BAC-WT - Bank of America Warrants

[Marve2013]

Breaking up the banks ... here we go again ...

 

http://www.bloomberg.com/news/articles/2016-02-16/fed-s-kashkari-floats-breaking-up-big-banks-to-avert-melt-down

 

Would like to think that a breakup would allow banks to trade closer to book value ... but all the negativity and coercion leading up to it can't be good

 

 

[Jurgis]

There was a question at DJCO meeting of why Munger bought BAC when he bought the three big ones for DJCO. I did not understand/hear the answer and I don't see it in any of the notes (perhaps note takers did not hear it either). Anyone know what the answer was?

[jay21]

There was a question at DJCO meeting of why Munger bought BAC when he bought the three big ones for DJCO. I did not understand/hear the answer and I don't see it in any of the notes (perhaps note takers did not hear it either). Anyone know what the answer was?

 

Didn't listen to this.

 

But my speculation is that he thinks BAC is closer to WFC than JPM and C. They bought ML which give them an investment bank arm but they were always focused on the basics of the business. Its the Countrywide and ML acquisitions that did them in. The price was probably attractive for a bank whose main operations he already understood.

[CorpRaider]

Could be.  Just beating your ass on C&I and CRE loans with the cheap, massive deposit funding base.  That's what I saw way back in like the early 2000's.

[coc]

There was a question at DJCO meeting of why Munger bought BAC when he bought the three big ones for DJCO. I did not understand/hear the answer and I don't see it in any of the notes (perhaps note takers did not hear it either). Anyone know what the answer was?

 

He said he bought it because it was way too cheap -- like Berkshire did in the old days. Less than intrinsic value. He also said "There's a lot of good in the Bank of America." He did not directly compare it to WFC.

[Viking]

Is anyone looking at the divergence of JPM vs BAC the past 6 weeks?  Difference in p/tbv looks especially large: BAC = .78 and JPM = 1.21

 

BAC simply returning to TBV would give a 28% return. Hard to see JPM going up 28% or to $73 which would be a new 52 week high. I have shifted a chunk of my JPM to BAC.

 

                Feb 16.      TBV.        52 wk

BAC.        $12.25.    $15.62.    $18.48.   

                  33%        78%.

 

JPM.        $58.35.    $48.13.    $70.61

                  17%        1.21%.   

 

It looks to me like BAC has been unfairly lumped in with the European banks (which do have lots of issues) creating a temporary opportunity in the stock price.

[JBTC]

Stealing this from another thread:

 

Saw this Munger quote from recent Daily Journal meeting - thought it was wise:

 

No one should buy a bank without a feeling for how shrewd management is. It is easy to delude yourself into thinking things, as it is very easy to hide the real numbers. Don’t invest in banks without real knowledge.

 

So fellow COBF'ers who are decently invested in BAC, what do you think of this?

 

I frankly fail the test. I have no idea how shrewd the banksters at BAC are. Moynihan gets the reputation of being a straightforward, button-up new england lawyer tasked with streamlining the bank. But thats about as far as I know.

 

The daily Journal has a 30% position in BAC. Berkshire has significant exposure to BAC as well.. My guess is Munger and Buffet are comfortable with how shrewd management is..

 

Not to be so blunt, but so what? Pabrai was comfortable with Horsehead.

 

Pabrai is not Munger and Buffett

 

I don't care if the ghost of Ben Graham came back with a 35 year old Warren Buffett on his arm and personally told me to buy BAC stock hand over fist.

 

I'm asking if anyone has insight into the level of shrewdness at BAC, and if not, what makes you comfortable buying/holding in light of what Munger said.

 

It's fine not to have an answer, I admittedly do not myself and tried to give my reasoning for owning the stock in spite of this lack of knowledge.

 

I think we should listen to Munger for the spirit of what he has to say, but not the exact words.

 

Let's just say Munger has higher standards for owning stocks than us. He owns very few. He talks Buffett out of many ideas.

 

No doubt bank management is critically important. The number one rule is honesty - are the numbers true?

