BAC-WT - Bank of America Warrants

[nkp007]

No Leaks yet about the dividend and buy backs?.

 

 

Countrywide Asks Court to Undo MBIA Ruling:

 

http://www.bloomberg.com/news/2013-03-12/bofa-s-countrywide-asks-appeals-court-to-undo-mbia-ruling.html?cmpid=yhoo

 

Cheers!

 

I heard from a reliable source that Bank of America, pending fed approval, could potentially pay a higher dividend / buy back shares (or both).

 

 

[sampr01]

Thanks NKP. Does anyone have any estimate or what are the expectation by street in regards to buybacks and dividend?. ;D

 

No Leaks yet about the dividend and buy backs?.

 

 

Countrywide Asks Court to Undo MBIA Ruling:

 

http://www.bloomberg.com/news/2013-03-12/bofa-s-countrywide-asks-appeals-court-to-undo-mbia-ruling.html?cmpid=yhoo

 

Cheers!

 

I heard from a reliable source that Bank of America, pending fed approval, could potentially pay a higher dividend / buy back shares (or both).

[nkp007]

Thanks NKP. Does anyone have any estimate or what are the expectation by street in regards to buybacks and dividend?. ;D

 

No Leaks yet about the dividend and buy backs?.

 

 

Countrywide Asks Court to Undo MBIA Ruling:

 

http://www.bloomberg.com/news/2013-03-12/bofa-s-countrywide-asks-appeals-court-to-undo-mbia-ruling.html?cmpid=yhoo

 

Cheers!

 

I heard from a reliable source that Bank of America, pending fed approval, could potentially pay a higher dividend / buy back shares (or both).

 

LOL no problem  ;D

[Parsad]

No Leaks yet about the dividend and buy backs?.

 

 

Countrywide Asks Court to Undo MBIA Ruling:

 

http://www.bloomberg.com/news/2013-03-12/bofa-s-countrywide-asks-appeals-court-to-undo-mbia-ruling.html?cmpid=yhoo

 

Cheers!

 

I'm surprised.  I think payouts may be lower than I expected, otherwise banks would be chomping at the bit to leak information.  Or perhaps because JPM wanted to release earlier, the Fed cracked down on the banks and warned them not to release before they do.  Cheers!

[sampr01]

Hi Sanjeev

 

can you clarify on statement "payouts may be lower than I expected?.  Lower in terms of your expectation or market expectations? and what Market really want from BAC ;D ;).

No Leaks yet about the dividend and buy backs?.

 

 

Countrywide Asks Court to Undo MBIA Ruling:

 

http://www.bloomberg.com/news/2013-03-12/bofa-s-countrywide-asks-appeals-court-to-undo-mbia-ruling.html?cmpid=yhoo

 

Cheers!

 

I'm surprised.  I think payouts may be lower than I expected, otherwise banks would be chomping at the bit to leak information.  Or perhaps because JPM wanted to release earlier, the Fed cracked down on the banks and warned them not to release before they do.  Cheers!

[ERICOPOLY]

The only class A warrants that I didn't sell last week were the remaining taxable ones.

 

Paying 13% annualized for leverage just isn't that great -- recourse or not.

 

I wonder if anyone yet has bought the common and shorted the warrant just to pick up that 13%.

[racemize]

The only class A warrants that I didn't sell last week were the remaining taxable ones.

 

Paying 13% annualized for leverage just isn't that great -- recourse or not.

 

I wonder if anyone yet has bought the common and shorted the warrant just to pick up that 13%.

 

Would you mind explaining that in a little more detail--I haven't quite figured out the cost for leverage model yet.  I've always just compared the break-even price between common and warrants (currently ~$25) and then decided if I thought it would be greater than that price at expiry, so I'm curious as to if/why I shouldn't think of it that way.

[ERICOPOLY]

The only class A warrants that I didn't sell last week were the remaining taxable ones.

 

Paying 13% annualized for leverage just isn't that great -- recourse or not.

 

I wonder if anyone yet has bought the common and shorted the warrant just to pick up that 13%.

 

Would you mind explaining that in a little more detail--I haven't quite figured out the cost for leverage model yet.  I've always just compared the break-even price between common and warrants (currently ~$25) and then decided if I thought it would be greater than that price at expiry, so I'm curious as to if/why I shouldn't think of it that way.

