BAC-WT - Bank of America Warrants

[hardincap]

Anyone have an opinion on why BAC B warrants are vastly underperforming stock and A warrants? I am long all three, and am very bullish BAC long term (5 years), but its frustrating to see B warrants lagging behind so badly right now.

[MrB]

It would not worry me if the intrinsic value is comparable. Is it?

Since you own both, how does the value of the Bs compare with the As?

[ECCO]

Anyone have an opinion on why BAC B warrants are vastly underperforming stock and A warrants? I am long all three, and am very bullish BAC long term (5 years), but its frustrating to see B warrants lagging behind so badly right now.

 

Do you know what is the excercise price of the "B"? Will BAC trade over that price before the expiration?

[MrB]

I'm thinking about the margin of safety that is left in the B's at current prices.

 

Exercise price of 13.30 plus warrant price of 5.00 translates into cost of 18.30 in 2018.

Tangible book today is about 13.50 and implies compounding of 9.7% over 6 years to 18.30, which is close to the 10% ROE most of us seem to hope for.

 

So what do you think? Is there significant margin of safety left, if any?

[Uccmal]

Hardincap, The Strike on the B warrants is 30.79.  I wouldn't expect them to start moving until the stock price is well in excess of 20.  Purely, a speculative investment.

 

Mr. B, Have you considered the future dividend increases into your calculation.  Let's suppose that Bac runs a 34 cents per share annual dividend - 4 cent bogey = 30 cents over 5 years.  Your price drops to 3.50 per share at todays quote.  So, your adjustment to stock price is 13.30 + 3.50 = 16.60.  However, this doesn't change the MOS. 

 

The way I figure is that the margin of safety is still in the common stock at the moment.  There isn't any in the warrants and there never was.  There never is a margin of safety in anything that may expire at zero. 

[MrB]

Mr. B, Have you considered the future dividend increases into your calculation.  Let's suppose that Bac runs a 34 cents per share annual dividend - 4 cent bogey = 30 cents over 5 years.  Your price drops to 3.50 per share at todays quote.  So, your adjustment to stock price is 13.30 + 3.50 = 16.60.  However, this doesn't change the MOS. 

 

The way I figure is that the margin of safety is still in the common stock at the moment.  There isn't any in the warrants and there never was.  There never is a margin of safety in anything that may expire at zero. 

 

Yes and the increase in the warrant shares too, but don't you think that for long term investors it is cancelled out by Buffett's dilution in 2021? He get's the anti dilution adjustments too.

 

Your last point is a very good one.

[uncommonprofits]

I'm thinking about the margin of safety that is left in the B's at current prices.

 

Exercise price of 13.30 plus warrant price of 5.00 translates into cost of 18.30 in 2018.

Tangible book today is about 13.50 and implies compounding of 9.7% over 6 years to 18.30, which is close to the 10% ROE most of us seem to hope for.

 

So what do you think? Is there significant margin of safety left, if any?

 

Something is wrong with the math.  Tangible book assuming $13.50 and a break even basis of $18.30 over a 6 yr period works out to compounding TBV at only 5.2%.  But the real time value is 7 (not 6) - so the real number should be roughly 4.5%.

 

So if tangible book today is $13.50 cummulated at 10% annually in 7 yrs works out to $26.30 ($10 higher due to a couple of errors imo).

[uncommonprofits]

Hardincap, The Strike on the B warrants is 30.79.  I wouldn't expect them to start moving until the stock price is well in excess of 20.  Purely, a speculative investment.

 

Mr. B, Have you considered the future dividend increases into your calculation.  Let's suppose that Bac runs a 34 cents per share annual dividend - 4 cent bogey = 30 cents over 5 years.  Your price drops to 3.50 per share at todays quote.  So, your adjustment to stock price is 13.30 + 3.50 = 16.60.  However, this doesn't change the MOS. 

 

The way I figure is that the margin of safety is still in the common stock at the moment.  There isn't any in the warrants and there never was.  There never is a margin of safety in anything that may expire at zero.

 

I agree that dividends need to be worked into the equation.  However, one needs to assume that tangible book drops in accordance with div payouts..... hence growth in TBV drops also. 

 

It should be worked out year by year but a simple (not entirely accurate) calc would be to take $26.30 (per 10% accumul tbv over 7 yrs) and reduce it by $1.50 (your assumed div payouts).  That would assume a tbv of $24.80 in 7 yrs.  Strike would of course be $11.80 (13.30-1.50).

