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WFC warrants


Guest kumar
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The interest or carry costs seems a bit high, but they are eight year options. I typically like to buy slightly in the money to leverage my bet. Typically I dont pay too much above breakeven. I usually do a thumb in the air valuation and buy when it seems cheap. 8 years though is an eternity and if Buffett is half right one will be laughing all the way to the bank. Hopefully we get a day of capitulation for Wells sooner or later. I think we just had one for SD and I will be trying to buy those options tomorrow.

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The warrants now trade on the NYSE under the ticker WFCWS. You should be able to buy them through any discount brokerage.

 

I bought some in the $8.60 range. Might be just in time for the Greek debt problem to blow up all financials.  :)

 

Thanks for the ticker!

 

Here's the prospectus:

http://www.sec.gov/Archives/edgar/data/72971/000119312510126208/d424b5.htm

 

Wells Fargo bought about 70mil of the warrants leaving about 40mil outstanding.

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So, if I understand this correctly, you buy the warrants at, lets say $7/warrant, which gives you the right to buy 1 share of WFC at $34.01 anytime before 10/28/2018, otherwise the warrants expire worthless on that date.  Your breakeven is $41.01/shs.  Correct???

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So, if I understand this correctly, you buy the warrants at, lets say $7/warrant, which gives you the right to buy 1 share of WFC at $34.01 anytime before 10/28/2018, otherwise the warrants expire worthless on that date.  Your breakeven is $41.01/shs.   Correct???

 

Yes!

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There's an additional sweetener, as I read it, which is that to the extent that the annual dividend exceeds $1.36 in a given year, the strike price is reduced by that amount.  Given that the annual dividend is currently 20 cents, this might seem irrelevant.  But, the previous dividend was $1.36 so, say, WFC goes back to that in 2011 or 2012 and raises the dividend by 10% per year after that, you would see the strike reduced by $2 to $4 (random choice) over the life of the warrant. 

 

I believe that if Wells pays a special dividend (in excess of the amount noted above) the strike is also reduced.

 

I can't guarantee this is correct but if anyone has an alternative understanding, please post.

 

 

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  • 2 months later...

These warrants ar back down below the issue price of $7.70 and give the right to buy Wells Fargo stock at $34 until 2018. If we have deflation WFC will likely get cheaper short term until they work through past problems but by 2018 with good management and a Fed and treasury creating a good environment for big banks even with deflation I would expect a profit. If we have continued disinflation I suspect WFC will do OK even short term as lots of people refinance with cheaper 30 year mortgages and eliminate other higher interest rate debt.

 

I don't expect deflation long term, US has had attrocious economic policy since 2000 and I expect it to continue. The people in charge are smart people so they must have a good reason which I do not understand for their apparently stupid policies. Accordingly I agree with Marc Faber's warning that long term USD is at risk. It seems prudent to insure against that risk.

 

So what if US inflation takes off. By $2018 the $34 might be half the value in current dollars. Further inflation will help debtors and fix the loan loss problem. Brazilian banks were able to maintain profits even with super high inflation. So these warrants look to me to offer cheap insurance for the "Marc Faber" risk with the likely outcome being a profit in almost any environment. What am I missing?

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These warrants ar back down below the issue price of $7.70 and give the right to buy Wells Fargo stock at $34 until 2018. If we have deflation WFC will likely get cheaper short term until they work through past problems but by 2018 with good management and a Fed and treasury creating a good environment for big banks even with deflation I would expect a profit. If we have continued disinflation I suspect WFC will do OK even short term as lots of people refinance with cheaper 30 year mortgages and eliminate other higher interest rate debt.

 

I don't expect deflation long term, US has had attrocious economic policy since 2000 and I expect it to continue. The people in charge are smart people so they must have a good reason which I do not understand for their apparently stupid policies. Accordingly I agree with Marc Faber's warning that long term USD is at risk. It seems prudent to insure against that risk.

 

So what if US inflation takes off. By $2018 the $34 might be half the value in current dollars. Further inflation will help debtors and fix the loan loss problem. Brazilian banks were able to maintain profits even with super high inflation. So these warrants look to me to offer cheap insurance for the "Marc Faber" risk with the likely outcome being a profit in almost any environment. What am I missing?

 

 

 

Whenever inflation takes off, banks get squeezed.

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I've been looking at these for a while, and tend to agree with Aberhound.  I do recognize the risk that inflation will squeeze banks, but I also keep reading (from Buffett among others) that banks tend to match the terms of their assets and liabilities to minimize this.  Might the squeezing depend on the rate of inflation, or more precisely the rate of change of inflation?  Help.

 

I look at these warrants as a fairly decent hedge against inflation, and with a slight possibility of deflation making them expire worthless.  Haven't bought yet, but have been tempted. 

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I've been looking at these for a while, and tend to agree with Aberhound.  I do recognize the risk that inflation will squeeze banks, but I also keep reading (from Buffett among others) that banks tend to match the terms of their assets and liabilities to minimize this.  Might the squeezing depend on the rate of inflation, or more precisely the rate of change of inflation?  Help.

 

I look at these warrants as a fairly decent hedge against inflation, and with a slight possibility of deflation making them expire worthless.  Haven't bought yet, but have been tempted.  

 

 

The operant word is try rather than tend (to match etc.).  The higher the rate of increase in inflation , the more difficult it is to do this.

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  • 2 years later...

Yep, a naive spectator would say you only need an annual <4% to break even, just don't forget the dividend adjustment kinda suck- so it'll have to be more than that. With about 1$ a year lost because of the lack of adjustment, you'll actually need about 7% just so you don't lose, and more like 9-10% to break even with the stock.

 

Besides- in the last few months the warrants have risen by almost 20% while the stock didn't move much so it kinda makes sense.

 

The BAC warrants indeed make less sense to me though. They have pretty consistently underperformed the stock.

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