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JPM - JP Morgan


shalab

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“The good news is that the prognosis from my doctors is excellent, the cancer was caught quickly, and my condition is curable,” the 58-year-old Dimon said in a statement. “Importantly, there is no evidence of cancer elsewhere in my body.”

 

 

 

 

http://www.businessweek.com/articles/2014-07-01/jpmorgan-s-jamie-dimon-has-throat-cancer

 

JPMorgan's Jamie Dimon Has Throat Cancer

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It is hard not to be bullish on JP Morgan in spite all the bad headlines.

 

http://alphatracker.co/c/post/barrons-is-bullish-on-j-p-morgan/

 

Its trading right at book.

 

Are you saying that is fair value?

 

I cant answer that: What does fair value mean to you? 

 

All I know, is all of the big US banks are trading cheap on a historical price to book value. 

 

 

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Why buy leaps and why not buy the warrants?

 

At current warrant prices of about 19$ @42.42 strike, you are paying approximately 4.5% annually to borrow the strike. Dividend is already above the threshold, so strike and conversion factor continue to be adjusted in your favor. 4.5% rate to borrow the strike translates into roughly 3% break even growth on the stock annually. Given managements guidance for 15% RoE, in one year we could theoretically recoup all the prepaid interest. Seems very cheap to me.

 

I know I am going to miss all these TARP warrants in a few years. ;)

 

Interesting pitch on the warrants here

http://www.institutionalinvestor.com/article/3399598/investpitch-brian-pitkin-jpmwsus.html#.VGpshvntm17

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rpadebet,

 

Both worth considering.  Here are my general thoughts about the warrants, for what little it is worth: the warrant expire on Oct 2018. Now there are already LEAPs for Jan 2017. At the end of next year there will be LEAPs for 2018 and at 2016 LEAPS for beyond the expiration date of the warrants.

 

I think lots of people looked at the warrants previously as a safe sort of thing ignoring the fact that it's a derivative because it was "so many years in the future", somewhat ignoring the cost as well. Some TARP warrants you can trade for the common so you don't have to put any cash, which could be an advantage of a sort if you plan to hold to expiry. Also could be technical reasons for funds to hold warrants instead of LEAPs.  As ericopoly showed one can do quite well with portfolio margin and puts.  If the common does increase enough to make the warrant worthwhile it will be really deep in the money, more like a stub. Near expiration it will still have the risk of a derivative that could be worth nothing.  Will you hold on without holding puts? If you'd buy puts then why not do it now? Or if you'd switch to the LEAPs then why not do it now? Or if you would not hold to expiry why not buy LEAPS instead now? There's also liquidity issues and other issues but as we get closer to Oct 2018 with the LEAPs already in 2017 it seems less and less attractive to me.

 

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rpadebet,

 

Both worth considering.  Here are my general thoughts about the warrants, for what little it is worth: the warrant expire on Oct 2018. Now there are already LEAPs for Jan 2017. At the end of next year there will be LEAPs for 2018 and at 2016 LEAPS for beyond the expiration date of the warrants.

 

I think lots of people looked at the warrants previously as a safe sort of thing ignoring the fact that it's a derivative because it was "so many years in the future", somewhat ignoring the cost as well. Some TARP warrants you can trade for the common so you don't have to put any cash, which could be an advantage of a sort if you plan to hold to expiry. Also could be technical reasons for funds to hold warrants instead of LEAPs.  As ericopoly showed one can do quite well with portfolio margin and puts.  If the common does increase enough to make the warrant worthwhile it will be really deep in the money, more like a stub. Near expiration it will still have the risk of a derivative that could be worth nothing.  Will you hold on without holding puts? If you'd buy puts then why not do it now? Or if you'd switch to the LEAPs then why not do it now? Or if you would not hold to expiry why not buy LEAPS instead now? There's also liquidity issues and other issues but as we get closer to Oct 2018 with the LEAPs already in 2017 it seems less and less attractive to me.

 

Meiroy,

Shouldn't the cost of rolling over the LEAPS be a factor?

The TARP warrants give you a total stock return when the dividend is over the threshold (which it already is, in case of JPM). LEAPS compensate you for regular dividend payouts, so if JPM steadily increases their dividends  over the next 4 years, aren't the warrants more attractive than leaps?

 

 

I guess the analysis I am looking for is, what is the total cost of ownership of JPM through LEAPs and how does it compare to owning it through warrants over the next 4 years. Anyone would be happy to buy the cheaper exposure.

 

I am not sure downside hedging costs are a differentiating factor as both kinds of long exposures can be hedged in similar ways.

 

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I guess the analysis I am looking for is, what is the total cost of ownership of JPM through LEAPs and how does it compare to owning it through warrants over the next 4 years. Anyone would be happy to buy the cheaper exposure.

 

Compare it to the cost of using puts+margin (puts are LEAPS too).

 

The $40 strike 2016 puts cost 1.75% a year.  On top of that add the margin borrowing rate.  Some people get their margin for only 50 bps, so 2.25% a year total.  That's 1/2 the cost of the warrants.

 

Risks are:

1)  margin rates increase

2)  stock plunges and the cost of rolling the puts goes higher (compared to the warrant holder who should see reduced decay if not a spike in the value of their premium if the stock goes much lower).

 

Benefits are:

1)  half the cost at current pricing

2)  if JPM shoots up by 2016 expiry you will likely want to exit the trade, and the warrant holders will wind up with costs in excess of 4.5% a year.  It might even cost them 10% over that year -- who knows.

 

One method is much better than the other if the stock drops a lot, the other if it goes up a lot.  And one method is better under status quo. 

