BAC-WT - Bank of America Warrants

[ourkid8]

Eric, what do you plan to do with you Jan 2015 leaps? I have done really well on them and I am debating either selling them or rolling them into Jan 2016 leaps.  What have you done or are you still waiting closer to expiry?

 

Tks,

S

[ERICOPOLY]

Something certainly seems fishy.  How many dozens, or hundreds, of people would have prior access to the CCAR conclusions? 

 

Re: buyback argument:  I have held BAC continuously for nearly 4 years.  People have had lots of time to buy the shares they want.  Buybacks at C and BAC are a waste of good cash that could be going into my pocket.  They just allow management to hide the stock dilution from options from those less aware.  I know the tax scheme favours buybacks, but I favour getting paid dividends.  Besides, the government needs the income ;)

 

Perhaps management could come up with a provision to adjust the strike price of employee options to capture ordinary dividends paid.

 

I feel like they would probably do something like that if you got your wishes to have no buybacks.

 

Were you instead to just wish for no stock options awarded to management, it would solve all of the problems wouldn't it?  Then we could still have tax-advantaged buybacks with no drawbacks.

[ERICOPOLY]

Eric, what do you plan to do with you Jan 2015 leaps? I have done really well on them and I am debating either selling them or rolling them into Jan 2016 leaps.  What have you done or are you still waiting closer to expiry?

 

Tks,

S

 

I have done a few things over the past couple of weeks.  I have dumped some of the BAC puts, and purchased a variety of 2016 BAC puts in $17, $15, and $12 strikes.

 

1)  Previously I had written some JPM and C puts.  I bought them back in and purchased the underlying common stock in both names instead.  I then purchased at-the-money puts in both names.  As part of that same trade I wrote an offsetting amount (on a notional basis) of Jan 2015 BAC $17 strike calls for $1.40 (break-even stock price of $18.40).  This was a means of switching some money to JPM and C while hedging out the BAC so I'm not adding additional downside.  A price of $18.40 to get out of BAC in order to switch to present values of JPM and C seemed like a great deal.  I got the C for $47.07 average cost and JPM for $55.61 average cost.  So buying C and JPM at those prices in exchange for BAC at $18.50 -- I think that added value.  One of the best parts is that if BAC, JPM, C rally by a lot and those calls happen get bought back for a big loss, I can then write an offsetting amount of calls on JPM and C (to pay for the cost of buying back the BAC calls).  Meanwhile, I can book the tax loss on the BAC calls.  I just need to be careful of wash sales and constructive sale rules.  But I think I can be careful.

 

The low SHLD price motivated me to write more puts on SHLD to finance the longer-term (2016) BAC puts. 

[Uccmal]

Something certainly seems fishy.  How many dozens, or hundreds, of people would have prior access to the CCAR conclusions? 

 

Re: buyback argument:  I have held BAC continuously for nearly 4 years.  People have had lots of time to buy the shares they want.  Buybacks at C and BAC are a waste of good cash that could be going into my pocket.  They just allow management to hide the stock dilution from options from those less aware.  I know the tax scheme favours buybacks, but I favour getting paid dividends.  Besides, the government needs the income ;)

 

Perhaps management could come up with a provision to adjust the strike price of employee options to capture ordinary dividends paid.

 

I feel like they would probably do something like that if you got your wishes to have no buybacks.

 

Were you instead to just wish for no stock options awarded to management, it would solve all of the problems wouldn't it?  Then we could still have tax-advantaged buybacks with no drawbacks.

 

Its really a moot point.  They are gojng to do what they are going to do.  Most of my rant revolves around publicizing stock buy backs when they are actually just paying the employees indirectly.  Either way the tax man will get his cut. 

 

Unless they buy back at least 5% per year of stock, NET of dilutions, it is sort of meaningless propaganda. 

[ourkid8]

On a positive note, the warrents are up today 5.28%.  This is on top of the 7.x% from yesterday... It finally feels great to hold BAC warrants!!!  :)

 

Tks,

S

 

 

[nkp007]

On a positive note, the warrents are up today 5.28%.  This is on top of the 7.x% from yesterday... It finally feels great to hold BAC warrants!!!  :)

 

Tks,

S

 

I never did the whole ERICOPOLY options arbitrage with the warrants, but it's nice to see both sides win (even if the options may win a little more, the lack of complication was worth it to me).

