Adding to BAC

Another quick update.  I just added 2500 BAC Class A TARP warrants at $2.01 apiece, for a total outlay of $5,030.

Trying Something Different... Again

On Friday I swapped out my Bank of America stock with Bank of America Class A TARP warrants.  Specifically, I sold all 2850 shares of BAC at $5.58 (for a total of $15,898) and bought 5000 shares of BAC-WTA at $2.09 (for a total outlay of $10,495).   By the way, if this sounds familiar, it's because I did the exact same thing back in July (http://mevsemt.blogspot.com/2011/07/trying-something-different.html).

And again, my logic for the swap is the same.  Simply put, I feel the warrants now have a better risk/reward profile.  It's actually pretty interesting, the common and the warrants usually move in tandem with each other, but recently their prices have deviated.  Here's what I mean.  I bought BAC on 11/25 at $5.18 (http://mevsemt.blogspot.com/2011/11/bac-my-favorite-mistake.html).  That same day the warrants closed at $2.47.  However, by last Friday, the common had RISEN to $5.58 and the warrants had FALLEN to $2.09.  In other words, in just under a month, the common outperformed the warrants by over 20%.  

Finally, for anyone who wants some light reading, I suggest you check out this 1992 OID interview with Bruce Berkowitz (http://www.fairholmefunds.com/pdf/oid1992.pdf).  The interview took place right after the Savings and Loan crisis, when just about everyone thought Wells Fargo was going bust and California was minutes away from falling into the Pacific.  So why do I bring this up?  Well, from 1991 to 1992, Berkowitz was buying Wells Fargo frantically, paying between $52 and $78 a share.  In fact, according to the interview, he put roughly 1/3rd of his liquid net worth in the stock.  So how'd it turn out?  Well, by 1998 the stock had risen to $374, at which time Wells merged with Norwest.  After the merger, Wells split 10 for 1, and by the end of 1999 the stock had risen as high as the equivalent of $498 a share.

Today, Berkowitz has been pounding his chest over BAC, much the same way he did for Wells over two decades ago.  In fact, he's even said BAC reminds him of Wells, and that he's basically staking his reputation on the company.  Given that he said this earlier in the year, when BAC was trading much higher, maybe it's time to listen?  

Questions?  Comments?  Email mevsemt@gmail.com

BAC... My Favorite Mistake

Sometimes, things don't turn out as expected.  As an individual investor, there will be plenty of times when my picks are just flat out wrong.  The trick is knowing when my thesis is "broken" vs. when I'm having a knee-jerk reaction to a falling stock price.  If the thesis is broken, maybe it's time to sell.  If the thesis is intact, maybe it's time to double down.

With this in mind, I've been reevaluating my position in St. Joe.  In a nutshell, I viewed JOE as a "jockey" bet on the capital allocation skills of Fairholme manager, Bruce Berkowitz (http://mevsemt.blogspot.com/2011/05/new-coattails-to-ride.html).  However, Fairholme is in flux right now.  With recent redemptions and the departure of co-manager Charlie Fernandez, I'm guessing JOE is very far down on Bruce's list of priorities.

Coincidentally, while my confidence in JOE has been waning, my interest in another Berkowitz pick has been growing.  Further, it's a holding that I'm somewhat familiar with, after all I've lost money on it not once, but twice!  I'm talking, of course, about Bank of America (click the "zz Bank of America" label on the right for my previous posts).

It's worth noting that when I finally sold BAC back in August, I was just swapping it for a position in AIG (and locking in a tax loss).  Additionally, I made the point that BAC (and other big banks) could still be compelling values.  Since then, my big-bank-thesis hasn't changed, but BAC's stock has fallen by a third.  For anyone interested, check out Fairholme's most recent presentation on the company: http://www.fairholmefunds.com/pdf/fairholme_stays_the_course.pdf.

Now let's take a step back.  Generally speaking, I want to keep a high % of my portfolio in cash due to the significant macro uncertainty.  After all, when you have someone like PIMCO's Mohamed El-Erian saying an Italian default would be "worse than Lehman" and calling the U.S. political dysfunction "terrifying," I think it's safe to say that caution is the name of the game.  Nonetheless, I still want to position the rest of my portfolio for the best possible risk adjusted returns (duh).

So where does this long, rambling post leave us (or as my wife says, land the plane)?  Well, on Wednesday I decided to swap JOE (sold at $13.45) for BAC (bought 2850 shares at $5.18).  With BAC, I'm hoping the 3rd time's a charm.  Additionally, JOE is going to stay on my watch list - once things settle down at Fairholme, JOE could once again become an interesting opportunity.

