BAC-WT - Bank of America Warrants

[Kraven]

Also, valueline predicts 90c for next year.  1.35 in 2015.  If management cannot make 1% RoA and 10% RoE with that deposit base by 2015, I would think they get fired.

 

It's going to be a function, in part, of where interest rates are.  NIMs are getting squeezed now and that's not anyone's fault.  If we are still in a ZIRP environment over the next few years those numbers are going to be potentially very tough to come by.

 

Moynihan though has stated that they can do 13% to 15% return on tangible book without getting any improvement from interest rates.

 

In other words, he is saying they are making 13% to 15% already, right now, as long as you can look through the elevated expenses.

 

Fair enough.  Although note that a 13-15% on tangible book is (off the top of my head) around a 7-9% return on book.  So doing 10% will still require something else along the way.  Don't get me wrong.  My point isn't that they're not doing well or that they won't do well in the future.  I think they are doing everything right.  My point was just that they shouldn't (and in my view, won't) get fired if they can't achieve a 10% ROE.  That's a tall order in the current environment.

[jay21]

I think a 1% RoA roughly equates to a 10% RoE.  WFC and USB are already well above a 1% RoA.  BoA should be building a similar b/s and company.  Therefore I think a 1% RoA should be easily attainable by 2015. 

 

I am not saying that management should be fired if they can't hit these numbers.  They have done a great job so far.  I would think that the stock price would still be depressed and people would see the performance gap between BoA and peers and demand a change in management.

[ERICOPOLY]

Also, valueline predicts 90c for next year.  1.35 in 2015.  If management cannot make 1% RoA and 10% RoE with that deposit base by 2015, I would think they get fired.

 

It's going to be a function, in part, of where interest rates are.  NIMs are getting squeezed now and that's not anyone's fault.  If we are still in a ZIRP environment over the next few years those numbers are going to be potentially very tough to come by.

 

Moynihan though has stated that they can do 13% to 15% return on tangible book without getting any improvement from interest rates.

 

In other words, he is saying they are making 13% to 15% already, right now, as long as you can look through the elevated expenses.

 

Fair enough.  Although note that a 13-15% on tangible book is (off the top of my head) around a 7-9% return on book.  So doing 10% will still require something else along the way.  Don't get me wrong.  My point isn't that they're not doing well or that they won't do well in the future.  I think they are doing everything right.  My point was just that they shouldn't (and in my view, won't) get fired if they can't achieve a 10% ROE.  That's a tall order in the current environment.

 

It's better than 7-9%.  It's actually 8.6%-9.9%.

 

15% return on current tangible book value is $2.02 per share.  Current tangible book is $13.48 per share.

 

$2.02 is 9.9% return on current $20.40 of book value per share.

 

So let's just round the 9.9% and call it 10% ROE.

 

13% return on tangible book is 8.6% ROE.

 

PS:  I also don't think they should get fired -- unless they are lying.

 

 

[benchmark]

Eric - Just curious.  Do you plan on holding much of your BAC position after it hits ~$20 or whatever your price target is?  Maybe as a source of income?

 

Apologies if you have been asked this before - 200+ page thread..

 

I have a lot of flexibility in that roughly 50% of my holding is in RothIRA where I can trade without tax consequences.  I want to diversify out of BAC when I can trade it for a roughly equivalent amount of distributable earnings in other high caliber businesses.  Right now the gap is just so wide.  Maybe that happens at $20, maybe the rest of the market will crash and it will happen at $13.  I don't know.

 

I have mostly warrants in my taxable account (much less that Eric's), and I plan on holding that for a while, given the tax advantages.

[ERICOPOLY]

Also, valueline predicts 90c for next year.  1.35 in 2015. 

 

Interesting.  With the NOLs that equates to earning $1.30 for next year and $1.95 for 2015.

 

Therefore, I recommend "Hold" rating on the stock.

[redskin]

Wouldn't that be excessive, about ~75% payout?  Anyone know off hand what the better banks (JPM, WFC) were approved for last year?

 

 

The other banks were employing a strategy of paying dividends while still needing to build capital.

 

BofA's strategy has been to rebuild capital first, then return everything in excess of that.

 

So a 75% payout is conservative in that it's not 100%.  Moynihan has stated that as some loans runoff they'll be able to put that money back to work in new loans, so therefore they don't need to retain anything at all for the business right now.

 

JPM was approved for a $15 billion buyback last year.

 

Moynihan has also stated that each dollar of earnings will produce more than a dollar of capital with the tax loss assets.

[ERICOPOLY]

Wouldn't that be excessive, about ~75% payout?  Anyone know off hand what the better banks (JPM, WFC) were approved for last year?

