BAC-WT - Bank of America Warrants

[finetrader]

I can't believe they did not raise rates. A little volatility and they get scared.

0.25%..Just do it so they they can stop talking about it.

I would argue that all this indecision is creating damage(volatility, fear) to the market.

What a bunch of coward!

 

Good timing Uccmal!

[TwoCitiesCapital]

I sold 20% of my Leaps going into this morning. 

 

After the feds non announcement I bought them all back at a discount in the last 30 minutes.

 

To think people actually thought the fed might raise rates. ...

 

Lol. They've only been talking about it for a few years. I know that I could probably be considered a "perma-bear" given that I've been largely negative on the rosy picture that is painted of the U.S. since 2011ish, but a large majority of economic data is weaker today than it was when they initiated all of the QE programs with the exception of the first one. It would be inconsistent, and pro-cyclical, to tighten rates at this point in time.

 

Not that a 0.25% rise in rates changes anything, but unfortunately we live in a world where signalling carries more importance than the actual action and that's why it's an issue....

 

[benchmark]

Now that rate increase is out of the question for 2015, what's the drivers for BAC's growth? Brian has said that if there is no rate increase, he'll have to cut more cost -- but cost cutting won't generate growth.

[ERICOPOLY]

Presumably BAC was trading above $18 two months ago on the thinking that a rate increase was in the cards and it would raise their returns to 1% ROA which is about $1.80 per share.  So it was 10x that number.

 

Now it's at 10x $1.55.

 

That's a difference of roughly $2.50 a share.

 

So over just two months, it suddenly priced in the scenario that they only earn $1.30 per share for the next five years before they magically hit their 1% ROA.

 

Or another way of phrasing it is that they earn zero for 1.5 years before hitting 1% ROA.

 

There are multiple ways of putting it... but a lot of negativity is priced in at the moment.

 

People have theories that low interest rates lead to bubbles.  My ass.

 

 

[ourkid8]

Are you loading up on leaps? :-)

 

Presumably BAC was trading above $18 two months ago on the thinking that a rate increase was in the cards and it would raise their returns to 1% ROA which is about $1.80 per share.  So it was 10x that number.

 

Now it's at 10x $1.55.

 

That's a difference of roughly $2.50 a share.

 

So over just two months, it suddenly priced in the scenario that they only earn $1.30 per share for the next five years before they magically hit their 1% ROA.

 

Or another way of phrasing it is that they earn zero for 1.5 years before hitting 1% ROA.

 

There are multiple ways of putting it... but a lot of negativity is priced in at the moment.

 

People have theories that low interest rates lead to bubbles.  My ass.

[tylerdurden]

 

To think people actually thought the fed might raise rates. ...

 

It seems you are an expert on trading these leaps; another perfect timing I guess...

 

I wouldn't count on "no rates rise for foreseeable future" thesis as much though; you might be surprised (pleasantly in your case I suppose)...

 

I am at Jamie Dimon camp on this. People could be surprised to see how fast the rates rise when the magical time comes.

 

I don't think anyone should be surprised if Fed pulls the trigger by Dec in a below 5% unemployment environment and more stable China outlook...

[wescobrk]

I agree about not leading to bubbles necessarily.

I can't for the life of me figure out what Schiller is talking about a bubble.

The S&P is around 16.5x forward earnings with zero interest rates and five-by-five-year inflation below two percent!

Wtf is Schiller smoking?

Maybe the S&P isn't cheap but to say it is in a bubble.

Slightly hijacking the thread, my apologies, but had to get off my chest.

 

Also, why does he focus so much on the past 10 years, 2 of those years the economy was on its back.

Lastly, Bullard is a nut, he is on cnbc saying he is arguing for a rate increase when he doesn't even have a vote! Who cares what he thinks!

Off soapbox.

 

Presumably BAC was trading above $18 two months ago on the thinking that a rate increase was in the cards and it would raise their returns to 1% ROA which is about $1.80 per share.  So it was 10x that number.

 

Now it's at 10x $1.55.

 

That's a difference of roughly $2.50 a share.

 

So over just two months, it suddenly priced in the scenario that they only earn $1.30 per share for the next five years before they magically hit their 1% ROA.

 

Or another way of phrasing it is that they earn zero for 1.5 years before hitting 1% ROA.

 

There are multiple ways of putting it... but a lot of negativity is priced in at the moment.

 

People have theories that low interest rates lead to bubbles.  My ass.

[Uccmal]

 

To think people actually thought the fed might raise rates. ...

 

It seems you are an expert on trading these leaps; another perfect timing I guess...

