BAC-WT - Bank of America Warrants

[redskin]

I have a question for the option experts out there.... What do you think of buying the B warrants and selling the Jan '19 32 calls for a credit of .15-.20?

[longlake95]

Mostly agree with dyow here.

 

The long suffering bank investors make 30-40% and now it's bail-time.  I don't know.  When the bull thesis on the thread above highlights a 12x PE vs. the ~25x for the market, I kind of have to chuckle.

 

Sure, maybe pare back your position(s), but we aren't exactly in nose-bleed area. 

 

This thread kind of makes me want to add... but I've pared back my BAC... holding WFC.  Also closed some bank hedges that didn't move as much as banks did... so I guess I'm getting longer banks than pre-election.

 

Still think the positive market reaction overall is odd, but I think for banks I think it's mostly / somewhat justified.

 

Another factor to consider is that it sometimes doesn't make sense to sell an appreciated stock even if it trades at fair value.  Because fair value might still mean a long-term 10% return.  So say pretty much everything in your portfolio is trading at a 30-50% discount to "fair" but you've got this BAC or WFC trading at a 10% discount or near "fair."  That BAC or WFC might keep compounding at 8-10% tax-deferred for a long time and this sudden improvement in fundamentals makes for a higher probability outcome.  Unless you've got this other fantastic idea that will do so much better than WFC or BAC, it's perfectly rational to hold even when you're used to seeing it trade at a larger discount.  So unless you think those other cheap stocks in your portfolio are very likely to work out it doesn't make sense to start selling willy nilly because just because you've got a nice profit...

 

Very much agree that these bank stocks are closing in on fair value, but maybe it's too easy to underestimate how quickly fair value can improve over time.  I've been negative on banks for a while because of my view on the yield curve and regulation, but that looks to be changing (well, we'll see).  Congrats to guys like Rasputin that went balls to the wall on this one.

 

I'm with Picasso - BAC, BAC.WT.A and C, have now morphed into a 25% position for me....boy....how your thinking changes. I'm inclined to sit tight, as even moderate growth in IV will make a big difference on overall portfolio returns. But what do I do with these A warrants? Sit tight and exercise in 2019? Sell, to reduce exposure? hmmm. sell some calls against my common...

 

LL

[Rasputin]

I'm over 90% in BAC common and I'm holding.  I doubt DJCO next 13F will show Munger paring down his stake.  For me, it's very likely that BAC earnings will be materially higher 5 years from now.  It's trading at about 15 times my 2017 eps forecast with 1-25 bps fed hike benefit (hopefully next week), similar long rate environment as 2016 (10 yr between 1.3% to 2.4%, 30 yr 2.1% to 3.1%), 30% tax rate, steady state loan portfolio, $1 B lower non interest income vs 2016.  Still very reasonable considering how low rates are. 

 

BAC has more tailwind while WFC has more headwind (given the same environment).

 

I traded out of the A warrants because if what happens in the market in Q1 2016 happens in Q4 2018 to Q1 2019, the A warrants could be zero.

[woltac]

I traded out of the A warrants because if what happens in the market in Q1 2016 happens in Q4 2018 to Q1 2019, the A warrants could be zero.

 

I have the same concern and have been selling my A warrants gradually as the price rises.  More than half of my A warrants have been liquidated to cash without reinvestment at this point.  I am holding all of the BAC common.

 

Keep in mind one of the failures of human judgement is the projection of the current state of affairs far into the future without consideration for alternate events, including black swan type events. 

 

 

[RadMan24]

I traded out of the A warrants because if what happens in the market in Q1 2016 happens in Q4 2018 to Q1 2019, the A warrants could be zero.

 

I have the same concern and have been selling my A warrants gradually as the price rises.  More than half of my A warrants have been liquidated to cash without reinvestment at this point.  I am holding all of the BAC common.

 

Keep in mind one of the failures of human judgement is the projection of the current state of affairs far into the future without consideration for alternate events, including black swan type events.

 

Not if you account for future dividend increases. Exercise price falls to below $12 -$11.50 (depending on if they jack up dividends next two years).  But I get what you're saying, the time horizon risk vs. continued appreciation in value vs. share price falling below exercise price. And the fact that it is now trading above tangible book and near book value. If TBV increases to $20 by 2018, that in itself would mitigate some downside risk as well.

[fareastwarriors]

'The Big Short' star who nailed the financial crisis says this is what will happen under Trump

http://www.cnbc.com/2016/12/19/the-big-short-guy-who-nailed-the-financial-crisis-says-this-is-what-will-happen-under-trump.html

[fareastwarriors]

Playing a Better Hand at Bank of America

https://www.bloomberg.com/gadfly/articles/2016-12-22/bank-of-america-ceo-brian-moynihan-has-a-better-hand-to-play

[dyow]

Edit: i should add emphasis on the point above.  i don't consider the banks right now to be "no brainer" plays, there are other spots in the market i like much better in terms of potential upside.  But if rates go up a lot, idk how that will impact the rest of the market so having exposure to banks makes sense.

