BAC-WT - Bank of America Warrants

[TwoCitiesCapital]

My limit order for $11.00 was hit.  Next stop $10.90 $10.00 :)

 

Fixed.

[Guest qanary]

Took a huge position today.  Thanks to everybody on the forum for their contributions over the last year and special thanks to the guest writers from ZH.  I love all the gloom-and-doom macro talk.  Good for prices.

[ni-co]

Took a huge position today.  Thanks to everybody on the forum for their contributions over the last year and special thanks to the guest writers from ZH.  I love all the gloom-and-doom macro talk.  Good for prices.

 

Yeah. That's kind of what the guys in the oil thread said, too. But hey, that's how markets work and it's a value investing forum after all.

[Guest qanary]

I can see how the oil guys being wrong correlates with my investment in BAC.  Thanks for the heads-up.

 

Took a huge position today.  Thanks to everybody on the forum for their contributions over the last year and special thanks to the guest writers from ZH.  I love all the gloom-and-doom macro talk.  Good for prices.

 

Yeah. That's kind of what the guys in the oil thread said, too. But hey, that's how markets work and it's a value investing forum after all.

[Viking]

I get that the banks in Europe are struggling as they have KNOWN litigation (still coming), credit quality (non performing loans from the last crisis still on books) and capital issues (not enough). It is generally understood that Europe was much slower in forcing its banks to deal with the crisis. What I am having a hard time understanding is why the US big banks are being lumped in with the large European banks in terms of these specific issues.

 

Here is a typical news wire headline from today: "PARIS (AP) — Questions are growing over the financial health of banks, particularly in Europe and the U.S., as they face a toxic mix of low economic growth, bad loans and squeezed earnings. France's Societe Generale became Thursday the latest bank to issue a confidence-shattering profit warning, which helped trigger a new sell-off in financial stocks. The bank saw its share price stumble 12 percent and major rivals like Deutsche Bank and UniCredit saw losses of nearly 10 percent."

 

I understand that the near term earnings picture for the big US banks is cloudy but are we really concerned about their financial health? BAC is trading at $11.15; tangible book value is about $15.60. The majority of its business is in the US and the US economy is chugging along. Yes, recent developments will bring earnings down in the coming quarters for the big US banks; however, they will still earn a great deal of money and continue to add to their excess capital positions.

 

It reminds me of when we had the last European bank panic a couple of years ago driven by Greece. Wells Fargo got absolutely hammered along with all the large global banks even though they have very little exposure to Greece/Europe. Investors were smart to buy WFC as the panic intensified as the shares rebounded nicely over the following year.

 

Time will tell if the sell off of US banks to current levels is warranted or simply panic selling. :-)

[Rasputin]

My limit order for $11.00 was hit.  Next stop $10.90 $10.00 :)

 

Fixed.

 

I have limit order all the way to $8 at $0.10 increment.  It's raining gold in my household. 

[rranjan]

I get that the banks in Europe are struggling as they have KNOWN litigation (still coming), credit quality (non performing loans from the last crisis still on books) and capital issues (not enough). It is generally understood that Europe was much slower in forcing its banks to deal with the crisis. What I am having a hard time understanding is why the US big banks are being lumped in with the large European banks in terms of these specific issues.

 

Here is a typical news wire headline from today: "PARIS (AP) — Questions are growing over the financial health of banks, particularly in Europe and the U.S., as they face a toxic mix of low economic growth, bad loans and squeezed earnings. France's Societe Generale became Thursday the latest bank to issue a confidence-shattering profit warning, which helped trigger a new sell-off in financial stocks. The bank saw its share price stumble 12 percent and major rivals like Deutsche Bank and UniCredit saw losses of nearly 10 percent."

 

I understand that the near term earnings picture for the big US banks is cloudy but are we really concerned about their financial health? BAC is trading at $11.15; tangible book value is about $15.60. The majority of its business is in the US and the US economy is chugging along. Yes, recent developments will bring earnings down in the coming quarters for the big US banks; however, they will still earn a great deal of money and continue to add to their excess capital positions.

