As BAC stock continues to fall, interesting perspective

[moore_capital54]

"If facts materialized showing the BAC represented a great buying opp, I'd be the first into the market, buying as much as I could. "

 

Munger by the time you see the facts BAC will have already reversed.

 

In terms of credibility, I am a new member to this board and would have at least given you credit had I seen in your posting history any investment ideas or any solid research or calls. Nothing.. All I see is someone that is good at articulating fears and appears to get a kick out of engaging the community whenever their ideas appear to be going south, even if it is temporarily. Further analysis indicates that there is a direct correlation between the increase in your posting activity and the volatility in the name you are tearing apart or if it's the market than the market.

 

You stop posting when ideas do well, and at best will provide some kind of conciliatory praise before rejoining the community several months/weeks later... IE: "OK its been a while, I see you guys got lucky congrats... So here is why your all wrong this time"

 

That is the tone I have extrapolated from your posting behaviour.

 

 

[Myth465]

moore_capital54

 

Thats what I have observed. Thus far Munger's posting behavior has been the best indicator of a market bottom......

[ERICOPOLY]

The real Munger is probably loading up with WFC right now.

[Ross812]

Whatever the value. We agree bac is miss priced. Bac is either insolvent, needs to issue equity, or is worth far more than $7. Why not buy the warrants and hedge your exposure with puts? The worst will be realized by 2013. And this will be worth much more than the cost of the puts. Or the bank will fail and you will lose little to nothing because of your puts. Either way, this is going to move hard when the market receives some clarity...

[Myth465]

Good interview.

 

http://finance.yahoo.com/blogs/daily-ticker/henry-blodget-vs-bank-america-rotted-core-164854408.html;_ylt=ArBraAoI_Dtz0KR5jSbEjL4p2YdG;_ylu=X3oDMTBwcWhydHFrBHBvcwMxMARzZWMDTWVkaWFCbG9nSW5kZXg-;_ylg=X3oDMTFvcGs0cnBnBGludGwDdXMEbGFuZwNlbi11cwRwc3RhaWQDBHBzdGNhdANibG9nBHB0A3NlY3Rpb25zBHRlc3QD;_ylv=3

 

I really like Blodget and watch the daily ticker every few days or so.

[AZ_Value]

Hello All,

 

Long time reader, first time poster. I had to sign up after reading this thread as I couldn't take it anymore  :D

 

Regarding Munger’s posts: I will briefly describe step by step what I emotionally went through after reading this thread  http://www.cornerofberkshireandfairfax.ca/forum/index.php?topic=4909.0  that he started a few weeks back where he quoted some Denninger dude who supposedly “does his homework” and said that banks were counting their market capitalization as part of their balance sheet capital.

1) WTF?? He has got to be kidding…  ???

2) Yeah, he’s probably kidding…  :)

3) OMG… Dude is serious  :o

4) Anger and rage!!!

5) Note to self: Remember to never, EVER, read again what Munger has to say about banks

 

Nothing personal Munger (really) but many of your posts are very short on logic and long on… I’m not sure what, but long on something else.

 

Ron

 

[ERICOPOLY]

Good interview.

 

http://finance.yahoo.com/blogs/daily-ticker/henry-blodget-vs-bank-america-rotted-core-164854408.html;_ylt=ArBraAoI_Dtz0KR5jSbEjL4p2YdG;_ylu=X3oDMTBwcWhydHFrBHBvcwMxMARzZWMDTWVkaWFCbG9nSW5kZXg-;_ylg=X3oDMTFvcGs0cnBnBGludGwDdXMEbGFuZwNlbi11cwRwc3RhaWQDBHBzdGNhdANibG9nBHB0A3NlY3Rpb25zBHRlc3QD;_ylv=3

 

I really like Blodget and watch the daily ticker every few days or so.

 

The problem I have with Blodget's argument is that he doesn't acknowledge that the banks have actually overstated their exposures to loan losses and have thus been releasing reserves.  I remember a year or so ago he was bitching they were "padding their earnings"... but back in 2008&2009 it logically follows that they must have been deliberately overstating their losses?

