BAC-WT - Bank of America Warrants

[John Hjorth]

Viking,

 

We simply need you to share with us, where to buy, brand, model etc. for your crystal ball. [ : - ) ]

[Viking]

John, my problem is I tend to overthink things... too smart by half :-)  I will come to a conclusion on something... it is so obvious to me that I assume it is also obvious to Mr. Market - and assume it has been fully priced into the stock. This results in me selling a position too early (for a nice gain). I am coming to better appreciate that some things take Mr. Market some time to appreciate and price into a stock. So I am trying to be more patient with my best ideas; just let the story play out, give Mr. Market time to understand, and watch the share price go up over time. Instead of being happy with a 30 or 40% gain stick around a little longer for a 100 or 150% gain.

 

I read Reminiscences of a Stock Operator (Edwin Lefevre) years ago and really liked the book (even though I try not and be a trader). What stuck with me is the idea of getting positioned properly for the big moves and to sit tight and do nothing. That is how you make the big money. The market will try and get you to sell your position along the way. Patience is key.

 

I do believe that we are still in the early innings of a big move in the bank stocks. There will be volatility and sell offs. However, looking out a couple of years the big banks earnings per share is going to grow 20% each and every year. A few years from now Mr. Market will love the big banks and the PE multiple will be sky high. Fear will shift to greed. We are not at the greed stage yet. 

 

The same thing happened with Apple in the last cycle. The stock went all the way down to $60 (split adjusted). Today it is trading at $170. Same company. Mr. Market went from hating the stock to loving it. Total earnings went up over the years. Share count came down (due to buybacks). PE multiple Mr. Market paid for earnings doubled from 8 to 16.

 

I see the same thing playing out for the big US banks. Total earnings will continue to grow (tax reform, interest rate increases, GDP growth, less regulation, less of a drag from legacy issues, weak competition), share count will be reduced by 7-8% per year, PE multiple will expand (or another way to look at it is price to book will continue to increase) as Mr. Market better understands the strength of the banking franchises in the US.

 

The key watch out for me is the US and world economy; as long as they both continue to chug along I am good sitting in the weeds and holding my shares. I think if tax reform passes at Christmas we may actually see an uptick in GDP growth in the US next year. If this happens current big bank earnings estimates will be low. There are so many tailwinds for this sector right now... Best of luck! :-) 

[fareastwarriors]

John, my problem is I tend to overthink things... too smart by half :-)  I will come to a conclusion on something... it is so obvious to me that I assume it is also obvious to Mr. Market - and assume it has been fully priced into the stock. This results in me selling a position too early (for a nice gain). I am coming to better appreciate that some things take Mr. Market some time to appreciate and price into a stock. So I am trying to be more patient with my best ideas; just let the story play out, give Mr. Market time to understand, and watch the share price go up over time. Instead of being happy with a 30 or 40% gain stick around a little longer for a 100 or 150% gain.

 

I read Reminiscences of a Stock Operator (Edwin Lefevre) years ago and really liked the book (even though I try not and be a trader). What stuck with me is the idea of getting positioned properly for the big moves and to sit tight and do nothing. That is how you make the big money. The market will try and get you to sell your position along the way. Patience is key.

 

I do believe that we are still in the early innings of a big move in the bank stocks. There will be volatility and sell offs. However, looking out a couple of years the big banks earnings per share is going to grow 20% each and every year. A few years from now Mr. Market will love the big banks and the PE multiple will be sky high. Fear will shift to greed. We are not at the greed stage yet. 

 

The same thing happened with Apple in the last cycle. The stock went all the way down to $60 (split adjusted). Today it is trading at $170. Same company. Mr. Market went from hating the stock to loving it. Total earnings went up over the years. Share count came down (due to buybacks). PE multiple Mr. Market paid for earnings doubled from 8 to 16.

 

I see the same thing playing out for the big US banks. Total earnings will continue to grow (tax reform, interest rate increases, GDP growth, less regulation, less of a drag from legacy issues, weak competition), share count will be reduced by 7-8% per year, PE multiple will expand (or another way to look at it is price to book will continue to increase) as Mr. Market better understands the strength of the banking franchises in the US.