 

It reminds me of when we had the last European bank panic a couple of years ago driven by Greece. Wells Fargo got absolutely hammered along with all the large global banks even though they have very little exposure to Greece/Europe. Investors were smart to buy WFC as the panic intensified as the shares rebounded nicely over the following year.

 

Time will tell if the sell off of US banks to current levels is warranted or simply panic selling. :-)

 

It's panic selling for sure because US banks are in good shape and not comparable to European banks at all. May be two-three factors acting at one time is creating all the downward pressure, but business fundamentals are good. BAC business have gotten so much better in the last few years, but it's back to those prices again.

 

Only time will tell if I am right, but I doubt that these prices will last for too long.

[LC]

switched remaining warrants to common today.

[Guest qanary]

I get that sense as well.  There are advantages to having been through the last European bank crisis and the GFC.

 

The only legitimate concern I've seen is the NIM compression/curve flattening.  But, curves have flattened and inverted before.  If it persists for years, that's bad (or there isn't strong loan demand), but banks won't write uneconomical loans and if they run-off/return capital, I think BAC provides a margin of safety at this price for that unlikely outcome.

 

No guarantees, but I think we're being adequately compensated for the risk.  The intrinsic value of BAC wasn't likely impaired by 30% within a month.

 

I get that the banks in Europe are struggling as they have KNOWN litigation (still coming), credit quality (non performing loans from the last crisis still on books) and capital issues (not enough). It is generally understood that Europe was much slower in forcing its banks to deal with the crisis. What I am having a hard time understanding is why the US big banks are being lumped in with the large European banks in terms of these specific issues.

 

Here is a typical news wire headline from today: "PARIS (AP) — Questions are growing over the financial health of banks, particularly in Europe and the U.S., as they face a toxic mix of low economic growth, bad loans and squeezed earnings. France's Societe Generale became Thursday the latest bank to issue a confidence-shattering profit warning, which helped trigger a new sell-off in financial stocks. The bank saw its share price stumble 12 percent and major rivals like Deutsche Bank and UniCredit saw losses of nearly 10 percent."

 

I understand that the near term earnings picture for the big US banks is cloudy but are we really concerned about their financial health? BAC is trading at $11.15; tangible book value is about $15.60. The majority of its business is in the US and the US economy is chugging along. Yes, recent developments will bring earnings down in the coming quarters for the big US banks; however, they will still earn a great deal of money and continue to add to their excess capital positions.

 

It reminds me of when we had the last European bank panic a couple of years ago driven by Greece. Wells Fargo got absolutely hammered along with all the large global banks even though they have very little exposure to Greece/Europe. Investors were smart to buy WFC as the panic intensified as the shares rebounded nicely over the following year.

 

Time will tell if the sell off of US banks to current levels is warranted or simply panic selling. :-)

[Viking]

My guess is markets will be a mess until the next Fed meeting in March; if the Fed gets more dovish then we could see a bottom in bank stocks.

 

If the Fed does not get dovish enough in March then we could see a larger sell off of the overall market. If this happens (i.e. the market averages fall another 10% from current levels) then we could see another leg down in bank stocks.

 

Crazy times...

[ni-co]

I get that the banks in Europe are struggling as they have KNOWN litigation (still coming), credit quality (non performing loans from the last crisis still on books) and capital issues (not enough). It is generally understood that Europe was much slower in forcing its banks to deal with the crisis. What I am having a hard time understanding is why the US big banks are being lumped in with the large European banks in terms of these specific issues.

 

Here is a typical news wire headline from today: "PARIS (AP) — Questions are growing over the financial health of banks, particularly in Europe and the U.S., as they face a toxic mix of low economic growth, bad loans and squeezed earnings. France's Societe Generale became Thursday the latest bank to issue a confidence-shattering profit warning, which helped trigger a new sell-off in financial stocks. The bank saw its share price stumble 12 percent and major rivals like Deutsche Bank and UniCredit saw losses of nearly 10 percent."