 

I think fresh out of crisis this is less of an issue. BAC is being run by a lawyer whose mission is to clean up the mess. This makes it less likely that the numbers aren't true.

 

Based on all indications, it seems Moynihan has been too conservative and moving too slowly in growing the business relative to JPM etc. This is frustrating but not fatal given BAC's circumstances.

 

The problem with Moynihan is he has no stature like Dimon, and he is also not plunking down $25mn for BAC stock. So BAC always has a confidence issue whenever the market is jittery.

 

 

[LC]

I think your two main points are circumstantial:

 

"Let's just say Munger has higher standards for owning stocks than us. He owns very few. He talks Buffett out of many ideas. "

The implication that Munger owns BAC therefore it must be good. Maybe what you say is true (maybe it isn't), that isn't a fundamentally good reason to do anything. The biggest thing I learned in 2015 is not to be lazy and do my own homework.

 

"I think fresh out of crisis this is less of an issue. BAC is being run by a lawyer whose mission is to clean up the mess. This makes it less likely that the numbers aren't true. "

The implication here is that because a lawyer is CEO and because we just went through a crisis (7/8 years ago- not exactly fresh) the numbers must be true. Again, not a fundamentally sound argument IMHO - perhaps Moynihan is  insulated from the ground troops and doesn't know what kinds of loans are being written. Perhaps he is doing just enough legally to get by while taking risks we won't know about. In terms of the crisis, well we have had a solid bull run over the last five years or so. Perhaps that has hidden many risks which will come to show when the tide goes out. I don't know. 

 

So we can say to follow the spirit of Munger's quotes, but how much more spirited do you need than him saying "Don't invest without real knowledge".

 

It seems to me I certainly have little real knowledge (at least on this issue of lending culture). So I'm literally doing exactly what CM says not to do. And yet here I am, not selling. The Halo effect or groupthink or whatever psychological misjudgement you want to call it is real, folks.

 

On the flip side, TheAiGuy presented a very valid argument IMHO. Perhaps CM is wrong and incentives trump lending culture in this case. I could see that as being a very real possibility.

 

In an attempt to take the psychology out of it, here's my basic list of pros/cons:

 

Pro:

Price is 78% (or whatver it is now) of TBV

Large deposit base and distribution network

Simplifying business lines

Is there upside if a "real banker" becomes CEO?

 

Cons:

No "real knowledge" of lending culture

Hard to f&*k up lending in the past few years, have they taken hidden risks?

Regularly underperform peers

 

 

Maybe I am just crapping out of my mouth at this point. Feel free to add  8)

[JBTC]

I think your two main points are circumstantial:

 

"Let's just say Munger has higher standards for owning stocks than us. He owns very few. He talks Buffett out of many ideas. "

The implication that Munger owns BAC therefore it must be good. Maybe what you say is true (maybe it isn't), that isn't a fundamentally good reason to do anything. The biggest thing I learned in 2015 is not to be lazy and do my own homework.

 

"I think fresh out of crisis this is less of an issue. BAC is being run by a lawyer whose mission is to clean up the mess. This makes it less likely that the numbers aren't true. "

The implication here is that because a lawyer is CEO and because we just went through a crisis (7/8 years ago- not exactly fresh) the numbers must be true. Again, not a fundamentally sound argument IMHO - perhaps Moynihan is  insulated from the ground troops and doesn't know what kinds of loans are being written. Perhaps he is doing just enough legally to get by while taking risks we won't know about. In terms of the crisis, well we have had a solid bull run over the last five years or so. Perhaps that has hidden many risks which will come to show when the tide goes out. I don't know. 

 

So we can say to follow the spirit of Munger's quotes, but how much more spirited do you need than him saying "Don't invest without real knowledge".

 

It seems to me I certainly have little real knowledge (at least on this issue of lending culture). So I'm literally doing exactly what CM says not to do.

 

On the flip side, TheAiGuy presented a very valid argument IMHO. Perhaps CM is wrong and incentives trump lending culture in this case. I could see that as being a very real possibility.

 

You misunderstood me. I wasn't suggesting at all that BAC is good because Munger has it.