 

I wouldn't count on "no rates rise for foreseeable future" thesis as much though; you might be surprised (pleasantly in your case I suppose)...

 

I am at Jamie Dimon camp on this. People could be surprised to see how fast the rates rise when the magical time comes.

 

I don't think anyone should be surprised if Fed pulls the trigger by Dec in a below 5% unemployment environment and more stable China outlook...

 

I dont know about the expert, or timing thing.  It can go either way or worse, absolutely no where.  Sooner or later interest rates will rise. 

 

to: Wescobrk: Bullard is doing the political thingy - a couple of the fed members are sent out to prep people for a possible interest rate rise. 

[racemize]

After a very long absence, I'm back into the LEAPS on Friday.  BAC 2017 13's.

[mvalue]

The S&P is 16.5 forward earnings if forward earnings are $119-120/shr. GAAP trailing earnings are under $95, and operating earnings a little over $108. Thus, the trailing GAAP PE is a little under 21x.

 

I would bet heavily against anything resembling real earnings hitting $120 over the next year. Doesn't mean the market will go down, just noting that the PEs you see from FactSet etc (which the WSJ often references as well) are only comparable to their historical self, not historical GAAP PE multiples.

 

I agree about not leading to bubbles necessarily.

I can't for the life of me figure out what Schiller is talking about a bubble.

The S&P is around 16.5x forward earnings with zero interest rates and five-by-five-year inflation below two percent!

Wtf is Schiller smoking?

Maybe the S&P isn't cheap but to say it is in a bubble.

Slightly hijacking the thread, my apologies, but had to get off my chest.

 

Also, why does he focus so much on the past 10 years, 2 of those years the economy was on its back.

Lastly, Bullard is a nut, he is on cnbc saying he is arguing for a rate increase when he doesn't even have a vote! Who cares what he thinks!

Off soapbox.

 

Presumably BAC was trading above $18 two months ago on the thinking that a rate increase was in the cards and it would raise their returns to 1% ROA which is about $1.80 per share.  So it was 10x that number.

 

Now it's at 10x $1.55.

 

That's a difference of roughly $2.50 a share.

 

So over just two months, it suddenly priced in the scenario that they only earn $1.30 per share for the next five years before they magically hit their 1% ROA.

 

Or another way of phrasing it is that they earn zero for 1.5 years before hitting 1% ROA.

 

There are multiple ways of putting it... but a lot of negativity is priced in at the moment.

 

People have theories that low interest rates lead to bubbles.  My ass.

[tylerdurden]

 

To think people actually thought the fed might raise rates. ...

 

It seems you are an expert on trading these leaps; another perfect timing I guess...

 

I wouldn't count on "no rates rise for foreseeable future" thesis as much though; you might be surprised (pleasantly in your case I suppose)...

 

I am at Jamie Dimon camp on this. People could be surprised to see how fast the rates rise when the magical time comes.

 

I don't think anyone should be surprised if Fed pulls the trigger by Dec in a below 5% unemployment environment and more stable China outlook...

 

I dont know about the expert, or timing thing.  It can go either way or worse, absolutely no where.  Sooner or later interest rates will rise. 

 

to: Wescobrk: Bullard is doing the political thingy - a couple of the fed members are sent out to prep people for a possible interest rate rise.

 

I actually agree with you on the potential of these trades going either way in the short run. That's why I prefer investing long run rather than trading anything short run. It's a personal choice of course.

 

I don't agree with some folks' views that a .25% increase can only be outrageous at this environment. By year end highly likely, we'll see below 5% U-3 and below 10% U-6 unemployment rates. Ok no inflation in sight but I don't think central banking policy is supposed to be that straightforward. If you watched Yellen's press conference she explained again why they are supposed to anticipate any overheating in advance and react in advance in order to smooth economic cycles rather than having sharp stops and gos for the economy. Anyways, it won't be that "shocking" to see a .25% increase in Dec for me. In terms of the bubble issue, the problem is there you don't know where the bubble or inbalances in the economy until it's too late therefore they are supposed to be pro-active rather than reactive. I guess 0.25% increase would still be highly accommodative as anyone would argue anyways...

[wescobrk]

I should have clarified my comments on Bullard on why he is a nut.

I was referring to late in 2014 AFTER QE was terminated he argued that the Fed should start QE again! I believe it was in Nov of 2014 then less than two months later he argued to raise rates in march of 2015!

He later said on CNBC that he stands by those comments. Crazy!

Reasonable people can differ on raising in Sept of 2015. I don't have a problem with that. I just think he is a nut plus he is always out in public even though he doesn't have a vote this year.

[plato1976]

Can someone educate me how a rising rate env must benefit bank of america?