 

I understand that the near term earnings picture for the big US banks is cloudy but are we really concerned about their financial health? BAC is trading at $11.15; tangible book value is about $15.60. The majority of its business is in the US and the US economy is chugging along. Yes, recent developments will bring earnings down in the coming quarters for the big US banks; however, they will still earn a great deal of money and continue to add to their excess capital positions.

 

It reminds me of when we had the last European bank panic a couple of years ago driven by Greece. Wells Fargo got absolutely hammered along with all the large global banks even though they have very little exposure to Greece/Europe. Investors were smart to buy WFC as the panic intensified as the shares rebounded nicely over the following year.

 

Time will tell if the sell off of US banks to current levels is warranted or simply panic selling. :-)

 

I'd argue that the fear around exposure to Europe was rational and the fact that people calmed down doesn't mean that there are no interdependencies. I don't want to hijack this thread with another macro discussion but the price declines in US banks make a lot of sense when you're taking a macro view. They will not make much sense when you don't. That's the same thing I said in all the oil threads and I basically got the same "ZH talk" reaction to that.

 

I quote from an interview with William White, who knows a thing or two about banks and macro (much more than I'll ever do), and I really encourage you all to read it, like I did here.

 

When you view the economy as a complex, adaptive system, like many other systems, one of the clear findings from the literature is that the trigger doesn’t matter; it’s the system that’s unstable. And I think our system is unstable.

 

This, in a nutshell, is why European banks matter for US banks and vice versa.

[Picasso]

My two cents:

 

I think the market is having a really difficult time figuring out exactly what BAC's business model looks like in this world we live in.  Shares have declined about 40% since November when everyone was hyped about rate increases (I still don't get why people were hyped, but that aside) yet what blows my mind is that if you just take a look at the average daily volume of BAC, it flips over its float every couple months since the peak.  It's clear to me that the market is so ridiculously short-term focused that you swing from investors trying to game a rate increase to investors trying to make up a new thesis, or dump their shares on whatever concern conveniently coincides with the share price decline.  If you have a long-term thesis that is still intact, stop acting surprised that you get this kind of volatility.  Investors in the market are absolutely retarded these days, it's to be expected.  The future of BAC shouldn't be changing so rapidly that the float's flipping over every couple months. 

 

But back to the business model, we're in a world where despite all this central bank easing there's just no inflation.  The goal of these central banks is to create inflation and so unless that changes, no inflation when central banks want inflation means they're going to continue to find ways that inadvertently hurt the banking business model.  Either by creating these bubbly debt pockets (like energy) by forcing people to reach for yield or further suppressing net interest margins by driving down long-term rates hoping it'll drive demand if they're just low enough.  The market is trying to figure out what that means for these large banks and the jury is still out.  The worst part is, *if* we go into a recession with these kinds of central bank policies, the central bank response almost guarantees that it's going to be impossible to be a prudent financial institution.  Now that it's happening all over the world the market is trying to come to grips with what it means for all banks with this kind of central bank framework.  That kind of long-term impact to earnings and the multiple you pay for that is a much bigger deal than whatever loan losses start hitting BAC. 

 

And for everyone who would then get upset at the central banks for causing this BAC pain, well those central banks are also why BAC wasn't a $0 back in 2008 or 2011 if they let Europe implode.  So you kind of take what you can get and be happy with the fact that things could have gone completely the other way.  But the repercussions involves rendering BAC a crappy business model until we work through whatever the heck it is we seem to be going through.  In my opinion it's been a bad business ever since 2008 but we've swung between different extremes as investors focus way too much on the short term catalysts.

 

There's obviously some correlation between all banks but that's probably because 90% of banks are subject to the same crappy conditions.  Some have more bad debt exposure, some have less economic growth, but they all have central banks intent on making it super hard for them to generate a good risk adjusted return.  There are some good banks out there (from a local market, competitive advantage perspective) and I'll be curious to see what ends up doing better over the long-term. 