 

I was trying to say that Munger rejects many decent stocks I would be content to own. He is classier guy than me. In this case, he and I owning the same thing is a pure coincidence.

 

In fact, I have moved beyond listening to his specific comments on stocks and assets some time ago. His view on oil seems funny (in the past he mentioned the idea that the US government ought to borrow to buy oil and bury it underground, or something in that nature).

 

If Monish Pabrai's recount is accurate, he said that it's ok for an investor to put all assets in a small town, as long as it includes a dealership, a commercial building, and a gas station. His point though is no need to over diversify, which I agree, but I would not invest like that at all.

 

The way I learn from Munger is he's an intellectual giant. I try to hear the key idea, not exactly what to do. He and I have different circumstances.

 

On the second point, keep in mind in investing we are dealing with probability here. None of us could ever find anything so called rock solid or fundamentally sound. There is no 100% in this business.

 

I tend to not worry about a crisis right after a crisis, because the odds of two crisis in a row is low. Can I gather enough evidence that the second crisis cannot happen? No. In fact, once a crisis has happened, all evidence, analysis, and news reporting point to more danger ahead. But that's not the way to bet.

 

I believe after the crisis, the scrutiny from regulators, investors, and the public on the banks has been intense, it has continued non stop, and it's continuing still. In such an environment, I prefer to worry about other things instead of banks cooking their books and making outrageous loans. There is just no evidence.

 

Stock price seems to dictate analysis. I didn't see nearly as many bearish-sounding posts or questions when BAC was $18.

 

 

[Rasputin]

10-Ks are out.

 

Below are # of sh repurchased and # of sh issued for wfc, jpm, bac in 2015

 

WFC

# sh repurchased 163.4 millions

# sh issued 69.9 millions

gross share buyback in $ : $8.947 Billions

 

JPM

# sh repurchased 89.8 millions

# sh issued 38.5 millions

gross share buyback in $ : $5.616 Billions

 

BAC

# sh repurchased 140.3 millions

# sh issued 4.05 millions

gross share buyback in $ : $2.374 Billions

[racemize]

for completeness:

 

Shares Outstanding:

WFC: 5 B

BAC: 10.4 B

JPM: 3.7 B

 

So net purchase %:

WFC: 1.9%

BAC: 1.31%

JPM: 1.39%

[Guest notorious546]

for completeness:

 

Shares Outstanding:

WFC: 5 B

BAC: 10.4 B

JPM: 3.7 B

 

So net purchase %:

WFC: 1.9%

BAC: 1.31%

JPM: 1.39%

 

net purchases seem awfully low

[Viking]

Can anyone explain to me how stock awards (via issuing new shares) are captured in net earnings? For both WFC and JPM, about 43% of total buy stock backs last year were offset by share dilution. The amount 'spent' on share awards at both banks was WFC $3.9 and JPM $2.4 billion. Very material. Does how this expense is reported affect reported Return numbers (like ROTCE)?

 

When they advertise their total return to shareholders is it really the net number that should be communicated (as it is the most relevant)?

 

It will be interesting to see what BAC does moving forward. If their buyback increases materially in the 2H of 2016 and they do not issue more shares shareholders will benefit greatly.

[Uccmal]

Can anyone explain to me how stock awards (via issuing new shares) are captured in net earnings? For both WFC and JPM, about 43% of total buy stock backs last year were offset by share dilution. The amount 'spent' on share awards at both banks was WFC $3.9 and JPM $2.4 billion. Very material. Does how this expense is reported affect reported Return numbers (like ROTCE)?

 

When they advertise their total return to shareholders is it really the net number that should be communicated (as it is the most relevant)?

 

It will be interesting to see what BAC does moving forward. If their buyback increases materially in the 2H of 2016 and they do not issue more shares shareholders will benefit greatly.

 

I may be wrong but share issuances are not counted in net earnings, other than the obvious reduction in Epc.

 

It would be nice if they told the truth or at least acknowledged that gross share repurchases are a bogus measure but they dont.  It doesn't take much to work it out.  It would also be nice if the practice was just eliminated and people were paid straight salaries or cash bonuses.  But that would be transparency and we wouldn't want that would we?

