WFC Stress Test Results

[sswan11]

But it will affect the basis of the shares, right?

[rranjan]

But it will affect the basis of the shares, right?

 

Basis - strike price + purchase price of warrant.

[meiroy]

...

That's why I'm comfortable with the BAC warrants...they have the protection of the dividend payouts and the exercise price is around tangible book.  Cheers!

 

If I may ask, how would you decide if the warrant itself is "over valued" and reached a point where it should be sold?

 

[MrB]

The prospectus for the warrants is on EDGAR, in or around Spring 2009.

 

The warrants are dilution potected, in the case of a common stock issue.  They are not buy back protected.  In the event of a buy back you get a larger pie piece if you keep the warrants, same as holding the common. 

 

It would not surprise me if these banks buy in some warrants at some point in time through the open market, probably closer to conversion dates.  For now, I cant imagine a CEO forgoing his bonus to reduce dilution 6 years down the road. 

 

UCCMAL,

Just to clarify. When the warrants itself are repurchased or do you mean the warrants do not adjust when the stock is repurchased?

[ERICOPOLY]

I'm also thinking, with regards to those $3 calls, they outperform the warrants up to a certain point.  Beyond that point the warrants begin to outperform the calls.  That's the only way to explain how they both wind up delivering similar returns out to about $33-36 per share.

 

So once the leverage in the calls grinds down (stock price is much higher than here), one can sell the calls and use the proceeds to purchase the warrants.  Like switching gears at the appropriate time to get optimal performance out of the engine.

 

I'm contemplating this as I have some lowish strike calls in my tax-free Roth account.

 

My calls are $4, mostly $5, and a few $7.

[ERICOPOLY]

The scenario the Fed tested for was for it to be happening right now.

 

In a few years the results would be far less harmful when BAC has another $30 billion in capital under it's belt, when the liabilities regarding legal and R&W are settled, when they are done with the foreclosures... when the underwater mortgages are less underwater, etc...  when they have their cost structure down...

 

So the warrants I guess really aren't all that risky -- by the time those warrants expire the strength and earnings power of the bank will be formidable.

[compoundinglife]

So the warrants I guess really aren't all that risky -- by the time those warrants expire the strength and earnings power of the bank will be formidable.

 

I disagree with this statement, you are making a ton of assumptions about what will or won't happen between now and expiration. Anything can happen and will there for IMO anytime you at the mercy of time you are introducing risk. I don't disagree with the overall BAC thesis, I own warrants, common, and 2014 $10 calls. But I would never say that the warrants aren't all that risky.

[meiroy]

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.

 

Wasn't clear to me from your previous post that that is what you wanted to say about buybacks, you are correct in principal. I might be wrong, but the way I see it is that these warrants are not a group of 30 nets nets, they are options. A leveraged buy with a built in aspect of market timing and the possibility of permanent loss of capital. It's a speculation. So, yeah, I do consider what you call completely psychological and technical, together with who might be on the other side of the trade now and later and what might happen between now and 2018. The horse can learn to talk by then, but it can also die of natural causes if nothing else. Of course, I have no intention on holding on to it until 2018 anyhow. Good luck.

 

[Arden]

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.

[Arden]

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?

[Arden]

 

 

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?

[Parsad]

So the warrants I guess really aren't all that risky -- by the time those warrants expire the strength and earnings power of the bank will be formidable.

 

I disagree with this statement, you are making a ton of assumptions about what will or won't happen between now and expiration. Anything can happen and will there for IMO anytime you at the mercy of time you are introducing risk. I don't disagree with the overall BAC thesis, I own warrants, common, and 2014 $10 calls. But I would never say that the warrants aren't all that risky.

 

I think you are correct on that.  Mohnish says that the warrants have a 7-8 year life...whereas equity has a 100-year life.  Anything is possible in that 7-8 years period...good or bad.  Cheers!

[ERICOPOLY]

So the warrants I guess really aren't all that risky -- by the time those warrants expire the strength and earnings power of the bank will be formidable.

 

I disagree with this statement, you are making a ton of assumptions about what will or won't happen between now and expiration. Anything can happen and will there for IMO anytime you at the mercy of time you are introducing risk. I don't disagree with the overall BAC thesis, I own warrants, common, and 2014 $10 calls. But I would never say that the warrants aren't all that risky.

 

I think you are correct on that.  Mohnish says that the warrants have a 7-8 year life...whereas equity has a 100-year life.  Anything is possible in that 7-8 years period...good or bad.  Cheers!