 

Instead he kind of throws up his hands claiming it's just like 2009 again where we don't trust the banks balance sheets.  That wasn't an environment when banks were finding out that their reserves were more than adequate -- instead they were raising capital to boost reserves, and appears to have overdone it.  The fact is they don't know what the losses are until they actually come in, but they appear to have been too careful.

 

He is smart enough to see this, so I think he's just going with what's popular and what sells -- he is after all in the news_as_entertainment business.

 

[txlaw]

He is smart enough to see this, so I think he's just going with what's popular and what sells -- he is after all in the news_as_entertainment business.

 

He's just eating up the publicity, isn't he? 

 

I'm sure this has been a boon for the Business Insider.

[rranjan]

Rranjan -- I didn't answer your question because I thought it was the height of ignorance.  With the question, you come across as someone who just finished reading Buffett and Graham writings for the first time, believing you are now one of the few "enlightened" and couldn't wait to pounce on the "less enlightened" -- very funny. 

 

So no -- I don't "think" that way.  If I had a position in which I had full confidence and the stock price was cut in half in less than a month to an absurd valuation, I would buy as much as I possibly could at the new lower valuation. 

 

Nope, my question had nothing to do with BAC at all. You chose to raise downside protection issue based on stock price being down rather than providing any valuation logic. You have told many times that you don't have any opinion on BAC so it's clear that you have no opinion on if BAC is worth $2 or $20. After admitting that you have no idea of valuation of BAC, you were dismissing some one else statement of downside protection based ONLY on stock price movement over the last few months. I just wanted to understand the basis of you statement. I did not want to make any assumptions so asked a direct question.

 

Based on your post above it seems you don't judge downside protection based on price movement but your earlier post was directly contradicting it. BAC might go to zero or go to $40 but you should not be talking about downside protection based on price movement. That's all I wanted to point out and it had nothing to do with anyone reading Graham's writing or Buffets past actions. That's irrelevent to this discussion.

[PlanMaestro]

He's just eating up the publicity, isn't he? 

 

I'm sure this has been a boon for the Business Insider.

 

Yes he is, just check his twitter account and how he is playing it out Munger-like.  Utterly irresponsible. Just say: I made a mistake, sorry.

[Myth465]

Honestly I liked the way Blodget played it. He even probably owns 100 shares to CYA. Then he basically said the CEO should come on the show to clear things up. Well played. I think his issues with BOFA mirror mine. Its simple ignorance, and a lack of effort or energy to figure out whats what. The balance shit is gigantic and I am out of cash with securities I understand very well also falling apart lol. I would rather just stay put then analyse something for 2 days and then buy.

 

I think he is right though in terms of what the CEO should do. Scenario testing and full / additional disclosure of the balance sheet is what they should do. On this issue, I agree this is just a dig for ratings, but I generally like his analysis of things, and probably his political / economic leanings. Also inmo Blodget lacks the smugness of Munger. He is basically saying I dont know but the market is betting against it, here is my take on why.......

 

I do however think its wrong to continually demand for posters to defend their ideas or prove their thesis's, read the thread, place your bet (or not), and find something else to do with your time is my advice.

[Smazz]

What would Daniele Chiese say??????

[PlanMaestro]

What would Daniele Chiese say??????

 

Paraphrasing Blodget: A 2 trillion asset base and I just took a 10% and 20% here and there. Just like his Internet stocks analysis: It is a $2 trillion market and we will take just a 10% and 20% here and there. Great analysis.

[txlaw]

Honestly I liked the way Blodget played it. He even probably owns 100 shares to CYA. Then he basically said the CEO should come on the show to clear things up. Well played. I think his issues with BOFA mirror mine. Its simple ignorance, and a lack of effort or energy to figure out whats what. The balance shit is gigantic and I am out of cash with securities I understand very well also falling apart lol. I would rather just stay put then analyse something for 2 days and then buy.