 

It's easy to compute -- just take today's stock price, compound it by 13% for 6 years, and you get that $25 price (break even with the common).

 

Were the leverage to cost less than 13%, the breakeven point would be lower.

 

[Parsad]

Hi Sanjeev

 

can you clarify on statement "payouts may be lower than I expected?.  Lower in terms of your expectation or market expectations? and what Market really want from BAC ;D ;).

No Leaks yet about the dividend and buy backs?.

 

 

Countrywide Asks Court to Undo MBIA Ruling:

 

http://www.bloomberg.com/news/2013-03-12/bofa-s-countrywide-asks-appeals-court-to-undo-mbia-ruling.html?cmpid=yhoo

 

Cheers!

 

I'm surprised.  I think payouts may be lower than I expected, otherwise banks would be chomping at the bit to leak information.  Or perhaps because JPM wanted to release earlier, the Fed cracked down on the banks and warned them not to release before they do.  Cheers!

 

Well, I had a bet that they would pay out $7B in dividends and buybacks, but that was probably too much to hope for.  They could easily pay that just from their 2013 cash flows, as about $4B will be saved in just expenses this year and alot of their legacy issues have been dealt with, so I don't expect any huge increase to their litigation reserves.  They also have about $25B more in capital than they require under Basel III, so that's a pretty good buffer for anything unexpected.  But if Citi asked for just $1.5B in buybacks, I have a hard time believing that BAC will pay out anything more than $3-3.5B...even though they could easily afford to pay $7B out annually going forward.  Cheers!

[bennycx]

Well.. it could be worth it if you use the money "saved" by buying warrants and compound it at a really high rate..

[xazp]

I own and follow C. I believe they are the exception and not the rule. 

 

C has brand-new management and had an embarrassing failure with CCAR last year.  The new management (I think) is deliberately setting expectations low for the first 6 months so he can say he "turned around" the company later this year.  And get a fat bonus.  An example is they didn't draw down any mortgage reserves even though every competitor did (& housing is clearly improving); and this has the impact of them coming far short on Q4 earnings.  [incidentally, I find it very annoying what he is doing, which amounts to playing games to make himself look good later on]. 

 

There have been rumors for months that C only applied for enough buybacks to cover stock-based compensation.  Those rumors have proven true.

 

--

 

I haven't seen any rumors from BAC about capital returns.  I'm still hopeful for $7B+ in returns. 

 

 

 

Well, I had a bet that they would pay out $7B in dividends and buybacks, but that was probably too much to hope for.  They could easily pay that just from their 2013 cash flows, as about $4B will be saved in just expenses this year and alot of their legacy issues have been dealt with, so I don't expect any huge increase to their litigation reserves.  They also have about $25B more in capital than they require under Basel III, so that's a pretty good buffer for anything unexpected.  But if Citi asked for just $1.5B in buybacks, I have a hard time believing that BAC will pay out anything more than $3-3.5B...even though they could easily afford to pay $7B out annually going forward.  Cheers!

[Mephistopheles]

The only class A warrants that I didn't sell last week were the remaining taxable ones.

 

Paying 13% annualized for leverage just isn't that great -- recourse or not.

 

I wonder if anyone yet has bought the common and shorted the warrant just to pick up that 13%.

 

Would you mind explaining that in a little more detail--I haven't quite figured out the cost for leverage model yet.  I've always just compared the break-even price between common and warrants (currently ~$25) and then decided if I thought it would be greater than that price at expiry, so I'm curious as to if/why I shouldn't think of it that way.

 

It's easy to compute -- just take today's stock price, compound it by 13% for 6 years, and you get that $25 price (break even with the common).

 

Were the leverage to cost less than 13%, the breakeven point would be lower.

 

 

But don't you believe that there is a very good chance that BAC will be above $25 in 6 years, given that the current book value is $19 or so? B If BVPS onlly grows by 6%/year, and if the stock trades at 1.0x, then the warrants will be a better deal than the common. Seems reasonable IMO.

[Mephistopheles]

 

The only class A warrants that I didn't sell last week were the remaining taxable ones.

