BAC-WT - Bank of America Warrants

[Rasputin]

There was at least a household name you could put on the pullback in 2011.  Grexit, or whatever the household word for it was.  A clearly identifiable "event" that was going to lead to systemic failure of European banks who are counter party to BAC.  So that was when BAC hit $5 -- it was when Bass was saying that Greece would go down within a week or two.  Soon after, the ECB acted and BAC lifted off.

 

The funny thing about this current pullback is that there is a separate thread to speculate on what is causing the European banks to go down.  There is no leading theory yet for the front page.  I think that's why I find it unsettling.  The leading theory could easily put the stock at $10.  There isn't much reason for it to be at $12 unless you believe in the risk of systemic banking failure in Europe and possible counter party failure, or large loan losses from recession.

 

This thing is, the stock has already entered the silly season.  What's $10 when you've already gone down to $12?  Another year of higher capital requirements and a somewhat deeper recession? 

 

Oh well.  Market goes up, market goes down.

 

I'm not a macro person but I do read macro news.  These are what I've seen floating around:

 

http://www.wsj.com/articles/investors-shun-bank-stocks-1454546371

 

gave me a flavor why ppl sell bank stocks

 

http://www.cnbc.com/2016/01/08/us-down-10-20-by-year-end-kyle-bass.html

 

kyle bass china's banking system losing $3.5 Trillion (China hard landing could be the equivalent of your grexit)

 

http://www.cnbc.com/2016/02/03/european-banks-near-terrifying-crisis-raoul-pal.html

 

http://www.forbes.com/sites/petertchir/2016/02/06/what-is-happening-to-european-banks/#100f639b5b2f

 

or this could be your grexit.  European banking crisis 2016 :)

 

I prefer to buy it at $10 vs $12.  $9 vs $10. I have orders all the way to $9. 

 

I personally feel much better buying bac today vs 2011.  Much less risk especially litigation and r&w, much higher capital, much higher liquidity, much lower operating costs.  Love it. 

 

 

 

 

 

 

[Rasputin]

For what it's worth, I have a buddy who works in the capital markets for one of these big banks (BAC, WFC, JPM, not going to say who) and they have received notice that they're getting hit with defaults on credit they didn't see as "direct" energy exposure in markets they least expected.  As a result they're heavily reviewing a lot of these loans and shutting down new lending on anything that might have any kind of energy exposure even in diversified economies.  It's not that great out there and I'd expect further hits to what they've already hinted as "energy" exposure.

 

I like Jamie Dimon's quote on this :

 

http://www.cnbc.com/2016/01/20/cnbc-transcript-jpmorgan-chase-chairman-ceo-jamie-dimon-live-from-davos-on-cnbcs-squawk-on-the-street-today.html

 

THE WAY WE LOOK AT RISK IS EVERYTHING WE DO, NO MATTER WHAT HAPPENS, WE'RE OKAY. WE COULD BE DEAD WRONG, AND WE'RE OKAY. AND WE LOOK AT THAT ON SINGLE NAME CREDITS, COUNTRY WIDE CREDITS, TRADING POSITIONS, ETC. WHILE TRYING TO SERVE THE CLIENT. SO LIKE IN THE OIL PATCH, I WANT TO GO TO HOUSTON IN A YEAR OR TWO, AND WALK IN A ROOM AND TALK TO SOME OF THE OIL FOLKS AND HAVE THEM SAY TO ME, JAMIE – YOU KNOW, INSTEAD OF SAYING YOU GUYS CUT AND RAN WHEN THINGS GOT TOUGH, YOU DIDN'T HELP US, YOU DIDN'T DO ANYTHING – INSTEAD SAY YOU GUYS WERE HERE IN GOOD TIMES AND BAD TIMES. WE ARE THERE IN GOOD TIMES AND BAD TIMES FOR OUR CLIENTS. AND THAT INCLUDES COUNTRIES, SOVERIGN WEALTH FUNDS, CENTRAL BANKS. YOU KNOW, AS OPPOSED TO – AND IF WE LOSE A LITTLE EXTRA MONEY DOING THAT, SO BE IT. THAT DOES NOT WORRY ME AT ALL. WE'RE GOING TO BE THERE IN GOOD TIMES AND BAD TIMES. AND WE'VE BEEN IN – I THINK WE'RE GOING TO HAVE OUR 75th ANNIVERSARY IN HOUSTON COMING UP THAT I'M GOING TO."