 

The key watch out for me is the US and world economy; as long as they both continue to chug along I am good sitting in the weeds and holding my shares. I think if tax reform passes at Christmas we may actually see an uptick in GDP growth in the US next year. If this happens current big bank earnings estimates will be low. There are so many tailwinds for this sector right now... Best of luck! :-)

 

Thanks for this...I trimmed a small bit this morning. It's so hard to just sit and do nothing when a stock is moving (up or down). It's something I'm still trying to work on.

[Rasputin]

transcript from cnbc interview

 

https://www.cnbc.com/2017/12/05/cnbc-transcript-bank-of-america-chairman-ceo-brian-moynihan-sits-down-with-cnbcs-wilfred-frost-today-on-cnbcs-squawk-alley.html

[Viking]

I was watching CNBC today. A couple of people said on different segments that tax reform had NOT been priced into bank stocks yet. This surprised me as it looks pretty clear to me that tax reform of some sort is coming in the next 10 days. Yes, we do not know the details (i.e. corporate rate may be 21%, may not come into effect until 2019 etc).

 

What do other posters think? Are investors waiting to see the exact detail before making any moves?

 

The other big item for bank stocks is interest rates. More people are talking about 4 increases by the Fed next year and saying we may be in recession watch by the second half of 2018. 3 months ago Mr Market was questioning IF the Fed would raise rates in Dec 17 and forecasting one increase in 2018. Today we will get one increase in Dec 17 and 4 more in 2018.

 

Again, what do people feel is priced into big US bank stocks?

 

I was thinking tax reform, a Dec 17 rate hike and three rate hikes in 2018 were priced into big bank stocks. Perhaps not and as the news comes out over the next 10 days we will get another jump in bank share prices. :-)

[onyx1]

I was thinking tax reform, a Dec 17 rate hike and three rate hikes in 2018 were priced into big bank stocks.

 

I my estimation, yes.  If not, very close to it. 

 

Tax reform with 20% rate + 4 hikes + $53bln expense goal reached + provision stable at 0.4% + $5bln extra buybacks + 3% loan growth, gets me to $2.65/share run rate at the end of 2018.

 

At 11x last night's close, there's a good argument that it's bake in the cake.

 

What if if regulatory reform triggers loan growth to 6% instead of 3%?  I estimate that would add only $0.07/share, and in this scenario, provisions would likely increase.  An increase to 0.5% from 0.4% brings us right back down to the run rate of $2.65. 

 

Maybe fair value is 12x and not 11x, or there's some additional upside from rates increasing in 2019.  But beyond that I don't much upside from here. 

 

 

Anyone see it differently?

 

 

 

[sleepydragon]

What about the potential regulatory reforms that will benefit smaller/regional banks such as USB and PNC, MTB etc..

now Alabama has a democratic senator, that will lower than chance of such reforms next year?

[gary17]

I was thinking tax reform, a Dec 17 rate hike and three rate hikes in 2018 were priced into big bank stocks.

 

I my estimation, yes.  If not, very close to it. 

 

Tax reform with 20% rate + 4 hikes + $53bln expense goal reached + provision stable at 0.4% + $5bln extra buybacks + 3% loan growth, gets me to $2.65/share run rate at the end of 2018.

 

At 11x last night's close, there's a good argument that it's bake in the cake.

 

What if if regulatory reform triggers loan growth to 6% instead of 3%?  I estimate that would add only $0.07/share, and in this scenario, provisions would likely increase.  An increase to 0.5% from 0.4% brings us right back down to the run rate of $2.65. 

 

Maybe fair value is 12x and not 11x, or there's some additional upside from rates increasing in 2019.  But beyond that I don't much upside from here. 

 

 

Anyone see it differently?

 

 

If these big banks are so good at printing money and are now very strong based on all the stress tests etc -- why shouldn't they be at 15 - 20x multiple?  isn't the whole point of doing stress test is to show the world they can continue to return capitals when there's a recession?