 

So assuming the stock traded at a conservative measure of 1.0x TBV, value of the warrants would be $13.00 ($24.80-11.80) in 7 yrs time .... implying a return on investment of about 14.6% for the warrants (based on a $5 assumed price today).  When it traded down near $2.00 this was around 30%.  Some might argue though that there is high probability BAC trades higher than 1.0x tbv in which case there could still be a decent return vs the risk involved.  One does need to do more accurate yr x yr assumptions on divs though to assess properly (and maybe adjust the time frame exactly - say 6.75 yrs?).  Certainly the margin of safety has dropped significantly ... wouldn't say it's zero though.  I need to update my spreadsheet.

 

 

 

[redskin]

Anyone have an opinion on why BAC B warrants are vastly underperforming stock and A warrants? I am long all three, and am very bullish BAC long term (5 years), but its frustrating to see B warrants lagging behind so badly right now.

 

I think the B's have been vastly outperforming the A's and the common. 

 

Returns year-to-date...

 

BAC/WS/B  +240%

BAC/WS/A  +140%

BAC            +77%

[twacowfca]

Anyone have an opinion on why BAC B warrants are vastly underperforming stock and A warrants? I am long all three, and am very bullish BAC long term (5 years), but its frustrating to see B warrants lagging behind so badly right now.

 

I think the B's have been vastly outperforming the A's and the common. 

 

Returns year-to-date...

 

BAC/WS/B  +240%

BAC/WS/A  +140%

BAC            +77%

 

Yep.  We started buying the B's in late Dec at 30 to 32 cents.  They have gone up more than the A's because they were then far out on the tail of the normal distribution, the holy grail of the B/S model.

[Green King]

Anyone have an opinion on why BAC B warrants are vastly underperforming stock and A warrants? I am long all three, and am very bullish BAC long term (5 years), but its frustrating to see B warrants lagging behind so badly right now.

 

I think the B's have been vastly outperforming the A's and the common. 

 

Returns year-to-date...

 

BAC/WS/B  +240%

BAC/WS/A  +140%

BAC            +77%

 

Yep.  We started buying the B's in late Dec at 30 to 32 cents.  They have gone up more than the A's because they were then far out on the tail of the normal distribution, the holy grail of the B/S model.

 

Can you give more of explanation ? for us who dosen't understand B/S model and haven't had experience playing around for it. So sites or reading for learn more about is characteristics and short comings ?

 

Thanks

It will be great help

GK

[twacowfca]

Anyone have an opinion on why BAC B warrants are vastly underperforming stock and A warrants? I am long all three, and am very bullish BAC long term (5 years), but its frustrating to see B warrants lagging behind so badly right now.

 

I think the B's have been vastly outperforming the A's and the common. 

 

Returns year-to-date...

 

BAC/WS/B  +240%

BAC/WS/A  +140%

BAC            +77%

 

Yep.  We started buying the B's in late Dec at 30 to 32 cents.  They have gone up more than the A's because they were then far out on the tail of the normal distribution, the holy grail of the B/S model.

 

Can you give more of explanation ? for us who dosen't understand B/S model and haven't had experience playing around for it. So sites or reading for learn more about is characteristics and short comings ?

 

Thanks

It will be great help

GK

 

 

You might get a copy of Fisher Black's original scientific paper that became the basis for the Black  Scholes Model or a couple of papers published earlier by Ed Thorp that outlined the basic ideas that Black used. References to Thorp's papers can be found in Black's bibliography.  Sorry, you'll have to find your own links to resources. 

 

Black's model is exquisite if one assumes that the distribution of stock prices over time is a log normal distribution or bell shaped curve.  In truth, it is not, and one can make a lot of money if one is aware of this truth. 

 

In this instance, the short term volatility for BAC was very high, and short term options for BAC were relatively expensive as was evident by the high implied volatility shown in Black Scholes calculations for valuing the options as they should have been because of the recent high volatility of the stock.  Thus, those who bought relatively short term calls on BAC were not taking advantage of mispricing of the calls, but merely betting that BAC would rebound in a relatively short time frame.  This wasn't a bad bet, but buying the very long duration warrants was an even better bet, even though they also had high implied volatility under B/S model calculations, because they could live to fight another day if it took a few years for BAC to recover substantial value. 

 

The BAC B warrants were way out of the money, far out on the tail of a log normal distribution, unlikely to ever increase in value enough to be in the money if the future distribution of BAC's stock price were truly expected to be log normal.  As such, the B/S model priced the warrants as a very long shot to ever have a chance to be in the money.  They were farther out on the long end of the tail than the A warrants.  Thus, when the stock rebounded, the B's moved much more as measured by the change in probability calculated incrementally moving away from the tails in the B/S calculations, than the A warrants that were much more into the higher probability area under the curve for graphing a log normal distribution.  (it's easy to graph any log normal distribution to help visualize how the probabilities change dramatically with movement away from the tails.)