 

 

[Rabbitisrich]

 

Its really a moot point.  They are gojng to do what they are going to do.  Most of my rant revolves around publicizing stock buy backs when they are actually just paying the employees indirectly.  Either way the tax man will get his cut. 

 

Unless they buy back at least 5% per year of stock, NET of dilutions, it is sort of meaningless propaganda.

 

I used to get similarly frustrated when WFC touted gross buyback figures. But you would be in a similar position if the company paid out dividends and compensation in cash. In fact, if the market is fooled by gross buybacks against net dilutions, then a pure cash program would be even more fooling because the opportunity costs aren't explicitly stated in the balance sheet.

[ourkid8]

Me neither, I never switched my warrants for leaps which in hindsight was a mistake.  However, I did buy a shit load of leaps on top of my warrant position which have performed exceedingly well...  :) (thanks again Eric)

 

Tks,

S

 

On a positive note, the warrents are up today 5.28%.  This is on top of the 7.x% from yesterday... It finally feels great to hold BAC warrants!!!  :)

 

Tks,

S

 

I never did the whole ERICOPOLY options arbitrage with the warrants, but it's nice to see both sides win (even if the options may win a little more, the lack of complication was worth it to me).

[MrB]

$2.40....ahhh....those were the days.

[wescobrk]

I remember talking how long it would take to get to tbv.

It's now at 1.28!

Moynihan has done a great job.

[ourkid8]

Now why don't you start talking about how long it would take to get to book?  I cannot wait for $22/share  :)

 

Tks,

S

 

I remember talking how long it would take to get to tbv.

It's now at 1.28!

Moynihan has done a great job.

[fareastwarriors]

Here’s Why Bank of America Corp Could Soon Hit $20

 

 

http://www.fool.com/investing/general/2014/03/07/bank-of-america-stock-20.aspx

[ECCO]

Here’s Why Bank of America Corp Could Soon Hit $20

 

 

http://www.fool.com/investing/general/2014/03/07/bank-of-america-stock-20.aspx

 

Analysts at Citigroup (NYSE: C  ) predict that the Charlotte-based bank could more than double its quarterly payout. And researchers at Markit Group believe the bank might quadruple it.

 

 

Double or quadruple!!! Wow!!!

 

I must admit that mentions like that give some punch. Its just funny that the autor dont give more détails about that potential dividend increase and what it really mean to double or quadruple the dividend...

 

[wescobrk]

A double? So from 120 million to 240 million for a company that earned 14 billion last year?

I'll try and restrain my excitement.

My guess is no more than 1 billion towards dividends and 5-7billion towards buybacks. I think it'll be at the high end for buybacks.

It's now 35 billion cheaper than bac while they are both earning virtually the same amount.

 

 

[fareastwarriors]

http://www.bloomberg.com/news/2014-03-17/u-s-banks-75-billion-payout-at-stake-in-fed-tests.html

 

 

U.S. Banks’ $75 Billion Payout at Stake in Stress Tests

[wescobrk]

This explains why we still haven't seen a pop with banks and why Citigroup is about 50 percent of the s&p multiple.

Instead of like last year the stocks running up a few days before the tests everyone is waiting until the actual news until they buy.

[nkp007]

This makes me sad:

 

http://online.wsj.com/news/articles/SB10001424052702303546204579439333433897984?mg=reno64-wsj

 

Beware Banks Bearing Buyback Gifts

For bank investors, Christmas now comes twice a year. Aside from the actual holiday, the other instance arrives in March when the Federal Reserve, rather than Santa Claus, leaves goodies under the tree.

 

Or so hope investors envisioning higher dividends and buybacks. Yet, once unwrapped, they should closely examine their capital-return gifts, especially when they are share repurchases.

 

The Fed, which is due to release "stress test" findings on big banks later this week and its capital-plan decisions the following one, has favored buybacks as the main component of capital returns. Ostensibly, in the event of trouble, it is easier for banks to scale these back without sending investors scurrying. Dividends, unfortunately, remain sacrosanct in too many investors' eyes.

