STOCK MARKET, BofA AND WARREN BUFFET.
In keeping with the theme of many recent posts by me, I want to weigh in again with a commentary on the government's sickening attempt to ride banks. Any quotes are from the Wall Street Journal.
The WSJ asked a good question: "How much cost and uncertainty can the government impose on a U.S. Bank before it buckles under the strain?"
Here are some points to bolster the need to get to the bottom of this pain in the Banking Industry.
$$$ Bank of America (under the new Dodd-Frank fiasco) are being stress-tested.
$$$ The government wants BofA to pick up the tab (for the ruin they {The U.S.}) have caused. Then once they ruin Bank of America they will have the taxpayers pick up the tab for this failure.
$$$ But Bank of America is doing better. They have $400 Billion in cash. They can fund their problems without much difficulty.
$$$ Warren Buffett's Berkshire Hathaway takes a stand. They're trying to change the discussion. "Washington flirting with bank nationalization."
$$$ The mortgage problem that Bank of America has primarily stems from the acquisition of CountryWide Financial, which the government cheered at the time. Funny, how the government turns on people.
$$$ A lot of the current problems also stem from "Robo-Signing" foreclosure paperwork, but the government has failed to uncover any actual victims. But the government has demanded billions from these banks.
$$$ New York's Attorney General, Eric Scheiderman, is driving a swath of destruction because he's so bone-headed. Get this: he was kicked off the negotiating committee by the Attorneys General of the other states. He wanted to interrupt the settlement between Bank of America and Mellon Bank.
$$$ The new financial bill, dubbed Dodd-Frank should be repealed. It's almost as bad for America as ObamaCare.
$$$ Speaking of which, all these banks from Main Street to Wall Street are having and will continue to have problems fighting "Obamanomics."
CONCLUSION: Since I started writing these blogs about the Buffett/BofA deal, the stock is up over a dollar, a 12% move. The stock looks like it wants to go up, the only thing holding it back are two forces that have come together to cripple American Free Enterprise---GOVERNMENT GRAVITY. The new G-Men.
Stay tuned. I have more comments to make about this. I'll try to do so tomorrow.
WADE
Wednesday, August 31, 2011
Tuesday, August 30, 2011
Horses and Memories
Life here is not that much fun. It's very boring. But once in awhile I see something, read something, or with my vast memory---almost photogenic in nature---I remember something that once made me happy..
We are a horse family. My daughters and wife, and now my grand-daughters have grown up loving these equine miracles.
So, here I am reading a book on a crime investigation called FREE FALL by Robert Crais, and on page 237 I find this paragraph: "The park was crowded, and most of the trail riders were families and kids, but most of the pen riders were serious young women with tight riding pants and heavy leather riding boots and their hair up in buns. We bought diet Cokes and watched them ride."
Those of you know my family and my caffeine proclivities should get a kick out of this. Hopefully not a horse kick. They hurt.
That's all for now.
I sure miss my kids and those fun times.
Wade
We are a horse family. My daughters and wife, and now my grand-daughters have grown up loving these equine miracles.
So, here I am reading a book on a crime investigation called FREE FALL by Robert Crais, and on page 237 I find this paragraph: "The park was crowded, and most of the trail riders were families and kids, but most of the pen riders were serious young women with tight riding pants and heavy leather riding boots and their hair up in buns. We bought diet Cokes and watched them ride."
Those of you know my family and my caffeine proclivities should get a kick out of this. Hopefully not a horse kick. They hurt.
That's all for now.
I sure miss my kids and those fun times.
Wade
OPTION PRICING BAC
I want to follow up on the Warren Buffett/Bank of America trade. The announcement came as the market was about to open. Within seconds the stock shot up, but very quickly it backed off. But very quickly after this open, the options seemed stuck. In fact, later, with the stock at the mid $7.50 range, there were some crazy prices coming out of the option guys. That is what I'd like to comment on.
In general, when there is a gap up or down, meaning the stock (especially at the open) trades significantly higher or lower, it takes awhile for the option market makers to settle in. It's called going through rotation. In fact, the option market opens a few minutes after the stock market opens, giving the market makers time to adjust, catch their breath, and adjust their prices, coming from their computer models.
Just think of the complexity of this. Bank of America for example: It has $1 incremental strike prices---say the 3, 4, 5, 6, 7, 8 dollar calls and many more----for September. It has puts to adjust as well. Now go to the October option strike prices and all other months out for about nine months. Add in two years of the January Leaps (R), and you have a computer running fast and hard. In three more seconds, the stock is up 10 cents, and all of those prices have to adjust again. This goes on all day. Now imagine doing this, even with the fastest computers, while trading---rapid and heavy---is also occuring. It can boggle the mind, especially a mind so finite as mine.
So what would you do? If I were a market maker I'd stop trading for awhile. Let it go through its rotation and settle down.
Here's an example: Bank of America stock was at $7.67. The $7 call would be 75 cents to $1 or so. The $8 call would be 30 or 40 cents. Now the price includes the in-the-money portion, time to expiration, but other components of their formulas. Not so this time. The $7 calls were going for 57 X 60 cents. That's not even representative of the in-the-money portion of 67 cents. It tells me the market is locked, meaning not active.
And what about the $8 calls? I thought you'd never ask. They were trading (NOT) at 0 X .01 cents. That confirmend to me that the trading was stopped.
Later in the day, when the big runoff was over, the stock was still at $7.76. The $7 calls were $1.03 X $1.05. The $8 calls were going for 44 X 45 cents. The spread between the bid and ask also tightened up, showing more confidence by the option market makers.
