BAC-WT - Bank of America Warrants

[alertmeipp]

The market is not doing any valuation right now.

 

I think ppl are getting pissed and just sell and move on.

 

As usual, I am fully invested and all I can do is suck it up at the moment.

 

I'm pretty much with you there--I'm thinking of gathering up some cash reserves as the paychecks come in, but I keep finding things I like!

 

I am in my mid 30 so one or two paycheck no longer has big impact to my book...

[alertmeipp]

 

I've been adding to my BAC-WT stake over the last few months, but it's been pretty painful to watch.

 

Putting money to work in a down market is like that. The econ isn't that bad, if it doesn't not blow up - some of these purchases will turn be golden. If it blows up, it would still be but will definitely be longer time frame.

 

I am getting more woriedy about the ppl at the top of our governments, they seems clueless sometimes.

 

[tombgrt]

 

And not buying BAC now because the $5 support is "broken"? I'd rather not gamble on wether an insanely cheap stock will sell off or not because of certain policies or because my technical chart says so, and just buy the damn thing. Maybe one can wait until he is certain the $3.xx bottom from 2009 will hold. After all, you were right from $15/10/8/6 to $5...

 

 

http://www.zerohedge.com/news/bank-america-drops-501-lowest-march-2009

 

As of minutes ago, BAC stock hit the nearly 3 year low value of $5.01 which immediately set off algorithmic defense programs, because as has been explained previously, should the stock trade under $5.00 during regular hours, instead of the After Hours session, when it hit $4.90 a few weeks ago, it will most likely set off numerous selling programs from plain vanilla funds which despite what pundits claims, have a hard floor of $5.00 (these are the same "pundits" who believe a downgrade of the EuropeAAAn club will have no impact on asset vallue) for held stocks.The result would be unpredictable so it is better to eat losses on algo all bid programs than to find out what would happen when the stock has  $4 handle.

 

Hm. Quite the impact...

I actually wished they were right once. Maybe we'll get lucky later on!

 

 

Btw, BAC warrants actually seem a lot cheaper now than they were before. The A warrants are at $2.03.

 

[ERICOPOLY]

Btw, BAC warrants actually seem a lot cheaper now than they were before. The A warrants are at $2.03.

 

Last summer when the stock was $8 the warrants were $3.62. 

 

Stock is down 38% since then and warrants would be $2.25 if they had declined by an equal percentage.

 

These warrants are weird.  They are supposed to be leverage but they have been trading in almost in equal percentage gains/losses as the common.

 

[txlaw]

Wow, quite amazing to see BAC trading at below $5 today.

 

Just read a blog post about WEB's investment in BofA: http://blogs.wsj.com/deals/2011/12/19/warren-buffett-is-1-5-billion-underwater-on-his-bank-of-america-stock/

 

I argued when the preferred deal was done that it was at a below market rate because WEB believed that the common was worth at least $7.14 per share and probably substantially more than that.  If that is correct, then WEB ought to be buying at these levels, unless he thinks things have changed materially such that the IV of BAC is now substantially below the $7.14 figure.

 

Or I could have just been dead wrong.  It's possible that WEB really was interested only in an asymmetric bet that would be covered no matter what but that would have a lottery ticket-like optionality. 

 

I've been adding to my BAC-WT stake over the last few months, but it's been pretty painful to watch.

 

I would be surprised if he is buying bac common. he got the slug he wanted and the structure he wanted.

 

You might be right. 

 

I'm surprised there are no other deep pockets buying up the common.  I would've expected some of these sovereign wealth funds to put their dollars into BAC.  Maybe they're not because of the way they've been burned in the last couple of years.

[tombgrt]

Btw, BAC warrants actually seem a lot cheaper now than they were before. The A warrants are at $2.03.

 

Last summer when the stock was $8 the warrants were $3.62. 

 

Stock is down 38% since then and warrants would be $2.25 if they had declined by an equal percentage.