 

That said BAC does look like it's too quickly priced in too many bad things at this price, but I'm not going to delude myself thinking it's at an inflection point where it's just this incredible business.  More of a cigar butt in this kind of world.

 

Anyway that's my take, no one has to take it seriously.

[ni-co]

I think the market is having a really difficult time figuring out exactly what BAC's business model looks like in this world we live in. 

 

I completely agree with you on your big picture. What I'd point out – and I consider this as especially relevant for banks and their business model – is that cause of all this is the change in the long-term debt cycle. Debt is expanding and contracting in

. At least since 2008, debt has been contracting all around the world, and all central banks (and governments) can do about it is trying to ease this contraction, which is what Ray Dalio has been saying – and been consistently right on – for many years now. It boggles my mind that he's been so spot-on with his model – correctly predicting the financial crisis, the CB action resulting from it, that QE wouldn't cause inflation, and now that CBs will be experiencing "pushing on a string" – and yet people are still blaming the CBs for everything that goes wrong (Dalio is literally the only fund manager out there who says that CBs are doing a good job. At the same time he is the most successful one – shouldn't this give people some pause?).

 

If you take Dalio's model it's very clear that the banking business model is under siege. This is because of the long-term debt cycle contracting and this will remain the case for many years to come. So, NIM won't come back for a very long time. Of course, banks will always be needed and they will figure out how to do their business in a contracting debt cycle but this is going to be a very painful process. Against this background, being a bank shareholder seems to be a bad risk/reward proposition – even in the long term. In my view, people who are expecting BAC, or any other bank, to simply go back to normal like it was in the 1990s or early 2000s are delusional because they completely miss this big picture. The late 1930s and the 1940s provide a far better model to think about the challenges and risks that banks will be facing in the coming one or two decades. When you view the world through Dalio's eyes everything that's happening right now with banks is completely logical and not surprising in the least. Brushing this aside as "ZH talk" is ignorant at best. I don't say that you have to follow this model but at least acknowledge that it exists and that it provides what seems to be a logical explanation for what is going on right now.

 

Since I am a value investor at heart it took me some time to internalize this model for the really big picture. But ever since, it has been extremely useful and rewarding.

[tede02]

One of my big takeaways from Dalio's model is how we've experienced prolonged periods of rock bottom interest rates before.  These periods have followed a financial crisis.  Going back to 1880, the 10 year dropped below 4% and stayed there for over 30 years.  Fast forward to the Great Depression, the 10 year dropped below 3% in 1934 and didn't get back above that mark until 1956 (I think it actually briefly exceeded 3% in 1954 but quickly dropped back). 

 

I agree that those who are counting on rising rates to boost bank profits should be careful and take a look back in history.  Not sure how Japanese banks have done over the past two decades.  I think rates there have been sub 2% since the early 1990s.  Perhaps a good (and recent) case study. 

[TheAiGuy]

I think this is being over thought:

 

Bank of America, the business:  ¯\_(ツ)_/¯

BAC, the stock, at $11:

[hyten1]

folks i hear what you are saying in regards to macro, dalio, debt cycle, nim etc etc.

 

but at the end of the day banks like WFC, JPM still made "20bil" that is B in this environment. at a PE of less than 10.

 

sure the future is uncertain, there probably isn't much growth etc etc. i understand the environment can get worse (that is why the stock is selling off) with the energy sector debts, contracting nim, regulation etc etc.

 

20bil in this environment which people seem to label as being very difficult/bad for banks.

 

if this was any other company, specially company that is so call the future we will be trading at multiples lot higher than that.

 

 

 

i hear ya

 

 

 

[TwoCitiesCapital]

folks i hear what you are saying in regards to macro, dalio, debt cycle, nim etc etc.

 

but at the end of the day banks like WFC, JPM still made "20bil" that is B in this environment. at a PE of less than 10.

 

...

 

20bil in this environment which people seem to label as being very difficult/bad for banks.

 

 

 

Actually, it wasn't $20B in this environment. It was $20B in last year's environment that started with a 2s-10s curve at 236 bps starting 12/31/2014 and no real negative impact from energy default.

