BAC-WT - Bank of America Warrants

[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. 

 

You forgot the oldest profession, but otherwise I agree.

 

Yes, I kept thinking about this and the oldest profession came to mind as well as wine making and a few other old world trades.

 

I recently read Anti-fragile and one point Taleb made was that things that have been around a very long time will most likely remain around the longest.  It's a fascinating conclusion.  But I agree.  It's unknown whether the tech industry will be around in 30-40 years, but I'm positive in 800-1,000 years there will still be bankers along with a few other professions that are timeless.

[orthopa]

I assume some also couple deflation with oils recent plunge. Looking at history $20-30 oil has been much more common then 100+ oil and 20-30 oil is much more amendable to an economic expansion then 100+ oil. I think the oil plunge has scared many to the safety of the US treasuries reinforcing lower rates and the deflationary thesis. Lets not forget the dollar strengthening as QE possibly starts in EU.

 

In terms of economic growth what is so bad about $40 oil and low rates to borrow? The most recent payrolls report showed some hope in regards to wage growth.

 

I get that BAC would benefit from any improvement in NIM but I would have to believe that current economic growth spurred by a 100-150B "tax cut" that the oil drop will afford the economy will be beneficial also.

 

I hold BAC warrants and have ~4 years to expiration, hard to imagine rates lower then they are now but the same could have been said in 2011 I guess.  :-\

 

[rkbabang]

Yes, I kept thinking about this and the oldest profession came to mind as well as wine making and a few other old world trades.

 

I recently read Anti-fragile and one point Taleb made was that things that have been around a very long time will most likely remain around the longest.  It's a fascinating conclusion.  But I agree.  It's unknown whether the tech industry will be around in 30-40 years, but I'm positive in 800-1,000 years there will still be bankers along with a few other professions that are timeless.

 

I remember that from Antifragile.  It is an interesting way of looking at things, but remember that it is more of a rule-of-thumb than a law of nature.

 

There are many professions that were around seemingly forever then just went away rather quickly: tinker, candlestick maker, blacksmith, potter, .... 

It is conceivable that some future technology could automate or streamline banking (value storage, lending, investing) to the point that the job of "banker" or the existence of companies that we would call "banks" no longer exist.    But, regardless of what the bitcoin enthusiasts would have you believe, this isn't on the immediate horizon.

[Uccmal]

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.

 

I dont get the deflation argument, or the connection to banking. 

 

We have just had 2 trillion in stimulus on an annualized basis from fuel savings.  More than half of that goes into consumers pockets more or less directly.  For goods and services it is like getting a larger Net Interest Margin baked into your operation. 

[Uccmal]

Increased my Leap position by 25% in the last two days. 

[ni-co]

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 can't invest into the banking profession you're talking about but only in individual companies. And as you correctly point out the last 4,000 years have shown that banking companies are not the most stable businesses. I don't think you gain anything from the fact that banking as a profession survives every banking crisis.

 

I think you have to keep the following two questions apart:

 

1. How likely is a worldwide deflationary recession or even worse a prolonged deflationary environment (like Gary Shilling has been predicting for years)?

 

2. In case of occurrence, how bad would it be for banks?

 

No. 1 is where all the uncertainty lies. No. 2 is quite clear in my opinion. A deflationary recession or – even worse – a prolonged deflationary environment would be very bad for banks.

 

Who says banks don't make money in an inflationary environment? They have been doing it for 80 years. The US hasn't seen a deflationary environment since the 1930s and I think there aren't a lot of investors who really have been thinking about what this means for their investments. Heck, even Buffett has never had to invest under such conditions.

 

How well did banks do the last time there was deflation in the US? How well did Japanese banks do during deflation? How well did banks do anywhere else in the world when there was a deflationary environment? A flattening yield curve and shrinking demand for credit don't seem to me exactly like the environment you wish for as a bank.

[ni-co]

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.

 

I dont get the deflation argument, or the connection to banking. 

 

We have just had 2 trillion in stimulus on an annualized basis from fuel savings.  More than half of that goes into consumers pockets more or less directly.  For goods and services it is like getting a larger Net Interest Margin baked into your operation.

 

The key to the deflationary argument is decreasing demand – for goods, services and capital. It's like in a recession but it's permanent and self-feeding. Does it really help to increase the capital supply when people don't spend it? Stimulus doesn't work when people take the money and buy something similar with it.

