Arden

There is a serious problem with high intelligence. Smart people are very good at finding arguments for their side, but are really bad at finding arguments for the other side: http://www.bakadesuyo.com/why-do-some-smart-people-lack-common-sense Very intelligent people tend to act as if their thinking of good reasons changes reality, and I bet you can see how this sometimes causes problems in investing.

I'd wait until you have a verdict or at least the other side of the story. What is the difference between liking a company and liking a stock, if a stock is a fraction of a company? You like the stock's chart?

The equivilant to stock shorting in housing would be renting a house and then selling it immediately. Unfortunatley, I'm pretty sure there are some legal problems with that :(

Great answer, thanks!

Do you know if there's any connection between beta and the volatiliy we enter into the BS formula? Are they the same?

Thanks again :) A rising interest also benefits banks, doesn't it? Theoretically, they could still give customers a very low interest and raise it less than the FED does in the future. Why do you think it'll hurt them? About taxation- I agree that rising taxes cause some risk, but ,listening to some of the statements both Obama and Romney made, It seems probable they will lower corporate tax rate after the elections (With Romney it's pretty certain, Obama less so) . Since WFC pays pretty much the full rate, it will be really significant, raising its rate of return several percentage points. I really hope this happens.

Thanks for your reply mate, glad to know I haven't gone too far with trying to make sense of BnS. A nobel prize may be nice, But if this method is more correct, then I would rather make truckloads of money instead :D As far as I can see, the warrants are priced using black and scholes, and the difference between cost of capital and risk free rate, especially now, is just huge, this could cause an unbelievable mispricing in some warrants. I think, and tell me if you agree, that as a value investor your biggest edge would be in long warrants , in stocks with a good return(or cost, I'm not sure) on capital with low volatility, because in volatile stocks the volatility that goes into the formula will compensate for its mistake in using risk free rate, thus making you lose your edge. This may be the reason BAC warrants don't have same leverage as the WFC warrant- WFC is a pretty calm stock (not that this means anything).

I've been making some calculations with the BS formula, and I reach some results that seem strange to me. For example- WFC warrant with a maturity in 6.5 years trade at 8.5, while 1.5 year options trade at almost 4. This seems weird to me, because it assumes that the 1.5 years starting now are worth a big chunk of the warrant price, while in my opinion the years after that are the more valuable ones, because if WFC compounds at 10, the year from year 5 to year 6 is worth a lot more than the year from now. This got me reading about the formula. Black Scholes' formula assumes stocks move at a random brownian motion with a drift, which is the risk free rate- meaning, the forumula assumes every risk is hedged perfectly, so everything should move at that rate. Putting aside the formula ignoring the company and its own compounding of its equity, is it logical to make an assumption that the risk free rate is the return for any stock? Maybe it's true for a commodity, but in stocks This seems to me not only a little off, but off by orders of magnitude in the long term. It seems the WFC warrant pricing closely tracks the Black scholes value for it, so if you assume WFC compounds at 15% or even at 5%, you're seeing something completely different of what a guy pricing with the risk free drift assumption sees. If I could rewrite the formula and assume a specific drift for WFC(the drift doesn't appear in the final formula) I would assume a drift of about 5-10% (to be conservative), which I suspect would change the warrant price by a lot. Am I understanding BS correcly? Do you think perhaps the risk free drift assumption does make sense?

Thanks again. I also got my reply just now: Guess that sums it up. Sucks, but I still think the warrants are a pretty good choice.

Thanks uccmal, Rabbitisrich. It seems that indeed the strike is adjusted for the excess. BTW, did you send your mail to the same address I wrote above? in "Chou's semiannual report" , are you referring to the latest? http://www.choufunds.com/pdf/SemiAR11.pdf If so, the relevant mention of the TARP warrant is the following: "We believe the strike price is adjusted downward for any quarterly dividend paid that exceeds a set price", so they do think it's the excess, but they don't sound too sure of themselves.

Sorry but I fail to follow. The part you are referring to is the following: The highlighted sentence is one of only two mentions of mentions of the term "per share fair market value" in the prospectus, and this is the definition of the term. It seems to me it is defined as the whole dividend You are referring to this: But again, I fail to see where it is said the per share fair market value is reduced by the regular dividend. You're sharp and know the prospectus well, so I would love it if you showed me the smoking gun.

Rabbitisrich you are not addressing the question. Of course dividend up to 0.34 do not trigger an adjustment, the question is: when the warrant is triggered, is the adjustment made for the excess above 0.34$ or the entire sum. I've quoted from the prospectus the paragraphs that make me think it is the entire sum, specifically the paragraph regarding the calculation of the new strike price that does not mention any excess. If you have a statement in the prospectus showing otherwise I would love to know about it, but the statement regarding the triggering of the adjustment can be interperted either way.

Investor relations in Wells Fargo are pretty hard to get. I've called the number above but the office I reached only deals with common stock, and they referred me to another office which has a voice mail saying they are out of the office and that I can call two other offices that deal with investor relations. I've done that, but they're both also out of the office. I've spent the better part of an hour and no result. I'll try again tommorow.

NVM, I will call them myself later.

