What a Lovely Frickin' Day!

[DCG]

What are some of the companies you guys think are 'dirt cheap'? Most of the companies that are cheap right now that I see have pretty questionable futures.

[Ross812]

I've been adding ALR, and BAC Warrants. Power Corp of Canada Pow:TO or PWCDF.pk is getting really cheap. I would really like Bidvest (bdvsy.pk) to go below $40.

[ERICOPOLY]

I'm sure Buffett is starting to feel like an undersexed guy in the Playboy mansion  :)

 

The small cap 3x bull fund trades under TNA.

 

 

 

 

 

 

 

[ShahKhezri]

I've been buying the BAC common the last two days, warrants havent really traded as pressured as the common the past two days, which is surprising.

[PlanMaestro]

I've been buying the BAC common the last two days, warrants havent really traded as pressured as the common the past two days, which is surprising.

 

I am starting to think that it is all about Berkowitz (and maybe Paulson) and some of his concentrated positions (MBI, AIG, C, BAC, and he does not have the warrants). It is almost as if there are bets based on redemption pressures ... the type of scenario for why he always wanted some cash.

[txlaw]

Anybody buy any MBIA?  I did.

[Rabbitisrich]

I've been buying the BAC common the last two days, warrants havent really traded as pressured as the common the past two days, which is surprising.

 

I am starting to think that it is all about Berkowitz (and maybe Paulson) and some of his concentrated positions (MBI, AIG, C, BAC, and he does not have the warrants). It is almost as if there are bets based on redemption pressures ... the type of scenario for why he always wanted some cash.

 

I think so too. I'm sure that there is legitimate fear surrounding these names, but Berkowitz is a concentrated investor with public cash flows. I opened a position in BAC today and, wonderful news, I am already down!

[sswan11]

If S&P downgrades US debt I can imagine the markets might not take it well Monday.

[valuecfa]

I've been buying the BAC common the last two days, warrants havent really traded as pressured as the common the past two days, which is surprising.

 

I am starting to think that it is all about Berkowitz (and maybe Paulson) and some of his concentrated positions (MBI, AIG, C, BAC, and he does not have the warrants). It is almost as if there are bets based on redemption pressures ... the type of scenario for why he always wanted some cash.

 

I think so too. I'm sure that there is legitimate fear surrounding these names, but Berkowitz is a concentrated investor with public cash flows. I opened a position in BAC today and, wonderful news, I am already down!

 

I own enough MBI, otherwise i would have begun adding more today. I did however open a BAC warrants position today (and hopefully a bit more on Monday as they didn't decline as much as i thought they would). Getting close to being fully invested now and am more drastically reducing corporate bond exposure in favor of equities... Lots of companies on my watch list are at or near my purchase price. Looking forward to spending the weekend looking for leftovers that i may have overlooked. I definitely don't think the broad market is extremely cheap, but it does seem to be one of the more cheaper asset classes.

[ERICOPOLY]

$24 (including dividends) is the point where the BAC warrants outshine the common (based on today's closing prices for each -- $8.17 for the common and $3.63 for the warrant).

 

Shouldn't the warrants be cheaper than this?

 

[goldfinger]

I am selling some tech like MSFT to buy BAC, MBI and AIG common (still have a sizable position in MSFT). It reminds me a bit of 2008: raising cash levels in the short term by investing in some companies that the market doesn't hate too much and that are very obviously undervalued and buying more undervalued ones. Hopefully those will prove good moves in the long run...  ::)

[PlanMaestro]

$24 (including dividends) is the point where the BAC warrants outshine the common (based on today's closing prices for each -- $8.17 for the common and $3.63 for the warrant).

 

Shouldn't the warrants be cheaper than this?

 

 

10% ROE for 7 years? BAC might well be above $60 in 2019

[ERICOPOLY]

Ericopoly, not sure where you get $24 from? 13.30 is the strike price for bac-wta.

 

Common is $8.17, warrant is $3.63.

 

$24 - $13.30 = $10.70.

 

$10.70 = 2.95 x $3.63

 

$8.17 * 2.95 = $24.10

 

 

$24 is roughly $24.10.

 

So this is why I said what I said -- that the break-even point between the common and the warrant is $24.  You need better than a 200% return from BAC by Jan 2019 or else you'd have been smarter to buy the common instead of going with the warrant.

 

I own the warrants, but I paid $3.75 today.  I have had some trouble (buyers remorse) understanding why the getting even point is so high.

 

Paulson estimated about $27 per share value for BAC.  If you grow that at 7% for the next 7.5 years, we get to $45.  There are perhaps reasons why the market won't go that high though.  I don't know.

 

I have to admit I like warrant for the tax shelter on the dividend  :D  I'm committed to reducing my taxes.

[ERICOPOLY]

Not sure what 2.95 is - is it EPS?

 

 

 

At $24 in January 2019, the warrant is worth $10.70.

 

That's a gain of 2.95x the $3.63 price paid for the warrant at today's close.

 

My point is that $24 is roughly the price where the warrant and the common stock have an equal gain.  Anything less than that and you have an opportunity cost versus the plain vanilla common.  I'm just a little surprised that the break-even point between the two is so high.