[vinod1]

They are included in the earnings. The stock options or awards value is estimated, almost invariably using Black-Scholes Model and expensed over the vesting period. So they are already a hit to earnings.

 

We need to calculate the net number unfortunately. I am attaching my numbers for WFC of the extent of the dilution.

 

Vinod

 

[Guest notorious546]

[Viking]

US economic data out today shows an economy that continues to chug along. Bond yields are moving higher and bank stocks are up nicely. BAC at $13 still looks crazy cheap. If the US$ continues to weaken a major headwind for the US economy will be gone.

 

http://www.calculatedriskblog.com

 

It is interesting how 'fears' took the US bank stocks so low (especially BAC). Reality looks to be reasserting itself. :-)

[TwoCitiesCapital]

US economic data out today shows an economy that continues to chug along. Bond yields are moving higher and bank stocks are up nicely. BAC at $13 still looks crazy cheap. If the US$ continues to weaken a major headwind for the US economy will be gone.

 

http://www.calculatedriskblog.com

 

It is interesting how 'fears' took the US bank stocks so low (especially BAC). Reality looks to be reasserting itself. :-)

 

Or it's a bounce which happens in every bear market. Not saying you're wrong or that I won't be, but just because stocks have retraced half their losses doesn't really mean anything given that nearly every market has bullish moves within it. I'd concede defeat if we saw new highs this year.

 

That being said - as long as other economies continue to do significantly worse than the U.S., I think you can expected that the USD will continue into strength. EM is still heavily troubled, China appears worse by the day, and the industrial production in the Eurozone, the U.K., Japan, and China is all still firmly in the negative territory suggesting an aggregate demand issue. We're witnessing a reversal of the trend from January/early-February, but every down market had upward retracements....

 

 

[Viking]

TwoCitiesCapital, I agree that it is far too early to declare victory. :-). My guess is we will lots of volatility in 2016 driven by all the macro uncertainty and hand wringing going on.

 

What I never understood was the severity of the sell off in BAC. It went from $17 to $11 in about 8 weeks. What catastrophe actually happened to deserve such a hair cut? Nothing. It was all driven by fear. 

 

Very large oil and gas losses? Large Euro bank failure and large counterparty losses? Negative interest rates and compression of net interest margin? None of these things actually happened. But the stock sold off like they are had actually happened and the losses had been taken and tangible book value had been reduced considerably.

 

Yes, the banks will take some losses on their oil and gas loan book but the number will likely be very manageable. The more impactful development is the continued improvement in US housing and the benefit this has for BAC (both with cleaning up legacy issues and growing new business moving forward). The market is only seeing the negative and is not considering the positive developments.

 

European banks continue to be a mess but the most likely scenario is their local governments will continue to paper over the issues as they have since 2008. The Euro banks will exit certain businesses and this will actually help BAC in certain lines of business over the medium term (less competition).

 

Negative interest rates are no where close to being a reality in the US. We definitely will not see 4 rate hikes from the Fed this year; however, we likely will get at least one and possibly two (if US data continues to chug along). This will be very good for the big US banks.

 

BAC at $11 is discounting a scenario I do not understand. Even at $13 the stock is discounting severe and permanent impairments to TBV; doesn't look very likely to me... But I have been wrong before... :-)

[Rasputin]

Based on March 1 closing price of $13.19, I expect the new exercise price for the A warrants to be $13.067 from $13.107. 

[ni-co]

US economic data out today shows an economy that continues to chug along. Bond yields are moving higher and bank stocks are up nicely. BAC at $13 still looks crazy cheap. If the US$ continues to weaken a major headwind for the US economy will be gone.

 

http://www.calculatedriskblog.com

 

It is interesting how 'fears' took the US bank stocks so low (especially BAC). Reality looks to be reasserting itself. :-)

 

Or it's a bounce which happens in every bear market. Not saying you're wrong or that I won't be, but just because stocks have retraced half their losses doesn't really mean anything given that nearly every market has bullish moves within it. I'd concede defeat if we saw new highs this year.