 

I think he is right though in terms of what the CEO should do. Scenario testing and full / additional disclosure of the balance sheet is what they should do. On this issue, I agree this is just a dig for ratings, but I generally like his analysis of things, and probably his political / economic leanings. Also inmo Blodget lacks the smugness of Munger. He is basically saying I dont know but the market is betting against it, here is my take on why.......

 

I do however think its wrong to continually demand for posters to defend their ideas or prove their thesis's, read the thread, place your bet (or not), and find something else to do with your time is my advice.

 

I really dislike how's he's playing up the whole "Why is big old BofA picking on a small blogger like me" aspect. 

 

It was a press release, for God's sake.  It's not Allied Capital trying to take down heroic David Einhorn! 

 

Blodgett is a blogger.  He should have expected criticism for a post throwing out crazy numbers like that, and he shouldn't be whining so much.  ZeroHedge, I think, had a much more clever rejoinder to criticism of their posts on BAC.

[ragnarisapirate]

Moynihan made it very clear he intends to buy shares when he is allowed to do so on the call with berkowitz. Moreover he made it very clear his ENTIRE net worth is in BAC.

 

You know, I once really screwed up by believing a CEO when he said stuff like this. In fact, he did have most of his net worth in the company... then, he said "I would take the company private, if I could..."

 

Then, the company restated financials like crazy, was no longer a value by any measure, and was later taken over by the FDIC, then sold of to BPOP.

 

The bank? W Holding company (Western Bank). It is without a doubt my biggest screw up ever.

 

BAC may very well be cheap, and if you understand their balance sheet, then good for you! I however, will stick to stuff that I understand a bit better. It is what makes me sleep at night!

[oddballstocks]

Whatever the value. We agree bac is miss priced. Bac is either insolvent, needs to issue equity, or is worth far more than $7. Why not buy the warrants and hedge your exposure with puts? The worst will be realized by 2013. And this will be worth much more than the cost of the puts. Or the bank will fail and you will lose little to nothing because of your puts. Either way, this is going to move hard when the market receives some clarity...

 

Ok, this is a fascinating approach to me, so looking at this for 100 shares to make it simple since options are priced in 100s:

 

I buy 100 A warrants at 3.39 for $339

I buy 1 Jan 13 7.50 put for 253

 

Total cash outlay is 592

 

Scenario 1: BAC bankrupt goes to $1/sh

Put is worth $6.50 in the money $650

I lose $339 on the warrants

End up with a gain of $58 overall

 

Scenario 2:

BAC needs to sell for $13.30 + $3.39 = $16.69 at Jan 2019 for a gain on the warrants

BAC needs to sell above $13.30 + $3.39 + $2.53 = $19.22 for a gain on the total investment

 

So BAC needs to rise 3.2x before a gain is realized

 

Am I right in how I'm thinking about this?

 

So I'm struggling with why the warrant is better than just buying the normal shares, buying the normal shares with the put will result in a small loss if the company goes to zero, but the upside is much bigger.  Whereas the shares need to rise above 19.22 for a gain owning the ordinaries would already have a $9.69 gain per share at that point.

 

Thoughts?

[Rabbitisrich]

Munger has been getting far too much attention given the quality of his analysis. If anyone is new to the board check out the "Bank Capital" thread to appreciate what he is offering. The smart short thesis isn't tracking stock movements. Someone like Chanos is going to challenge you on redefault rates, loss severities, home prices, extend n' pretend, yield curve flattening, counterparty risk, derivative covenants, etc...

 

Tearing apart the Mungers of the world is a self-indulgence. If your brain isn't burning calories to answer the opposing thesis, it's wiser to seek out a better "opponent".

 

[Munger]

rranjan -- fair eough.  I see your point.  I was more dismissing the notion that any outside investor could independently develop an accurate measure of tangible BV for BAC and consequently any estimate of margin of safety based on this measure is highly flawed.  And I also completely agree that BAC could go to $0 or could well go to $40+ but I also believe that it is impossible for anyone outside BAC (and possibly even for those on the inside) to determine the likelihood of BAC reaching $40+ or going to $0 -- too opaque.  Most true value investors would run from BAC because the margin of safety is impossible to determine given the lack of insight into the assets and the high leverage.

