BAC-WT - Bank of America Warrants

[fareastwarriors]

http://www.bloomberg.com/news/2013-04-18/montag-s-bofa-trading-unit-trails-peers-as-revenue-falls.html

 

 

BofA’s Merrill Unit Sputters as Moynihan Reduces Risk

 

 

 

Fixed-income, currency and commodity revenue reported yesterday by the Charlotte, North Carolina-based lender tumbled 20 percent to $3.3 billion from a year earlier while total trading revenue fell 13 percent to $4.5 billion in the quarter, missing the $5 billion estimate of David Trone, an analyst with JMP Securities LLC. Among the five biggest U.S. investment banks, only Morgan Stanley (MS)’s fixed-income sales fell more.

 

 

[ERICOPOLY]

I hate to say it but I'm rooting for the stock to keep dropping.  It's nice to be 100% hedged.

[buylowersellhigh]

I hate to say it but I'm rooting for the stock to keep dropping.  It's nice to be 100% hedged.

 

Is that b/c you hope to take off the hedge and buy some BAC common/Leaps eventually?

[ERICOPOLY]

I hate to say it but I'm rooting for the stock to keep dropping.  It's nice to be 100% hedged.

 

Is that b/c you hope to take off the hedge and buy some BAC common/Leaps eventually?

 

I hope so.

 

 

 

[Uccmal]

I agree dimon said he didn't find buying stock aggressively above tbv makes sense either.

I think 48 cents annual dividend next year .3 of 1.60 roughly earnings power) and they could still easily buyback buffet's 5.5 billion roughly (I think there is a 10% buyback premium) and maybe 5 billion stock buyback.

 

That gives a little above 4% dividend yield at today's stock price.

 

Maybe 60-70cents dividend in 2015.

 

Cardboard pointed this out and he is absolutley correct.

 

How many times can I say "i hate stock buybacks, I hate stock buybacks....".  Everyone rants on about how tax efficient they are.  But when your turning around and diluting them back out they are not so efficient after all.  There are a handful of examples of buybacks done well.  A handful, and most of them are in the book Ceo Outliers, that I just read.  Out of thousands/millions of companies... A handful. 

 

Increasing the dividend by that 5 billion would have been 0.47/48 cents per share.  That would have given the stock price legs.  We would be headed to $15 now.  It also keeps management disciplined.  Buybacks are useless, useless, useless.

 

I dont mind them retiring debt.  IMHO, the 10 B should go entirely into that. 

 

If I have any complaint at this time, it is that they went to soft on the CCAR request.  Maybe a bolder CEO is needed. 

[Cardboard]

But, then you would be unhedged and even more levered into BAC. Right?

 

By the way, I am not sure I follow your thinking to jump into Fairfax at these prices. I have had my experience over the last few weeks with "related" hedges such as SPY puts. Let me tell you, they work like shit! When you have stocks that drop 3 to 5% daily and the S&P only goes down 0.5 to 1.5%, you really eat some crow. That is why I believe that Fairfax 100% stock hedge policy using index swaps is not serving them as well as some here may think. Just look at SD over the last few days to see what I mean.

 

So if they make big money during a downturn, it can only be on these CPI related derivatives or mega deflation type instruments. Very far from a certainty. The rest will be pretty static considering some treasury gains and hedges ineffectiveness. 

 

Cardboard

[Cardboard]

You are quite correct Uccmal to have your doubts about buybacks. They only seem to work when the CEO holds so much stock that he gets the impact of dilution.

 

Brian Moynihan doesn't. On Charlie Rose, he mentioned that his job was to buyback all these shares that were issued during the financial crisis. I almost fell off my chair laughing... This is just months after he diluted the share count by something like 7% by offering a sweet deal to Uncle Warren and saying plainly during the same interview that he did not need the capital. And now, some are also discovering how much on-going dilution they are applying each year to compensate managers and the board.

 

Another reason why buybacks don't work out well is because they are small and are used exactly for that purpose or to cancel out the effect of issuing shares to insiders. It is then sold to shareholders as a great use of capital, but in effect what they are doing is removing any limitation on compensation. Buyback $5 billion worth of shares and increase pay for everyone by that amount! Everyone wins right? 