 

When a stock has potential to advance substantially over years, the B/S model misprices calls because it doesn't capture the reality of fat tails nor the capacity of the market to have an upward trend nor the ability of better businesses to outperform other stocks in the market.  These factors are trivial for short term options, and the B/S model usually works very well in the short term.  However, the generally upward trend in the market and the tendency of better businesses to outperform over time or rebound sharply after taking a dive present amazing opportunities to profit from long dated calls and even more opportunity with longer dated warrants.

                          :)

[Green King]

Thanks  :D I will read on.!!!

 

So am current in saving that the current price of the B warrants are prices as so due to the B/S model. And if they BAC shares go further in price the increase the Warrants value was be far higher than B and A. In the same light if BAC goes down the B warrants would go down further than the other two.  Since the the bell curve is backed further and the probability excise goes from something like 1% to 0.01%.

Another questions being

How do you know if its miss prices are all the warrants in this area mispriced or is something that you look for bottom up if you believe a stock is going to do well. So buying these mispriced warrants would give a ground return. How do you know if they are mispriced do you run a B/S model use the number as a mark and find out ?

 

GK

[MrB]

Something is wrong with the math.  Tangible book assuming $13.50 and a break even basis of $18.30 over a 6 yr period works out to compounding TBV at only 5.2%.  But the real time value is 7 (not 6) - so the real number should be roughly 4.5%.

 

So if tangible book today is $13.50 cummulated at 10% annually in 7 yrs works out to $26.30 ($10 higher due to a couple of errors imo).

 

You're right. Used this on the fly http://www.epx.com.br/ctb/hp12c.php , which gives the wrong answer whereas this http://epx.com.br/ctb/hp12c.php gives the correct one. In case anyone else is using it.

[MrB]

Something is wrong with the math.  Tangible book assuming $13.50 and a break even basis of $18.30 over a 6 yr period works out to compounding TBV at only 5.2%.  But the real time value is 7 (not 6) - so the real number should be roughly 4.5%.

 

So if tangible book today is $13.50 cummulated at 10% annually in 7 yrs works out to $26.30 ($10 higher due to a couple of errors imo).

 

You're right. Used this on the fly http://www.epx.com.br/ctb/hp12c.php , which gives the wrong answer whereas this http://epx.com.br/ctb/hp12c.php gives the correct one. In case anyone else is using it.

 

Ok, I actually don't know what is going on here. I just used http://www.epx.com.br/ctb/hp12c.php in a different browser to my regular browser (Chrome) and it gives the correct answer 5.2 and when I run it in Chrome it gives 9.7, so it is either Chrome or the cash that is causing issues.

 

I realize it is off-topic, but just in case anyone else is using (this) online calculator(s).

[ECCO]

http://www.sec.gov/Archives/edgar/data/5272/000095012311003847/y89089e424b2.htm#605

 

Common Stock to be issued, assuming full exercise of all Warrants  74,997,777 shares of Common Stock

 

Net proceeds, assuming full exercise of all Warrants  Approximately $3.372 billion (initial exercise price of $45.00 per share) (calculated net of ). 67,650.196 Warrants retained due to tax withholding

 

Could someone explain me the twist here. What is the "warrants retained due to tax withholding" refering to?

 

Does that mean there is 74,997,777 warrants on the market?

Or, (74,997,777-67,650,196) 7,347,581 warrants?

 

 

 

[jegenolf]

67,650.196 Warrants retained due to tax withholding

 

You made me look, but it's a decimal not a comma. Makes a big difference!

[MrB]

67,650 :P 196

[twacowfca]

Thanks  :D I will read on.!!!

 

So am current in saving that the current price of the B warrants are prices as so due to the B/S model. And if they BAC shares go further in price the increase the Warrants value was be far higher than B and A. In the same light if BAC goes down the B warrants would go down further than the other two.  Since the the bell curve is backed further and the probability excise goes from something like 1% to 0.01%.

Another questions being

How do you know if its miss prices are all the warrants in this area mispriced or is something that you look for bottom up if you believe a stock is going to do well. So buying these mispriced warrants would give a ground return. How do you know if they are mispriced do you run a B/S model use the number as a mark and find out ?