 

[onyx1]

I was thinking tax reform, a Dec 17 rate hike and three rate hikes in 2018 were priced into big bank stocks.

 

I my estimation, yes.  If not, very close to it. 

 

Tax reform with 20% rate + 4 hikes + $53bln expense goal reached + provision stable at 0.4% + $5bln extra buybacks + 3% loan growth, gets me to $2.65/share run rate at the end of 2018.

 

At 11x last night's close, there's a good argument that it's bake in the cake.

 

What if if regulatory reform triggers loan growth to 6% instead of 3%?  I estimate that would add only $0.07/share, and in this scenario, provisions would likely increase.  An increase to 0.5% from 0.4% brings us right back down to the run rate of $2.65. 

 

Maybe fair value is 12x and not 11x, or there's some additional upside from rates increasing in 2019.  But beyond that I don't much upside from here. 

 

 

Anyone see it differently?

 

 

If these big banks are so good at printing money and are now very strong based on all the stress tests etc -- why shouldn't they be at 15 - 20x multiple?  isn't the whole point of doing stress test is to show the world they can continue to return capitals when there's a recession?

 

 

In my opinion, there's a case for 13x based on trailing earnings, which is slightly above LT average for large US banks.  But not 15x-20x.  These translate to such a low earnings yield that to justify it would require a considerable amount of unattainable growth.

[gary17]

I was thinking tax reform, a Dec 17 rate hike and three rate hikes in 2018 were priced into big bank stocks.

 

I my estimation, yes.  If not, very close to it. 

 

Tax reform with 20% rate + 4 hikes + $53bln expense goal reached + provision stable at 0.4% + $5bln extra buybacks + 3% loan growth, gets me to $2.65/share run rate at the end of 2018.

 

At 11x last night's close, there's a good argument that it's bake in the cake.

 

What if if regulatory reform triggers loan growth to 6% instead of 3%?  I estimate that would add only $0.07/share, and in this scenario, provisions would likely increase.  An increase to 0.5% from 0.4% brings us right back down to the run rate of $2.65. 

 

Maybe fair value is 12x and not 11x, or there's some additional upside from rates increasing in 2019.  But beyond that I don't much upside from here. 

 

 

Anyone see it differently?

 

 

If these big banks are so good at printing money and are now very strong based on all the stress tests etc -- why shouldn't they be at 15 - 20x multiple?  isn't the whole point of doing stress test is to show the world they can continue to return capitals when there's a recession?

 

 

In my opinion, there's a case for 13x based on trailing earnings, which is slightly above LT average for large US banks.  But not 15x-20x.  These translate to such a low earnings yield that to justify it would require a considerable amount of unattainable growth.

 

That's the part I don't get -  i don't think earnings yield should be related to growth; but rather stability of the earnings.

it's like long term bonds have such low yield ! they have no growth - but have stability

[Viking]

Gary, another aspect of the big banks that I do not think is built into their historical valuation is capital return over the next 5 years. Most of the big banks will likely be paying out +100% of earnings for the next few years. They are all overcapitalized by $15-$20 billion and this capital will also be returned over time. Shares outstanding will be coming down by 5-7% (depending on bank) and dividends will be growing at 20-25% per year (with yields in the 2 to 2.5% range.

 

Surely a business that is returning +100% of earnings to shareholders (and still growing total revenue and total profits) is worth a higher PE multiple than a business retaining most of its earnings and growing at the same rate.

 

The big banks have had such a nice run the past 3 months. I do not expect straight up to the sky. Similar to earlier this year perhaps we get a couple of quarters of sideways action as Mr Market digests all the new news and we see what the banks have to say (especially on tax reform once it has passed and we know the details).

 

Bottom line, the banks are the safest they have been in many decades. Perhaps over time they will come to be viewed more as utility like businesses; especially the banks with more predictable business models.

[onyx1]

I was thinking tax reform, a Dec 17 rate hike and three rate hikes in 2018 were priced into big bank stocks.

 

I my estimation, yes.  If not, very close to it. 