 

I'll throw Barel Karsen some props -- seems to be well grounded in reality.  Note he is not saying BAC is a short just pointing out the self delusion by those who believe they can value this company, specifically tangible BV -- exactly what I've been saying.

 

http://www.barelkarsan.com/2011/08/bank-of-america-value-stock.html

 

With Bank of America (BAC) trading at just a third of its book value, I frequently receive questions pertaining to its potential as a value investment.

 

Some value investors purport to be able to value banks. Some may actually be able to, while others may only think they are able to. For the average retail investor, however, it is just too difficult to determine the intrinsic values of these "black boxes", for several reasons.

 

First of all, determining the value of the assets of these institutions is a guess at best, without a deep understanding of the bank's loan portfolio. As we've discussed before, some businesses are easier to understand than others. With the complex behemoths banks have become, their business models are very difficult to understand. I can't honestly say that they fall within my circle of competence.

 

But even if one could determine what the assets are worth to some range of values, the amount of leverage used by the banks seriously clouds the value of the equity. For example, for Bank A, you may believe the assets are worth $10,000 plus or minus 10%; but if Bank A uses $9000 in debt to fund those assets, the remaining equity value could be anywhere from $0 to $2000. As long as the shares trade in that range, you have no idea if you're buying at a discount to intrinsic value. If one is wrong about Bank of America's liabilities, for example, even a seemingly large discount to book value can be completely wiped out.

 

Needless to say, the high debt levels used by banks also make them much more susceptible to collapse during downturns, which is a phenomenon we could see at any time without warning. Value investors much prefer companies with low debt, as these have much greater power to weather downturns.

 

Even if a bank is offering a high dividend yield of late (not BAC), it's extremely important to understand where that dividend is coming from in order to attain reasonable assurance that it is sustainable. Buying blindly for dividend yield is not an option. The dividend cuts that have taken place throughout this downturn have proven how susceptible this strategy is to an erosion of principal.

 

Are there circumstances under which I would buy banks? Certainly. Under a situation where the entire industry is undervalued for example, a purchase of a basket of several banks helps diversify away the risk of failures here and there. This is a similar situation to Francis Chou's approach on pharmaceuticals, where large amounts of research money are being spent, but it's unclear which companies will reap the rewards.

 

The bottom line is, buying individual banks is a risk unless you understand the value of what it is you're buying. Buying because stocks are down, or because momentum is up, or because yields are high does not adequately protect your capital.

[Guest Hester]

Many things to say.

 

You'd want to match the maturity of the puts and calls. So it would probably be better to buy LEAPS than the warrants. Also, if you're making a bet for BAC to go bankrupt you'd want to buy the most far out of the money puts. The 7.50 puts aren't good enough.

Also, if BAC goes bankrupt it won't be trading at a dollar, it's a zero, unless it gets rescued, so more reward.

 

These types of trades are long volatility, you are basically saying that the next year will be very volatile, but trailing volatility is already high, so they are more expensive to do right now.

 

Given all that, having the opinion that BAC stock is in limbo right now and will be a huge winner or bankrupt by 2013, one can structure the trade to make it very profitable if that works out.

 

Buy $2.5 Jan 2013 Puts for $.37.

Buy $12.50 Jan 2013 Calls for $.67

Cash outlay: $1.04.

 

BAC goes bankrupt: $1.04 becomes $2.50 (140% profit)

BAC goes a little more than doubles to $15 (about the 52 week high): $1.04 becomes $2.50, (140% profit) (this also assumes no time value left to the call, which probably wouldn't be true and would result in more profit).

 

If BAC more than doubles then this will make a killing. So as you can see if one believes BAC will move big 15 months then one can make a lot of money. If volatility and the VIX fall down to more normal levels, and BAC stays at this level, this trade would get cheaper and very interesting.