If short term rate rises while long term rate drops or stays the same, should rising interesting rate a negative for banks?

 

I should have clarified my comments on Bullard on why he is a nut.

I was referring to late in 2014 AFTER QE was terminated he argued that the Fed should start QE again! I believe it was in Nov of 2014 then less than two months later he argued to raise rates in march of 2015!

He later said on CNBC that he stands by those comments. Crazy!

Reasonable people can differ on raising in Sept of 2015. I don't have a problem with that. I just think he is a nut plus he is always out in public even though he doesn't have a vote this year.

[KCLarkin]

Can someone educate me how a rising rate env must benefit bank of america?

If short term rate rises while long term rate drops or stays the same, should rising interesting rate a negative for banks?

 

Simplifying this:

 

In a zero interest rate environment, the rate paid on deposits should be negative. But banks generally can't charge for deposits. So as short term rates rise, deposit costs will stay low but interest income will increase (even if long term rates don't rise, there is variable rate debt). This will increase spreads.

[Uccmal]

Can someone educate me how a rising rate env must benefit bank of america?

If short term rate rises while long term rate drops or stays the same, should rising interesting rate a negative for banks?

 

 

Short answer:  There are certain assumptions in place.  The yield curve needs to be maintained for one. 

 

The big concern has been/is Net Interest Margins.  They have become compressed up against zero.  The bulk of a banks borrowings are from deposits, especially with BAC.  When deposits pay 0.01 % and loan rates are compressed (partly from too much liquidity) NIMs are tight.  If/when the overnight lending rate is increased - say by 0.5% the banks will increase what they pay on deposits to 0.4% (just an example).  They will turn around these deposits and lend them out across the curve slightly higher than prime or whatever.  This opens up the NIMs a bit.  We are talking fractions of a percent on over a trillion in deposits. 

0.1% of 1 trillion is 1billion (which by definition of NIM goes straight to the profit/loss line). 

 

There is also some time arbitrage going on.  Banks borrow across the yield curve via short/medium term notes.  This money can work positive for them in a rising environment.  They have all been refinancing preferreds, bonds, and credit products at lower cost over the last few years. 

 

For proof, you need only look at NIMs when rates have been higher. 

 

For proof on how banks behave you need only look at the two recent interest rate cuts in Canada.  The BoC has dropped interest rates by 0.5% but banks have dropped prime around 0.35%.  They are collecting the 0.15% difference.  Kind of sleazy but that is how the game is played. 

 

This is how it is supposed to unfold.  If the banks cant lend, due to too much liquidity, it wont necessarily unfold as it should. 

 

 

[Uccmal]

Can someone educate me how a rising rate env must benefit bank of america?

If short term rate rises while long term rate drops or stays the same, should rising interesting rate a negative for banks?

 

Simplifying this:

 

In a zero interest rate environment, the rate paid on deposits should be negative. But banks generally can't charge for deposits. So as short term rates rise, deposit costs will stay low but interest income will increase (even if long term rates don't rise, there is variable rate debt). This will increase spreads.

 

So much simpler than what I wrote but the same idea.

[nikhil25]

Bank of America CEO Moynihan retains chairman title after vote

http://www.reuters.com/article/2015/09/22/us-bankofamerica-vote-idUSKCN0RM0BH20150922

[sswan11]

From Barron's:

 

 

By STEVEN M. SEARS

Updated Sept. 26, 2015 2:15 a.m. ET

Last week, Brian Moynihan thwarted a shareholder rebellion to remove him as Bank of America ’s chairman. As a result, he remains head of the board of directors and CEO of one of the world’s largest banks.

 

If victory has not gone to his head, Moynihan will probably make shareholder-friendly moves to reward loyalists.

 

While the bank’s leadership is naturally mum on capital-return plans, it is reasonable to think that Moynihan is planning to significantly increase Bank of America’s common-stock dividend and stock-buyback program.

 

In 2015, the bank is expected to earn $16 billion, up from $4.8 billion in 2014. The growth shows Bank of America’s earnings power when free of subprime-mortgage litigation settlements.

 

The Federal Reserve, which approves buyback and dividend plans, bases capital-return decisions on the previous year’s earnings. A big earnings increase should let Moynihan reward patient investors who supported his turnaround efforts and believed that the bank could become a money-making machine should interest rates ever increase.

 

Bank of America now pays a quarterly dividend of five cents. In 2015, that will contribute to a $4.5 billion return—$2.1 billion in dividends and $2.4 billion in stock repurchases. In 2014, the bank returned nearly $3 billion to shareholders via $1.3 billion in dividends and $1.7 billion in stock buybacks. He has to submit his capital-return plan to the Fed by the first week of April.