 

Even so, buybacks often don't provide the benefit investors expect. Namely, that they will boost earnings and book value per share by shrinking the amount of stock outstanding and so dividing the profit pie into fewer slices.

 

First, big banks issue a lot of options and restricted stock to employees. So buybacks often only counter those, rather than meaningfully reducing the number of shares outstanding.

 

A sharp rise in banks' share prices last year also means firms get less bang for each buyback buck. Plus, rising share prices push a higher proportion of older options "into the money," in which market value exceeds the strike price. This raises the chance of options being exercised, expanding the share count.

 

Consider Wells Fargo. Over the past three years, it bought back about $11.7 billion of stock. During that time, though, its basic shares outstanding declined by only about 0.2%. And its diluted average shares outstanding increased by nearly 1%.

 

Wells Fargo isn't alone. When it comes to buybacks, banks are "running faster to stand still," Goldman Sachs analyst Richard Ramsden noted in a report last week. He estimated the median increase in buybacks in the coming year for banks taking part in the Fed's capital-plan reviews will be 17%, but that will boost earnings per share by just 3.2%.

 

This gap will be even more pronounced at firms like Wells Fargo, J.P. Morgan Chase, Citigroup and Bank of America. Mr. Ramsden estimates such money-center banks will increase buybacks 19%, although the boost to earnings per share will be just 2.4%.

 

The added twist is that those estimates of earnings accretion are on a gross basis, so they don't take into account the impact of share issuance. When that is netted out, the accretion often is nonexistent.

 

This adds further weight to arguments that buybacks aren't always as effective as dividends. With the latter, investors know exactly how much cash they are getting and can decide whether to reinvest. And the diminished impact of buybacks means the total yield of bank stocks, that arising from both dividend payouts and share repurchases, may be something of a mirage.

 

Making matters worse: Most banks don't impose valuation discipline around buybacks. Only J.P. Morgan has officially signaled it wouldn't repurchase shares over certain loose valuation thresholds.

 

And investors already have wearying experience of how this plays out. In the run-up to the financial crisis, banks spent billions of dollars repurchasing stock that was trading at two to three times tangible book value or more. Come the crisis, banks were hoarding capital defensively and so couldn't buy back shares when they traded below tangible book value, an opportunity to purchase a dollar's worth of assets for less than 100 cents.

 

Given this, along with the fact buybacks often don't provide their intended benefit, the Fed should consider lightening the weight it has placed on this form of capital return. Meanwhile, investors celebrating coming capital-return decisions should be wary they haven't actually received a lump of coal.

 

[sswan11]

In the event of BAC increasing dividend, I'm seeking advice on whether to exercise 2015 and/or 2016 12 and 15 strike calls - prior to ex-div date to acquire dividend.  IB has a page on this but I don't really understand it - trying to understand cost/benefits to early options exercise:

 

http://ibkb.interactivebrokers.com/tag/exercisedelivery

 

INTRODUCTION

 

Exercising an equity call option prior to expiration ordinarily provides no economic benefit as:

 

It results in a forfeiture of any remaining option time value;

Requires a greater commitment of capital for the payment or financing of the stock delivery; and

May expose the option holder to greater risk of loss on the stock relative to the option premium.

Nonetheless, for account holders who have the capacity to meet an increased capital or borrowing requirement and potentially greater downside market risk, it can be economically beneficial to request early exercise of an American Style call option in order to capture an upcoming dividend.

 

The conditions which make this scenario most likely and the early exercise decision favorable are as follows:

 

1. The option is deep-in-the-money and has a delta of 100;

 

2. The option has little or no time value;

 

3. The dividend is relatively high and its Ex-Date precedes the option expiration date.

 

 

Any advice appreciated! 

[wescobrk]

Thanks nkp for posting.

I was upset last year when Moynihan didn't buyback everything the first quarter. I didn't find out till later that the regulators only allow at most 25 percent a quarter even if the stock drops a lot and the bank could save shareholders a few bucks.

According to the article wells (and other banks)  diluted shares increased even though it "bought back" 12 billion worth of stock.

The article might  be misleading since the government forced them to dilute since wells didn't want their money in 2008.

 

A pessimistic article until I read an article on bloomberg (sorry no link) starting in 2015 the Fed will let some banks pay out 100 percent earnings.