So, in closing, let's look at this stock as a covered call possibility:
1) We'll buy 1,000 shares of stock at $7.76, or $7,760---or half of that on margin. Now sell 10 contracts (representing our 1,000 shares) for $1.03. That's $1,030. Yes we'd have to give back 76 cents, or $760 if called out, but that is not bad.
2) Now, let's look at the $8 call. If you bought the stock and sold this strike price, it would look like this, You would have the same cash into the stock. Now, sell the $8 call for 44 cents, and take in $440. Someone now has the right to buy your stock, anytime on or before the third Friday of September for $8. If they were to do so, you would take in $8,000. That's $240 more than you paid for it and you also get to keep the option premium of $440.
A couple of quick points: a. make sure you protect the downside movement of the stock. Maybe put in a stop-loss at $6.90 to $7.20---whatever makes you happy and secure. b. By selling the out-of-the money (actually either of them) you can always buy-back the option, meaning you would end the obligation to deliver the stock at one of the two prices. On the next rise in the stock price, you could sell it again, or even sell the October's. This way, you're selling more time, and putting more cash into your account. You can pull out this received option premium anytime you want to.
Tomorrow and this week, I think we'll see some good movements in the market. August is one of the three most down months in the market, but the last week has been kind for many years. It's funny, because so many brokers go on vacation, but oftentimes (like the day after Thanksgiving, the day before Christmas, or even Friday before Easter and others), the market rises on light volume. It doesn't make sense, but there you go.
As we get ready to post this blog entry, BAC stock is at $8.19. The $8 calls are going for .56 x .57. These prices are all snapshots in time. Be sure to do your own homework and consult your financial professionals before entering into any trades.
Have a great week. Watch and learn to connect the dots.I standby ready to help.
Wade
Saturday, August 27, 2011
STOCK MARKET VALUATIONS
STOCK MARKET VALUATIONS---AND THE WARREN BUFFETT MOVE INTO BANK OF AMERICA
That day, I learned a valuable lesson in accounting. Let me introduce you to GAAP -- or Generally Accepted Accounting Principles. There is not enough time here to mouth off about all of it, suffice it to say, the valuations they wanted to use were not what I thought.
For example. One property, which I had purchased for $60,000 was listed at about $60,000, even after some depreciation expense and some capital investments. It was worth $120,000, easily. "Not according to GAAP," he stated. "You have to list your assets at cost (meaning the adjusted cost basis) or the market value, whichever is less." I thought I misheard him. "You meant to say more, not less, right?" "No, it's whichever is less." "But that means on some properties I would have a negative basis, as I owe more in mortgages than this lower valuation." I started to get the picture. The only thing he would do is let me footnote the numbers, and explain in subsequent pages the real street values.
Let me give two examples from today. First, a publicly traded company buys a $10,000,000 property. It depreciates it down to $9,500,000 over the years. They've taken good care of it, and the real street value is $12,000,000. They just refinanced the mortgage for $10,000,000. Now do the financial statement. Assets? Liabilities? The asset is listed at $9,500,000. Remember, cost or market whichever is less. Liabilities, $10,000,000, the mortgage. Yep, you added right. This property shows up as a net ($500,000) in equity, whereas in real life there's a $2,500,000 net equity.
Example two: Your company has a chance to buy some private stock in a technical company to help it go public. The stock sold for $1, and you bought 10,000,000 shares. You list it on your books at $10,000,000. In six months they need more money and go out for a new round of financing at $2 per share. You're excited. Your stock value just doubled. Your balance sheet is going to look great. You're thinking your investment has turned into $20,000,000. It may have, but you must list it at $1, or the original $10,000,000, as your cost basis is lower than the new $2 per share. Then, a year later, they still haven't gone public and they need a little more money, but no one wants to get involved. They lower the price to 50 cents, and now guess what? That's right, your value is cut in half. Your 10,000,000 shares times 50 cents, the new market value, equals $5,000,000. Hopefully it will go public soon and you can list the stock at a public market value.
QUESTION OF IMPORTANCE
Do you see that a company can have assets on its books that are worth far more in the real world than how they're characterized on their financials? And we can't go out and kick the tires all the time. The point is that many companies have huge values that are worth so much more than depicted.
Okay, let's get back to banks and how their financial statements are different. Everything is backwards with banks. Let's just deal with real estate loans, as this type of loan, and Bank of America's purchase of Countrywide Financial is a big problem.
Where we would list the property as an asset, banks list the outstanding (and performing) loan as the asset. They list the house as a liability. The property is their negative. If they take back too many properties (called REOs, or Real Estate Owned), they may not be able to make new loans, until they clean up their books. That's why banks will do almost anything to get rid of REOs. In fact, this is the reason why banks are forestalling the foreclosure process on hundreds of thousands of delinquent mortgages.
And it gets worse. Our benevolent government has now imposed new accounting rules, under the dubious title. "STRESS TEST." Here's how it goes with one mortgage. Imagine how bad their books would look with 10,000 of these foreclosed properties or non-performing loans. A bank loans $300,000 of a $350,000 home. Everything looks good. Real estate prices were stable but now their squishy. The test is this: How much would that loan be worth if you had to sell it now for cash? What? They don't have to do that. It's a stupid scenario, but it's government. Take it from someone who has seen government in action, up close and personal. It makes no sense.
That's like asking this: You buy a car and two days later, you have to sell it now. I mean now. Your $25,000 is worth how much, especially if the buyers smell blood in the water? What can you get, 70%, 60%, or even less.