 

Of course, there has to be a big move for it to work.

 

 

I buy 100 A warrants at 3.39 for $339

I buy 1 Jan 13 7.50 put for 253

 

Total cash outlay is 592

 

Scenario 1: BAC bankrupt goes to $1/sh

Put is worth $6.50 in the money $650

I lose $339 on the warrants

End up with a gain of $58 overall

 

Scenario 2:

BAC needs to sell for $13.30 + $3.39 = $16.69 at Jan 2019 for a gain on the warrants

BAC needs to sell above $13.30 + $3.39 + $2.53 = $19.22 for a gain on the total investment

 

So BAC needs to rise 3.2x before a gain is realized

 

Am I right in how I'm thinking about this?

 

So I'm struggling with why the warrant is better than just buying the normal shares, buying the normal shares with the put will result in a small loss if the company goes to zero, but the upside is much bigger.  Whereas the shares need to rise above 19.22 for a gain owning the ordinaries would already have a $9.69 gain per share at that point.

 

Thoughts?

[txlaw]

It's amazing how it's gone from BAC needs to raise capital immediately to BAC is going bankrupt.

 

I'd like to hear the thesis on why BAC is going to have to file for BK.

[rranjan]

Munger - It's simply assymetric risk reward situation here.

 

Very good cash flow operations/assets.

Reduced leverage.

High quality of loans originated in last few years.

Lower quality loans originated during the boom period is reducing as compared to total.

Long term deposit advantage is huge.

Not being depending on short term credit market for wirting loans.

 

Check how much bad loans are still in the book and you can check whats the delinquency rate currently to write some portion of it to zero. Assume worst case scenario and then check how much bad loan reserve are already taken. Current situations in many financials are lot different than 2008 so comparison with 2008 is not warranted. More than bad loans , non-avaibility of short term credit was problem at that time specially when most financials were dependent on short term credit avaibility to finance long term obligations which was very stupid.

 

 

Next day some journalist( yes not analyst) can come and write that BAC needs to raise $500 billions and it's upto people judgement to take them seriously.

 

 

There is risk in making any assumption when you estimate a range of valuation but under most reasonable estimate some people are seeing assymetric risk/reward situation here. Risk is there in any investment and it's a matter of finding mispriced bet which you feel comfortable with.

 

You can check everything and if you can not form any opinion then just move on. There are many bargains out there and you don't need to agree on BAC. If you disagree then people are rightly going to ask you reasons.

[Rabbitisrich]

It's amazing how it's gone from BAC needs to raise capital immediately to BAC is going bankrupt.

 

I'd like to hear the thesis on why BAC is going to have to file for BK.

 

Look at the stock price. I think I've made my point.

[rranjan]

It's amazing how it's gone from BAC needs to raise capital immediately to BAC is going bankrupt.

 

I'd like to hear the thesis on why BAC is going to have to file for BK.

 

Look at the stock price. I think I've made my point.

 

;D ;D ;D

[Ross812]

Oddballstocks,

 

Here is a break down of warrants/common with puts in 2013

 

My scenario is BofA has major problems and goes to the $1-$2 range or the market figures out BofA is going to be alright and we see $15 easily.

 

 

 

 

 

 

 

Cmn_Wnt_Put_Break_Down.bmp

[Munger]

rranjan -- you (like other bulls) never come to grips with the reality that you have zero insight into the assets and the assumptions that underlie tangible book value estimates.  To say otherwise is pure self delusion.  Given this reality and the leverage, investing in BAC based on some assumption of "downside protection" is ludicrous.  There is no foundation to your "asymmetric risk/reward" assertion.

 

And how could you have blind faith in management assertions re BV when the only sample we have of those assumptions (FHLB -- see earlier post) are completely unrealistic?  And what happens to BAC's own calc of BV if home prices decline next year instead of going up? -- there is no margin of safety in BAC's own assumptions in this regard...if you listened to the Berk conf call management acknowledged that their assumptions do not cosider a further decline in home prices or even a recession...crazy.