 

These warrants are weird.  They are supposed to be leverage but they have been trading in almost in equal percentage gains/losses as the common.

 

Yes, leverage is very limited for the A warrants. Like 20-25% extra on normal upside at best I'd guess.

 

How about the B warrants? A lot more risk but at least there is real leverage. If the stock recovered to $15 in the next two years or something, those warrants are a 7/9-bagger based on discounted historical prices. Strike price is high (I bet Berkowitz would consider it doable) but the company has 7 years to recover and grow. Options probably provide the same upside tho, no view on that.

 

http://www.investorpoint.com/stock/BAC%252EWS%252EB-BANK%20OF%20AMERICA%20Corp.%20WARRANTS/chart/

[ERICOPOLY]

Wow, quite amazing to see BAC trading at below $5 today.

 

Just read a blog post about WEB's investment in BofA: http://blogs.wsj.com/deals/2011/12/19/warren-buffett-is-1-5-billion-underwater-on-his-bank-of-america-stock/

 

I argued when the preferred deal was done that it was at a below market rate because WEB believed that the common was worth at least $7.14 per share and probably substantially more than that.  If that is correct, then WEB ought to be buying at these levels, unless he thinks things have changed materially such that the IV of BAC is now substantially below the $7.14 figure.

 

Or I could have just been dead wrong.  It's possible that WEB really was interested only in an asymmetric bet that would be covered no matter what but that would have a lottery ticket-like optionality. 

 

I've been adding to my BAC-WT stake over the last few months, but it's been pretty painful to watch.

 

I would be surprised if he is buying bac common. he got the slug he wanted and the structure he wanted.

 

You might be right. 

 

I'm surprised there are no other deep pockets buying up the common.  I would've expected some of these sovereign wealth funds to put their dollars into BAC.  Maybe they're not because of the way they've been burned in the last couple of years.

 

I think Korea has been buying BAC.

[hyten1]

eric what makes you think korea has been buying? just curious?

[ERICOPOLY]

Korea Investment Corp has a new position as of 9/30/11

 

http://www.foxbusiness.com/industries/2011/09/22/korea-investment-corp-to-buy-more-bank-america-shares-reports/

 

[Uccmal]

I get gmail alerts for BAC;

 

There is a slew of articles about BAC breaking the "all important" $5 resistance barrier.  Now, I realize some funds may have to sell below $5 per share but this all seems sort of ludicrous.  The investor is truly an irrational beast. 

 

[twacowfca]

I get gmail alerts for BAC;

 

There is a slew of articles about BAC breaking the "all important" $5 resistance barrier.  Now, I realize some funds may have to sell below $5 per share but this all seems sort of ludicrous.  The investor is truly an irrational beast.

 

Look at BAC's chart for the last two days.  The spiky up action and the lack of similar spiky down action means that a major buyer has been supporting the stock above the $5.00 level.  We've started to nibble at the beast on the idea that there may be a pony in there somewhere.  :)

[tombgrt]

I have no idea how you can determine that from a chart. I only see some spiky up action in the last half hour today, for the rest it seems normal. There are probably a lot of days you can find this pattern when a stock is going up?

 

The pony is almost a sure thing if you ask me. But if things turn out better than most expect, we'll get a full-scale petting zoo instead.

[ubuy2wron]

bac is it's own little island. it's decoupled from up moves in in the financials. it goes up less and down more. it's the most hated stock on the planet. yes even more than rimm.

peter  I find myself seldom agreeing with you but you are exactly on target with this comment. The hatred for BAC on zerohedge is palpable, they want it destroyed but then the zero hedge blog is largely constituted by investors who are the exact opposit of the regulars here.

[twacowfca]

I get gmail alerts for BAC;

 

There is a slew of articles about BAC breaking the "all important" $5 resistance barrier.  Now, I realize some funds may have to sell below $5 per share but this all seems sort of ludicrous.  The investor is truly an irrational beast.