 

Paying 13% annualized for leverage just isn't that great -- recourse or not.

 

I wonder if anyone yet has bought the common and shorted the warrant just to pick up that 13%.

 

Would you mind explaining that in a little more detail--I haven't quite figured out the cost for leverage model yet.  I've always just compared the break-even price between common and warrants (currently ~$25) and then decided if I thought it would be greater than that price at expiry, so I'm curious as to if/why I shouldn't think of it that way.

 

It's easy to compute -- just take today's stock price, compound it by 13% for 6 years, and you get that $25 price (break even with the common).

 

Were the leverage to cost less than 13%, the breakeven point would be lower.

 

 

But don't you believe that there is a very good chance that BAC will be above $25 in 6 years, given that the current book value is $19 or so? If BVPS only grows by 6%/year, and if the stock trades at 1.0x, then the warrants will be a better deal than the common. Seems reasonable IMO.

 

[cemadh]

Sorry to be so dense, but -

Stock is at $12.0x today. Computing at 13% annually for 6 years means the stock is at $25.

The A warrants are at $5.7x for a $13.3 strike. If stock is at $25 in 6 years, warrants will be 25-13.3 or $11.6 which is also roughly 13% annualized.

 

I get that.

However, this calculation ignores dividends. Why? Perhaps because of the assumption that whatever dividends the holder of the stock gets reduces the warrant strike price by the same amount and so the dividends "are a wash". But this is not true. Depending on the timing and the amount of the dividend payouts, the A warrants could outperform the common stock.

 

Yes?

[Shane]

I was a little confused by this as well.

[ERICOPOLY]

Take $12 and instead of buying 1 share of stock, buy 1 warrant.  You have about $6.35 in cash left over.

 

Now buy stock with that cash.  You can buy .529 shares of stock with that.

 

You have leverage of 1.529x in this example..

 

Okay, now instead of buying the warrants, use some other form of financing the leverage to purchase a 1.529x long position in the common.  Take a loan from your parents if you only want a few hundred thousand worth of leverage (sorry, bad Mitt Romney joke).

 

Anyways, whatever form of financing you come up with, purchase a position in the common leveraged 1.529x.

 

And make sure you reinvest all dividends back into the stock (same as the warrants).

 

The lower price at the time and bigger the dividend payouts, the more shares you purchase with your reinvested dividends.  Mechanically, this is exactly what goes on inside the warrants.

 

Now, I guarantee you will do better than the warrants as long as your financing rate is less than 13% annualized.  Maybe your parents  aren't such loan sharks and only charge you 13%.

 

Anyways, the reason why this leverage is so damned expensive is because it's non-recourse.  However, there is other non-recourse leverage available in the options market.

 

Also, notice you it takes 13% annualized rate to grow that $6.35 in cash to $13.30 over six years?

 

 

 

[stahleyp]

eric, thanks for the lesson there. Did you just move the BAC A proceeds to BAC common or do you have a large amount of cash now?

[ERICOPOLY]

eric, thanks for the lesson there. Did you just move the BAC A proceeds to BAC common or do you have a large amount of cash now?

 

I put most of the cash in BAC common stock and some in 2015 calls.  There are the $10 strikes that I purchased for $2.65 when the stock was at $11.15 last week, and I bought some $12 strike 2015 calls today for roughly $2.10. 

 

Incidentally, those $12 strikes are non-recourse that cost 10% annualized for the leverage (higher if there are dividend increases).  So in the first couple of years, that will feel almost the same as with the warrants.  But beyond those two years (like when the stock is up at $17-$20 and beyond), the cost of $12 puts will be laughable.  And I'll defray their laughable cost by writing far out of the money calls.  For example, today the $22 strike calls cost almost the same as the $7 puts.

 

And I might just be out of the stock entirely in 2 years if the price is $20.

 

Will the market still be willing to pay 13% annualized for the cost of leverage when the stock is $20?  It's a fair question -- if not, like if it only is willing to pay 5% for deep-in-the-money leverage, it may be that you don't get much advantage over the common as the stock rises from $12 to $20.