 

Would you mind sharing what those spots are that you like much better?

 

Thanks.

 

Energy. Cheniere energy is trading at 41, its worth about a $100 in a couple years.  You can bet the farm on that.

 

Back to banks.  Hold your bank stocks. 

[Uccmal]

I held a 50/50 mix between common and warrants.  Sold out of my warrants recently at just shy of $6.60 (cost basis was $2.55) and have painfully watched them run in the meantime.  As the expiration date gets closer (although 2 years away still) I've had a harder time holding and took what I saw as an irrational market move (I had no idea what Trump would actually do once in office) to exit.  I consider this a pretty big mistake because the sell decision has less to do with IV and more to do with nerves.  Live and learn I suppose.  Glad to still own a decent slug of the common.

 

You are unnecessarily beating yourself up.  FWIW, you have absolutely done the right thing, by selling the warrants and keeping the common.  I have been on both ends of this, with Leaps that are triple or greater in value, and ones that have gone to zero.  There are a couple of ways to get over sellers regret.  The simplest one is to invert the situation.  How would you feel if something unexpected happened in the opposite direction?  The other is to stop looking and forget about it. 

 

 

[rkbabang]

I held a 50/50 mix between common and warrants.  Sold out of my warrants recently at just shy of $6.60 (cost basis was $2.55) and have painfully watched them run in the meantime.  As the expiration date gets closer (although 2 years away still) I've had a harder time holding and took what I saw as an irrational market move (I had no idea what Trump would actually do once in office) to exit.  I consider this a pretty big mistake because the sell decision has less to do with IV and more to do with nerves.  Live and learn I suppose.  Glad to still own a decent slug of the common.

 

You are unnecessarily beating yourself up.  FWIW, you have absolutely done the right thing, by selling the warrants and keeping the common.  I have been on both ends of this, with Leaps that are triple or greater in value, and ones that have gone to zero.  There are a couple of ways to get over sellers regret.  The simplest one is to invert the situation.  How would you feel if something unexpected happened in the opposite direction?  The other is to stop looking and forget about it. 

 

Yes, the biggest mistakes I've made investing can be summed up in three words "sold too early".  I try not to think about the calls I sold shortly after the election when BAC was trading around $18. I don't even want to look at what they are worth now.  I'm just glad I was able to stop myself from selling any of my A warrants.

[fareastwarriors]

Long interview with CEO.

 

https://www.bloomberg.com/news/videos/2016-12-22/a-conversation-with-bofa-s-brian-moynihan

[HalfMeasure]

Anyone willing to share their thoughts on the upside scenario? E.g. corporate tax rates down to 25%, a few rate hikes this year and the 10 year closing the year ~400bps, etc. What does BAC's earnings power look like in that scenario? Where are is everyone's heads at assuming no regulatory relief, as well as what potential regulatory relief do you guys foresee as reasonably possible?

[tylerdurden]

Hi everybody - I don't know whether you have seen the recent interview on Barron's with Mohnish Pabrai. I am not a fan of him or anything like that but one thing he said about the Tax Advantages of exercising the GM Warrants got my attention. Please see below the excerpt from the interview. Can you guys guess what he is referring to in terms of exercising warrants having a tax advantage for him? I am not sure whether there are any people on the board who exercised any of the TARP warrants rather than selling into the market. It seems the tax applications are not very clear but I am curious about the tax cost basis of any shares received through a cashless warrant exercise... perhaps someone can share some experience with this. Thanks in advance!

 

 

 

http://www.barrons.com/articles/why-mohnish-pabrai-likes-gm-fiat-and-southwest-air-1481352344

 

 

 

Why do you own GM warrants, instead of the common stock?

 

The warrants date back to 2009, during the auto bailouts. They are unusual instruments that the company never would have issued if it were as healthy as it is today. It was forced to issue them. The warrants have a 10-year life and some unusual provisions. For example, I can put the warrants back to the company anytime and exchange them for shares. I don’t need to sell them into the market. That has a tax advantage for me.

 

The warrants are an option. If GM’s stock price doubles, I will make 3.5 times on the warrants.

 

[Mephistopheles]

He means that if you swap the warrants for stock, there would be no tax bill as there wouldn't be a sale. Your cost basis for the warrants would be transferred to the stock.

[tylerdurden]

He means that if you swap the warrants for stock, there would be no tax bill as there wouldn't be a sale. Your cost basis for the warrants would be transferred to the stock.