Questions?  Comments?  Email mevsemt@gmail.com

Out of the Frying Pan?

This week has been absolutely insane!  Typically I'm not a "trader", but the volatility we've had this week has created some interesting opportunities...

Regular readers know Bank of America has been a huge thorn in my side - first I took a loss on the common stock, then I traded it in for TARP warrants only to have things go from bad to worse!  But there's a silver lining; over the last three days BAC-WTA has rebounded about 50% off its lows.  Now this isn't a function of a great earnings release or anything like that, rather it's simply a bi-product of the volatility that's been dominating the market.  

Anyway, as a result I decided to sell my stake in BAC-WTA for two reasons.  First, I'm still underwater on this position so I wanted to lock in a tax loss.  Second, I wanted to use the proceeds to buy AIG TARP warrants (AIG-WT), which are still right around their all-time lows and IMO represent a better value at this time.  Specifically, I sold the 4,000 shares of BAC-WTA for $3.40 (netting me $13,595) and used the proceeds to buy 2,000 shares of AIG-WT at $6.94 (costing $13,885).

For anyone interested in AIG there's a great analysis here: http://longtermvalue.wordpress.com/2011/05/13/american-international-group-aig/.  Bruce Berkowitz has also commented extensively on the company, so you can check that out as well.  And lastly, just because I sold BAC doesn't mean I've given up on the company (or banks in general).  In fact, Citigroup is another company high on my watch list.

Questions?  Comments?  Email mevsemt@gmail.com

Trying Something Different...

Today I made an interesting trade - it's not really a new investment but rather a different flavor of an old one.  The company I'm talking about is Bank of America, and what I did was buy the class "A" TARP warrants ("BAC-WTA" on yahoo finance) while at the same time selling my 2000 shares of BAC common stock.  I purchased the TARP warrants for $4.52 (costing me $18,085) and sold the common for $9.76 (netting me $19,516).  In other words, I simply exchanged the common for the warrants.

For those of you not familiar with TARP warrants I suggest reading the following as a quick primer: http://www.choufunds.com/pdf/SA10%20pdf.pdf (the relevant commentary is on pages 2-5).  As you can see the terms for BAC-WTA are really quite interesting - the warrants don't expire until Jan. 2019, the strike price is $13.30, and if BAC starts paying a dividend the strike price is adjusted down dollar-for-dollar so long as the dividend exceeds $0.01 per quarter. 

So why'd I make this exchange?  Well I've been following the big banks and TARP warrants for over a year now, but only recently has the price fallen to the point where I THINK the risk/reward favors the warrants.  Prior to this I preferred to be conservative and just own the regular stock.  Keep in mind this is a levered investment, so if BAC does well the warrants will be a home run, but if the economy falls off a cliff and BAC flounders I'll end up with egg on my face. 

Lastly, Bruce Berkowitz just gave a great interview in which he discusses BAC, which can be found here: http://www.fairholmefunds.com/pdf/amaii2011.pdf.

Questions?  Comments?  Email mevsemt@gmail.com

Adding to Bank of America...

Today I bought an additional 600 shares of BAC at $10.93, bringing my total share count to 2,000 and making it my second largest position after LUK (as of today BAC accounts for 12-13% of my portfolio).  Obviously I think BAC is a good deal at these prices, but this transaction also has the added benefit of reducing % of my portfolio allocated to cash, which had gotten a little too high after my recent deposits.  Lastly, Fortune published a surprisingly good article on the CEO of BAC, Brian Moynihan (http://finance.fortune.cnn.com/2011/07/07/can-brian-moynihan-fix-americas-biggest-bank/?iid=HP_LN).  It's well worth reading if you're a current BAC holder or are thinking about buying the stock.

Questions?  Comments?  Email mevsemt@gmail.com

Big Banks?!

For those of you keeping up with my blog you've probably noticed I have a huge % of my portfolio in cash, so today I decided put some of it to work by buying Bank of America (BAC).  Specifically, I just bought 1,400 shares at $12.38 (for a total outlay of $17,337, or about 10% of my portfolio). 

Rather than do a lengthy write-up I'm just going to reference 2 previous posts, which should go a long way toward explaining why I think the stock's attractive: http://mevsemt.blogspot.com/2010/08/investing-checklist.html and http://mevsemt.blogspot.com/2010/09/uu-investing.html. 

Questions?  Comments?  Feel free to email me at mevsemt@gmail.com.