 

 

The other banks were employing a strategy of paying dividends while still needing to build capital.

 

BofA's strategy has been to rebuild capital first, then return everything in excess of that.

 

So a 75% payout is conservative in that it's not 100%.  Moynihan has stated that as some loans runoff they'll be able to put that money back to work in new loans, so therefore they don't need to retain anything at all for the business right now.

 

JPM was approved for a $15 billion buyback last year.

 

Moynihan has also stated that each dollar of earnings will produce more than a dollar of capital with the tax loss assets.

 

Their $15b approval was pretty lame, but remember the Fed is making them retain capital.

 

It could have been as much as 100% of what they generate, I believe, if they were already at 9.5% B3.

[writser]

Eric, I'm a fellow shareholder in BAC as well and I greatly appreciate your posts here. I'm wondering something about your approach to this investment though. If I had such a significant part of my savings invested in BAC, I would constantly try to break down my thesis. Like Bruce Berkowitz says: "Can you kill it?". Because if you are wrong on this one, you are ****ed. So shouldn't you be the devil's advocate in this thread? For example, reading some of your posts from a while ago, you predicted a $15-$20 shareprice in the beginning of 2013. Looks like that might be a bit too optimistic. Did you make any assumptions back then that proved to be incorrect? Do you force yourself to look back at what you wrote a year ago?

 

I think if you are 100% invested in BAC, follow all the day-to-day news and write a couple of posts a day defending your your investment on this message board, you are placing yourself in a position where it is very easy to become biased / emotionally attached. And this is probably something you should really avoid if it is your only investment. Any thoughts on this?

[ERICOPOLY]

For example, reading some of your posts from a while ago, you predicted a $15-$20 shareprice in the beginning of 2013. Looks like that might be a bit too optimistic. Did you make any assumptions back then that proved to be incorrect? Do you force yourself to look back at what you wrote a year ago?

 

I don't know if you watch baseball, but when the ball is hit over the wall between the posts you can consider it a run scored.  However you have to wait for the runner to tag all of the bases before the point goes up on the board.

 

With BAC it's more like that scene from The Natural with the lights exploding and everything.  Remember how slowly Robert Redford ran the bases?  Mr. Market is simply replaying that scene in extra slow motion.

 

[Kraven]

With BAC it's more like that scene from The Natural with the lights exploding and everything.  Remember how slowly Robert Redford ran the bases?  Mr. Market is simply replaying that scene in extra slow motion.

 

Great movie.  So what is Moynihan's Wonderboy?

[Parsad]

Eric, I'm a fellow shareholder in BAC as well and I greatly appreciate your posts here. I'm wondering something about your approach to this investment though. If I had such a significant part of my savings invested in BAC, I would constantly try to break down my thesis. Like Bruce Berkowitz says: "Can you kill it?". Because if you are wrong on this one, you are ****ed. So shouldn't you be the devil's advocate in this thread? For example, reading some of your posts from a while ago, you predicted a $15-$20 shareprice in the beginning of 2013. Looks like that might be a bit too optimistic. Did you make any assumptions back then that proved to be incorrect? Do you force yourself to look back at what you wrote a year ago?

 

I think if you are 100% invested in BAC, follow all the day-to-day news and write a couple of posts a day defending your your investment on this message board, you are placing yourself in a position where it is very easy to become biased / emotionally attached. And this is probably something you should really avoid if it is your only investment. Any thoughts on this?

 

Re:  the $15-20 prediction, it's actually a game many of us have going.  I was saying that we would hit tangible book by Christmas.  While Eric and I, among others, believe that the stock is worth tangible book or better right now, and probably $15-20 within a couple of years, he wasn't actually guaranteeing or predicting when the price would hit that.  We used to do this for Fairfax, and it's continued with many other stocks over the years.  The big thing is if "Sanjeev has gone for lunch" on days when these stocks would go up alot, because coincidentally on days when Fairfax stock used to move 5% plus, I would say I was out to lunch and missed the move...so it became a running joke.

 

In terms of Eric's large bets...he's always made them.  And yes, you live by the sword and die by the sword, but usually when any of us make big bets, it's because we've done the work on the analysis side and have already tried to kill it a thousand times over.  I'm still trying to kill my ideas even when I'm falling asleep each night...what have I missed...why is it so cheap...what could happen in the worst case scenario?  I also spend an inordinate amount of time killing other's theories on why I may be wrong.  If I can't, then that's a risk I have to work into the price I've paid so far, and the level of concentration that position is going to have. 

 

Investing is as much art as science, and we are constantly reviewing the work before we do anything else...but when you think the odds are in your favor, you have to bet big...that is the only way to outperform the markets by a signifcant margin over time and build wealth.  Cheers! 