The government test comes in around 30 cents on the dollar. I've heard of some at even 10 cents on the dollar. Who could stand such scrutiny? By the way, everyday you hear of banks closing their doors, or trying to become a different institution other than a bank. ABC $300,000 mortgage, (performing or not) is now valued at $90,000 on a good day. That's their asset. Their liability is the real estate. Are you starting to get the picture?
DOUBLE DOWN
Now, let's even look deeper into this government mess. A bank could be perfectly healthy. Billions in reserve---enough to meet any normal contingency. But their balance sheet shows them running in the red. It could look bleak. Pardon me while I put in a little political commentary. I honestly believe this administration did this to take over certain banks (Like AIG, GM, etc) and to possibly nationalize the whole banking system. They started by nationalizing the student loan program, which took an important and vital money-making service away from banks. They have taken over others, and shut down others. It is quite sickening.
Okay, back to the numbers, and then we'll get back to the Bank of America deal with Warren Buffet. Remember the loans? Tens of thousands of loans, underwater houses. Loans foreclosed on. Loans not performing quite right. The books look bad. Think it through. The bank created this $300,000 loan. The government poison makes them stress test it down to market, at say $90,000. The loan is in default so it's written down further, and the liability---the house (which in the real world could be close to $300,000 or more if the government would get their hands off of things)---which to everyone else is a positive asset shows up as a liability, skewing the whole picture. Now take this times hundreds of thousands. Aren't you glad we have a kind government that is willing to step in and save the day?
It's all bogus. Now, take some shrewd investors and/or attorneys and sic them on this situation. They know the real value. They position themselves to take advantage of the system. Bankruptcy judges are oblivious to GAAP, and the unsettling valuations the attorneys rip off.
WHAT'S THE TRUE VALUE?
Let's speak to Book Value, or Break-Up Value. As the assets are listed on their financials, filed every quarter, so is the company valued and evaluated. Here's a rule-of-thumb number. Say a company has a book value of $8, which is what Microsoft used to be. Their stock will typically trade at 3 times this amount. If the book value is $50 (the current evaluation of all their assets---at the lesser value) the stock might trade at close to $150.
What if you could find a company with a negative book value compared to their stock price. Say you have a company with a Book Value of $14 or $15, and the stock is going for $7? If this were a piece of real estate, valued at $250,000 and you could buy it for $125,000, wouldn't you jump at the chance?
So, just what did Warren Buffett see in Bank of America? Barron's listed the stock at trading at 57% of book value. And, (I know I've crossed the line of redundancy and circumlocution), this book value is way under the real value, but it is according to GAAP. What would you do? He saw the opportunity and he took it.
He made the loan, getting preferred stock. He's getting 6% per year while he waits to convert the stock into shares locked in at $7.14. He's got unlimited upside potential with virtually no downside risk. So how do we tag along? Jump in the game, because the game is afoot.
BANK OF AMERICA AND P/E RATIOS.
This won't take long. It's important to look at the P/E (Stock Price divided by the Earnings Per Share [EPS]---either past tense, future estimates of the P/E or a blend of both). Simply put, the P/E tells you how many dollars it takes to buy $1 worth of earnings. If the share price is $30 and the EPS is $1, the P/E is 30. If the EPS were $2, the P/E would be 15---stated as 15 times earnings. This is a simple, cabdriver's explanation.
You want to find companies with a low P/E. The historical P/E, across the board, and through history, is 15.5. Today it is common to talk of stocks on the NYSE at 20 times earnings. NASDAQ at 30 to 40 times earnings. You can use this in a way to judge the stock you are thinking of buying. Say your target stock is trading at 18 Xs earnings. In that sector (banks, food, airlines, computer chips, etc.) the average P/E is 12. You would be paying a premium for your stock. If the average P/E is 25, then you would be getting your stock at a discount. This ratio applies to all prices of stocks. You could have a stock at 50 cents, $50, or $500. The ratio works out. You can also look at the earnings and see if they're growing from quarter to quarter, or year to year. I will write more on this in future blogs.
Let's look at BofA. Barron's reported that the current P/E ratio was 4.9 times the estimated future year's earnings. That is really low. Yes, it could change, but often when the company makes a projection, or gives "guidance," the new word dujour, such guidance is on the low side. Companies love to give low numbers, reduce expectations, and then work like crazy to beat their numbers.
CONCLUSION
4.9 times earnings. It's a bargain. The book value is upside down, in a positive way, even though we call it Negative Book Value. Like the jargon of the day---"BAD" means "GOOD." They have plenty of cash, and I still do not think they had to do this deal with Warren Buffet. It was to look good, and maybe get the FEDS to back off a little, with Warren and Barack being buddies like they are.
Add all of this information to information in the previous blog and again I think you will see the game is afoot.
NOTE: Right now the option premiums say the stock is going nowhere. That will change very shortly. I like this as a covered call candidate, using the buy-back as I explained in my covered call book, STOCK MARKET MONEY MACHINE. Check out the book at Amazon.com---Create Space. It's available as an eBook or as a softbound book.
I have two more blogs on this topic. One is on government stress-tests, and the other is on the pricing of options. Stay tuned.
Abundantly Yours,
Wade
I hope in this blog to share some vitally important information on how companies value their assets, and how you might be able to find bargain stocks and build your wealth.
Years ago, as a new real estate investor, I had acquired about a dozen properties. I got some really good deals, and I spent quite a bit of money fixing them up. I needed to do a financial statement and took all of my paperwork to a big accounting firm, at least for Tacoma, it was big. The CPA took all of my forms, paperwork and verifications and went to work. A week later I went in and looked at this beautifully bound Financial Statement. I was shocked. My net worth was nowhere near what I thought it would be. That day, I learned a valuable lesson in accounting. Let me introduce you to GAAP -- or Generally Accepted Accounting Principles. There is not enough time here to mouth off about all of it, suffice it to say, the valuations they wanted to use were not what I thought.