 

Tax reform with 20% rate + 4 hikes + $53bln expense goal reached + provision stable at 0.4% + $5bln extra buybacks + 3% loan growth, gets me to $2.65/share run rate at the end of 2018.

 

At 11x last night's close, there's a good argument that it's bake in the cake.

 

What if if regulatory reform triggers loan growth to 6% instead of 3%?  I estimate that would add only $0.07/share, and in this scenario, provisions would likely increase.  An increase to 0.5% from 0.4% brings us right back down to the run rate of $2.65. 

 

Maybe fair value is 12x and not 11x, or there's some additional upside from rates increasing in 2019.  But beyond that I don't much upside from here. 

 

 

Anyone see it differently?

 

 

If these big banks are so good at printing money and are now very strong based on all the stress tests etc -- why shouldn't they be at 15 - 20x multiple?  isn't the whole point of doing stress test is to show the world they can continue to return capitals when there's a recession?

 

 

In my opinion, there's a case for 13x based on trailing earnings, which is slightly above LT average for large US banks.  But not 15x-20x.  These translate to such a low earnings yield that to justify it would require a considerable amount of unattainable growth.

 

That's the part I don't get -  i don't think earnings yield should be related to growth; but rather stability of the earnings.

it's like long term bonds have such low yield ! they have no growth - but have stability

 

Stability only works if you have a good credit pledging to back it.  Bank equity isn't credit worthy, it's the bottom of the waterfall.

 

Further, bank earnings aren't stable.  Even in the good times before the crisis BAC's earnings were volatile.  Somethings like 30% standard deviation.

[onyx1]

Gary, another aspect of the big banks that I do not think is built into their historical valuation is capital return over the next 5 years. Most of the big banks will likely be paying out +100% of earnings for the next few years. They are all overcapitalized by $15-$20 billion and this capital will also be returned over time. Shares outstanding will be coming down by 5-7% (depending on bank) and dividends will be growing at 20-25% per year (with yields in the 2 to 2.5% range.

 

Surely a business that is returning +100% of earnings to shareholders (and still growing total revenue and total profits) is worth a higher PE multiple than a business retaining most of its earnings and growing at the same rate.

 

Good point and I agree.  The way I think about this is to value the extra capital return separately.  I see $20bln that Moynihan referenced, plus maybe an additional $10-$15bln in DTA remaining worth $2-$3/share on top of the baseline P/E. 

 

If all goes as planned by the end of 2018 and a run rate of $2.60 * 11x = $28.60 , add $3.00 and we are at $31.60.

 

The reality is that all is not likely to go as planned.  I'm not seeing a lot of short term upside at current price of $29.

[Viking]

Onyx, I am also wondering if the shares of the banks are not running out of gas in the near term. It was interesting to see them sell off after the Fed announcement; I wonder if the same thing will happen when tax reform is finalized. I have sold some BAC the past 2 days and gone from extreme overweight to overweight. It has been a great year and this locks in a 30% gain for me. If we see a sell off of the bank shares at some point in the coming months I will be happy to buy back :-)

 

I still think we will see $35 on BAC in the next 12 months (should tax reform pass). However, they will need to execute and we will need the US economy to continue chugging along (I think both will happen).

[onyx1]

Onyx, I am also wondering if the shares of the banks are not running out of gas in the near term. It was interesting to see them sell off after the Fed announcement; I wonder if the same thing will happen when tax reform is finalized. I have sold some BAC the past 2 days and gone from extreme overweight to overweight. It has been a great year and this locks in a 30% gain for me. If we see a sell off of the bank shares at some point in the coming months I will be happy to buy back :-)

 

I still think we will see $35 on BAC in the next 12 months (should tax reform pass). However, they will need to execute and we will need the US economy to continue chugging along (I think both will happen).

 

I'm waffling back and forth. 

 

The hard part for me is that I own my shares in a taxable account and the I face a stiff tax bill on a capital gain that is now way into eight digits.  I hate paying taxes and I have FOMO, so it's easy to convince myself to hold on for additional compounding, (FOMO self says: plus it's a great business that Buffett loves!). 

 

But the rational side of me says this ain't going anywhere for a while, sell some.