 

Look at BAC's chart for the last two days.  The spiky up action and the lack of similar spiky down action means that a major buyer has been supporting the stock above the $5.00 level.  We've started to nibble at the beast on the idea that there may be a pony in there somewhere.  :)

 

What I mean by spiky price action is that frequently the stock price will plateau at a certain price, although not exactly.  When it does this, the fluctuations off the plateau are almost entirely up, rarely down.  I interpret this as meaning that one or more major buyers are taking most of the shares offered at each plateau.  Please note several of these plateaus with spiky up price action recently, as BAC continues to rise off these plateaus. 

 

Today's price action shows less of this pattern, meaning that that buyer(s) support appears less necessary to provide liquidity as the selling pressure near the $5.00 price that is necessary for institutional purchases may have abated.  :)

[leftcoast]

Btw, BAC warrants actually seem a lot cheaper now than they were before. The A warrants are at $2.03.

 

Last summer when the stock was $8 the warrants were $3.62. 

 

Stock is down 38% since then and warrants would be $2.25 if they had declined by an equal percentage.

 

These warrants are weird.  They are supposed to be leverage but they have been trading in almost in equal percentage gains/losses as the common.

 

Strange divergence over the past few days:

http://bigcharts.marketwatch.com/kaavio.Webhost/charts/big.chart?nosettings=1&symb=bacwsa&uf=0&type=2&size=2&sid=4553783&style=320&freq=1&startdata-ipsquote-timestamp=9/19/2011&enddata-ipsquote-timestamp=12/22/2011&rand=927506182&compidx=aaaaa%3A0&comp=bac&ma=0&maval=9&lf=1&lf2=0&lf3=0&height=335&width=579&mocktick=1

[meiroy]

Btw, BAC warrants actually seem a lot cheaper now than they were before. The A warrants are at $2.03.

 

Last summer when the stock was $8 the warrants were $3.62. 

 

Stock is down 38% since then and warrants would be $2.25 if they had declined by an equal percentage.

 

These warrants are weird.  They are supposed to be leverage but they have been trading in almost in equal percentage gains/losses as the common.

 

Strange divergence over the past few days:

http://bigcharts.marketwatch.com/kaavio.Webhost/charts/big.chart?nosettings=1&symb=bacwsa&uf=0&type=2&size=2&sid=4553783&style=320&freq=1&startdata-ipsquote-timestamp=9/19/2011&enddata-ipsquote-timestamp=12/22/2011&rand=927506182&compidx=aaaaa%3A0&comp=bac&ma=0&maval=9&lf=1&lf2=0&lf3=0&height=335&width=579&mocktick=1

 

also with the wfc warrants.

 

[twacowfca]

Btw, BAC warrants actually seem a lot cheaper now than they were before. The A warrants are at $2.03.

 

Last summer when the stock was $8 the warrants were $3.62. 

 

Stock is down 38% since then and warrants would be $2.25 if they had declined by an equal percentage.

 

These warrants are weird.  They are supposed to be leverage but they have been trading in almost in equal percentage gains/losses as the common.

 

Strange divergence over the past few days:

http://bigcharts.marketwatch.com/kaavio.Webhost/charts/big.chart?nosettings=1&symb=bacwsa&uf=0&type=2&size=2&sid=4553783&style=320&freq=1&startdata-ipsquote-timestamp=9/19/2011&enddata-ipsquote-timestamp=12/22/2011&rand=927506182&compidx=aaaaa%3A0&comp=bac&ma=0&maval=9&lf=1&lf2=0&lf3=0&height=335&width=579&mocktick=1

 

also with the wfc warrants.

 

 

It's a common phenomenon. When, a stock tanks the historical volatility and the implied volatility typically increase a lot.

[ERICOPOLY]

The AIG warrants don't suffer from the same thing.  They usually move about 2x the stock movement.