 

Then, when perhaps it only costs 5% for the leverage in the warrant, maybe that's the time I'll move from the call options back to the warrants.  ;D ;D ;D

[hyten1]

man eric every  time you write about the option transaction you make, i have to think about it .... a lot :)

 

so let me get this straight you buy 12 calls today and lots of common when stock went down to 11.15

 

so if the future beyond 2 years (i asume you would have roll over your 12 calls or execerise it etc) you'll take the proceed from selling deep out of the money calls and use this proceed to buy 12 puts

 

this way you have put a upper and lower limit of whatever the deep out of the money call is lets say its $30 and a lower cap with your 12 puts :)

 

you can't lose yet you can gain up to $30 :)

 

am i understanding this right? this obviously onlly apply to common, whatever option you have you'll obviously have to take care of them depending on what happens (roll them over, sell them or exercise them etc).

[ERICOPOLY]

Plus, if for example we get to $17 by Christmas 2013 I should be able to write covered calls for 2015 to recover most if not all of the $2 premium I'm paying today for the $12 calls.

 

Thus, this leverage might not be costing me 10% annualized.  It very well turn up more like 5% annualized cost.  Depends on how soon the stock rises -- if there's a bit more than a year before expiry then I can recover quite a bit of the sunk cost of the premium.

 

It's important to note that when WFC was trading at $10 in early 2009, the premium for calls was very high -- 30% of at-the-money strike.  But later, the premium was a lot lower, 15% or so of at-the-money strike.  30% of $10 is $3, and 15% of $20 is $3.

 

It seems that you can often get back your premium if there is a big run.  Non-recourse leverage that winds up costing you nothing is wonderful.

 

 

 

[ERICOPOLY]

man eric every  time you write about the option transaction you make, i have to think about it .... a lot :)

 

so let me get this straight you buy 12 calls today and lots of common when stock went down to 11.15

 

so if the future beyond 2 years (i asume you would have roll over your 12 calls or execerise it etc) you'll take the proceed from selling deep out of the money calls and use this proceed to buy 12 puts

 

this way you have put a upper and lower limit of whatever the deep out of the money call is lets say its $30 and a lower cap with your 12 puts :)

 

you can't lose yet you can gain up to $30 :)

 

am i understanding this right? this obviously onlly apply to common, whatever option you have you'll obviously have to take care of them depending on what happens (roll them over, sell them or exercise them etc).

 

I'm effectively saying that when the $12 call matures, take delivery of the stock and own the common.  Using margin loan.  Then hedge the margin loan at same $12 strike.  It should be really cheap to do this (buying the put) if the stock is indeed in the $17 - $20 range by 2015.

 

[stahleyp]

Thanks for the insight. Man, I really do wish I was as smart as you. But, hey, knowing you is a great consolation prize!  :)

[hyten1]

eric regarding " I should be able to write covered calls for 2015 to recover most if not all of the $2 premium I'm paying today for the $12 calls."

 

but aren't you risking being put the call? if the stock is around 17, i assume in order to write cover call that have premium of $2 or so the strike price would be awfully close to $17?

 

 

[ERICOPOLY]

eric regarding " I should be able to write covered calls for 2015 to recover most if not all of the $2 premium I'm paying today for the $12 calls."

 

but aren't you risking being put the call? if the stock is around 17, i assume in order to write cover call that have premium of $2 or so the strike price would be awfully close to $17?

 

At the time that I write the call I'll still either be holding the original $12 calls that I purchased today, or I'll have exercised them and will be holding the underlying common.  One offsets the other.

 

At some point a decision will be made that the stock is no longer discounted enough to justify borrowing money at high rates for leverage in order to greedily squeeze another percentage or two.  If the stock were at $20 right this friggin second, would you want to leverage it at 13% annualized rate?  That's what I'm talking about.  Nobody is going to want to.  Thus, the warrants will no longer be commanding a premium that costs 13% annualized for the embedded leverage.

 

People are paying a very dear price for the leverage in the warrants today, but later after the stock has run up... will they still come?

 

Thus, I want the calls instead.

 

[stahleyp]

eric, thanks for the lesson there. Did you just move the BAC A proceeds to BAC common or do you have a large amount of cash now?

 

And I might just be out of the stock entirely in 2 years if the price is $20.

 

 

 

Whenever you decide to do that, please, please let us know!  ;)