[dcollon]

You could use some options to reduce some of your risk if you wanted...

[onyx1]

You could use some options to reduce some of your risk if you wanted...

 

Funny you say that because I've been looking at options over the last week.  I can give up a years worth of earnings and buy down side protection under $27 for a year.  I can reduce protection to zero cost if I sell the upside over $31.  Neither on strike me as a great deal.  More times than not I have regretted option trades on equities,  plus it gives me anxiety.

[sleepydragon]

Onyx, I am also wondering if the shares of the banks are not running out of gas in the near term. It was interesting to see them sell off after the Fed announcement; I wonder if the same thing will happen when tax reform is finalized. I have sold some BAC the past 2 days and gone from extreme overweight to overweight. It has been a great year and this locks in a 30% gain for me. If we see a sell off of the bank shares at some point in the coming months I will be happy to buy back :-)

 

I still think we will see $35 on BAC in the next 12 months (should tax reform pass). However, they will need to execute and we will need the US economy to continue chugging along (I think both will happen).

 

I'm waffling back and forth. 

 

The hard part for me is that I own my shares in a taxable account and the I face a stiff tax bill on a capital gain that is now way into eight digits.  I hate paying taxes and I have FOMO, so it's easy to convince myself to hold on for additional compounding, (FOMO self says: plus it's a great business that Buffett loves!). 

 

But the rational side of me says this ain't going anywhere for a while, sell some.

 

I always try to buy the same stock in both my taxable and none taxable accounts (50% split), and then when I need to take profit, I do it on the tax free account and keep the taxable holdings forever. Also,  if the stock falls, I harvest the loss in taxable account.

[onyx1]

Onyx, I am also wondering if the shares of the banks are not running out of gas in the near term. It was interesting to see them sell off after the Fed announcement; I wonder if the same thing will happen when tax reform is finalized. I have sold some BAC the past 2 days and gone from extreme overweight to overweight. It has been a great year and this locks in a 30% gain for me. If we see a sell off of the bank shares at some point in the coming months I will be happy to buy back :-)

 

I still think we will see $35 on BAC in the next 12 months (should tax reform pass). However, they will need to execute and we will need the US economy to continue chugging along (I think both will happen).

 

I'm waffling back and forth. 

 

The hard part for me is that I own my shares in a taxable account and the I face a stiff tax bill on a capital gain that is now way into eight digits.  I hate paying taxes and I have FOMO, so it's easy to convince myself to hold on for additional compounding, (FOMO self says: plus it's a great business that Buffett loves!). 

 

But the rational side of me says this ain't going anywhere for a while, sell some.

 

I always try to buy the same stock in both my taxable and none taxable accounts (50% split), and then when I need to take profit, I do it on the tax free account and keep the taxable holdings forever. Also,  if the stock falls, I harvest the loss in taxable account.

 

Me too, but in my case my taxable account is my primary account and is much larger than tax free.  I've already sold in my Roth IRA.

[sleepydragon]

Onyx, I am also wondering if the shares of the banks are not running out of gas in the near term. It was interesting to see them sell off after the Fed announcement; I wonder if the same thing will happen when tax reform is finalized. I have sold some BAC the past 2 days and gone from extreme overweight to overweight. It has been a great year and this locks in a 30% gain for me. If we see a sell off of the bank shares at some point in the coming months I will be happy to buy back :-)

 

I still think we will see $35 on BAC in the next 12 months (should tax reform pass). However, they will need to execute and we will need the US economy to continue chugging along (I think both will happen).

 

I'm waffling back and forth. 

 

The hard part for me is that I own my shares in a taxable account and the I face a stiff tax bill on a capital gain that is now way into eight digits.  I hate paying taxes and I have FOMO, so it's easy to convince myself to hold on for additional compounding, (FOMO self says: plus it's a great business that Buffett loves!). 

 

But the rational side of me says this ain't going anywhere for a while, sell some.

 

I always try to buy the same stock in both my taxable and none taxable accounts (50% split), and then when I need to take profit, I do it on the tax free account and keep the taxable holdings forever. Also,  if the stock falls, I harvest the loss in taxable account.

