BAC-WT - Bank of America Warrants

[gary17]

LOL - may be only a few super computers in the world doing all the trades....  humans are just nibbling on the side... we don't move the market :)

[grasshopper]

Hi everyone,

 

first time posting, long time lurker. been in BAC and AIG in a mix of warrants and LEAPS for about 3-4 years now, so about the same time as this thread started. Just came across this thread a few months ago as I was re-assessing my portfolio and reviewing my thesis at the time.

 

Going through my notes from the time I first started building my positions, I have alot of similar statements that you can find on this thread from the same timeline (2010-2011) ....one thing I wrote down, but didn't really dig into that deep at the time was how this situation, especially the BAC situation, mirrored that chapter in the Joel Greenblatt book about WFC in the early 90's

 

Had that point down as an afterthought, discovered later on that BB actually wrote the same thing on his presentation, and remembered that he was the actual dude referenced in the chapter from the Greenblatt book, so I took a look at that old 90's article from OID.

 

Anyways, the WFC idea basically worked out really well.....really well for these guys.

 

Personally BAC has also worked out really well for me and alot of you guys who got in around the same timeframe. Now I was wondering...and need to post on this forum to ask because I'm actually a really young guy who was probably just playing video games all day in the early 90's as a kid..... What happened in the years following the OID article that caused WFC to become such a grand slam?

 

There are vague references to this in alot of the articles I'm finding from the time period, but basically from the jist of it:

 

WFC survived and somewhere along the way traded back to TBV....where we all sit currently with BAC

 

Other things happened that caused it to really zoom out of the park.....which I'm not so clear on....

macro events?? caused a general market rise and WFC managed to outperform in one of the greatest bull markets???? (don't really know....can anyone on this board recall any specific events or anything I can use for a reference point? Dates, books, events, etc)

 

From my own fuzzy memory.....I guess this would be about the time of the run-up in tech and internet companies, but before the dot com boom and bust, which I thought was around the late 90's....... This was also before LTCM....so the only other event I can think about in this timeframe is Mexican debt crisis???? the first one???

 

Reading through historical WFC reports, but would love any general outline from anyone who knows on this board.

 

I guess I'm just trying to see what situations are different from the 90's to today. Regulatory issues are different today as well...but a part of me feels like at the time...there was alot of regulatory and international uncertainty as well.

 

Anyways, just looking for some historical perspective from anyone on the board who may have at least been in the industry around this timeframe or actually invested in this situation at the time.

 

Thanks to all the contributors on this board, been very interesting to read through the whole thread. Very educational.

[Uccmal]

Hi Grasshopper, Check out the wikipedia article.  It is fairly detailed.  That was in my pre investment days. 

[grasshopper]

I guess you're referring to this http://en.wikipedia.org/wiki/History_of_Wells_Fargo

 

Funny, i didn't notice they had an article on just the History of Wells, thought it was only the section in the main article.

 

So basically, Wells was able to survive the California recession, got a boost from recovering real estate values in California around 92-93, then went on in the rest of the decade to grow from a regionally focused bank (CA) to a western juggernaut, and consequently a national superbank (with little to no IB or international presence)

 

Today, we have basically BAC with a Wells Fargo (present version) size footprint and ML attached, but without the Wells Fargo performance. No more growth by M&A expected in the medium term....maybe never again? Are we assuming only organic growth in this new post GFC world for SIFIs?

 

I guess I'm running through this exercise to see how far more we go with BAC from here... we are obviously not going to get any growth by acquisition like Wells in the 90s, but we can still see a lot of operating improvements to catch up to Wells.

 

Used up catalysts:

End of (inflated) litigation....(we hope)

New BAC savings

Survival

 

Catalysts Remaining:

Interest Rates normalizing

Massive Buybacks (starting to really lose hope with this one considering recent buyback performance of BAC)

Dividend Catch up to peers

ML spinoff? (don't really think this one is plausible, but within the realm of possibility, I feel like ML is the only thing in this equation that could play a wild card with the valuation to give additional upside)

 

Catalysts from WFC in 90's that are unapplicable to BAC today

Growth from acquisitions

rebounding asset values from CA (i guess this is also applicable to BAC today on a nationwide basis, but has already been used up??)

