previously that reverse-QE is also possible to sell off all the long term bonds it bought up in the past 5 or so years. This...will in effect, cause long-term yields to rise. This basically gives the Fed an effective policy lever to lift long term rates as well, not just short term rates that everyone assumes will raise this year.

 

So...today, we have the US economy getting better, alot of the rest of the world tanking, yet US 10 year bond yields are still dropping...to ridiculously low levels...with NO QE...a strange situation...

 

Obviously we don't know when it will turn...but considering that the Fed has the lever to correct this strange imbalance, especially if the US economy is recovering...why is everyone worried so much about long term rates staying low for 5+ years??? I understand that our current Fed will talk about wage growth being stagnant, reduced workforce part. blah blah blah, but even then, our economy isn't doing that badly and we can surely normalize our long term yields and at the same time reduce the balance sheet at the Fed right

 

 

[finetrader]

grasshopper, you just made my day!

 

I thought the FED would never sell the bonds they bought during QE's. I was still under the impression that the FED would never be able to delevered his balance sheet because FED's moves was supposed to create inflation in the long run. But if long term rates and inflation keep staying low even if the economy is improving, I would seize this opportunity if I were them.

[Uccmal]

Surely they will sell the bonds when the time is right.  Why not reload bullets for the next recession?

 

I dont want to get all philosophical but I have been investing for nearly 20 years.  In that time, I have seen the Nasdaq dot com bubble, the time of zero government deficits, 9/11 and the bush governments unprecedented debt run up, Hurricane Katrina, Interest rates dropped to low single digits, the housing bubble, the financial crash, oil prices at $10, oil prices at $130, deflation, inflation, interest rates at zero, Gov't deficits skyrocket, Gov't deficits come back down, etc, etc, etc.

 

No one can predict interest rates, inflation, deflation, oil prices, etc., etc., etc. 

 

Things we know: Us economy is improving, Interest rates are really low, EU and China are pouring money on a smouldering fire, oil is relatively low in price, Big Us banks that are well run WFC, and JPM are making record (or close) profits, and Bac may join them in being well run. 

 

End of rant. 

 

 

[Rabbitisrich]

Grasshopper, it isn't that weird to see long rates dropping without QE. The QE twist intended to reduce long term yields in the short run in order to effect activity that would increase PCE growth to 2% while lowering unemployment. You wouldn't expect to see a "don't fight the Fed" situation in long run long term yields because the market knows that the Fed wants inflation expectations to be anchored, and the term premium hasn't accelerated its three decade decline. The weird thing is that the Fed has been signalling that it intends to bump around 2% PCE from below, while assiduously assuring that they won't let inflation overheat. Then you have certain governors claiming satisfaction with multiple years of missing the 2% target, suggesting that there is no defense of an inflation pathway, but rather a targeted channel between 2% and something less than 2%. And finally, the Fed has been planning for a reduction of its balance sheet despite continuing to miss its target, and downward adjustments of their own inflation expectations. If you anticipate lower inflation due to a global slowdown, Fed tolerance of deviating from trend, and a still declining term premium, then low rates without QE makes sense.

[Rabbitisrich]

As investors we often suffer from recency bias as Eric highlighted. I am no exception. I find myself looking at interest rates and feel like they will never go back up also.  Often this point of extreme pessimism is right when things start to change. We will see what happens.

 

I don't think recency bias applies in this case because Moynihan has been getting the benefit of the doubt. We give him a pass on sliding behind H.8 numbers because of regulatory and legal distractions, and the fact that Countrywide turned out to have illusory underwriting skills and a weak back office. But it's 4Q14, the top line numbers are weak excluding DVA and the low global markets revenue (even if you decide to ignore FVA). It's just a picture of a management team that is focused on Basel, CCAR, and LCR, while waiting for the economy to improve.

[CorpRaider]

Rates might move up this week if Draghi does not come through. 

[Uccmal]

As investors we often suffer from recency bias as Eric highlighted. I am no exception. I find myself looking at interest rates and feel like they will never go back up also.  Often this point of extreme pessimism is right when things start to change. We will see what happens.

 

I don't think recency bias applies in this case because Moynihan has been getting the benefit of the doubt. We give him a pass on sliding behind H.8 numbers because of regulatory and legal distractions, and the fact that Countrywide turned out to have illusory underwriting skills and a weak back office. But it's 4Q14, the top line numbers are weak excluding DVA and the low global markets revenue (even if you decide to ignore FVA). It's just a picture of a management team that is focused on Basel, CCAR, and LCR, while waiting for the economy to improve.