For example. One property, which I had purchased for $60,000 was listed at about $60,000, even after some depreciation expense and some capital investments. It was worth $120,000, easily. "Not according to GAAP," he stated. "You have to list your assets at cost (meaning the adjusted cost basis) or the market value, whichever is less." I thought I misheard him. "You meant to say more, not less, right?" "No, it's whichever is less." "But that means on some properties I would have a negative basis, as I owe more in mortgages than this lower valuation." I started to get the picture. The only thing he would do is let me footnote the numbers, and explain in subsequent pages the real street values.
Let me give two examples from today. First, a publicly traded company buys a $10,000,000 property. It depreciates it down to $9,500,000 over the years. They've taken good care of it, and the real street value is $12,000,000. They just refinanced the mortgage for $10,000,000. Now do the financial statement. Assets? Liabilities? The asset is listed at $9,500,000. Remember, cost or market whichever is less. Liabilities, $10,000,000, the mortgage. Yep, you added right. This property shows up as a net ($500,000) in equity, whereas in real life there's a $2,500,000 net equity.
Example two: Your company has a chance to buy some private stock in a technical company to help it go public. The stock sold for $1, and you bought 10,000,000 shares. You list it on your books at $10,000,000. In six months they need more money and go out for a new round of financing at $2 per share. You're excited. Your stock value just doubled. Your balance sheet is going to look great. You're thinking your investment has turned into $20,000,000. It may have, but you must list it at $1, or the original $10,000,000, as your cost basis is lower than the new $2 per share. Then, a year later, they still haven't gone public and they need a little more money, but no one wants to get involved. They lower the price to 50 cents, and now guess what? That's right, your value is cut in half. Your 10,000,000 shares times 50 cents, the new market value, equals $5,000,000. Hopefully it will go public soon and you can list the stock at a public market value.
QUESTION OF IMPORTANCE
Do you see that a company can have assets on its books that are worth far more in the real world than how they're characterized on their financials? And we can't go out and kick the tires all the time. The point is that many companies have huge values that are worth so much more than depicted.
Okay, let's get back to banks and how their financial statements are different. Everything is backwards with banks. Let's just deal with real estate loans, as this type of loan, and Bank of America's purchase of Countrywide Financial is a big problem.
Where we would list the property as an asset, banks list the outstanding (and performing) loan as the asset. They list the house as a liability. The property is their negative. If they take back too many properties (called REOs, or Real Estate Owned), they may not be able to make new loans, until they clean up their books. That's why banks will do almost anything to get rid of REOs. In fact, this is the reason why banks are forestalling the foreclosure process on hundreds of thousands of delinquent mortgages.
And it gets worse. Our benevolent government has now imposed new accounting rules, under the dubious title. "STRESS TEST." Here's how it goes with one mortgage. Imagine how bad their books would look with 10,000 of these foreclosed properties or non-performing loans. A bank loans $300,000 of a $350,000 home. Everything looks good. Real estate prices were stable but now their squishy. The test is this: How much would that loan be worth if you had to sell it now for cash? What? They don't have to do that. It's a stupid scenario, but it's government. Take it from someone who has seen government in action, up close and personal. It makes no sense.
That's like asking this: You buy a car and two days later, you have to sell it now. I mean now. Your $25,000 is worth how much, especially if the buyers smell blood in the water? What can you get, 70%, 60%, or even less.
The government test comes in around 30 cents on the dollar. I've heard of some at even 10 cents on the dollar. Who could stand such scrutiny? By the way, everyday you hear of banks closing their doors, or trying to become a different institution other than a bank. ABC $300,000 mortgage, (performing or not) is now valued at $90,000 on a good day. That's their asset. Their liability is the real estate. Are you starting to get the picture?
DOUBLE DOWN
Now, let's even look deeper into this government mess. A bank could be perfectly healthy. Billions in reserve---enough to meet any normal contingency. But their balance sheet shows them running in the red. It could look bleak. Pardon me while I put in a little political commentary. I honestly believe this administration did this to take over certain banks (Like AIG, GM, etc) and to possibly nationalize the whole banking system. They started by nationalizing the student loan program, which took an important and vital money-making service away from banks. They have taken over others, and shut down others. It is quite sickening.
Okay, back to the numbers, and then we'll get back to the Bank of America deal with Warren Buffet. Remember the loans? Tens of thousands of loans, underwater houses. Loans foreclosed on. Loans not performing quite right. The books look bad. Think it through. The bank created this $300,000 loan. The government poison makes them stress test it down to market, at say $90,000. The loan is in default so it's written down further, and the liability---the house (which in the real world could be close to $300,000 or more if the government would get their hands off of things)---which to everyone else is a positive asset shows up as a liability, skewing the whole picture. Now take this times hundreds of thousands. Aren't you glad we have a kind government that is willing to step in and save the day?
It's all bogus. Now, take some shrewd investors and/or attorneys and sic them on this situation. They know the real value. They position themselves to take advantage of the system. Bankruptcy judges are oblivious to GAAP, and the unsettling valuations the attorneys rip off.
WHAT'S THE TRUE VALUE?
Let's speak to Book Value, or Break-Up Value. As the assets are listed on their financials, filed every quarter, so is the company valued and evaluated. Here's a rule-of-thumb number. Say a company has a book value of $8, which is what Microsoft used to be. Their stock will typically trade at 3 times this amount. If the book value is $50 (the current evaluation of all their assets---at the lesser value) the stock might trade at close to $150.