 

This is not a media scare but a real risk. Ray Dalio has been warning of this for a few years:

http://video.cnbc.com/gallery/?video=3000338430

[wescobrk]

I hope the sell off continues for a few more days.

Another 5% drop in financials I'm going to start buying aggressively.

[Ham Hockers]

http://www.bloombergview.com/articles/2014-12-19/bank-appraiser-does-better-as-whistleblower

 

BTW, everyone should be reading Matt Levine. He's awesome especially for covering legal stuff. He has a Caesars article that I particularly loved.

[ni-co]

BTW, everyone should be reading Matt Levine. He's awesome especially for covering legal stuff. He has a Caesars article that I particularly loved.

 

+1 – Completely agree. He was essentially the only journalist out there willing and capable to walk you through the SHLD rights offering.

[CorpRaider]

Is that the bald guy on Bloomberg who loves fords?

 

 

[nodnub]

Is that the bald guy on Bloomberg who loves fords?

 

No

 

http://www.bloombergview.com/contributors/matt-levine

[hardcorevalue]

Does anybody have any thoughts on what happens to BofA if we get 10 year rates sub 1% for an extended period of time? I'd assume NIM margin would come under further pressure. All the talk of normalized earnings power and Moynihan's comments are in normalized interest rate environment, perhaps this may be further off than many of us would like. I know Buffett says he never lets interest rates influence his decision but given the expiry dates of the warrants and the experiences of Japanese banks I'd be curious to hear people's thoughts.

[Guest Schwab711]

Does anybody have any thoughts on what happens to BofA if we get 10 year rates sub 1% for an extended period of time? I'd assume NIM margin would come under further pressure. All the talk of normalized earnings power and Moynihan's comments are in normalized interest rate environment, perhaps this may be further off than many of us would like. I know Buffett says he never lets interest rates influence his decision but given the expiry dates of the warrants and the experiences of Japanese banks I'd be curious to hear people's thoughts.

 

Mortgages will be cheaper and there will be lots of revolvers being issued and anything else that lacks direct commitment and is fee based. Large banks are actually quite nimble in almost any interest rate environment as long as yields and yield curves progress slowly and without a lot of volatility. Interest rate volatility creates illiquid situations. Insolvency generally only occurs through terrible strategy or bad underwriting/local economics. Japanese banks are still profitable, just very inefficient relative to most of the world (but quite efficient within the Japanese system).

[hardcorevalue]

Sure but with banks already paying almost nothing on savings accounts isn't their some lower bound problem with falling rates in terms of NIM?

[Uccmal]

Does anybody have any thoughts on what happens to BofA if we get 10 year rates sub 1% for an extended period of time? I'd assume NIM margin would come under further pressure. All the talk of normalized earnings power and Moynihan's comments are in normalized interest rate environment, perhaps this may be further off than many of us would like. I know Buffett says he never lets interest rates influence his decision but given the expiry dates of the warrants and the experiences of Japanese banks I'd be curious to hear people's thoughts.

 

In an even lower interest rate scenario they reprice their debt even lower, and for longer time frames.  The payoff gets delayed.  Everyone else reprices their debt as well, so there is fee income there. 

 

I would think that they will drift into negative interest rate territory on deposits, or stop lending.  I think this is what is behind Obama's push to loosen mortgage requirements again.  But, I cant see The majors being too keen on lending to subprime borrowers again in any hurry after having their asses sued off. 

 

After some serious thought I am hedging my bets by buying more common stock and very slowly getting rid of my Leap positions.  I have had a significant change of mind in the past couple of weeks.

[benchmark]

Does anybody have any thoughts on what happens to BofA if we get 10 year rates sub 1% for an extended period of time? I'd assume NIM margin would come under further pressure. All the talk of normalized earnings power and Moynihan's comments are in normalized interest rate environment, perhaps this may be further off than many of us would like. I know Buffett says he never lets interest rates influence his decision but given the expiry dates of the warrants and the experiences of Japanese banks I'd be curious to hear people's thoughts.

 

In an even lower interest rate scenario they reprice their debt even lower, and for longer time frames.  The payoff gets delayed.  Everyone else reprices their debt as well, so there is fee income there. 

 

I would think that they will drift into negative interest rate territory on deposits, or stop lending.  I think this is what is behind Obama's push to loosen mortgage requirements again.  But, I cant see The majors being too keen on lending to subprime borrowers again in any hurry after having their asses sued off. 

 

After some serious thought I am hedging my bets by buying more common stock and very slowly getting rid of my Leap positions.  I have had a significant change of mind in the past couple of weeks.