 

Rabbitsrich, Maybe waiting is all they should be doing.  After all, action is what got BAC in trouble before. 

 

I like to review the situation at Fairfax.  I think it serves as a reality check on BAC. 

 

In 97/98 FFH bought Tig and C&F.  The quality of these operations started to become readily apparent in 1999.  That is when management started to work on fixing these operations. 

 

They were kept afloat by the huge bond gains in 2002/03 time frame (Kept afloat is the operative here).  There was the protracted financial crisis for the insurance industry of 911 followed by KRW.  That was when Fairfax was selling stock at $125 US per share to Markel and Cundill, and selling shares of ORH and NB to raise regulatory capital.  FFh did not get its mojo back until late 2007 when the CDS started to turn.  Prem calls them the 7 lean years. 

 

Not to excuse BAC but we are just into year 5.5 since the worst financial meltdown in 80 years.  BAC has dealt with 100 B in lawsuits, and probably far more once you include legal costs.  They have finally cleaned up their own TIG and C&F.  They are facing huge regulatory hurdles and expenses as referenced by JPM's CEO.  Interest margins are very tight. 

 

RabbitsRich, What exactly do you expect them to do? 

[wescobrk]

Grasshopper, it isn't that weird to see long rates dropping without QE. The QE twist intended to reduce long term yields in the short run in order to effect activity that would increase PCE growth to 2% while lowering unemployment. You wouldn't expect to see a "don't fight the Fed" situation in long run long term yields because the market knows that the Fed wants inflation expectations to be anchored, and the term premium hasn't accelerated its three decade decline. The weird thing is that the Fed has been signalling that it intends to bump around 2% PCE from below, while assiduously assuring that they won't let inflation overheat. Then you have certain governors claiming satisfaction with multiple years of missing the 2% target, suggesting that there is no defense of an inflation pathway, but rather a targeted channel between 2% and something less than 2%. And finally, the Fed has been planning for a reduction of its balance sheet despite continuing to miss its target, and downward adjustments of their own inflation expectations. If you anticipate lower inflation due to a global slowdown, Fed tolerance of deviating from trend, and a still declining term premium, then low rates without QE makes sense.

 

Maybe the current Fed is doing what Greenspan did when they asked about the second mandate (not price stability) he said he ignored it.

I wouldn't be surprised if Yellen raises before the market expects this year.

I don't think the market is discounting in how independent she can be. I think she wants to exhibit a (the market is not my concern).

The world has already gotten a hint from the SNB that central banks don't always have as much concern for the market as the market thinks, sorry, a bit circular there.

 

Anyway, I think it'll be a great buying opportunity when there is a close to 10% selloff from something the Fed does this year.

[Rabbitisrich]

 

Maybe the current Fed is doing what Greenspan did when they asked about the second mandate (not price stability) he said he ignored it.

I wouldn't be surprised if Yellen raises before the market expects this year.

I don't think the market is discounting in how independent she can be. I think she wants to exhibit a (the market is not my concern).

The world has already gotten a hint from the SNB that central banks don't always have as much concern for the market as the market thinks, sorry, a bit circular there.

 

Anyway, I think it'll be a great buying opportunity when there is a close to 10% selloff from something the Fed does this year.

 

A rate hike in the face of declining inflation and years of missing their own official targets might indicate a reliance on survey measures of inflation expectations, or fears of future market reactions (bond vigilantes). Both are extrapolated from current market and output data, so you could be right that a surprised Yellen might react with ANOTHER wave of stimulus, if the resulting slow down is too severe. However, it is pretty obvious that 2% is not a target. If the "real" target range is lower than market expectations, then we could see a lasting valuation change as Yellen waits out the turbulence.

[Rabbitisrich]

 

RabbitsRich, What exactly do you expect them to do?

 

No well informed ideas. This is just shallow outside passive minority investor ranting. I feel like Office Depot shareholders must have felt watching Staples.

[justinbaka]

You ignore the fact that it was levered more than 2.7x on the downside on previous down days.

 

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.

 

This might be obvious to a lot of people, but why is the warrant declining less than expected as compared to the common (the explanation was a rising put premium in the warrant).. what does this mean? Does this mean that the warrant is relatively more expensive than the common in this regard?