What if you could find a company with a negative book value compared to their stock price. Say you have a company with a Book Value of $14 or $15, and the stock is going for $7? If this were a piece of real estate, valued at $250,000 and you could buy it for $125,000, wouldn't you jump at the chance?
So, just what did Warren Buffett see in Bank of America? Barron's listed the stock at trading at 57% of book value. And, (I know I've crossed the line of redundancy and circumlocution), this book value is way under the real value, but it is according to GAAP. What would you do? He saw the opportunity and he took it.
He made the loan, getting preferred stock. He's getting 6% per year while he waits to convert the stock into shares locked in at $7.14. He's got unlimited upside potential with virtually no downside risk. So how do we tag along? Jump in the game, because the game is afoot.
BANK OF AMERICA AND P/E RATIOS.
This won't take long. It's important to look at the P/E (Stock Price divided by the Earnings Per Share [EPS]---either past tense, future estimates of the P/E or a blend of both). Simply put, the P/E tells you how many dollars it takes to buy $1 worth of earnings. If the share price is $30 and the EPS is $1, the P/E is 30. If the EPS were $2, the P/E would be 15---stated as 15 times earnings. This is a simple, cabdriver's explanation.
You want to find companies with a low P/E. The historical P/E, across the board, and through history, is 15.5. Today it is common to talk of stocks on the NYSE at 20 times earnings. NASDAQ at 30 to 40 times earnings. You can use this in a way to judge the stock you are thinking of buying. Say your target stock is trading at 18 Xs earnings. In that sector (banks, food, airlines, computer chips, etc.) the average P/E is 12. You would be paying a premium for your stock. If the average P/E is 25, then you would be getting your stock at a discount. This ratio applies to all prices of stocks. You could have a stock at 50 cents, $50, or $500. The ratio works out. You can also look at the earnings and see if they're growing from quarter to quarter, or year to year. I will write more on this in future blogs.
Let's look at BofA. Barron's reported that the current P/E ratio was 4.9 times the estimated future year's earnings. That is really low. Yes, it could change, but often when the company makes a projection, or gives "guidance," the new word dujour, such guidance is on the low side. Companies love to give low numbers, reduce expectations, and then work like crazy to beat their numbers.
CONCLUSION
4.9 times earnings. It's a bargain. The book value is upside down, in a positive way, even though we call it Negative Book Value. Like the jargon of the day---"BAD" means "GOOD." They have plenty of cash, and I still do not think they had to do this deal with Warren Buffet. It was to look good, and maybe get the FEDS to back off a little, with Warren and Barack being buddies like they are.
Add all of this information to information in the previous blog and again I think you will see the game is afoot.
I have two more blogs on this topic. One is on government stress-tests, and the other is on the pricing of options. Stay tuned.
Abundantly Yours,
Wade
CONNECT THE DOTS--THE WIZARD OF OMAHA STRIKES AGAIN
STOCK MARKET---CONNECT THE DOTS---#1 (THE WIZARD OF OMAHA STRIKES AGAIN)
I had occasion last night to sit out at the picnic tables with a bunch of curmudgeons. The big news of the day was Warren Buffett (Berkshire-Hathaway [BRK.A]) investing $5,000,000,000, yes as in B for Billion, into Bank of America. Upon the announcement and shortly after the market opened, the stock went up to over $8.50 from around $7.01, and then settled for the day around $7.50. This caused me to think long and hard about this stock, the foundation of the company, and this news announcement. As always, it never is what meets the eye. I love these moves, and I love figuring things out. You will read here my analysis of this transaction, broken into two parts. One is my initial take, and then today when I was e-mailed more news about this new deal.
The reason this is important to me right now, is two-fold:
1) I've been writing about the stock as a covered call candidate. The options were really good, about 10% for the September calls. Example, the stock was $7.01 and the $7 calls were going for about 70 cents. You could buy the stock, and then sell to someone the risky option for 70 cents. If you owned 1,000 shares, and then sell 10 contracts of the options, you'd take in $700. Now the stock will rise, stay the same, or go down. Whatever, you get to keep the $700. If you sell the stock at $7 you would lose $10, that's the one cent. This scenario is not that important to this discussion, but it proves a mighty powerful point about option pricing, which I'll share as one punchline at the end of this blog.
2) This is a piece of Americana---both Bank of America and Warren Buffett---and add to that the deal that was made, you too will say, "Only in America." It's brilliant or it's crazy, you decide.
To summarize: The first announcement just said that Warren Buffett is buying $5 Billion of Bank of America stock. What would you think if you owned this stock? It's going to go up, right? It's a bullish sign for American Banks. Other bank stocks might also go up. $5 Billion dollars in the market place will do a lot of good. You would have been mostly wrong.
I've noticed that so many people just read the Headlines. Everything on TV is condensed to sound-bites, headlines flashing across the screen. OnE constant in the stock market is that everybody over-reacts. They over-react when the news is good, and buy. They over-react when the news is bad, and sell. It all works out after people read the whole article, get more news, and delve into the details.
BACK TO LAST NIGHT
I said to everyone last night, that the news was not what it seemed. This was not an open-market purchase. The only way a deal like this (a guaranteed 6% return, and the right to buy the stock at $7.14) would go down, is if there was a new SEC filing, new stock created, etc. This type of trade will be like the Oil Sheiks buying stock when banks were in need of cash ten plus years ago. Everyone asked what it means. I tried to explain preferred stock, and warrents, and then book value and negative book value. I tried to shed some light on GAAP (Generally Accepted Accounting Principles), and how America works at the Billion Dollar level. It made sense to me and I hope I can help you see this. The effort is worth it. Believe me, this type of knowledge is very powerful.