[ERICOPOLY]

I think if you are 100% invested in BAC, follow all the day-to-day news and write a couple of posts a day defending your your investment on this message board, you are placing yourself in a position where it is very easy to become biased / emotionally attached. And this is probably something you should really avoid if it is your only investment. Any thoughts on this?

 

I think you are right that many people would be scared and just trying to defend.

 

I'm spending a lot of time reading everything Brian Moynihan says, and reading everything the analysts then make claims about.  It's sort of like woman is from Venus and man is from Mars.

 

I might be biased, but to me it looks like they haven't listened to a damn thing he has said lately.

[ERICOPOLY]

With BAC it's more like that scene from The Natural with the lights exploding and everything.  Remember how slowly Robert Redford ran the bases?  Mr. Market is simply replaying that scene in extra slow motion.

 

Great movie.  So what is Moynihan's Wonderboy?

 

I think he cracked his bat trying to get that last dividend approval.  Then he went back to the dugout, rebuilt his capital along the way, and has walked back to the plate with a new piece of hickory (9% B3).  100% capital return.  Shock and awe.

[Parsad]

I think if you are 100% invested in BAC, follow all the day-to-day news and write a couple of posts a day defending your your investment on this message board, you are placing yourself in a position where it is very easy to become biased / emotionally attached. And this is probably something you should really avoid if it is your only investment. Any thoughts on this?

 

I think you are right that many people would be scared and just trying to defend.

 

I'm spending a lot of time reading everything Brian Moynihan says, and reading everything the analysts then make claims about.  It's sort of like woman is from Venus and man is from Mars.

 

I might be biased, but to me it looks like they haven't listened to a damn thing he has said lately.

 

Another thing...take a look at the size of this thread.  I believe it may be the biggest thread we've had on any one subject...and not the rhetorical, off-topic stuff that was going on in the LVLT thread or some others.  This board has probably analyzed BAC in more detail than any analyst report you will ever find...probably in more detail than most investment teams at large firms, including those that we admire!  We've take this thing to the woodshed in a big way! 

 

You go back to the beginning, and you see how the thought process has changed...even by some posters who originally were providing feedback to kill the idea, but eventually came around as the business turned.  It's been dissected in so many ways, and hundreds of questions have been entertained and answered.  It's why I started the "Investment Ideas" board...a running history on specific ideas that people can reflect back on.  And BAC is one of the ideas that has been a real winner and will continue to be a winner for the next few years at least!  Cheers! 

[Kraven]

With BAC it's more like that scene from The Natural with the lights exploding and everything.  Remember how slowly Robert Redford ran the bases?  Mr. Market is simply replaying that scene in extra slow motion.

 

Great movie.  So what is Moynihan's Wonderboy?

 

I think he cracked his bat trying to get that last dividend approval.  Then he went back to the dugout, rebuilt his capital along the way, and has walked back to the plate with a new piece of hickory (9% B3).  100% capital return.  Shock and awe.

 

Let's just hope there isn't a crazy fan out there.

[StubbleJumper]

With BAC it's more like that scene from The Natural with the lights exploding and everything.  Remember how slowly Robert Redford ran the bases?  Mr. Market is simply replaying that scene in extra slow motion.

 

Great movie.  So what is Moynihan's Wonderboy?

 

I think he cracked his bat trying to get that last dividend approval.  Then he went back to the dugout, rebuilt his capital along the way, and has walked back to the plate with a new piece of hickory (9% B3).  100% capital return.  Shock and awe.

 

 

To go one step further, he has done just like Babe Ruth during the '32 World Series.  He pointed to centre field, swung the bat and hammered the hanging curve ball.  The only question remaining is how far past the fence will the ball fly?

 

 

SJ

[Parsad]

With BAC it's more like that scene from The Natural with the lights exploding and everything.  Remember how slowly Robert Redford ran the bases?  Mr. Market is simply replaying that scene in extra slow motion.

 

Great movie.  So what is Moynihan's Wonderboy?

 

I think he cracked his bat trying to get that last dividend approval.  Then he went back to the dugout, rebuilt his capital along the way, and has walked back to the plate with a new piece of hickory (9% B3).  100% capital return.  Shock and awe.

 

 

To go one step further, he has done just like Babe Ruth during the '32 World Series.  He pointed to centre field, swung the bat and hammered the hanging curve ball.  The only question remaining is how far past the fence will the ball fly?

 

 

SJ

 

The ball won't have to fly...Eric will put it on his lap when he gets into his Netjets plane!  ;D  Cheers!

[ERICOPOLY]

With BAC it's more like that scene from The Natural with the lights exploding and everything.  Remember how slowly Robert Redford ran the bases?  Mr. Market is simply replaying that scene in extra slow motion.