 

The large US banks will lose more money in this environment, but they will be okay. 

 

[Picasso]

I'm just hearing that it's affecting markets that one wouldn't expect it to directly or even indirectly impact.  I don't disagree that they won't be okay or generate okay profits, it's just going to be difficult and you'll likely see expectations continue to move lower.  Credit standards are going to continue to tighten (look at what's happening to guys like LC) as it appears we're going into the other part of the banking cycle.

 

Rasputin, you do better work on stocks like BAC than most so I don't doubt you are comfortable with the risk.  The rest of the market isn't going to be since BAC had their chance to generate full cycle ROE's and they couldn't do it.  A long-term shareholder of BAC wants the price to go down but I don't get the attraction to the LEAP's.  That's setting time against your side, time you probably don't have in this environment.  I'd just average down into the common and know you're going to have to deal with some pain which might last a little longer than most on here anticipate.

[CorpRaider]

Seems to be some chatter around DB problems; it is down ~10%  more today.  CoCo's down ~ 35% YTD?

[racemize]

So, I just listened to that Raoul Pal video, and read the quote in a related article (probably quoting from the same thing).  I get the strong impression that he has no clue what is actually going on with the banks.  All he's saying is "holy shit, look how they have gone down--they only go down when things are really bad, and it might be like 2009, and Citi almost went bankrupt in 2009, so probably it's going to go bankrupt this time".  All his references are to "long term charts".  There appears to be no substance at all to his analysis.  Maybe he actually has some, but he certainly doesn't present any evidence in the video.

[tylerdurden]

I'm just hearing that it's affecting markets that one wouldn't expect it to directly or even indirectly impact.  I don't disagree that they won't be okay or generate okay profits, it's just going to be difficult and you'll likely see expectations continue to move lower.  Credit standards are going to continue to tighten (look at what's happening to guys like LC) as it appears we're going into the other part of the banking cycle.

 

Rasputin, you do better work on stocks like BAC than most so I don't doubt you are comfortable with the risk.  The rest of the market isn't going to be since BAC had their chance to generate full cycle ROE's and they couldn't do it.  A long-term shareholder of BAC wants the price to go down but I don't get the attraction to the LEAP's.  That's setting time against your side, time you probably don't have in this environment.  I'd just average down into the common and know you're going to have to deal with some pain which might last a little longer than most on here anticipate.

 

Can you be more specific about the extent of the banks exposure spreading over to other areas? What % of losses we are talking about here? Anectodal feedback is always difficult I think. It all depends on whether we can generalize the info you receive from your data source or not.

[Viking]

I think part of what is going on is the market is continuing to throw a tantrum to get the FED to back off on interest rate increases. It is interesting to listen to Carney's (Bank of England) recent speech where he is sounding very pessimistic and then compare that to the recent release from the Fed... Simply amazing how different they assess the current situation and the risks.

 

At some point the FED will back off; they can't be totally clueless. Yellen's commentary on Wed/Th will be key to the direction of financial markets for the next month or so. If she does not change her tune we likely will see further weakness. If she gets more dovish then we could see a nice little rally. All month stocks have not been trading on fundamentals but rather on expectations the macro environment and central bank actions.

[Picasso]

I'm just hearing that it's affecting markets that one wouldn't expect it to directly or even indirectly impact.  I don't disagree that they won't be okay or generate okay profits, it's just going to be difficult and you'll likely see expectations continue to move lower.  Credit standards are going to continue to tighten (look at what's happening to guys like LC) as it appears we're going into the other part of the banking cycle.