 

The current environment is a 2s-10s spreads that stands at 101 bps as of yesterday and that has been contracting rapdily. Whatever their NIM was last year that generated $20B, well, it's going to be less than half that this year unless if the 2s-10s blows out quickly. On top of that, you have the concerns on the absolute exposure to energy in an environment where profits were already going to fall significantly.

 

I'm not saying not to buy BofA, or that it's going to go bankrupt, or that this is the end of the world. But it's NOT the same scenario as it was last year and the banks won't make $20B this year by a long-stretch. I'm not here to be negative - Santander is one of my largest positions and I'm suffering right alongside you guys, but to expect the same profits this year from U.S. banks that you received last year is ludicrous.

[hyten1]

2cities

 

i totally agree, i don't expect that things to stay the same, no ones know what is going to happen, hence the sector getting hammered.

 

i guess what i am trying to point out is if it wasn't the energy sector debt it was something else. WFC made 18bil in 2012, 21bil in 2013, 22bil in 2014 etc.  each time frame had its own issues.

 

i totally understand this time could be different, the NIM has contracted etc. the energy sector debt still a unknown. not saying very bad things cannot happen. just putting thing in some perspective in regards to the banks.

 

my biggest concern is mostly regulation and this long term low rates/deflation scenario which is obviously not good for the banks

 

hy

[Rasputin]

folks i hear what you are saying in regards to macro, dalio, debt cycle, nim etc etc.

 

but at the end of the day banks like WFC, JPM still made "20bil" that is B in this environment. at a PE of less than 10.

 

...

 

20bil in this environment which people seem to label as being very difficult/bad for banks.

 

 

 

Actually, it wasn't $20B in this environment. It was $20B in last year's environment that started with a 2s-10s curve at 236 bps starting 12/31/2014 and no real negative impact from energy default.

 

The current environment is a 2s-10s spreads that stands at 101 bps as of yesterday and that has been contracting rapdily. Whatever their NIM was last year that generated $20B, well, it's going to be less than half that this year unless if the 2s-10s blows out quickly. On top of that, you have the concerns on the absolute exposure to energy in an environment where profits were already going to fall significantly.

 

I'm not saying not to buy BofA, or that it's going to go bankrupt, or that this is the end of the world. But it's NOT the same scenario as it was last year and the banks won't make $20B this year by a long-stretch. I'm not here to be negative - Santander is one of my largest positions and I'm suffering right alongside you guys, but to expect the same profits this year from U.S. banks that you received last year is ludicrous.

 

hmm this chart shows 12/31/2014 2-10 spread was 150 bps and it dipped to 121 bps jan 30 2015. 

 

https://research.stlouisfed.org/fred2/series/T10Y2Y

 

BAC's reported NIM past 3 years:

 

2013 2.37

2014 2.25

2015 2.2

 

2s-10s spread per that stlouisfed chart in 2013 : 148 bps to 260 bps

2s-10s spread per that stlouisfed chart in 2014 : 150 bps to 266 bps

2s-10s spread per that stlouisfed chart in 2015 : 121 bps to 177 bps

 

How much do you think BAC will make in 2016???

[TwoCitiesCapital]

folks i hear what you are saying in regards to macro, dalio, debt cycle, nim etc etc.

 

but at the end of the day banks like WFC, JPM still made "20bil" that is B in this environment. at a PE of less than 10.

 

...

 

20bil in this environment which people seem to label as being very difficult/bad for banks.

 

 

 

Actually, it wasn't $20B in this environment. It was $20B in last year's environment that started with a 2s-10s curve at 236 bps starting 12/31/2014 and no real negative impact from energy default.

 

The current environment is a 2s-10s spreads that stands at 101 bps as of yesterday and that has been contracting rapdily. Whatever their NIM was last year that generated $20B, well, it's going to be less than half that this year unless if the 2s-10s blows out quickly. On top of that, you have the concerns on the absolute exposure to energy in an environment where profits were already going to fall significantly.