[grasshopper]

I dont want to get all philosophical but I have been investing for nearly 20 years.  In that time, I have seen the Nasdaq dot com bubble, the time of zero government deficits, 9/11 and the bush governments unprecedented debt run up, Hurricane Katrina, Interest rates dropped to low single digits, the housing bubble, the financial crash, oil prices at $10, oil prices at $130, deflation, inflation, interest rates at zero, Gov't deficits skyrocket, Gov't deficits come back down, etc, etc, etc.

 

No one can predict interest rates, inflation, deflation, oil prices, etc., etc., etc. 

 

Things we know: Us economy is improving, Interest rates are really low, EU and China are pouring money on a smouldering fire, oil is relatively low in price, Big Us banks that are well run WFC, and JPM are making record (or close) profits, and Bac may join them in being well run. 

 

 

It's true we can't predict, but even if we can't, we can still create the range of outcomes and consider how likely each one is. I just think considering the situation of the player with the gigantic balance sheet of long term bonds...the scenario with long-term rates going back up is more likely...

 

Of course, that's what I want to think considering I'm holding BAC....

 

and now we might see NEGATIVE yields on 10 year bonds this year because I said that. :o

 

 

 

 

 

[meiroy]

With market volatility + oil, would CCAR rules be changed again?

http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20141023a1.pdf

 

This is part of the "Severely Adverse Scenario":

 

"The scenario also includes a rise in oil prices

(Brent crude) to approximately $110 per barrel."

 

"Despite this decline in real activity, higher oil prices

cause the annualized rate of change in the CPI to

reach 4¼ percent in the near term, before subsequently

falling back."

 

So, they only had adverse scenario which included oil prices going up.

 

*pause for a brief silence here*

 

Would they now follow this same line of thinking and allow higher distribution of profits because oil is lower?

 

Or, would they continue this line of thinking that "something will be different" and assume a massive wave of bad debt due to the lower oil prices (which is of course possible).

[wescobrk]

Gotta love Mr. Market. It was at $18.12 not even 3 weeks ago.

Now it's at $15.26.

I hope it breaks 15.

To quote McDonald's, "I'm loving it."

[mlcglobal]

Series of articles about BAC.

 

http://marketrealist.com/2015/01/bank-americas-commercial-loan-portfolio-diversified/

[karthikpm]

Anyone adding to Warrants ? Is the common a safer bet in case of a recession / deflation? If NIMs do not improve, what's the 5 year outlook for BAC?

[sswan11]

Berkowitz comments in A/R out today:

 

http://www.fairholmefunds.com/reportsmgt/

 

Bank of America (22.3%) has executed its business plan admirably to date. By refocusing on core customer relationships across multiple

platforms (i.e., checking, credit card, mortgage, and small business), the company is positioning itself for long-term profitability. Effective

cross-fertilization of these services will make parallels with best-in-class Wells Fargo more pronounced, and help Bank of America’s stilldepressed

market price to at least reach book value, reflecting the higher values of existing business. The company recently surpassed its

2011 cost-cutting goal of $8 billion per annum, ahead of schedule. Litigation expenses – a major weight on the company in recent years

– have largely dissipated. Heeding lessons learned from the financial crisis, the company prudently disposed of a profitable (at the time)

wholesale mortgage business. Intermediaries might seem like ideal clients, but history shows that they are more adversary than friend.

Investors should not be surprised to see Bank of America continue to shrink no-longer-core activities. However, the company’s balance

sheet is poised for a growing business economy and a rising interest rate environment, with every increase of 100 basis points potentially

boosting revenue by $3.7 billion. Sometimes you must take two steps back in order to go ten steps forward.

When we initiated the Fund’s investments in Fannie Mae (4.5%) and Freddie Mac (3.5%), conventional wisdom

[Viking]

BNN interview with Dick Bove on Jan 15; discusses US bank earnings. Feels the U.S. government is 'nationalizing' the large US banks. He says regulation is causing investors to reduce their expected secular growth rate for banks which is causing the shares to sell off.

 

http://www.bnn.ca/Video/player.aspx?vid=530429

 

http://www.thestreet.com/story/13031145/1/banks-have-been-nationalized--asset-managers-next-analyst-bove.html?puc=yahoo&cm_ven=YAHOO