 

Catalysts from WFC that may be applicable today for BAC

quote from wiki: Wells Fargo posted healthy gains in that core market. Wells slashed its labor force—by more than 500 workers in 1993 alone—and boosted cash flow with technical innovations. The bank began selling stamps through its automated teller machines (ATMs), for example, and in 1995 was partnering with CyberCash, a software startup company, to begin offering its services over the Internet.

 

Can't really imagine how this would help BAC today, but I guess IT is one of their moats from smaller sized banks. Perhaps maybe an P2P online lending platform or something a-la Lending Club...

 

So...I'm just thinking out loud about ideas on why BAC might become a multi-bagger, even though I realistically think we won't see anything like this because BAC is already so damn huge. I mean most of the people from this board are probably sitting on doubles and triples already and anything else is just gravy. I'm just trying to decide if I should rotate out of this position as we move closer to BV and beyond....

 

I understand why BAC makes so much sense to Buffett though, since Berkshire is so damn big and BAC allows him to deploy a huge amount of capital for a long period of time, but for most of us with much smaller portfolios, without the juice from LEAPs or warrants, BAC isn't really going to be a life changing investment from here on out.....or is it???? We've already seen a lot of the easy gains the last 3 years...

 

can anyone articulate how they see BAC post warrant expiration (2019 beyond)??? I mean...I can see the scenarios that lead to $25-30 in the next few years, but what after?

 

[Uccmal]

I think its an easy double, in 5 years.  Beyond that an awful lot will depend on management, cost control, and lending discipline.  All the parts are in place.  I figure I will eventually convert some of my Leaps to common and collect the dividends.  That will likely be in Jan. 2017 now. 

 

 

[sswan11]

BofA and U.S. Bancorp face another mortgage suit

Dec 17 2014, 15:23 ET | About: Bank of America Corporation (BAC) | By: Stephen Alpher, SA News Editor  Contact this editor with comments or a news tip

This time its the National Credit Union Administration Board, and it's suing Bank of America (NYSE:BAC) and U.S. Bancorp (NYSE:USB) over losses on $5.8B in MBS."Even after ample evidence came to light that the trusts were riddled with defective loans, defendants shut their eyes to such problems,” according to the complaint. “As participants in many roles in the securitization process, defendants were economically intertwined with the parties they were supposed to police.”

 

seekingalpha.com/news/2184695-bofa-and-u-s-bancorp-face-another-mortgage-suit?uide=616493&uprof=45

[kevin4u2]

I agree, easy double from here for the common. I'll exercise a large portion of my warrants in January 2019.

 

Kevin

 

 

I think its an easy double, in 5 years.  Beyond that an awful lot will depend on management, cost control, and lending discipline.  All the parts are in place.  I figure I will eventually convert some of my Leaps to common and collect the dividends.  That will likely be in Jan. 2017 now.

[Uccmal]

New 52 week high on BAc, and  AIG, and WFC. 

 

Since I cant decide what to do with this info, I will do nothing. 

[tng]

The warrants are really lagging the common stock. The "cost of borrowing" has collapsed. Even though BAC is at highs, I'm wondering if I should add the warrants.

[vinod1]

Rolled over all LEAPS into warrants and for good measure bought some puts.

 

Vinod

[benchmark]

Rolled over all LEAPS into warrants and for good measure bought some puts.

 

Vinod

why?

[vinod1]

Rolled over all LEAPS into warrants and for good measure bought some puts.

 

Vinod

why?

 

Much more attractive than the 2017 $15 calls that I sold. Calls are at $4.3, given that warrants have about $1.7 more in intrinsic value and dividends are likely to be at least another $0.3, I am paying just $0.7 more for two more years.

 

Puts are on Russell 2000.

 

Vinod

[obtuse_investor]

Thanks for posting your recent trade, Vinod.

 

Here are some numbers I just crunched up regarding the warrants.