 

Thanks. So you mean your cost basis on the shares would be the exercise price plus the cost of the warrants? I think that's the calculation for exercise with cash but for cashless exercise it gets a little bit more confusing. Please see below the excerpt from the prospectus. Ignoring the fractional shares, does this mean the tax basis of the received shares will be equal to the tax basis of the warrant itself? Not sure how to read this...

 

"A U.S. Holder will have a tax basis in the shares of our common stock received upon the exercise of a warrant equal to its tax basis in the warrant, less any amount attributable to any fractional share. The initial tax basis in a warrant of a U.S. Holder is the purchase price of the warrant."

 

 

The tax consequences of the exercise of a warrant that requires a cashless exercise are not

clear. We expect that the warrants will be treated for U.S. federal income tax purposes as an

option to receive a variable number of shares of our common stock on exercise with no exercise

price. Alternatively, the exercise of the warrants could be treated as a recapitalization. In either

case, a U.S. Holder generally will not recognize gain or loss upon exercise of a warrant except with

respect to any cash received in lieu of a fractional share. A U.S. Holder will have a tax basis in the

shares of our common stock received upon the exercise of a warrant equal to its tax basis in the

warrant, less any amount attributable to any fractional share. The initial tax basis in a warrant of

a U.S. Holder is the purchase price of the warrant. If the warrant is treated as an option to receive

a variable number of shares of common stock, the holding period of common stock received upon

the exercise of a warrant will commence on the day the warrant is exercised. If the exercise is

treated as a recapitalization, the holding period of common stock received upon the exercise of a

warrant will include the U.S. Holder’s holding period for the warrant.

[Picasso]

Yeah but for tax purposes your holding period starts all over again.  Unless you plan to stick it out at least an extra year I don't see much of an advantage other than extra leverage.

[tylerdurden]

I guess it makes sense to postpone the tax day as long as you like the prospects of your investment but if you think the shares are fairly valued, I might consider selling rather than exercising the warrants and sitting one more year just because I am able to postpone the tax payment. As long as these warrants do not allow you to decrease your tax bill and you are paying the same tax then there is not much of a tax advantage here... perhaps he was comparing these warrants to some others which you can not exercise and have to sell into the market. Maybe it's an advantage against those securities specifically...

 

Yeah but for tax purposes your holding period starts all over again.  Unless you plan to stick it out at least an extra year I don't see much of an advantage other than extra leverage.

[fareastwarriors]

How Merrill Tamed Its Herd, Pushing Brokers to Pitch Bank Products

 

In a shift from the commission-based brokerage model, Merrill is pushing its brokers to serve as overall financial advisers

http://www.wsj.com/articles/how-merrill-tamed-its-herd-pushing-brokers-to-pitch-bank-products-1483704001

 

Brokers Once Disdained Independent Advisers. Now They Copy Them

 

Wall Street brokerages are moving to comply with new retirement-advice regulations, boost profit and take back market share

http://www.wsj.com/articles/brokers-once-disdained-independent-advisers-now-they-copy-them-1483704001

[Rasputin]

Now that 2017 DFAST scenario is out, I expect BAC to request $12 Billion in capital return (50% higher vs 2016 request) for Q3 2017 - Q2 2018 capital return period. 

 

 

[mttddd]

Anyone trimming their position? This position for me at least is now the one I am least comfortable with

[TheAiGuy]

Anyone trimming their position? This position for me at least is now the one I am least comfortable with

 

I still have a few shares I bought last year during the mini-panic that I'm waiting to hit a 1 year holding period, but I'm otherwise out.

[Junto]

Selling into a rising rate and potential reduced/ deregulation environment is not advisable.

 

Biggest reason to sell would be outlook on credit but value is still cheap on historical standards.

[benchmark]

Selling into a rising rate and potential reduced/ deregulation environment is not advisable.

 

Biggest reason to sell would be outlook on credit but value is still cheap on historical standards.

I sold all my Jan 18 call option recently -- still holds all my common and warrants, but considering trimming warrant now -- timing is always a problem for leaps/options.

[mttddd]

Selling into a rising rate and potential reduced/ deregulation environment is not advisable.

 

Biggest reason to sell would be outlook on credit but value is still cheap on historical standards.

I sold all my Jan 18 call option recently -- still holds all my common and warrants, but considering trimming warrant now -- timing is always a problem for leaps/options.

 

This, i just sold all of my warrants but considering opening a smaller position in the common. I am worried that it currently has rising interest rates/deregulation priced in. Assuming that all goes as planned I assume it will go up further but I dont think it will be anything spectacular. On the flip side, if the fed decides to not raise rates or deregulation looks like it is going to be lighter than anticipated I think the market will over react (at which point ill gladly buy back in).

[redskin]

This string has been really quiet.  Did everyone sell out?