I'll send an email to investor relations, I'm not really sure how to call them since I'm out of the US and it's a bit of a mess since I just moved and don't yet have a supplier for calls to the US (maybe if they had skype :) ), would love it if someone here could give them a call. You're right in - the market is naturally mostly pretty right, but notice that it is not obious at all that the price of the option should indeed be that much higher if the adjustment is performed as I think it is- so it's unclear if the option is indeed negligently mispriced by the market. It is an option after all, and even within this forum there is debate if the common or the stock is better, and this forum obviously really likes banks. To someone a bit more afraid of banks this may seem quite scary, and the price of 11 may be about right for them. Edit: investor relations: https://www.wellsfargo.com/invest_relations/ir_faq#Q15 " How can I contact someone in Investor Relations? Please call 1-415-371-2921 or email investorrelations@wellsfargo.com "

Peter Burke, what say you? Why do you think only the excess matters? i think it's been vetted by many people. the language is confusing. but I believe it's the excess. It is the excess above 0.34/q. if it was the total dividend the warrants would be worth $8-9 more than they are trading to account for the cumulative dividend. What kind of argument is that? Are you assuming the market understands the prospectus better? Where in the prospectus do you see the adjusment is only on the excess. It doesn't seem that way to me, since the formula for adjusment says nothing regarding any excess. The way it seems to be adjusted, as I quoted above from the prospectus, is multiplying the strike price by the stock price after the ex date divided by the stock price before the ex date. if a forum of value guys who read prospectuses aren't sure how the adjustment is made, it seems to me we just might have a serious edge in solving this. To me it seems the adjustment if for the entire amount, any idea how we can resolve this? It indeed seems quite significant - about 60-80 percent increase on today's price depends on the understanding of this thing.

the strike comes down by the EXCESS of the dividend above $.34. Peter Burke, what say you? Why do you think only the excess matters?

BTW, Why do you think that the warrants only benefit from the portion of the dividend that's above 0.35$? What I'm seeing is: 1.“ordinary cash dividends” means a regular quarterly cash dividend on shares of our common stock out of surplus or net profits legally available therefor (determined in accordance with generally accepted accounting principles in effect from time to time). Ordinary cash dividends will not include any cash dividends paid subsequent to October 28, 2008 to the extent the aggregate per share dividends paid on our outstanding common stock in any quarter exceed $0.34, as adjusted for any stock split, stock dividend, reverse stock split, reclassification or similar transaction." 2.... dividends of our common stock and other dividends or distributions referred to in the preceding bullet point), the exercise price in effect prior to such record date will be reduced immediately thereafter to the price determined by multiplying the exercise price in effect immediately prior to the reduction by the quotient of (x) the market price (as defined below) of our common stock on the last trading day preceding the first date on which our common stock trades regular way on the principal national securities exchange on which our common stock is listed or admitted to trading without the right to receive such distribution, minus the amount of cash and/or the fair market value of the securities, evidences of indebtedness, assets, rights or warrants to be so distributed in respect of one share of our common stock (such subtracted amount and/or fair market value, the “per share fair market value”) divided by (y) such market price on the date specified in clause (x). It seems as though the entire dividend is reduced as long as it's above 0.34, isn't it?

Thanks, you too :) I do think the stock has a certain advantage in that if WFC does triple in the next few years you would still be able to hold it and earn dividend on he part that belongs to the IRS for a long time, but I can see myself holding the warrant until maturity. With a recovery in housing this old horse won't seem so scary.

Myth, There is new regulation(Can't remember its name, read about it on morningstar) in the electricity market that will make the majority of coal operated plants uneconomical, and I can't see them switching to anything but gas.

Thanks Uccmal. If they warrants are not adjusted for buybacks than the warrants kind of leverage a buyback, so it's much better than a dividend. But it seems you're wrong- WFC have already purchased quite a lot of warrants 2 years ago (less in the YTD), it makes sense to me that they'll buy more . it's not exaggerated to say that you won't be able to get them in the market 2-3 years from now.

What are you seeing in regard to natural gas? a rise or a drop? the article gives reasons for both.

You really think someone will buy WFC for a Dollar more in 2018, because it paid a dividend back in 2012? You think they will do that even though that WFC has a dollar less in equity? That's nonsense and completely psychological and technical. I want WFC in 2018 to have as much equity as possible, as long as they can get a decent return. The correct price of the warrant now depends on whether WFC will reach about 55 by 2018, since you have to compensate for the alternative yield of the common. I think it's possible, but much more so with less dividends and more buybacks.

the strike comes down by the EXCESS of the dividend above $.34. Dammnnn :P I totally misunderstood that. If so, then I should have prayed that the dividend will be as low as possible, because if they are above the threshold of 0.34, I'm losing 1.32$ of equity every year, and it's better for me that they just don't pay out. BTW, Eric and pals, Do the buybacks at least reach the warrant holders intact?

The 2 statement are unrelated- I know that the adjustment is only above 34 cents, but how do you figure the strike price will come down by a penny? are you saying the adjustment is done in the same proportion as (dividend)/(market price of common)? is that true for buybacks as well? because if some, we should expect the strike price to rise.