 

That being said - as long as other economies continue to do significantly worse than the U.S., I think you can expected that the USD will continue into strength. EM is still heavily troubled, China appears worse by the day, and the industrial production in the Eurozone, the U.K., Japan, and China is all still firmly in the negative territory suggesting an aggregate demand issue. We're witnessing a reversal of the trend from January/early-February, but every down market had upward retracements....

 

There is a really great quote by John Burbank: People default to price to tell them what's happening in the world and it takes a lot of price change to get your mentality to change.

 

I think that the mentality is still "mean reversion" (after the financial crisis) because that's what seems to have happened for seven years now if you take the S&P 500 – like most people do – as a guideline for how the world is doing.

[TwoCitiesCapital]

TwoCitiesCapital, I agree that it is far too early to declare victory. :-). My guess is we will lots of volatility in 2016 driven by all the macro uncertainty and hand wringing going on.

 

What I never understood was the severity of the sell off in BAC. It went from $17 to $11 in about 8 weeks. What catastrophe actually happened to deserve such a hair cut? Nothing. It was all driven by fear. 

 

Very large oil and gas losses? Large Euro bank failure and large counterparty losses? Negative interest rates and compression of net interest margin? None of these things actually happened. But the stock sold off like they are had actually happened and the losses had been taken and tangible book value had been reduced considerably.

 

Yes, the banks will take some losses on their oil and gas loan book but the number will likely be very manageable. The more impactful development is the continued improvement in US housing and the benefit this has for BAC (both with cleaning up legacy issues and growing new business moving forward). The market is only seeing the negative and is not considering the positive developments.

 

European banks continue to be a mess but the most likely scenario is their local governments will continue to paper over the issues as they have since 2008. The Euro banks will exit certain businesses and this will actually help BAC in certain lines of business over the medium term (less competition).

 

Negative interest rates are no where close to being a reality in the US. We definitely will not see 4 rate hikes from the Fed this year; however, we likely will get at least one and possibly two (if US data continues to chug along). This will be very good for the big US banks.

 

BAC at $11 is discounting a scenario I do not understand. Even at $13 the stock is discounting severe and permanent impairments to TBV; doesn't look very likely to me... But I have been wrong before... :-)

 

I'd only say that stocks aren't just valued absolutely, but valued relatively. Imagine a world where stocks traded at a P/E of 1. Do you think BofA would trade anywhere near tangible book value in that kind of world regardless of it's ROE, ROA, TBV, P/B, etc. etc. etc.

 

As value investors we should tend towards absolute values and we should be (ex. buying at 5x P/E etc. regardless if there is the possibility that the relative value could cause it to go to 1x). But, and it's a very large but, I think the observation that the value relative to its peer is also a driving force should stop you from blowing your whole load at 5x - maybe start building positions over time or waiting for absolute panic, or etc. Whatever irrational selling occurred that took it to 5x doesn't have to stop before it gets to 1x - and if you're sitting on an 80% loss, it's hard to feel good about the ridiculous value you were getting at 5x.

 

Now these are obviously extreme examples, but if you look at European financials, EM financials, etc. and their valuations relative to the U.S. banks, then you do get a pretty extreme difference. U.S. banks have the ability to be dragged down by that relative value of global financials. The same potential exists for all U.S. stocks given their extreme premiums relative to the rest of the globe.

 

 

[Aberhound]

The situation that scares me is the counterparty default.

 

Same scare I had with Fairfax in 2008.

 

Large reinsurance recoverable hedged with CDS.

 

AIG goes down and no bailout.  Barclays, Citigroup, DeutcheBank, BofA go down.  The Fairfax CDS portfolio is kaput.

 

AIG's reinsurance is worthless ->  most reinsurers go down in daisy chain style.

 

Fun isn't it?

 

Junto's post does help me feel better.

 

Counterparty risk is back.