 

The reason why the warrants look cheap is because the strike is so low as to be nearly meaningless.  I guess people are much more afraid of the price drop on the way down to $42 rather than the odds of going much below $42.

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I guess the analysis I am looking for is, what is the total cost of ownership of JPM through LEAPs and how does it compare to owning it through warrants over the next 4 years. Anyone would be happy to buy the cheaper exposure.

 

Compare it to the cost of using puts+margin (puts are LEAPS too).

 

The $40 strike 2016 puts cost 1.75% a year.  On top of that add the margin borrowing rate.  Some people get their margin for only 50 bps, so 2.25% a year total.  That's 1/2 the cost of the warrants.

 

Risks are:

1)  margin rates increase

2)  stock plunges and the cost of rolling the puts goes higher (compared to the warrant holder who should see reduced decay if not a spike in the value of their premium if the stock goes much lower).

 

Benefits are:

1)  half the cost at current pricing

2)  if JPM shoots up by 2016 expiry you will likely want to exit the trade, and the warrant holders will wind up with costs in excess of 4.5% a year.  It might even cost them 10% over that year -- who knows.

 

One method is much better than the other if the stock drops a lot, the other if it goes up a lot.  And one method is better under status quo. 

 

The reason why the warrants look cheap is because the strike is so low as to be nearly meaningless.  I guess people are much more afraid of the price drop on the way down to $42 rather than the odds of going much below $42.

 

Thanks for the explanation. I guess the determining factor for me here is the margin rate. I cant get anywhere close to 0.5% ;). 1.25% is the break even margin rate and I cant get that either.

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I guess the analysis I am looking for is, what is the total cost of ownership of JPM through LEAPs and how does it compare to owning it through warrants over the next 4 years. Anyone would be happy to buy the cheaper exposure.

 

Compare it to the cost of using puts+margin (puts are LEAPS too).

 

The $40 strike 2016 puts cost 1.75% a year.  On top of that add the margin borrowing rate.  Some people get their margin for only 50 bps, so 2.25% a year total.  That's 1/2 the cost of the warrants.

 

Risks are:

1)  margin rates increase

2)  stock plunges and the cost of rolling the puts goes higher (compared to the warrant holder who should see reduced decay if not a spike in the value of their premium if the stock goes much lower).

 

Benefits are:

1)  half the cost at current pricing

2)  if JPM shoots up by 2016 expiry you will likely want to exit the trade, and the warrant holders will wind up with costs in excess of 4.5% a year.  It might even cost them 10% over that year -- who knows.

 

One method is much better than the other if the stock drops a lot, the other if it goes up a lot.  And one method is better under status quo. 

 

The reason why the warrants look cheap is because the strike is so low as to be nearly meaningless.  I guess people are much more afraid of the price drop on the way down to $42 rather than the odds of going much below $42.

 

You might be using different prices, but if we use the current prices

 

Stock $60.76

Warrant $19.37

 

Time Value is: $42.42 + $19.37 - $60.76 = $1.03

 

Dividend threshold: $1.52

 

So we are paying $2.55 to borrow $42.42 or 6% if time value goes to zero in a year. As long as time value does not become negative then the max borrowing cost for warrants is 6%.

 

Am I missing something?

 

Vinod

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I guess the analysis I am looking for is, what is the total cost of ownership of JPM through LEAPs and how does it compare to owning it through warrants over the next 4 years. Anyone would be happy to buy the cheaper exposure.

 

Compare it to the cost of using puts+margin (puts are LEAPS too).

 

The $40 strike 2016 puts cost 1.75% a year.  On top of that add the margin borrowing rate.  Some people get their margin for only 50 bps, so 2.25% a year total.  That's 1/2 the cost of the warrants.

 

Risks are:

1)  margin rates increase

2)  stock plunges and the cost of rolling the puts goes higher (compared to the warrant holder who should see reduced decay if not a spike in the value of their premium if the stock goes much lower).

 

Benefits are:

1)  half the cost at current pricing

2)  if JPM shoots up by 2016 expiry you will likely want to exit the trade, and the warrant holders will wind up with costs in excess of 4.5% a year.  It might even cost them 10% over that year -- who knows.

 

One method is much better than the other if the stock drops a lot, the other if it goes up a lot.  And one method is better under status quo. 

 

The reason why the warrants look cheap is because the strike is so low as to be nearly meaningless.  I guess people are much more afraid of the price drop on the way down to $42 rather than the odds of going much below $42.

 

You might be using different prices, but if we use the current prices

 

Stock $60.76

Warrant $19.37

 

Time Value is: $42.42 + $19.37 - $60.76 = $1.03

 

Dividend threshold: $1.52

 

So we are paying $2.55 to borrow $42.42 or 6% if time value goes to zero in a year. As long as time value does not become negative then the max borrowing cost for warrants is 6%.

 

Am I missing something?

 

Vinod

 

You're correct.

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You might be using different prices, but if we use the current prices

 

Stock $60.76

Warrant $19.37

 

Time Value is: $42.42 + $19.37 - $60.76 = $1.03

 

Dividend threshold: $1.52

 

So we are paying $2.55 to borrow $42.42 or 6% if time value goes to zero in a year. As long as time value does not become negative then the max borrowing cost for warrants is 6%.

 

Am I missing something?

 

Vinod

 

If we are comparing warrant against buying stock on the margin and buying put to hedge the strike, shouldn't the max borrow for 1 year be 2.55/60.76 or 4.2%?

 

Also since expiry of warrant is 4 years away, shouldn't you be using 1/4th of the time value to compute borrow cost (this assumes time value goes to zero over the entire life instead of in the next one year). If it goes to zero in the next one year then borrow cost for next 3 years would be only 2.5% p.a.

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