 

I don't know that there is going to be deflation -- I see prices gone up everywhere, so feds has to raise the rate.

[obtuse_investor]

As I was about to be done for the day... I saw this in my mailbox...

 

Bank of America (BAC.WS.A-N) at $6.29: New 52-Week Low

 

Last: $6.29 Net Change: $-0.34 Change: -5.13%

Prev. close: $6.63 Volume: 372,713

High: $6.79 Low: $6.29

52 Week High: $8.73 52 Week Low: $6.30

[orthopa]

I added more A warrants today at 6.20. They were down more then 7% at some point I believe. 4-5 times the common at the same time % wise.  Not sure what was I but I scooped some up. At its simplest common needs to be at 19.50 with no adjustment in 4 years to break even? Common was just over 18 2 weeks ago.

 

I hope Im not missing something painfully obvious. Looks like market really not liking rates going lower...

[Picasso]

I think it is interesting that the current price of the A warrants is the same as when this thread first started in 2010.  For those that were able to load up in 2011 it was a good run up to $8 over a few years. 

 

So far we are 595 pages into the discussion and unless you were a great timer it hasn't really meant much in terms of performance.  Sure the current valuation of BAC looks appealing for long-term shareholders but I found it interesting to find how timing had more of an impact on returns than anything else regarding these warrants.

[Grenville]

So far we are 595 pages into the discussion and unless you were a great timer it hasn't really meant much in terms of performance. 

 

To be fair, the discussion on this thread is about Bank of America and all its equity instruments: Leaps, common, warrants, conv. pref...

[rohitc99]

 

After some serious thought I am hedging my bets by buying more common stock and very slowly getting rid of my Leap positions.  I have had a significant change of mind in the past couple of weeks.

Hi uccmal

can you share what is the change in your thought process ?

[bennycx]

The current valuation doesn't really entice me anymore. While on a price to tangible book value BAC looks attractive, it rightly deserves a lower premium compared to WFC even in a normalised environment. Once I got out of thinking solely on P/B and thought about earnings and the banking business in general, I found better opportunities outside and sold it few months ago to concentrate on better ideas. I still believe BAC could be a good investment though.

[kevin4u2]

The current valuation doesn't really entice me anymore. While on a price to tangible book value BAC looks attractive, it rightly deserves a lower premium compared to WFC even in a normalised environment. Once I got out of thinking solely on P/B and thought about earnings and the banking business in general, I found better opportunities outside and sold it few months ago to concentrate on better ideas. I still believe BAC could be a good investment though.

 

I disagree with Bennycx.  BAC earns nearly the same ROTCE as WFC and JPM excluding the CRES division, based on Q3 numbers. 

 

Here is a link to something I just wrote on my blog.  I allow seeking alpha to pick up the content on my blog.   

 

http://seekingalpha.com/article/2811495-top-investments-for-2015-a-followup-bank-of-america-and-citigroup

[Uccmal]

 

After some serious thought I am hedging my bets by buying more common stock and very slowly getting rid of my Leap positions.  I have had a significant change of mind in the past couple of weeks.

Hi uccmal

can you share what is the change in your thought process ?

 

I indicated this awhile back somewhere on here, even before my rethink.  I find that options work best when the stock can be reasonably expected (by me) to rise Quickly at some point. 

 

The major catalysts are gone.  All we can expect is steadily growing earnings and dividends from here.  Steady growth is not necessarily good for options where you need a quick return to make money. 

 

An example:

 

Today for 2017 x 17  cost 2.50. = 19.50 ignoring the carrying cost.  To break even on the Leap in two yrs requires the stock to be at $22.  To make 50 % in two years requires the stock to be 23.25. 

 

Can you reasonably predict that the stock will be at 23.25 in two years.  We could get a bear market mauling somewhere in there where every option you have goes to zero but the common is only down around $15.00 and the dividend is 0.60 per share. 

 

At a certain point the common becomes more desirable from a safety and return perspective.  I think we are near that point - maybe not exactly today but around $18.00 anyway.

 

We can be reasonably sure that BAC will get a dividend raise to 30 or 4o cents per year making the common all that more compelling.  I think in a few years Bac will reach 30 a share, but I cannot for the life of me predict when. 

 

I know this isn't exactly clear.  It is more an opinion drawn from experience.  Once you have had options go to zero a few times, you get to see decay in real time, and its not nice.