 

Assuming,

- dividends are maintained at $0.05/Qtr until expiry (Jan 16, 2019)

- Based on latest closing warrant price of $6.98

- exactly 4 years remaining on the warrant (for ease of calculation)

 

If common closes at $25 on expiry, compounded rate of return on the warrants is: 15.50%

If common closes at $27.5 on expiry, compounded rate of return on the warrants is: 20.91%

If common closes at $30 on expiry, compounded rate of return on the warrants is: 25.69%

 

Assuming I didn't make a disastrous error in my calculations, and you believe in the commons comfortably being in the $25-$30 range, then A warrants are a no brainer at these prices.

 

Disclosure: Still hanging on to most of my warrants since 2011.

 

[Txvestor]

Thanks for posting your recent trade, Vinod.

 

Here are some numbers I just crunched up regarding the warrants.

 

Assuming,

- dividends are maintained at $0.05/Qtr until expiry (Jan 16, 2019)

- Based on latest closing warrant price of $6.98

- exactly 4 years remaining on the warrant (for ease of calculation)

 

If common closes at $25 on expiry, compounded rate of return on the warrants is: 15.50%

If common closes at $27.5 on expiry, compounded rate of return on the warrants is: 20.91%

If common closes at $30 on expiry, compounded rate of return on the warrants is: 25.69%

 

Assuming I didn't make a disastrous error in my calculations, and you believe in the commons comfortably being in the $25-$30 range, then A warrants are a no brainer at these prices.

 

Disclosure: Still hanging on to most of my warrants since 2011.

 

 

 

I suspect this will all depend on whether we go into a significant recession between now and the expiry of these warrants in 4 yrs. if we do then none of these estimates will be near close, and there will likely be losses on these warrants. If we continue with an economic expansion between now and then, then it is very likely BOA will trade in that $25-30 range. That said, from $5-6 for the common in 2012 when WEB made his investment in the early stage of the economic expansion, to $17-18 now was the far more rational bet with warrants.

In my view, henceforth it is a much more difficult one to handicap with any certainty.

Having said that, I do think BOA is still selling somewhat under its intrinsic value/fair value in a market where that is not so easy to find. That offers some margin of safety for the common.

I feel more secure in holding the common stock which still can likely offer a decent return with more downside protection and no expiry.

Considering we exited the big recession in mid 2009, you'd have to be very confident in a continuous economic expansion exceeding a decade in duration to buy the warrants. Historically that is not a common thing, but neither is what the Fed. Is doing. So who knows!

Thats however is my rationale for being long more BOA rather than the warrants(smaller position). And I've switched warrants to long common recently.

[ERICOPOLY]

That said, from $5-6 for the common in 2012 when WEB made his investment in the early stage of the economic  expansion, to $17-18 now was the far more rational bet with warrants.

 

The warrants were at $2 when the stock was at $5.  The common actually has outperformed the warrants since then.

[ourkid8]

Eric,  Is the warrants a more rational investment then leaps considering the cost of leverage.  Will you be switching out of your leaps?

 

Tks,

S

 

That said, from $5-6 for the common in 2012 when WEB made his investment in the early stage of the economic  expansion, to $17-18 now was the far more rational bet with warrants.

 

The warrants were at $2 when the stock was at $5.  The common actually has outperformed the warrants since then.

[benchmark]

Rolled over all LEAPS into warrants and for good measure bought some puts.

 

Vinod

why?

 

Much more attractive than the 2017 $15 calls that I sold. Calls are at $4.3, given that warrants have about $1.7 more in intrinsic value and dividends are likely to be at least another $0.3, I am paying just $0.7 more for two more years.

 

Puts are on Russell 2000.

 

Vinod

Thanks for the explanation Vinod. I have some Jan 16 leap that I'm still holding -- I want to wait sometimes in next May for it become long-term, but it's making me nervous ... such is the perils of time-bounded instruments

[orthopa]

With BAC moving solidly over 18 today the A warrants look like a smashing deal but are barely moving yet again. I had some leaps I converted to warrants. The cost of leverage looks to continue to decrease unnoticed by the market?

[Uccmal]

Rolled over all LEAPS into warrants and for good measure bought some puts.

 

Vinod

why?

 

Much more attractive than the 2017 $15 calls that I sold. Calls are at $4.3, given that warrants have about $1.7 more in intrinsic value and dividends are likely to be at least another $0.3, I am paying just $0.7 more for two more years.

 

Puts are on Russell 2000.