 

Guys... come on.  I said  "aren't all that risky"

 

Do this mean:

 

a)  less risky than the common

b)  same risk as the common

c)  more risky than the common

 

If your answer isn't "c", I'm throwing a shoe.

 

 

[Rabbitisrich]

For WFC, ordinary cash dividends only include up to $0.34 after adjustments prior to the dividend, and the anti-dilutive provision excludes ordinary cash dividends. It's basically invisible so far as the dilution adjustments are concerned.

[Parsad]

So the warrants I guess really aren't all that risky -- by the time those warrants expire the strength and earnings power of the bank will be formidable.

 

I disagree with this statement, you are making a ton of assumptions about what will or won't happen between now and expiration. Anything can happen and will there for IMO anytime you at the mercy of time you are introducing risk. I don't disagree with the overall BAC thesis, I own warrants, common, and 2014 $10 calls. But I would never say that the warrants aren't all that risky.

 

I think you are correct on that.  Mohnish says that the warrants have a 7-8 year life...whereas equity has a 100-year life.  Anything is possible in that 7-8 years period...good or bad.  Cheers!

 

Guys... come on.  I said  "aren't all that risky"

 

Do this mean:

 

a)  less risky than the common

b)  same risk as the common

c)  more risky than the common

 

If your answer isn't "c", I'm throwing a shoe.

 

What?  b)...yes, I agree...thwap!  Ouch!  ;D  Cheers!

[Uccmal]

 

 

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?

 

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. 

[meiroy]

"Additionally, the exercise price of and the number of shares underlying the warrants will not be adjusted for any regular quarterly cash dividends that are in the aggregate less than or equal to $0.34 per share of common stock"

 

So, pardon me for being picky here, that 7c on March 24 2011 falls under the category of "regular quarterly cash dividend"?

 

http://yahoo.brand.edgar-online.com/displayfilinginfo.aspx?FilingID=7806841-4946-9885&type=sect&dcn=0000950123-11-026766

 

"SAN FRANCISCO, March 18, 2011 — Wells Fargo & Company (NYSE: WFC) today announced a special first quarter 2011 cash dividend on its common stock of $0.07 per share,..."

 

 

[Arden]

 

 

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?

 

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.

[Uccmal]

Arden, Why dont you send a note or call investor relations at WFC?  That should settle it. 

 

FWIW,  Everytime I have thought the market had overlooked something like this it was me who was wrong.

[Arden]

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

"

[Arden]

NVM, I will call them myself later.

[Arden]

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.

[compoundinglife]

So the warrants I guess really aren't all that risky -- by the time those warrants expire the strength and earnings power of the bank will be formidable.

 

I disagree with this statement, you are making a ton of assumptions about what will or won't happen between now and expiration. Anything can happen and will there for IMO anytime you at the mercy of time you are introducing risk. I don't disagree with the overall BAC thesis, I own warrants, common, and 2014 $10 calls. But I would never say that the warrants aren't all that risky.

 

I think you are correct on that.  Mohnish says that the warrants have a 7-8 year life...whereas equity has a 100-year life.  Anything is possible in that 7-8 years period...good or bad.  Cheers!

 

Guys... come on.  I said  "aren't all that risky"

 

Do this mean:

 

a)  less risky than the common

b)  same risk as the common

c)  more risky than the common

 

If your answer isn't "c", I'm throwing a shoe.

 

When put that way sure. Saying I disagree with that statement was more a product of the fact that I have said the same thing to myself many times and I have been trying really hard to think about the time constraints of the warrants and not trick myself in to thinking that they offer the same safety as common over the long run.

 

I saw a WEB interview recently where they asked him how he felt about uncertainty in the markets at the moment, and his response was basically (para-phrasing) "uncertainty always exists, it existed before the crisis and it existed before 9/11 it's just that people didn't know it was there". That was in response to one of those "how do you get the cohones to invest when there is uncertainty". Even though his statement was more of a "I don't care about uncertainty because its always there I can't change that". The same thinking applies to being cautious w/the options/warrants, the uncertainty is always there that something negative either with BAC or more Macro could happen that renders the options/warrants positions worthless because of the expiration feature. That being said its something you can assign a probability to and act accordingly.

 

On another note go BAC!  ;D

 

[Rabbitisrich]

 

 

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?

 

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.

 

Arden, I'm not sure what market opinion has to do with the prospectus, but "ordinary cash dividends" is defined as up to $0.34 and it is explicitly excluded from triggering anti-dilutive measures.

[Arden]

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.