 

[PlanMaestro]

there was a big seller in the bac As on Thursday.

 

despite difference of opinions we are both buying!

[twacowfca]

there was a big seller in the bac As on Thursday.

 

Likely delta hedging.  They are too pricey in relation to the common.  :)

[meiroy]

there was a big seller in the bac As on Thursday.

 

Likely delta hedging.  They are too pricey in relation to the common.  :)

 

Can you set a tax loss by switching from the warrants to the common?

 

[twacowfca]

there was a big seller in the bac As on Thursday.

 

Likely delta hedging.  They are too pricey in relation to the common.  :)

 

Can you set a tax loss by switching from the warrants to the common?

 

That would likely be a wash sale because warrants are considered to be a substantially similar security.

[meiroy]

there was a big seller in the bac As on Thursday.

 

Likely delta hedging.  They are too pricey in relation to the common.  :)

 

Can you set a tax loss by switching from the warrants to the common?

 

the irs says you can if they are not substantially identical. and ask yourself this. is the warrant terms substantially identical to the common terms?

 

 

Following twacowfca's definition I got to this:

 

"Section 1091.-Loss from Wash Sales of Stock or Securities

 

 

 

26 CFR 1.1091-1: Losses from wash sales of stock or securities.

 

 

 

If an individual taxpayer, who is not a dealer in stocks or securities, sells common stock of a corporation at a loss and simultaneously purchases warrants for common stock of the same corporation, the loss is not allowable by reason of section 1091(a) of the Internal Revenue Code of 1954. If the taxpayer sells stock warrants of a corporation at a loss and simultaneously purchases common stock of the same corporation, the loss is allowable unless the relative values and price changes are so similar as to make the warrants fully convertible securities and therefore substantially identical with the shares of common stock.

....

(a) DISALLOWANCE OF LOSS DEDUCTION.

...

Where stock or securities substantially identical to stock or securities sold at a loss are acquired within a specified period, the words "substantially identical" indicate that something less than precise correspondence will suffice to make the transaction a wash sale. See Marie Hanlin et al., Executors v. Commissioner, 108 Fed. (2d) 429. Whether a stock warrant is substantially identical with the stock of the issuing corporation is dependent upon the facts of the particular case. If the warrant may be exercised only upon the payment of a substantial consideration, it may be true that a stock purchase warrant is not substantially identical with the stock of the issuing corporation. But it does not follow that in every instance a warrant could not be substantially identical with the underlying security to which it relates. A warrant may be traded at a price substantially equal to the current value of the underlying common stock and have all the earmarks of a fully convertible security and thus be considered substantially similar to the stock.

..."

 

So the answer is, it depends?

 

Key sentence: "If the warrant may be exercised only upon the payment of a substantial consideration, it may be true that a stock purchase warrant is not substantially identical with the stock of the issuing corporation."

 

The warrants indeed require substantial consideration to be exercised, therefore one might assume from this that the tax loss deduction is allowed.  What is your opinion?

 

 

 

[Kiltacular]

meiroy,

 

I had looked into this issue previously but hadn't found the language you discuss.

 

After reading this, I would say that a very easy case could be made in this instance that give the current prices of the warrants, the common, and, importantly, the conversion price of the warrants, the securities are currently NOT substantially similar and a tax loss could be taken.

 

An alternative scenario that would probably prevent me from feeling this way would be, say, if the common was currently trading at 20 while the strike on the warrants was around 12.  Then, you'd be deep in the money.  Even then, you still quote the key section which might make the argument that they're still different pass muster.

 

Finally, even if you do this -- and it clearly isn't clear you can't -- you'd have to first be auditied before you'd even have to explain your position.  Based on the current prices / strikes, I feel the explanation would be simple.

 

 

[Arden]

Do you by chance know what happens with the WFC or BAC warrants when the company gives out a dividend?

 

Does the dividend hurt the option holder? do they lower the strike price?