 

Great movie.  So what is Moynihan's Wonderboy?

 

I think he cracked his bat trying to get that last dividend approval.  Then he went back to the dugout, rebuilt his capital along the way, and has walked back to the plate with a new piece of hickory (9% B3).  100% capital return.  Shock and awe.

 

 

To go one step further, he has done just like Babe Ruth during the '32 World Series.  He pointed to centre field, swung the bat and hammered the hanging curve ball.  The only question remaining is how far past the fence will the ball fly?

 

 

SJ

 

The succeeding pitch was also a homer, this time Lou Gehrig.  The pitcher was then pulled from the game.

 

[jay21]

Eric, I'm a fellow shareholder in BAC as well and I greatly appreciate your posts here. I'm wondering something about your approach to this investment though. If I had such a significant part of my savings invested in BAC, I would constantly try to break down my thesis. Like Bruce Berkowitz says: "Can you kill it?". Because if you are wrong on this one, you are ****ed. So shouldn't you be the devil's advocate in this thread? For example, reading some of your posts from a while ago, you predicted a $15-$20 shareprice in the beginning of 2013. Looks like that might be a bit too optimistic. Did you make any assumptions back then that proved to be incorrect? Do you force yourself to look back at what you wrote a year ago?

 

I think if you are 100% invested in BAC, follow all the day-to-day news and write a couple of posts a day defending your your investment on this message board, you are placing yourself in a position where it is very easy to become biased / emotionally attached. And this is probably something you should really avoid if it is your only investment. Any thoughts on this?

 

This is why I revisited the thesis a page or two ago.  It seems like the bear arguments are largely refuted.  Now the earnings power needs to show through and capital needs to be returned to shareholders.

[jay21]

 

In terms of Eric's large bets...he's always made them.  And yes, you live by the sword and die by the sword, but usually when any of us make big bets, it's because we've done the work on the analysis side and have already tried to kill it a thousand times over.

 

Just curious, what other large bets has Eric made (near 100% allocated)?

[Parsad]

 

In terms of Eric's large bets...he's always made them.  And yes, you live by the sword and die by the sword, but usually when any of us make big bets, it's because we've done the work on the analysis side and have already tried to kill it a thousand times over.

 

Just curious, what other large bets has Eric made (near 100% allocated)?

 

Fairfax.  There were other large bets, but Fairfax was the only other one he went 100% into as well I believe...is that correct Eric?  Cheers!

[ERICOPOLY]

 

In terms of Eric's large bets...he's always made them.  And yes, you live by the sword and die by the sword, but usually when any of us make big bets, it's because we've done the work on the analysis side and have already tried to kill it a thousand times over.

 

Just curious, what other large bets has Eric made (near 100% allocated)?

 

Fairfax.  There were other large bets, but Fairfax was the only other one he went 100% into as well I believe...is that correct Eric?  Cheers!

 

That's the only other time it's been 100%.

 

They're very similar in a way really, as Sanjeev first pointed out.

[nwoodman]

Eric,  the way FFH's share price is heading you may well get another chance ;)

[meiroy]

 

In terms of Eric's large bets...he's always made them.  And yes, you live by the sword and die by the sword, but usually when any of us make big bets, it's because we've done the work on the analysis side and have already tried to kill it a thousand times over.

 

Just curious, what other large bets has Eric made (near 100% allocated)?

 

Fairfax.  There were other large bets, but Fairfax was the only other one he went 100% into as well I believe...is that correct Eric?  Cheers!

 

That's the only other time it's been 100%.

 

They're very similar in a way really, as Sanjeev first pointed out.

 

Aren't you hedged for like +40%? So that's not really 100%.

 

[ERICOPOLY]

 

In terms of Eric's large bets...he's always made them.  And yes, you live by the sword and die by the sword, but usually when any of us make big bets, it's because we've done the work on the analysis side and have already tried to kill it a thousand times over.

 

Just curious, what other large bets has Eric made (near 100% allocated)?

 

Fairfax.  There were other large bets, but Fairfax was the only other one he went 100% into as well I believe...is that correct Eric?  Cheers!

 

That's the only other time it's been 100%.

 

They're very similar in a way really, as Sanjeev first pointed out.

 

Aren't you hedged for like +40%? So that's not really 100%.

 

I was until the Q3 report came out.  I was impressed with their progress and their conference call remarks regarding their having already fully achieved their capital build goals and that they intend to return 100% moving forward.  Moynihan then later clarified that they will get all the capital they need to run the business merely from running off loans.  Thus, anything generated can be 100% returned for a while because they have absolutely no need nor desire to retain it.  It's all "ours".