 

[shalab]

ok - it makes sense now. If the common stock is going to hit $24, it will be growing at 14.4% a year for the next 8 years.

 

 

[redskin]

Shalab,

 

2.95 is the multiple you would make on the stock if it went to $24.  You would also make 2.95X your money on the warrant if the stock settled $24 at expiration.

 

Ericopoly,

 

You also have to consider the adjustment to the warrant strike price if BAC pays a dividend over $0.01/qtr.  If BAC earns $20B annually and has a payout of 25%, the dividend would be $0.50 annually.  7 years of that dividend would reduce the strike price by $3.50.  New strike would be around $9.50.

[ERICOPOLY]

Ericopoly,

 

You also have to consider the adjustment to the warrant strike price if BAC pays a dividend over $0.01/qtr.  If BAC earns $20B annually and has a payout of 25%, the dividend would be $0.50 annually.  7 years of that dividend would reduce the strike price by $3.50.  New strike would be around $9.50.

 

In one of my posts above I wrote "including dividends" in the $24 price.  Later I may have forgotten to repeat those words.

 

So if you want to plug in $3.50 for the accumulated dividends, then you have:

 

$20.5 - $9.8 warrant strike = $10.70.

 

So that's exactly the same $10.70 value of the warrant as in my prior computation.  

 

I feel that the warrant will most likely outperform the common, but I still feel like the breaking even point ought to be lower.  Perhaps the warrant is just less liquid, and somebody really wants to own them, so they've fallen less sharply than the common as of late (the common fell more than the leveraged warrant the past couple of days).  It could be partly that, or it could be rising volatility premium as well.  A substantial price component in the warrant must be the time value, and the time value didn't change much in just two days of course.

[rranjan]

 It could be partly that, or it could be rising volatility premium as well.  A substantial price component in the warrant must be the time value, and the time value didn't change much in just two days of course.

 

I my opinion thats the reason.

[Uccmal]

Eric, the advantage of the warrants is that you can buy twice as much for the same price.  If it moves rapidly above the strike price in the next 2-3 years the warrants will trade in tandem.

 

Example:  BAC at $8.00 today

              BAC warrant at 3.75

 

Within two years so there is time value unhindered:

              BAC at $20

              BAC warrant at 15.75 (say $15 for arguments sake to account for some time decay)

 

1000 shares of BAC at 8000 going to 20000 = 12000

2130 warrants at 3.75:  8000 going to 15*15 = 22500 = 14500 (excludes dividends which of course amplifies the effect)

 

The only advantage in the warrants is in the leverage.  The greater  the gain the greater the advantage. 

 

Most of it hinges on the gain in BAC stock.  BAC is taking its medicine.  It has been my personal observation that well run companies who take their medicine (FFH for example) grow far stronger than they ever were before. 

 

 

 

[DCG]

Since when is BAC a 'well run company'?

[ERICOPOLY]

Eric, the advantage of the warrants is that you can buy twice as much for the same price.  If it moves rapidly above the strike price in the next 2-3 years the warrants will trade in tandem.

 

Example:  BAC at $8.00 today

             BAC warrant at 3.75

 

Within two years so there is time value unhindered:

             BAC at $20

             BAC warrant at 15.75 (say $15 for arguments sake to account for some time decay)

 

1000 shares of BAC at 8000 going to 20000 = 12000

2130 warrants at 3.75:  8000 going to 15*15 = 22500 = 14500 (excludes dividends which of course amplifies the effect)

 

The only advantage in the warrants is in the leverage.  The greater  the gain the greater the advantage.  

 

Most of it hinges on the gain in BAC stock.  BAC is taking its medicine.  It has been my personal observation that well run companies who take their medicine (FFH for example) grow far stronger than they ever were before.  

 

 

I know what you are saying, I'm just undecided if this is the right form of leverage compared to what else is out there.

 

Those $5 2013 calls are only $4.  That's 2x leverage, already in the money.  So when you take delivery, you then buy more $5 strike puts to replace the old ones (they ought to be very, very cheap) or just move the strike up on the put to lock in gains as you go (the only way out of the warrant is going to be selling it and paying tax, unless you want to buy more puts in addition to the cost of the leverage you have already paid).

 

Those calls only cost you 80 cents of premium ($9 break even point less the $8.20 stock price).  Once you take delivery on the shares you can buy more puts with the dividend, moving the strike up.

 

Compare that 80 cents to what the leverage in the warrants will really cost, which is actually about $9 if held to maturity ($8 stock price + $9 cost gets you to $3.70+$13.30).  This is written from the point of view that it's nearly a certainty the stock is over $17 in 7.5 years -- opinions vary of course.

 

Yes, the calls only last 1.5 years versus 7.5 years for the warrants, but can one argue that's worth paying 11.25x more for the leverage (9 = 11.25x.80)?  If you believe the stock will be over $17 at settlement of the warrants (I do), then it really will cost you $9 per share for the price of having leverage.