 

Is anybody worried about DeutscheBank selling about $1T in CDS? Citibank took $250B and JPM is buying with only part sold so far. DB is exiting entirely from single company CDS which they sold in good times and now default risk is much greater. It will be interesting to see what losses they report on the sales. Probably a few billion reported only because more would be fatal to both them and the entire system. Are Citi and JPM and other purchasers overpaying to save the European banks? Or are they going to strike a Buffett style deal and DB will have to lie on their reports and fail to mention the massive loss? Or is there a secret side deal by the ECB or the Fed or both to guarantee the losses above a certain treshold? I don't know enough to judge what the losses might be. Any educated guesses? Does anyone know if the contracts require collateral to be posted which is what brought down AIG? Ironically if 5 years ago I was to pick the most solvent European potential counterparties for a massive derivative portfolio DB would have been at the top of my list. This demonstrates how the counterparty risk modelling is a lie the same as the efficient market hypothesis. If BAC refuses to participate might they suffer the same fate as Bear Stearns who refused to participate when the hat was handed around?

 

I bring this forward to investigate if this uncertainty is a cause for the weakness in the US banks. I recall Hoover's book of the Great Depression when he was surprised how much European debt the US banks held and how much they increased those loans in the late stages when everyone know for years that the Europeans were not fixing their debt problems. Hoover attributed this problem as one of the leading causes for thousands of US banks going bankrupt.

[Viking]

I am somewhat surprised (but happy) that the Fed appears to have gotten a little more realistic with its economic and interest rate outlook. This reduces the chances we see a significant policy error from the Fed (like 4 rate increases in 2016) and moves their estimates closer to what the market is expecting.

 

This shift to a more 'dovish' stance by the Fed has resulted in a US$ sell off. US$ weakness is doing three things:

1.) reducing risk of China devaluing yuan rapidly

2.) oil is increasing in price

3.) commodities are rebounding

 

Euro central banks recent commentary looks to be viewed favourably by financial markets.

US economy continues to chug along.

Financial markets have had a pretty solid run the past month.

 

When you weave it all together it looks like US banks are in a pretty good situation; they should see solid earnings in 2016 (with some weakness in Q1 due to increase in oil loss reserves and drop in trading). Oil is trading much higher than $25. The US economy continues to chug along. China 'issues' look to have stabilized. Europe is committed to more QE. 

 

BAC and Citi continue to trade at severely depressed prices... Today, I am not sure what exactly their stock prices are discounting. Perhaps the concern is sentiment could reverse quickly and things could get ugly again... :-)

[TwoCitiesCapital]

I am somewhat surprised (but happy) that the Fed appears to have gotten a little more realistic with its economic and interest rate outlook. This reduces the chances we see a significant policy error from the Fed (like 4 rate increases in 2016) and moves their estimates closer to what the market is expecting.

 

This shift to a more 'dovish' stance by the Fed has resulted in a US$ sell off. US$ weakness is doing three things:

1.) reducing risk of China devaluing yuan rapidly

2.) oil is increasing in price

3.) commodities are rebounding

 

Euro central banks recent commentary looks to be viewed favourably by financial markets.

US economy continues to chug along.

Financial markets have had a pretty solid run the past month.

 

When you weave it all together it looks like US banks are in a pretty good situation; they should see solid earnings in 2016 (with some weakness in Q1 due to increase in oil loss reserves and drop in trading). Oil is trading much higher than $25. The US economy continues to chug along. China 'issues' look to have stabilized. Europe is committed to more QE. 

 

BAC and Citi continue to trade at severely depressed prices... Today, I am not sure what exactly their stock prices are discounting. Perhaps the concern is sentiment could reverse quickly and things could get ugly again... :-)

 

Why exactly do you think that a weaker $ means less risk of a Chinese devaluation? They've already moved from being linked to the dollar to a basket of their trade partners so it should have far less impact than previously expected.

 

Secondly, a weaker dollar is counterproductive to the BoJ and ECBs goals because it means a stronger euro and yen - the exact opposite of what they've been trying to achieve. So they'll likely announce even more stimulus policies to weaken the euro and yen. It's hard to imagine a sustained weaker $ when we're still the only major economy to be hiking rates and removing liquidity while everyone else is easing and trying to debase their currencies more...