NOTE TO READERS: This is where I'd like to explain how some of the accounting principles work, and how the banking accounting is different. I need to explain, "Marked to Market," and the like. The deal is powerful because this is a purchase of an under-valued stock, as you will see. In the next blog I will share some very powerful information that will help a lot of this make more sense. Usually I interrupt an article and wind along a winding road to get to the destination, but this information is supplemental, though interesting and casually important to this topic. If you like connecting the dots, go there, read it and come back here and pick up this story.
Moving On: Here was the infomation gleaned from the first pass at the news. Warren Buffet is investing $5 Billion in Bank of America. He will receive a guarenteed 6% each year, or $300,000,000. He will be able to buy the stock at $7.14. The market reacted, the stock shot up. Later in the day the details became apparent and the stock backed off.
My thoughts were that this had to be a new class of stock. Also, Bank of America was getting the money. Why, you might ask? They have $400 Billion cash on hand, and they're sitting on deposits of over $1 Trillion dollars. Out of a Barron's article (Jacqueline Doherty) we learn that they made $6 Billion last quarter. Within the article is the statement that banks stocks are near the cheapest they've been in history, based on Book Value and P/E ratios. Why do they need $5 Billion from Mr. Buffett? The truth from my perspective---THEY DON'T. So why the deal? To bolster the stock price. PR. To show Mr. Buffet is the investor of last resort. More PR.
To summarize part of the information of Book Value and P/E ratios, look at this. BAC is trading at 57% of tangible book value (Ibid. Doherty) and at 4.9 times next years estimated earnings. Remember 20 times earnings is about average for a New York Stock Exchange stock. Yes, banks stocks are down, but this is way down. Look at the Book Value. A little over 50 percent. That means this company has assets (based on their last earnings filing) where their stock is trading at a percentage of their listed assets (57%). In reality that means that the stock could and should be trading at a $12 to $14 price. Think of this. If you wanted to buy real estate or a company and could get it for 50% or so of its value, would that not be a heck of a bargain? And remember, these asset values ("Cost Basis or Market Value, whichever is less) are much lower than their worth in the real world.
So, from Mr. Buffett's point of view, he's getting the company for 50% or realistically 20% to 30% of the real value. Now let me share a paragraph from a news article. Then I'll do my best to parse the words so it makes sense.
"The terms of the deal were favorable to Buffett. He received 50,000 shares of cumulative perpetual preferred shares costing $100,000 each that will pay a 6% annual dividend, which is a good return in a low-return world in which the Treasury note yields 2.23%. Buffett's Berkshire Hathaway will net $300 Million in dividends per year."
"Buffett also got warrants, or the right over the next 10 years to purchase shares of BofA common stock at a price of $7.14 per share."
MY EXPLANATION
Here's how I see it. Mr. Buffett loans (invests) $5,000,000,000. He buys 50,000 shares of a type of preferred stock for $100,000 each. Everyone here who read the article missed the word "each." He gets 6% or $300,000,000 a year in interest (OOPS---in dividends). He has 10 years to convert these shares into 700,000,000 shares of common stock at $7.14 per share. $7.14 times 700,000,000 is $5,000,000,000, minus a little change for arbitrage.
He gets paid every year for the investment/loan. If the stock goes up, to say $15 to $20 (I think it can easily go to $30 over the next year or so, especially if Mr. O goes packing, back to the streets of Chicago). The stock is undervalued. If the Banking Authorities wise up, and get rid of the ridicules stress-test, and let banks run on good, solid banking principles, they will recover quite nicely.
He's taken a small fraction of the cash reserve of Berkshire Hathaway and added it to the huge cash reserve of Bank of America, and everybody benefits.
Yeah, the only conclusion is the PROMO trick and if they're successful, then everyone wins. I sure hope so.
I had occasion last night to sit out at the picnic tables with a bunch of curmudgeons. The big news of the day was Warren Buffett (Berkshire-Hathaway [BRK.A]) investing $5,000,000,000, yes as in B for Billion, into Bank of America. Upon the announcement and shortly after the market opened, the stock went up to over $8.50 from around $7.01, and then settled for the day around $7.50. This caused me to think long and hard about this stock, the foundation of the company, and this news announcement. As always, it never is what meets the eye. I love these moves, and I love figuring things out. You will read here my analysis of this transaction, broken into two parts. One is my initial take, and then today when I was e-mailed more news about this new deal.
The reason this is important to me right now, is two-fold:
1) I've been writing about the stock as a covered call candidate. The options were really good, about 10% for the September calls. Example, the stock was $7.01 and the $7 calls were going for about 70 cents. You could buy the stock, and then sell to someone the risky option for 70 cents. If you owned 1,000 shares, and then sell 10 contracts of the options, you'd take in $700. Now the stock will rise, stay the same, or go down. Whatever, you get to keep the $700. If you sell the stock at $7 you would lose $10, that's the one cent. This scenario is not that important to this discussion, but it proves a mighty powerful point about option pricing, which I'll share as one punchline at the end of this blog.
2) This is a piece of Americana---both Bank of America and Warren Buffett---and add to that the deal that was made, you too will say, "Only in America." It's brilliant or it's crazy, you decide.
To summarize: The first announcement just said that Warren Buffett is buying $5 Billion of Bank of America stock. What would you think if you owned this stock? It's going to go up, right? It's a bullish sign for American Banks. Other bank stocks might also go up. $5 Billion dollars in the market place will do a lot of good. You would have been mostly wrong.
I've noticed that so many people just read the Headlines. Everything on TV is condensed to sound-bites, headlines flashing across the screen. OnE constant in the stock market is that everybody over-reacts. They over-react when the news is good, and buy. They over-react when the news is bad, and sell. It all works out after people read the whole article, get more news, and delve into the details.