 

I'm not saying not to buy BofA, or that it's going to go bankrupt, or that this is the end of the world. But it's NOT the same scenario as it was last year and the banks won't make $20B this year by a long-stretch. I'm not here to be negative - Santander is one of my largest positions and I'm suffering right alongside you guys, but to expect the same profits this year from U.S. banks that you received last year is ludicrous.

 

hmm this chart shows 12/31/2014 2-10 spread was 150 bps and it dipped to 121 bps jan 30 2015. 

 

https://research.stlouisfed.org/fred2/series/T10Y2Y

 

BAC's reported NIM past 3 years:

 

2013 2.37

2014 2.25

2015 2.2

 

2s-10s spread per that stlouisfed chart in 2013 : 148 bps to 260 bps

2s-10s spread per that stlouisfed chart in 2014 : 150 bps to 266 bps

2s-10s spread per that stlouisfed chart in 2015 : 121 bps to 177 bps

 

How much do you think BAC will make in 2016???

 

Apologies. You are correct on the spreads. I was looking at 12/31/13 and not 14 due to a typo in Bloomberg. It's hard for me to guess how much they'll earn as there are dozens of variables at play - but most of they point negative at this point suggesting it's going to be quite a bit lower.

 

I expect the NIM to contract further from the 2.2 you saw in 2015. How much depends on their loan-books positioning what percentage of loans matures each year.  I would expect NIM contraction to continue for a few years minimum as each year's higher margin loans roll off and are replaced by less profitable loans. This means each year, lower and lower margin loans become a higher and higher percentage of the loanbook which will pressure NIM for years to come.

 

On top of the multi-year pressure on NIM, you now are looking at increasing write offs in the billions of dollars for energy exposure. Lastly, we haven't gone through a recession yet and the recovery does appear to be getting long-in tooth. If Bank of America and others can't make decent returns near the very top of the cycle when employment is at it's best, wages appear to be accelerating, and we're 7 years into a recovery - then who wants to be in it when it crosses that peaks and heads back down to the trough?

 

 

 

[ourkid8]

I also did the same. 

 

switched remaining warrants to common today.

[plato1976]

any estimation of the normalized BAC earning power in this new "norm"?

let's forget about energy write-off for now

just want to estimate the earning power in the low NIM env

 

folks i hear what you are saying in regards to macro, dalio, debt cycle, nim etc etc.

 

but at the end of the day banks like WFC, JPM still made "20bil" that is B in this environment. at a PE of less than 10.

 

...

 

20bil in this environment which people seem to label as being very difficult/bad for banks.

 

 

 

Actually, it wasn't $20B in this environment. It was $20B in last year's environment that started with a 2s-10s curve at 236 bps starting 12/31/2014 and no real negative impact from energy default.

 

The current environment is a 2s-10s spreads that stands at 101 bps as of yesterday and that has been contracting rapdily. Whatever their NIM was last year that generated $20B, well, it's going to be less than half that this year unless if the 2s-10s blows out quickly. On top of that, you have the concerns on the absolute exposure to energy in an environment where profits were already going to fall significantly.

 

I'm not saying not to buy BofA, or that it's going to go bankrupt, or that this is the end of the world. But it's NOT the same scenario as it was last year and the banks won't make $20B this year by a long-stretch. I'm not here to be negative - Santander is one of my largest positions and I'm suffering right alongside you guys, but to expect the same profits this year from U.S. banks that you received last year is ludicrous.

[boilermaker75]

Eric,

 

You must have sacrificed your last two chickens.

 

Boiler

[CorpRaider]

http://www.bloomberg.com/news/articles/2016-02-12/bank-of-america-increases-ceo-moynihan-s-pay-23-to-16-million

 

Richly deserved.

[ERICOPOLY]

Eric,

 

You must have sacrificed your last two chickens.

 

Boiler

 

No, I just put in a market order at the open and drove the stock up.  Not enough liquidity out there.  I had buy orders in 10 cent increments all the way to $11.90.  I'd almost have the order filled and then the next buy would get tripped as the next 10 cent increment arrived.