 

The bull case for a dividend hike and buyback program is based on the belief that Moynihan has fixed the internal shortcomings that led to the cancellation of a $4 billion stock buyback in 2014. The cancellation upset many shareholders who’d been hurt when the bank issued some 2.3 billion more shares over 2009 and 2010 to pay back a credit-crisis loan from the federal government and to fund its purchase of Merrill Lynch in 2008.

 

Bank of America soon faces several key market tests that will gauge investors’ and the Fed’s sentiments about the bank. By Sept. 30, the bank must submit an additional capital plan to the Fed that shows it has addressed some previous weaknesses. Upon receipt, the Fed has 75 days to respond. The company also reports third-quarter earnings on Oct. 14, which will provide an important data point for its valuation.

 

We have long liked BofA stock since shares fell from about $55 to single digits during the worst of the credit crisis. We doubted the U.S. government would let it fail after Lehman Brothers’ collapse and believed that investor sentiment was too negative. Any bit of good news seemed likely to make the stock advance. It’s frustrating that the stock has failed to trade above $20 on growing earnings power, but low interest rates are difficult for investors to ignore.

 

WHEN RATES RISE, Bank of America will benefit. Some investors say every one-percentage-point shift upward in the yield curve could increases annual earnings by about $4 billion. For that Tomorrowland reason, it makes sense to warehouse the stock and keep buying shares. After all, the Fed could raise rates later this year or in early 2016.

 

To position themselves, investors can buy Bank of America’s stock, and sell the May 15 put recently bid at $1.09. The put allows investors to buy stock at $13.91. If the stock advances, the money received for selling the put can be kept.

 

It’s not a high-risk bet, in our opinion. On Moynihan’s first day as CEO in 2010, Bank of America’s stock was at $15.69. After five years, the price is basically unchanged, despite his efforts. That’s why Moynihan must dramatically increase his capital-return plans.

 

If not, shareholders could revolt again, and it is unlikely that Moynihan could sway them as he did last week.

 

 

 

 

 

 

 

[pocoapoco]

Everyone knows that div / buyback going up and rates going up and those things will help the stock.  Since everyone "knows" that I'm actually more wary about my position than I was a year ago.

 

[jay21]

Everyone knows that div / buyback going up and rates going up and those things will help the stock.  Since everyone "knows" that I'm actually more wary about my position than I was a year ago.

 

Everyone has "known it" for 2-3 years. Still waiting for that payoff though.

[redskin]

I think there is a lot of room for error with this investment.  What multiple are you willing to pay?  The stock is currently around $15.50.  If you are willing to pay 12X, BAC normalized earnings would be $1.29 or $14.5 billion annually.  I think it would be a big disappointment for BAC to only earn $14.5B annually. 

[yitech]

Big US banks lose patience with Fed

http://www.ft.com/intl/cms/s/0/e0d51f2c-63e0-11e5-a28b-50226830d644.html#axzz3nCC4mhmN

 

"But, after the decision from the US Federal Reserve to keep its target overnight rate on hold this month, more lenders are taking their cue from Wells Fargo, the biggest bank in the world by market capitalisation, said analysts. Over the past year the San Francisco-based bank has run down its cash and short-term investments to buy longer-term assets, on the basis that rates will stay “lower for longer”, according to John Shrewsberry, chief financial officer. That conviction is now catching, said Jason Goldberg, an analyst at Barclays, which recently hosted representatives from about 150 banks at a conference in New York. “The consensus was: give up on the Fed,” said Mr Goldberg."

 

"Even if the Fed does push up short-term rates for the first time in nine years in the months ahead, the prospect of further easing measures in deflation-hit Japan and the still sluggish eurozone is likely to mean that the pace of increases remains slow. That means that banks will be under pressure to find more ways to boost profits, such as accelerating branch closure programmes.

“Bankers are starting to say, we can’t run these institutions based on hope for higher rates, so let’s figure out what we can do,” said Fred Cannon, global director of research at Keefe, Bruyette & Woods."

 

 

[Guest notorious546]

i think this is getting to pretty attractive territory again,

trades at very small premium to tangible book value (15.02/share) and below book value (21.91/share). 9.6x 2016e earnings, 8.6x 2017e earnings

[karthikpm]

Anyone adding today - warrants or common?

[gary17]

warrants are still very expensive !  i think the cost of leverage is about 11% or so ! 

 

 

i'm just sitting here, enjoying the show lol

 

 

seems like the market is thinking if there's no rate change; BAC profitability will be low

 

 

Gary