 

Rasputin, you do better work on stocks like BAC than most so I don't doubt you are comfortable with the risk.  The rest of the market isn't going to be since BAC had their chance to generate full cycle ROE's and they couldn't do it.  A long-term shareholder of BAC wants the price to go down but I don't get the attraction to the LEAP's.  That's setting time against your side, time you probably don't have in this environment.  I'd just average down into the common and know you're going to have to deal with some pain which might last a little longer than most on here anticipate.

 

Can you be more specific about the extent of the banks exposure spreading over to other areas? What % of losses we are talking about here? Anectodal feedback is always difficult I think. It all depends on whether we can generalize the info you receive from your data source or not.

 

I would have no idea on the percentages and don't want to get too specific.  It's just starting to spook this particular bank because it's not as simple as labeling what's energy and what isn't.  Let's say a commercial building has 30% exposure to some energy related tenants in a solid city like Denver.  That loan isn't going to get done anymore.  It's a double edged sword because when a BAC or a WFC customer needs to rollover debt, what are they supposed to do?  Everyone has a hawk eye on these non-performing asset pools and they're considered toxic right now. 

 

You don't have to read into it too much other than there's some real credit issues going on right now.  How it affects the earnings power of BAC versus others, who knows. 

[tylerdurden]

I'm just hearing that it's affecting markets that one wouldn't expect it to directly or even indirectly impact.  I don't disagree that they won't be okay or generate okay profits, it's just going to be difficult and you'll likely see expectations continue to move lower.  Credit standards are going to continue to tighten (look at what's happening to guys like LC) as it appears we're going into the other part of the banking cycle.

 

Rasputin, you do better work on stocks like BAC than most so I don't doubt you are comfortable with the risk.  The rest of the market isn't going to be since BAC had their chance to generate full cycle ROE's and they couldn't do it.  A long-term shareholder of BAC wants the price to go down but I don't get the attraction to the LEAP's.  That's setting time against your side, time you probably don't have in this environment.  I'd just average down into the common and know you're going to have to deal with some pain which might last a little longer than most on here anticipate.

 

Can you be more specific about the extent of the banks exposure spreading over to other areas? What % of losses we are talking about here? Anectodal feedback is always difficult I think. It all depends on whether we can generalize the info you receive from your data source or not.

 

I would have no idea on the percentages and don't want to get too specific.  It's just starting to spook this particular bank because it's not as simple as labeling what's energy and what isn't.  Let's say a commercial building has 30% exposure to some energy related tenants in a solid city like Denver.  That loan isn't going to get done anymore.  It's a double edged sword because when a BAC or a WFC customer needs to rollover debt, what are they supposed to do?  Everyone has a hawk eye on these non-performing asset pools and they're considered toxic right now. 

 

You don't have to read into it too much other than there's some real credit issues going on right now.  How it affects the earnings power of BAC versus others, who knows.

 

Thanks. For sure, energy will have direct and indirect impacts on banks but will all those impacts justify this drop in shares? I guess we'll have to wait at least a couple of quarters to find out. I hope we'll have all these potential bankruptcies etc soon in energy so banks can show they cleaned most of the problems otherwise this will continue depressing the share price for long time. Another thoery I heard today is the oil rich countries are selling bank shares from their investment funds so we have this particular meltdown in bank shares.

[Jurgis]

So, I just listened to that Raoul Pal video, and read the quote in a related article (probably quoting from the same thing).  I get the strong impression that he has no clue what is actually going on with the banks.  All he's saying is "holy shit, look how they have gone down--they only go down when things are really bad, and it might be like 2009, and Citi almost went bankrupt in 2009, so probably it's going to go bankrupt this time".  All his references are to "long term charts".  There appears to be no substance at all to his analysis.  Maybe he actually has some, but he certainly doesn't present any evidence in the video.

 

I got the same impression.