 

Yes, the leverage in the calls won't cost 80 cents for the entire 7.5 years, as they expire in 1.5 years.  But for that remaining 6 years after taking delivery on the shares the cost of buying replacement puts will be very inexpensive.  Imagine for example what a $5 strike LEAP put will cost you when the stock is $20?  A hell of a lot less than the present 70 cent quotation is my bet -- probably only 10 cents or something, and you'll just use some dividend to buy it.  So after 6 more years, I'd be amazed if the leverage of the calls cost a total amounting to as much as 20% of what you have to pay for the privilege of leverage in the warrants.  

 

Chances are just high that most of the gains in the stock will happen in the next 4 years, and I doubt the calls route will cost much more than a $1 in total for the leverage in that time frame.   If the $5 put can be replaced today for 70 cents when the stock is at $8, what will it cost when the stock is at $20?

 

Warrants will do better if stock is less than $8.75 in 18 months (actually, that number assumes the warrant is still worth $3.75 in 18 months despite decay).  What does your gut tell you about the stock price in 18 months?  If you are that terrified that it will be less than $8.75, then I guess that's why it seems okay to pay so much for the leverage in the warrant?  Perhaps paying 8x as much for the leverage?  Is less than $8.75 in 18 months really what is worrying us and is that why we hold the warrants and not the $5 strike call.

 

There are other strikes of course, like the 2013 $10 call for $1.30.  I'm just not going to spend the time to run this line of thinking on more than one strike.

 

EDIT:  Granted, I forget to mention the margin interest costs after taking delivery on the shares.  Interest rates might be a lot higher, perhaps.  You could be paying that for a while after 2013 settlement date.  

[ubuy2wron]

Has any one calculated the return on buying the stock and selling the warrents a very long term covered call.

[ERICOPOLY]

Has any one calculated the return on buying the stock and selling the warrents a very long term covered call.

 

Pay $8.17 for stock and sell warrant for $3.63.  Net cash outlay of $4.54.

 

$13.30 = 2.92 x $4.54.

 

So maximum 200% return over 7.5 years.  

 

This is the same return as if the stock goes to $23.85 -- but the stock only needs to go to $13.30, so much more certainty.

 

However, it's too conservative for me.  You should be doing much better than tripling your money over 7.5 years at these prices.

 

I'm considering the $10 strike call for $1.30.  I mean, if it expires worthless you lose max of $1.30 -- but there will be decay on those warrants too -- perhaps as much at $1.30, perhaps less, perhaps more. 

 

 

 

 

 

[Aberhound]

My approach is to scour for risks so I am more cautious. For instance, this US big bank comparison chart causes me to believe that Morgan Stanley and Bank of America have sold the most Euro sovereign debt insurance. ARe these charts anticipating defaults in the fall? BAC probably fell partly because it also has US mortgage loss exposure so I think MS has the greatest exposure to European risks. I sold Fairfax to take advantage of the rise (I missed the chance to sell in the managed portfolio) and because earthquake and storm risk seems to be unexpectedly large so I am concerned that the premiums have been too low. I read an interesting paper on the increase in atomic decay rates. I was taught that they were fixed so I am mystified. Is that the cause of the increased volcanism and earthquakes and if not what is? BRK looks cheap but I decided to hold off while I consider if the insurance risk has changed unexpectedly. I bought CEF (gold/silver) for 25% of my personal portfolio (first time gold holding for my personal portfolio) because I expect increased debasement. There is some good public policy as I am watching for measures that improve business competitiveness and profitability. The US seems to have enjoyed the greatest improvement in competitiveness as the real estate collapse has lowered the cost of real estate and local and state governments are forced by the better constitutional structure to cut costs. Unfortunately too much hubris in the federal government is causing so much harm that these improvements are masked. This laptop I am writing on cost me $325 in the US which is a third of what I paid two years ago in Canada and the quality is much better. For the managed portfolios I already had them 25% gold/silver, 10% FFH and 50% cash and 15% oil and gas (store of value) after taking profits this spring in anticipation of the Euro problems and possible war in Syria then Iran. Sovereign defaults will cause a flood of money from bonds to the stock market so I am watching the US big moat companies with interest. I am watching for some humility in Washington as my signal to buy. Ironically the managed portfolios which I manage to preserve wealth have done much better than my personal portfolio which I have so far managed on the traditional value investment approach. I ran a comparison of CEF and BRK and CEF has outperformed 700% to 100%. The CEF chart looks logarithmic compared to an arithmetic rise for BRK. I don't see a change in the factors which have caused this anomaly.

 

[ERICOPOLY]

My approach is to scour for risks so I am more cautious. For instance, this US big bank comparison chart causes me to believe that Morgan Stanley and Bank of America have sold the most Euro sovereign debt insurance. ARe these charts anticipating defaults in the fall?

 

Bank of America Corp., the biggest U.S. bank, said yesterday it had a $16.7 billion exposure to the five countries at the end of June, including loans and leases. This includes $15.2 billion of “non-sovereign” exposure, according to a quarterly report. The Charlotte, North Carolina-based lender purchased credit-default protection of $1.77 billion as a hedge against potential losses, according to the filing.

 

http://www.businessweek.com/news/2011-08-05/citigroup-has-31-7-billion-gross-exposure-in-five-nations.html