 

Me too, but in my case my taxable account is my primary account and is much larger than tax free.  I've already sold in my Roth IRA.

 

Best option may be just buy a 1-2 year in the money puts in ur taxable account. If stock rise, u keep the capital loss tax deduction. If stock fall,u exercise put to sell and pay long term capital gain.

[gary17]

Onyx, I am also wondering if the shares of the banks are not running out of gas in the near term. It was interesting to see them sell off after the Fed announcement; I wonder if the same thing will happen when tax reform is finalized. I have sold some BAC the past 2 days and gone from extreme overweight to overweight. It has been a great year and this locks in a 30% gain for me. If we see a sell off of the bank shares at some point in the coming months I will be happy to buy back :-)

 

I still think we will see $35 on BAC in the next 12 months (should tax reform pass). However, they will need to execute and we will need the US economy to continue chugging along (I think both will happen).

 

I'm waffling back and forth. 

 

The hard part for me is that I own my shares in a taxable account and the I face a stiff tax bill on a capital gain that is now way into eight digits.  I hate paying taxes and I have FOMO, so it's easy to convince myself to hold on for additional compounding, (FOMO self says: plus it's a great business that Buffett loves!). 

 

But the rational side of me says this ain't going anywhere for a while, sell some.

 

If i have a gain of 8 digits I would be finding a nice beach to surf than worry about taxes LOL 

but may be that's why i don't get 8 digit gains lol

[Viking]

Most of my investments are all in tax protected accounts (RRSP, RESP and TFSA). As a result I do not have to think about taxes when I buy or sell an investment; only when I withdraw funds (RRSP and RESP). This greatly simplifies the investment decision and I am sure it has resulted in higher returns over the years.

 

Here in Canada we have a number of very good vehicles for people to grow their savings; my favourite is the TFSA.

 

As an aside, I have an RESP account for my three kids. I opened the account about 14 years ago when my youngest was born. I put in $2,000 for each child ($6,000 total); the government kicked in 20% so I started with $7,200. I have made no further contributions. Today the plan is worth $98,000. Great example of the power of compounding. Blows me away that more people are not interested in figuring investing out. Slow and steady wins the race :-)

[racemize]

Most of my investments are all in tax protected accounts (RRSP, RESP and TFSA). As a result I do not have to think about taxes when I buy or sell an investment; only when I withdraw funds (RRSP and RESP). This greatly simplifies the investment decision and I am sure it has resulted in higher returns over the years.

 

Here in Canada we have a number of very good vehicles for people to grow their savings; my favourite is the TFSA.

 

As an aside, I have an RESP account for my three kids. I opened the account about 14 years ago when my youngest was born. I put in $2,000 for each child ($6,000 total); the government kicked in 20% so I started with $7,200. I have made no further contributions. Today the plan is worth $98,000. Great example of the power of compounding. Blows me away that more people are not interested in figuring investing out. Slow and steady wins the race :-)

 

Well 20% a year is a bit better than most can get!

[kab60]

Tax free accounts. Wow.  8)

 

I pay 27-42 pct. on realized gains no matter the holding period (same with dividends). In my pension account I pay 14,7 pct. on gains once a year - no matter if the gains are realized or not.

[onyx1]

Most of my investments are all in tax protected accounts (RRSP, RESP and TFSA). As a result I do not have to think about taxes when I buy or sell an investment; only when I withdraw funds (RRSP and RESP). This greatly simplifies the investment decision and I am sure it has resulted in higher returns over the years.

 

Here in Canada we have a number of very good vehicles for people to grow their savings; my favourite is the TFSA.

 

As an aside, I have an RESP account for my three kids. I opened the account about 14 years ago when my youngest was born. I put in $2,000 for each child ($6,000 total); the government kicked in 20% so I started with $7,200. I have made no further contributions. Today the plan is worth $98,000. Great example of the power of compounding. Blows me away that more people are not interested in figuring investing out. Slow and steady wins the race :-)

 

Well 20% a year is a bit better than most can get!

 

 

Very impressive Viking.