BACK TO LAST NIGHT
I said to everyone last night, that the news was not what it seemed. This was not an open-market purchase. The only way a deal like this (a guaranteed 6% return, and the right to buy the stock at $7.14) would go down, is if there was a new SEC filing, new stock created, etc. This type of trade will be like the Oil Sheiks buying stock when banks were in need of cash ten plus years ago. Everyone asked what it means. I tried to explain preferred stock, and warrents, and then book value and negative book value. I tried to shed some light on GAAP (Generally Accepted Accounting Principles), and how America works at the Billion Dollar level. It made sense to me and I hope I can help you see this. The effort is worth it. Believe me, this type of knowledge is very powerful.
NOTE TO READERS: This is where I'd like to explain how some of the accounting principles work, and how the banking accounting is different. I need to explain, "Marked to Market," and the like. The deal is powerful because this is a purchase of an under-valued stock, as you will see. In the next blog I will share some very powerful information that will help a lot of this make more sense. Usually I interrupt an article and wind along a winding road to get to the destination, but this information is supplemental, though interesting and casually important to this topic. If you like connecting the dots, go there, read it and come back here and pick up this story.
Moving On: Here was the infomation gleaned from the first pass at the news. Warren Buffet is investing $5 Billion in Bank of America. He will receive a guarenteed 6% each year, or $300,000,000. He will be able to buy the stock at $7.14. The market reacted, the stock shot up. Later in the day the details became apparent and the stock backed off.
My thoughts were that this had to be a new class of stock. Also, Bank of America was getting the money. Why, you might ask? They have $400 Billion cash on hand, and they're sitting on deposits of over $1 Trillion dollars. Out of a Barron's article (Jacqueline Doherty) we learn that they made $6 Billion last quarter. Within the article is the statement that banks stocks are near the cheapest they've been in history, based on Book Value and P/E ratios. Why do they need $5 Billion from Mr. Buffett? The truth from my perspective---THEY DON'T. So why the deal? To bolster the stock price. PR. To show Mr. Buffet is the investor of last resort. More PR.
To summarize part of the information of Book Value and P/E ratios, look at this. BAC is trading at 57% of tangible book value (Ibid. Doherty) and at 4.9 times next years estimated earnings. Remember 20 times earnings is about average for a New York Stock Exchange stock. Yes, banks stocks are down, but this is way down. Look at the Book Value. A little over 50 percent. That means this company has assets (based on their last earnings filing) where their stock is trading at a percentage of their listed assets (57%). In reality that means that the stock could and should be trading at a $12 to $14 price. Think of this. If you wanted to buy real estate or a company and could get it for 50% or so of its value, would that not be a heck of a bargain? And remember, these asset values ("Cost Basis or Market Value, whichever is less) are much lower than their worth in the real world.
So, from Mr. Buffett's point of view, he's getting the company for 50% or realistically 20% to 30% of the real value. Now let me share a paragraph from a news article. Then I'll do my best to parse the words so it makes sense.
"The terms of the deal were favorable to Buffett. He received 50,000 shares of cumulative perpetual preferred shares costing $100,000 each that will pay a 6% annual dividend, which is a good return in a low-return world in which the Treasury note yields 2.23%. Buffett's Berkshire Hathaway will net $300 Million in dividends per year."
"Buffett also got warrants, or the right over the next 10 years to purchase shares of BofA common stock at a price of $7.14 per share."
MY EXPLANATION
- Preferred Shares are a special breed. They act like debt in some ways. If the company liquidates, for example, preferred shareholders would be paid in advance of creditors. Notice that this 6% is called a dividend, not interest. This avoids double-taxation (one of my pet peeves, which we'll save for another day); and keeps the transaction off the books as debt, or a loan, unless Mr. Buffett has a special arrangement with Mr. Obama's IRS. They have become pretty chummy lately.
- This transaction looks more like a convertible debenture. But does it quack like a duck?
- The stock did not go into the market and buy shares like the rest of us have to. This deal came from a cigar-filled backroom. It has a smell to it.
- The money goes to B of A. They have $5 Billion to add to their balance sheet.
Here's how I see it. Mr. Buffett loans (invests) $5,000,000,000. He buys 50,000 shares of a type of preferred stock for $100,000 each. Everyone here who read the article missed the word "each." He gets 6% or $300,000,000 a year in interest (OOPS---in dividends). He has 10 years to convert these shares into 700,000,000 shares of common stock at $7.14 per share. $7.14 times 700,000,000 is $5,000,000,000, minus a little change for arbitrage.
He gets paid every year for the investment/loan. If the stock goes up, to say $15 to $20 (I think it can easily go to $30 over the next year or so, especially if Mr. O goes packing, back to the streets of Chicago). The stock is undervalued. If the Banking Authorities wise up, and get rid of the ridicules stress-test, and let banks run on good, solid banking principles, they will recover quite nicely.
He's taken a small fraction of the cash reserve of Berkshire Hathaway and added it to the huge cash reserve of Bank of America, and everybody benefits.
Yeah, the only conclusion is the PROMO trick and if they're successful, then everyone wins. I sure hope so.
Wednesday, August 24, 2011
A Little Political Humor
My wife got this on her Facebook Feed from the page "Government Gone Wild". I thought it was pretty good:
"The President has just confirmed that the D.C. earthquake occurred on a rare and obscure fault-line, apparently known as "Bush's Fault". The President also announced that the Secret Service and Maxine Waters continues an investigation of the quakes's suspicious ties to the Tea Party. Conservatives however have proven that it was caused by the founding fathers rolling over in their graves."