 

Vinod

Thanks for the explanation Vinod. I have some Jan 16 leap that I'm still holding -- I want to wait sometimes in next May for it become long-term, but it's making me nervous ... such is the perils of time-bounded instruments

 

Yep, that's about the size of it.  I have worked with Leaps for 8 or 9 years now.  Whenever they are up I start to worry.  My 2016s - 15$ strike are double what I paid.  As the stock rises I will take profits on the way in dribs and drabs, keeping a sizable core position.  If/when it retrenches I reload with farther out dates, if available.  Its a constant struggle to balance fear and greed. 

[sswan11]

Ambac sues BofA over mortgages

 

http://seekingalpha.com/news/2201495-ambac-sues-bofa-over-mortgages

[yitech]

Anyone buying into Jeffrey Gundlach deflation thesis? i.e. 10Y approaching 1% killing NIMs of banks?

 

Bank-Stock Hopes Must Yield to Bond-Market Reality http://www.wsj.com/articles/bank-stock-hopes-must-yield-to-bond-market-reality-heard-on-the-street-1420565841

 

10-Year Treasury Yield Dips Below 1.9% http://www.wsj.com/articles/bank-stock-hopes-must-yield-to-bond-market-reality-heard-on-the-street-1420565841

[ni-co]

Anyone buying into Jeffrey Gundlach deflation thesis? i.e. 10Y approaching 1% killing NIMs of banks?

 

Bank-Stock Hopes Must Yield to Bond-Market Reality http://www.wsj.com/articles/bank-stock-hopes-must-yield-to-bond-market-reality-heard-on-the-street-1420565841

 

10-Year Treasury Yield Dips Below 1.9% http://www.wsj.com/articles/bank-stock-hopes-must-yield-to-bond-market-reality-heard-on-the-street-1420565841

 

Yes, I'm buying it. BAC has its own dynamics,  but I don't like the risk/reward picture anymore. Normally I'm focused on the individual company and not on the sector or the economy as a whole. But I think there is a larger than 50% risk that we're heading for a worldwide deflationary recession and I'm not willing to effectively bet against it with a large BAC position. Might be that it is a total scare and I lose out on this one but I'm more interested in preserving my capital at this moment.

[yitech]

Completely agree with you. I sold off all my banks today and will re-assess this later. Very hostile environment for banks if this comes true.

[oddballstocks]

Completely agree with you. I sold off all my banks today and will re-assess this later. Very hostile environment for banks if this comes true.

 

Strange thing to do.  The WSJ article is interesting, but totally fails to appreciate that most banks aren't keeping any loans on their books longer than 10 years.  Couple that with a run on the housing market to "buy before rates rise" and thing are looking alright.

 

Just an observation.  Seems like every market condition is a reason to hate banks.  Deflation will kill banks, inflation will kill banks etc.  Yet this is an industry that's been around for 4,000 years.  Besides farming, basic goods sales and construction not much else has a history that far back.  In our current history banks are so highly regulated that they're almost a license to print money.  It's a regulated arbitrage.

 

I wouldn't necessarily classify banks as great buy and hold investments.  The types of stocks like GE that you could tuck in your desk in 1940 and retire a millionaire.  But I'm very confident that no matter the economic environment that they aren't going away. 

[rkbabang]

Completely agree with you. I sold off all my banks today and will re-assess this later. Very hostile environment for banks if this comes true.

 

Strange thing to do.  The WSJ article is interesting, but totally fails to appreciate that most banks aren't keeping any loans on their books longer than 10 years.  Couple that with a run on the housing market to "buy before rates rise" and thing are looking alright.

 

Just an observation.  Seems like every market condition is a reason to hate banks.  Deflation will kill banks, inflation will kill banks etc.  Yet this is an industry that's been around for 4,000 years.  Besides farming, basic goods sales and construction not much else has a history that far back.  In our current history banks are so highly regulated that they're almost a license to print money.  It's a regulated arbitrage.

 

I wouldn't necessarily classify banks as great buy and hold investments.  The types of stocks like GE that you could tuck in your desk in 1940 and retire a millionaire.  But I'm very confident that no matter the economic environment that they aren't going away. 

 

You forgot the oldest profession, but otherwise I agree.