[orthopa]

Im mostly in warrants so the market/fed/economy etc has three years to get its act together and get the price per share above my breaken on the warrants of around ~16 on the common. When I bought these thinds 4-5 year ago I never imagined a 12 handle share price with 3 years to expiration. 

 

Shows how reliable long term forcasting and estimates are.  ::)

[Rasputin]

I'm just hearing that it's affecting markets that one wouldn't expect it to directly or even indirectly impact.  I don't disagree that they won't be okay or generate okay profits, it's just going to be difficult and you'll likely see expectations continue to move lower.  Credit standards are going to continue to tighten (look at what's happening to guys like LC) as it appears we're going into the other part of the banking cycle.

 

Rasputin, you do better work on stocks like BAC than most so I don't doubt you are comfortable with the risk.  The rest of the market isn't going to be since BAC had their chance to generate full cycle ROE's and they couldn't do it.  A long-term shareholder of BAC wants the price to go down but I don't get the attraction to the LEAP's.  That's setting time against your side, time you probably don't have in this environment.  I'd just average down into the common and know you're going to have to deal with some pain which might last a little longer than most on here anticipate.

 

Picasso,

 

I expect the pain to last about 9 quarters :)  Those fine people at the fed chose 9 quarter stress period for a reason (j/k, it's remnant of the first stress test in 2009 called SCAP)

 

http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20090424a1.pdf

 

page 3 talks about time horizon

 

I am lucky that this downturn occurs in 2016.  My warrants/stock price may recover by Q2 2018 (9 quarter stress period beginning Q1 2016:) just enough time to exercise them before expiration :)   

 

2015 stress test severely adverse scenario had GDP going down 2.8%, 4.7%, 2.4%, 1.7% (for 4 quarters), flat line, then growing 2.4%, 2.5%, 4.4%, 4.3%.  It also had 10 year T yield at 0.9%, 1%, 1.2%, 1.3%, 1.5%, 1.5%, 1.6%, 1.8%, 1.9%.  Dow Jones Total Stock Market Index went down to 17134, 12499, 10190, 8771, 8606, 9087, 9607, 10481, 11521. 

 

In that scenario BAC's projected loan losses over the 9 quarter stress period was

$46 B.  Projected provisions was $49 B.  Trading and counterparty losses assuming failure of the largest counterparty was $18 B.  Other losses $4.1 B.  Realized AFS losses $0.9 B.  Total losses $72 B (use provisions number).  BAC's projected PPNR over the 9 quarter stress period was $34 B.  So pre-tax losses over the 9 quarter stress period was $38 B.

 

Since BAC still has DTA, let's assume pre-tax losses is equal to after-tax losses. 

 

BAC CET1 fully phased in was at $154 B 12/31/2015.  With $38 B after-tax losses, CET1 would be roughly $116 B or $10.5 per share by the end of the 9 quarter stress period

 

Right now the market cap is roughly $135 B or $19 B discount to BAC CET1.  If we say the right price for BAC is 1 times CET1, the market is already assuming half of the severely adverse scenario losses. 

 

At end of business today, Dow Jones total stock market index was still 18922, 10 yr T yield was 1.7%, no large counter-party has failed yet. 

 

[Picasso]

See that logic makes sense to me.  But nine quarters is an eternity for the rest of the market and there's probably a good chance it continues to over penalize the stock.  I know things can flip on a dime, it just looks like dead money for anyone thinking this will turnaround anytime soon.  You really have to take a long-term view here.  If they ever start generating better ROE's then you'll be glad you did anyway.

[ni-co]

So, I just listened to that Raoul Pal video, and read the quote in a related article (probably quoting from the same thing).  I get the strong impression that he has no clue what is actually going on with the banks.  All he's saying is "holy shit, look how they have gone down--they only go down when things are really bad, and it might be like 2009, and Citi almost went bankrupt in 2009, so probably it's going to go bankrupt this time".  All his references are to "long term charts".  There appears to be no substance at all to his analysis.  Maybe he actually has some, but he certainly doesn't present any evidence in the video.