 

While a dividend goes into the shareholder's pocket to do as he or she pleases and there is no game being played. It has to be paid, it has to be budgeted. It establishes a clear line of authority between the company and the real boss or the shareholders. IMO, it is well worth paying the 25% max tax rate upon receiving them to get this kind of attention and discipline from your managers.

 

Cardboard

[wescobrk]

 

Re: BAC-WT - Bank of America Warrants

« Reply #3552 on: Today at 01:02:37 PM »

Quote

I hate to say it but I'm rooting for the stock to keep dropping.  It's nice to be 100% hedged."

 

Good luck. If the Fed expands qe we could see a 5-10% move to the upside in one day.

 

 

http://www.bloomberg.com/news/2013-04-18/three-fed-presidents-say-disinflation-may-prompt-easing.html

[ERICOPOLY]

But, then you would be unhedged and even more levered into BAC. Right?

 

Once I saw BAC plunge after the earnings I sold the FFH in my RothIRA.  So the RothIRA is actually 100% in cash right now. 

 

So I have flexibility.

 

 

[stahleyp]

Eric, at what price do you think you'll buy more BAC or take off the hedges?

[Uccmal]

You are quite correct Uccmal to have your doubts about buybacks. They only seem to work when the CEO holds so much stock that he gets the impact of dilution.

 

Brian Moynihan doesn't. On Charlie Rose, he mentioned that his job was to buyback all these shares that were issued during the financial crisis. I almost fell off my chair laughing... This is just months after he diluted the share count by something like 7% by offering a sweet deal to Uncle Warren and saying plainly during the same interview that he did not need the capital. And now, some are also discovering how much on-going dilution they are applying each year to compensate managers and the board.

 

Another reason why buybacks don't work out well is because they are small and are used exactly for that purpose or to cancel out the effect of issuing shares to insiders. It is then sold to shareholders as a great use of capital, but in effect what they are doing is removing any limitation on compensation. Buyback $5 billion worth of shares and increase pay for everyone by that amount! Everyone wins right? 

 

While a dividend goes into the shareholder's pocket to do as he or she pleases and there is no game being played. It has to be paid, it has to be budgeted. It establishes a clear line of authority between the company and the real boss or the shareholders. IMO, it is well worth paying the 25% max tax rate upon receiving them to get this kind of attention and discipline from your managers.

 

Cardboard

 

 

 

Was that The Outsiders by Thorndike?

 

That is correct. 

 

The rhetoric around buying back your own stock is making me nauseous.  Of all the companies I have ever held, or read the reports for, which is definitely in the hundreds, only Seaspan has ever retired a meaningful number of shares.  I cant think of another outside of the ones in that book. 

 

Since it is relevant to the BAc thesis does anyone have other good examples of recent significant buybacks?

[enoch01]

You are quite correct Uccmal to have your doubts about buybacks. They only seem to work when the CEO holds so much stock that he gets the impact of dilution.

 

Brian Moynihan doesn't. On Charlie Rose, he mentioned that his job was to buyback all these shares that were issued during the financial crisis. I almost fell off my chair laughing... This is just months after he diluted the share count by something like 7% by offering a sweet deal to Uncle Warren and saying plainly during the same interview that he did not need the capital. And now, some are also discovering how much on-going dilution they are applying each year to compensate managers and the board.

 

Another reason why buybacks don't work out well is because they are small and are used exactly for that purpose or to cancel out the effect of issuing shares to insiders. It is then sold to shareholders as a great use of capital, but in effect what they are doing is removing any limitation on compensation. Buyback $5 billion worth of shares and increase pay for everyone by that amount! Everyone wins right? 

 

While a dividend goes into the shareholder's pocket to do as he or she pleases and there is no game being played. It has to be paid, it has to be budgeted. It establishes a clear line of authority between the company and the real boss or the shareholders. IMO, it is well worth paying the 25% max tax rate upon receiving them to get this kind of attention and discipline from your managers.

 

Cardboard

 

 

 

Was that The Outsiders by Thorndike?

 

That is correct. 