 

GK

 

You're getting a fairly good understanding of these important insights.  There is one thing that seems paradoxical about the BAC A warrants compared to the B warrants.  The implied volatility (IV) of the B warrants has been much lower than the IV of the A warrants. This is contrary to what one might expect because options, particularly puts,  on a stock or index that are far out of the money often exhibit a "smile" pattern after going through a period of high volatility.  When the smile pattern appears, the options that are farther out of the money have a higher IV and  are "pricey" compared to options that are closer to being in the money.  However, the A warrants have more protection against payment of dividends than the B warrants.  This may explain some of the difference in the Relative IVs.

 

In any case the B warrants seemed like the better bargain, so we bought the Bs instead of the As.

[Parsad]

Something is wrong with the math.  Tangible book assuming $13.50 and a break even basis of $18.30 over a 6 yr period works out to compounding TBV at only 5.2%.  But the real time value is 7 (not 6) - so the real number should be roughly 4.5%.

 

So if tangible book today is $13.50 cummulated at 10% annually in 7 yrs works out to $26.30 ($10 higher due to a couple of errors imo).

 

You're right. Used this on the fly http://www.epx.com.br/ctb/hp12c.php , which gives the wrong answer whereas this http://epx.com.br/ctb/hp12c.php gives the correct one. In case anyone else is using it.

 

Ok, I actually don't know what is going on here. I just used http://www.epx.com.br/ctb/hp12c.php in a different browser to my regular browser (Chrome) and it gives the correct answer 5.2 and when I run it in Chrome it gives 9.7, so it is either Chrome or the cash that is causing issues.

 

I realize it is off-topic, but just in case anyone else is using (this) online calculator(s).

 

MrB...I think you can afford to buy a $20 calculator, or use the one on your iPhone!  ;D  See you in a few weeks, by the way.  Cheers!

[Rabbitisrich]

http://newsandinsight.thomsonreuters.com/Legal/News/2011/07_-_July/Why_BofA_is_%28partly%29_to_blame_for_criticism_of_its_MBS_deals/

 

 

Alison Frankel, of Reuters' "On The Case", reports on developments in MBS class action damages.

 

Deutsche Bank $12.80 per $1000 initial certificate value

Wells Fargo $2.70 per $1000 initial certificate value

Merrill Lynch $19.05 per $1000 initial certificate value

Bank of America $2.00 per $1000 initial certificate value (The $8.5 settlement; not a class action; not settled)

 

 

 

[Grenville]

Commentary on the BNY Settlement and MBIAvCountrwide

 

http://www.subprimeshakeout.com/2012/03/mbs-discovery-battles-heating-up-impacting-litigation-timelines-and-leverage.html

 

 

The ruling on whether the BNY settlement will proceed under Article 77 on April 24.

[MrB]

SYSTEMIC RISK ANALYSIS (DYNAMIC MES WITH SIMULATION) OF U.S. FINANCIALS

http://vlab.stern.nyu.edu/welcome/risk/

BAC tops the list for the US http://vlab.stern.nyu.edu/analysis/RISK.USFIN-MR.MESSIM

[ERICOPOLY]

SYSTEMIC RISK ANALYSIS (DYNAMIC MES WITH SIMULATION) OF U.S. FINANCIALS

http://vlab.stern.nyu.edu/welcome/risk/

BAC tops the list for the US http://vlab.stern.nyu.edu/analysis/RISK.USFIN-MR.MESSIM

 

#11 globally:

 

http://vlab.stern.nyu.edu/analysis/RISK.WORLDFIN-MR.GMES

 

[berkshiremystery]

SYSTEMIC RISK ANALYSIS (DYNAMIC MES WITH SIMULATION) OF U.S. FINANCIALS

http://vlab.stern.nyu.edu/welcome/risk/

BAC tops the list for the US http://vlab.stern.nyu.edu/analysis/RISK.USFIN-MR.MESSIM

 

#11 globally:

 

http://vlab.stern.nyu.edu/analysis/RISK.WORLDFIN-MR.GMES

 

I once read the Deutsche Bank annual report, and my gut feeling was always that DB had the most suspicious balance sheet leverage (equity vs assets). But what do I know,... I only like to look through the eyes of a 12 year old at the numbers,...  ::)

 

I just saw this year it's almost the same:

-> http://www.db.com/ir/en/content/ordinary_share.htm

--> http://www.db.com/ir/en/content/reports_2011.htm

---> http://www.db.com/ir/en/download/Deutsche_Bank_Annual_Report_2011_entire.pdf

 

 

#1 DB, currently as of 2011:

2,164 assets

53.4 total equity

 

#11 BofA, currently as of 2011:

2,129 assets

230 total equity