 

I got the same impression.

 

Yes. Because he explicitly said that he has no (clear) idea – only that it has to do with negative rates and European banks not being able to take it (here are some ideas what could be the issues: http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/european-bank-crisis/). I know this is hard to fathom for value investors but with banks, it actually matters in its own right when their stocks and bonds are making 20 year lows. It becomes a reflexive process and the trigger doesn't really matter once it starts going. Gundlach e.g. understands this and made the same point. Equity markets are closing for the European banks – and this is enough for people panicking, thereby ensuring that markets remain closed.

 

How does it affect US banks? Counter-party risk, which Raoul Pal mentioned ("swap and derivatives markets"), would also be no. 1 on my list. It can't be good for the rest of the banking world that DB has the world's largest derivative book (much of it completely obscure OTC stuff) and is a bit short on the equity side. Who are the counter-parties to those gigantic DB positions? I know that most positions are netted-off but, as I mentioned in another thread, this only matters until a counter-party (e.g. DB…) is failing. This, of course, can also become self-fullfilling like the LTCM example clearly shows.

 

No. 2 on my list is disinflation/deflation (resulting from a global economic slowdown and a secular deleveraging) leading to waning NIM – the very reason I sold my large BAC position one year ago.

[CorpRaider]

See that logic makes sense to me.  But nine quarters is an eternity for the rest of the market and there's probably a good chance it continues to over penalize the stock.  I know things can flip on a dime, it just looks like dead money for anyone thinking this will turnaround anytime soon.  You really have to take a long-term view here.  If they ever start generating better ROE's then you'll be glad you did anyway.

 

Certainly has been dead money for a long period to date...

[dcollon]

Attached is a quick snapshot of the CDS market for some of the banks.

CDS_Snapshot.docx

[ERICOPOLY]

At this rate, we going to hit the $11 handle.

 

Sure, over the next two days.  But how about after that?

 

Two days later:  $11.91 after hours...  do I hear the $10 handle coming?

[Rasputin]

yes, would love to see $10 :)  I hope pain lasts at least all of 2016. 

[meiroy]

Countdown to another QE or a meltdown?

[ERICOPOLY]

yes, would love to see $10 :)  I hope pain lasts at least all of 2016.

 

Down 1/3 of the way to $10 in the few hours that I slept. 

 

$11.59.  Hmm...  maybe we're being too optimistic.  $9?

 

EDIT:  Already at $11.32 in the opening minutes!

[wescobrk]

My 401k is only 30% in cash. I prefer to have at least 50% (my employer doesn't offer any shorting of any kind).

I need to switch jobs (for lots of reasons) but this will allow me to use some cash after I roll to an ira to buy at some nice prices.

At this rate, we'll be down another 10% by late this month.

[tede02]

You could take a loan out from your 401k (if your plan allows) and invest the money in a taxable account.  The max is $50k.  You pay yourself all the interest.  Don't do it if you're planning to switch jobs however. 

[dutchman]

Eric, do you still own any?

[TheAiGuy]

I bought here (and 3 days ago). The common looks cheep here -- I think the warrants are overpriced relative to the common, though.

[ERICOPOLY]

Eric, do you still own any?

 

Tons, but all hedged at $15 strike.

 

The short story is that I picked the strategy of going on margin with married puts instead of owning the warrants.  That was back in 2013 when BAC was $12 and the warrants were $5.65.  Once the stock rose, I rolled to the higher strike $15 puts.

 

So, I don't think I've lost any money since then, but neither have I made any (excepting some income from selling out of the money calls).  Sure felt good for a while though.

 

My strategy avoided the massive losses incurred by the warrants during this time frame -- as I said beforehand, the options had the flexibility to roll to higher strike puts.  The warrants lacked that key feature.  That's why I'm break-even instead of down 40% in the warrants.