 

The rhetoric around buying back your own stock is making me nauseous.  Of all the companies I have ever held, or read the reports for, which is definitely in the hundreds, only Seaspan has ever retired a meaningful number of shares.  I cant think of another outside of the ones in that book. 

 

Since it is relevant to the BAc thesis does anyone have other good examples of recent significant buybacks?

 

DirecTV

[Guest wellmont]

 

The rhetoric around buying back your own stock is making me nauseous.  Of all the companies I have ever held, or read the reports for, which is definitely in the hundreds, only Seaspan has ever retired a meaningful number of shares.  I cant think of another outside of the ones in that book. 

 

Since it is relevant to the BAc thesis does anyone have other good examples of recent significant buybacks?

 

wtm ibm ptp twc

 

but just do a google search of dutch tender offer. you will see numerous companies just in the last year that have dramatically lowered their share count. for example: Healthsouth, Silgan, Forrester, elan, aol

 

it's quite common for companies to dramatically lower the share count.

[ERICOPOLY]

Eric, at what price do you think you'll buy more BAC or take off the hedges?

 

I haven't decided, and I might sell volatility on something other than BAC.

 

[Uccmal]

 

The rhetoric around buying back your own stock is making me nauseous.  Of all the companies I have ever held, or read the reports for, which is definitely in the hundreds, only Seaspan has ever retired a meaningful number of shares.  I cant think of another outside of the ones in that book. 

 

Since it is relevant to the BAc thesis does anyone have other good examples of recent significant buybacks?

 

wtm ibm ptp twc

 

but just do a google search of dutch tender offer. you will see numerous companies just in the last year that have dramatically lowered their share count. for example: Healthsouth, Silgan, Forrester, elan, aol

 

it's quite common for companies to dramatically lower the share count.

 

I stand partly corrected.  However, when I ran a search there were very few companies - all of the ones you listed came up but not a whole lot more.  In the universe of companies very few meaningfully reduce their count.  Too often, enough shares are bought back to dampen the issuance of new shares, but not actually reduce the share count -'that is my experience from reading hundreds of balance sheets - maybe too much bottom feeding on my part.  I fear this is what BAC will do at the shareholders expense.  Management will need to show me otherwise. 

[Liberty]

I fear this is what BAC will do at the shareholders expense.  Management will need to show me otherwise.

 

Do you think that paying a dividend instead of doing buybacks reduces the amount of shares issued for compensation?

[Uccmal]

I fear this is what BAC will do at the shareholders expense.  Management will need to show me otherwise.

 

Do you think that paying a dividend instead of doing buybacks reduces the amount of shares issued for compensation?

 

No idea.  Sure as hell removes the BS publicity from the equation though. 

 

Companies that pay and regularly increase their dividends are much more discplined and have better total returns.  This has been researched - I just dont have a link for you.  If it comes back to me I will post.  If BAC has a Whale Event those buybacks will go out the window.

[ERICOPOLY]

IMO, it is well worth paying the 25% max tax rate upon receiving them to get this kind of attention and discipline from your managers.

 

The top tax rate on dividends is more than 35% in California.  The tax on dividends comes on top of the dilution.

 

The tax cost would be much larger than the dilution cost.

 

[rjstc]

I agree dimon said he didn't find buying stock aggressively above tbv makes sense either.

I think 48 cents annual dividend next year .3 of 1.60 roughly earnings power) and they could still easily buyback buffet's 5.5 billion roughly (I think there is a 10% buyback premium) and maybe 5 billion stock buyback.

 

That gives a little above 4% dividend yield at today's stock price.

 

Maybe 60-70cents dividend in 2015.

 

Cardboard pointed this out and he is absolutley correct.

 

How many times can I say "i hate stock buybacks, I hate stock buybacks....".  Everyone rants on about how tax efficient they are.  But when your turning around and diluting them back out they are not so efficient after all.  There are a handful of examples of buybacks done well.  A handful, and most of them are in the book Ceo Outliers, that I just read.  Out of thousands/millions of companies... A handful. 

 

Increasing the dividend by that 5 billion would have been 0.47/48 cents per share.  That would have given the stock price legs.  We would be headed to $15 now.  It also keeps management disciplined.  Buybacks are useless, useless, useless.