"The President has just confirmed that the D.C. earthquake occurred on a rare and obscure fault-line, apparently known as "Bush's Fault". The President also announced that the Secret Service and Maxine Waters continues an investigation of the quakes's suspicious ties to the Tea Party. Conservatives however have proven that it was caused by the founding fathers rolling over in their graves."
Tuesday, August 23, 2011
Red Light - Green Light
I've been watching the stock market a lot lately. This sell-off is weird. Companies are making millions but afraid to expand and grow---meaning hiring new people. But in a market like this it's important to keep things in perspective. Years ago I isolated what I think is the most important discovery I or anyone has ever made in the market. Understanding this and mastering the simple mechanics is very important to wise trading.
I am speaking of my "Red-Light, Green-Light" phenomenon. Basically it deals with the quarterly news cycles. As the CEO of a publicly traded company there were times when I could talk about earnings and such and times when I had to be quiet. These dealt with the times throughout the year when a company comes up on earnings but hasn't released the numbers yet. I thought what if I and 25,000 other CEOs, CFOs, COOs and other insiders had to be quiet all at the same time? No news, except that issued by analysts, pundits, and lay citizens? What would happen to the market in general and to that particular stock? News to stocks is like gas to a car. You need it to get to the next station. The news could also be bad, but let's just categorize it as news. You've heard, "No news is good news?" Not to the stock market. "NO news is bad news."
Without going into detail here, let me summarize. The market goes down in February, May, August into September, and often the first few weeks of December, then rallies into the year end---called the Santa Clause Rally. If you can get my book RED-LIGHT, GREEN-LIGHT, and read the first two chapters, you'll see how this works. In fact I show the charts of a 40 year study in the market, which shows this quite clearly. In fact it's quite remarkable.
You've all heard things like this: We're entering the earnings season." We're in the earnings reporting season." This week (say, mid-July) 190 of the S & P 500 companies will give their earnings. What you never hear is this: Hey everyone, we're leaving the earnings season. Get your money out of harms way." And for option traders this can be devastating, because they own a fixed time investment and it expires. Time becomes the enemy for option investors.
Now, to this year. We've had a double whammy. We' had the typical summer rally, but it was stepped on by the talk of the Debt Ceiling. Now we're in the August red-light period and it's tough. It will come back.
Also, note that everyone is talking about the DOW selling off 10%. It seems like the media is trying to run cover for this administration. They use the figure from August 1st to the present. Go back four weeks before that and you'll see the DOW at 12,800. It's now at 10,700 (and it's been lower). That's about 20% in anyone's book (except Liberal Commentators). Oh, and 20% down in any given time period signals a bear market. That's the technical definition.
Have heart though. In 1987, we had the largest sell-off in my history. However, if you had $100,000 invested it would have gone do to $60,000. That's bad, but if you did not panic, within 13 months you would have been back up to $120,000. That's $20,000 ahead. So keep you head and don't panic.
To see all of this in chart format go to YahooFinance.com, or Bigcharts.com or Stockcharts.com and look at the whole market for this year. You will be amazed how these months play out.
Happy investing.
I'll have some more political commentary and some covered calls later.
I am speaking of my "Red-Light, Green-Light" phenomenon. Basically it deals with the quarterly news cycles. As the CEO of a publicly traded company there were times when I could talk about earnings and such and times when I had to be quiet. These dealt with the times throughout the year when a company comes up on earnings but hasn't released the numbers yet. I thought what if I and 25,000 other CEOs, CFOs, COOs and other insiders had to be quiet all at the same time? No news, except that issued by analysts, pundits, and lay citizens? What would happen to the market in general and to that particular stock? News to stocks is like gas to a car. You need it to get to the next station. The news could also be bad, but let's just categorize it as news. You've heard, "No news is good news?" Not to the stock market. "NO news is bad news."
Without going into detail here, let me summarize. The market goes down in February, May, August into September, and often the first few weeks of December, then rallies into the year end---called the Santa Clause Rally. If you can get my book RED-LIGHT, GREEN-LIGHT, and read the first two chapters, you'll see how this works. In fact I show the charts of a 40 year study in the market, which shows this quite clearly. In fact it's quite remarkable.
You've all heard things like this: We're entering the earnings season." We're in the earnings reporting season." This week (say, mid-July) 190 of the S & P 500 companies will give their earnings. What you never hear is this: Hey everyone, we're leaving the earnings season. Get your money out of harms way." And for option traders this can be devastating, because they own a fixed time investment and it expires. Time becomes the enemy for option investors.
Now, to this year. We've had a double whammy. We' had the typical summer rally, but it was stepped on by the talk of the Debt Ceiling. Now we're in the August red-light period and it's tough. It will come back.
Also, note that everyone is talking about the DOW selling off 10%. It seems like the media is trying to run cover for this administration. They use the figure from August 1st to the present. Go back four weeks before that and you'll see the DOW at 12,800. It's now at 10,700 (and it's been lower). That's about 20% in anyone's book (except Liberal Commentators). Oh, and 20% down in any given time period signals a bear market. That's the technical definition.
Have heart though. In 1987, we had the largest sell-off in my history. However, if you had $100,000 invested it would have gone do to $60,000. That's bad, but if you did not panic, within 13 months you would have been back up to $120,000. That's $20,000 ahead. So keep you head and don't panic.
To see all of this in chart format go to YahooFinance.com, or Bigcharts.com or Stockcharts.com and look at the whole market for this year. You will be amazed how these months play out.
Happy investing.
I'll have some more political commentary and some covered calls later.
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