It would be pretty difficult I would think for bac to pay out more than 20 billion a year in options.

The same goes for Citigroup.

[Rabbitisrich]

This makes me sad:

 

http://online.wsj.com/news/articles/SB10001424052702303546204579439333433897984?mg=reno64-wsj

 

 

Man, that article is error-ridden. So the author asserts that dividends are superior because it offers more choice? There may be pro-dividend arguments, but this one is nonsensical. Due to tax treatment, a dividend is like an increase in your percentage ownership, after a buyback, that is then sold on your behalf. You end up with a pile of cash (the dividend) and the same % ownership. For this automated process, the IRS treats your sold portion as if you had a $0 basis in that tax year. A buyback provides a higher % ownership, plus the option to sell your stock or to maintain your position, with an IRS loan that you can call at your CHOICE!

 

 

[Rabbitisrich]

 

First, big banks issue a lot of options and restricted stock to employees. So buybacks often only counter those, rather than meaningfully reducing the number of shares outstanding.

 

Wells Fargo isn't alone. When it comes to buybacks, banks are "running faster to stand still," Goldman Sachs analyst Richard Ramsden noted in a report last week. He estimated the median increase in buybacks in the coming year for banks taking part in the Fed's capital-plan reviews will be 17%, but that will boost earnings per share by just 3.2%.

 

This adds further weight to arguments that buybacks aren't always as effective as dividends. With the latter, investors know exactly how much cash they are getting and can decide whether to reinvest. And the diminished impact of buybacks means the total yield of bank stocks, that arising from both dividend payouts and share repurchases, may be something of a mirage.

 

Making matters worse: Most banks don't impose valuation discipline around buybacks. Only J.P. Morgan has officially signaled it wouldn't repurchase shares over certain loose valuation thresholds.

 

The first paragraph does not include the argument that buybacks increase compensation through shares. Is it really true that dividends reduce stock compensation? If so, relevant and interesting, but without that information the complaint doesn't hold.

 

The last paragraph seems to view a bank as a retailer of its stock, opportunistically purchasing and selling a limited inventory. But stocks can be split and sold as needed. A bank that repurchases its shares is not literally investing in itself. If the stock is overvalued, then the bank can issue shares. It isn't in the same position as an investor.

[MYDemaray]

Everyone likes to complain about dilutive nature of share based compensation, and maybe it's excessive, but I think as shareholders it's better for the risk takers to be eating their cooking, than taking home cash bonuses and rolling the dice with our money.  Just my two cents.

[Uccmal]

Everyone likes to complain about dilutive nature of share based compensation, and maybe it's excessive, but I think as shareholders it's better for the risk takers to be eating their cooking, than taking home cash bonuses and rolling the dice with our money.  Just my two cents.

 

My issue has never been with buybacks or stock options.  Its with the BS that surrounds them.  BAC advertises that they bought back 5 b of shares but dont publicize that they issued 5 billion as well. 

 

One thing I have always really liked about FFh is that when Prem decided him and the other executives needed to be paid more they added the dividend rather than paying themselves with copious amounts of stock options.  That way, all shareholders were created almost equal. 

 

And really, what is wrong with just paying someone a good wage to do their job and doing away with options altogether.  In theory options are supposed to align employee interests with shareholders but it was a good idea that is now abused.  And the government will get their cut either way so I dont buy the tax avoidance argument, either. 

[morningstar]

It's worth noting that BAC is not paying people with options, it's paying people with restricted shares issued at the prevailing market level. This is replacing cash compensation. If you want to preserve your top capital markets and trading personnel, you need to pay them. Current practices basically demand that a large portion of compensation be restricted and vest over time, so the options are pretty limited here.

[Rabbitisrich]

One thing I have always really liked about FFh is that when Prem decided him and the other executives needed to be paid more they added the dividend rather than paying themselves with copious amounts of stock options.  That way, all shareholders were created almost equal. 

 

It would still be better for taxable investors if FRFHF just repurchased shares. The WSJ writer is wrong in thinking that you have more certainty with a dividend. Watsa may lose out if he sells his excess % ownership, post-buyback, when the stock is cheap. But it is the same opportunity cost if he receives a dividend, and does not reinvest. There is no additional certainty. The economic position is the same before taxes.