 

I dont mind them retiring debt.  IMHO, the 10 B should go entirely into that. 

 

If I have any complaint at this time, it is that they went to soft on the CCAR request.  Maybe a bolder CEO is needed.

 

Uccmal was that book the Outsiders by Thorndyke?

[ERICOPOLY]

The stock compensation is expensed so it hurts Moynihan's chances of hitting the ROA target in the same manner as cash compensation.  There is really no incentive there to pay with stock vs cash.  I mean, he still has to watch the expense levels either way.

 

The only annoying thing is that the stock might have a lot of upside left.  A few years from now the stock awards won't matter as when the stock is fully valued there won't be any negative valuation pain from issuing stock one year only to buy it back the next.  So this isn't a perpetual problem.

 

[mevsemt]

Other companies that have benefited from buybacks: azo, an, gps, tjx, aap, pm

 

Those are just off the top of my head (notice 3 of them are current/past ESL holdings).  Personally, I look for "intelligent" buybacks as a sign of smart management.  For instance, in 2012 stra suspended its dividend and for most of the year stopped buying back stock.  Then, in November and December, rather than reinstate their dividend, they bought back almost 5% of their shares in those 2 months alone.  Impressive.

 

Mevsemt.blogspot.com

 

 

[Uccmal]

The stock compensation is expensed so it hurts Moynihan's chances of hitting the ROA target in the same manner as cash compensation.  There is really no incentive there to pay with stock vs cash.  I mean, he still has to watch the expense levels either way.

 

The only annoying thing is that the stock might have a lot of upside left.  A few years from now the stock awards won't matter as when the stock is fully valued there won't be any negative valuation pain from issuing stock one year only to buy it back the next.  So this isn't a perpetual problem.

 

 

At the moment management has decided to pay themselves, but not us, the shareholders.  And they justify this by turning around and announcing buybacks at a level which is barely better than a wash for shareholdes.  Enough said.

 

Thorndyke - Outsiders - Eight Ceos.....  Book is okay.  Explains what most of us already know.  The examples are interesting. 

[Uccmal]

Other companies that have benefited from buybacks: azo, an, gps, tjx, aap, pm

 

Those are just off the top of my head (notice 3 of them are current/past ESL holdings).  Personally, I look for "intelligent" buybacks as a sign of smart management.  For instance, in 2012 stra suspended its dividend and for most of the year stopped buying back stock.  Then, in November and December, rather than reinstate their dividend, they bought back almost 5% of their shares in those 2 months alone.  Impressive.

 

Mevsemt.blogspot.com

 

 

 

Cant argue with that.  When I said above that I hate buyacks, I meant the vast majority that are done poorly.  BAC announcing that they were going to do only 5 billion sent my alarm bells up as to "how is this going to make a difference". 

[MrB]

Other companies that have benefited from buybacks: azo, an, gps, tjx, aap, pm

 

Those are just off the top of my head (notice 3 of them are current/past ESL holdings).  Personally, I look for "intelligent" buybacks as a sign of smart management.  For instance, in 2012 stra suspended its dividend and for most of the year stopped buying back stock.  Then, in November and December, rather than reinstate their dividend, they bought back almost 5% of their shares in those 2 months alone.  Impressive.

 

Mevsemt.blogspot.com

 

 

 

Cant argue with that.  When I said above that I hate buyacks, I meant the vast majority that are done poorly.  BAC announcing that they were going to do only 5 billion sent my alarm bells up as to "how is this going to make a difference".

 

Agree generally.

Another example of the exception...AIG

[Cardboard]

I think that Uccmal mentioned most companies, so BAC with their 4% buyback should be lumped with the vast majority of companies that have on-going buybacks for 5 or 10% of their shares which equates to about no buyback and no value creation.

 

Some may continue posting about exceptions, but that is what they are. AZO is a great one along with AIG. It just shows two examples of great leaders.

 

Regarding options equating cash compensation expense this is untrue. They play with Black Scholes, then there are tax differences, then some companies exclude theses non-cash costs from bonus calculations and in Moynihan case the ROA objectives are so low that he could double stock expenses and it would not matter.

 

Cardboard