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“Treasury Rights… most controversial investment of the last 25 years”

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We’ve now reached a groundswell of eager reader questions about Steve Sjuggerud’s “Treasury Rights” teaser, so let’s dig in and have a look.

Steve’s letter tells us that this is “the most realistic way to make outrageous ‘once-in-a-lifetime’ gains today” … a very tantalizing promise indeed. And of course, for the full information about these “Treasury Rights” he’d like you to sign up for a subscription to his True Wealth Systems, which is the “upgrade” letter for his True Wealth subscribers ($1,550 per year for Systems versus $39 per year for the basic True Wealth). The pitch is that he’s hired a bunch of Eastern Bloc programmers to develop quantitative systems and sift market data to find the buy signals he looks for, but in this case he’s specifically talking about one kind of investment, those aforementioned “Treasury Rights.”

Which you’ve probably heard of — these “Treasury Rights” are more commonly referred to as “TARP Warrants” … they’re the warrants that the US government demanded from bailed-out financial firms to make sure that the bailers-out participated somewhat in whatever recovery the stocks of the bailed-out might subsequently enjoy. And unlike past bailouts, the government in many cases facilitated a secondary market in these warrants by selling them, so it’s possible (and has been for a while) to buy the long-term TARP warrants on a handful of banks and other financial firms.

And there’s some definite temptation here, because these are very long-term warrants — and it’s otherwise very hard for small investors to get the leverage that’s provided by long-term derivative exposure to large-cap stocks. Established and profitable large cap companies almost never have publicly traded warrants, and even for speculative little stocks you almost never see warrants that go out this far — most of these are ten-year warrants, which means they still have six or seven years before they hit their expiration date.

There are roughly a dozen of these TARP warrants trading now, about half are from national banks that you would definitely know (JP Morgan Chase, Wells Fargo, Bank of America, etc.) and the rest from smaller or regional banks or insurance companies (Comerica, PNC, Hartford Financial and the like). The expiration dates are all in 2018 or 2019, ten years out from when the initial bailout deals were made. And with the exception of Bank of America, most of the warrants have strike prices that are in reasonable proximity to the current trading price — some warrants are already trading “in the money” (above the warrant strike price), and most others are close enough to give you a fighting chance. They also, in most cases that I’ve seen, adjust for dividends — so in case the company hikes dividends substantially over the next few years you’ve got a chance for your warrant to enjoy some of the impact of those dividends (that’s another feature that makes these warrants stand out from others — in most cases, holders of warrants or options don’t get any dividend protection).

Here’s how Sjuggerud describes these warrants and their reason for being:

“‘The Treasury’s Big “Upside-Kicker’

“Lehman Brothers had just gone under…

“AIG—one of the biggest and most important links in the financial chain—was collapsing…

“The stock market crashed…

“Even Goldman Sachs had to beg the government for help.

“On October 3, 2008, President George Bush signed the emergency Troubled Asset Relief Program (TARP) into law.

“In short, it was the mother of all bailouts.

“As I mentioned before, over 920 different businesses got a piece of the $700 BILLION TARP money.

“But here’s what most people don’t know about the bailouts…

“The government INSISTED on receiving Treasury rights for just about every single business that accepted TARP money.

“Of course, these businesses had little choice. They HAD to take the government’s deal. It was that… or go under.

“And here’s where it gets interesting…

“Companies who took bailout money, in exchange for the Treasury rights, had two choices when they paid their loan back:

“1) They could buy the Treasury rights back from the government privately, if a “fair market value” price could be agreed…

“Or…

“2) If a price couldn’t be agreed, the government could keep the rights and cash them out later… or sell them on the open market.”

So that’s what we’re dealing with here — the warrants (rights) that the government has sold on the open market, and that are now traded among investors.

And why should we want to buy these unique little assets? In Sjuggerud’s words:

“While the government certainly made decent money on these Treasury rights, they actually cashed out way, way too early.

“Now that we can see the economy and stock market recovering, there is simply enormous potential in these investments over the next few years.

“You see, despite the incredible sums of money the government’s made on Treasury rights…

“And that the fact that you can buy them on the open market…

“Most people have never heard of them before—and as a result they are still incredibly cheap.”

And Sjuggerud says that his True Wealth Systems “supercomputer” was used to sift through the available warrants and pick out the best ones — apparently not all of the TARP warrants are good speculations. So which are his favorites? Here’s what he teases:

“My favorite of these issues is another industry leader, this one based in Pennsylvania. It’s been around since the early 1900′s. This company’s financials are in excellent shape.”

Well, from the relatively short list of available warrants I’d wager this is probably PNC Financial (PNC for the stock, PNC-WT or PNC.WT for the TARP Warrant). PNC has actually been around a bit longer than that, since the 1850s or so under various names, but it’s the best fit for an “industry leader” in Pennsylvania.

Their warrants give you the right to buy PNC for $67.33 before December 13, 2018, and the stock is currently at about $66, so it’s right near the money — the warrant last traded at about $12, so you’re basically betting that PNC’s shares will go up by at least 20% over the next six and a half years. Not a bad bet, one assumes. I’m not a bank analyst and I rarely understand banking balance sheets, but PNC is trading at right about book value and is large and profitable (their $35 billion market cap doesn’t put them in the same league as national titans like Wells Fargo and Bank of America, but there aren’t many larger regional banks — PNC is in the top ten US banks measured by deposits or book value).

So that’s one guess. Another one?

“There’s also a second issue I recommend that gives you the chance to take advantage of nearly the exact same gains.

“This company, with offices in Chicago, has a fortress-like balance sheet… and is also in a clear uptrend”

Well, “offices in Chicago” doesn’t necessarily mean that much. If we’re to assume a “real” Chicago connection, headquartered in or near the Windy City, than this is very likely Wintrust Financial (WTFC for the stock, WTFCW for the warrants). WTFC is one of the smaller banks that has warrants available, and the warrants are trading well “in the money” to give you a bit of downside protection — the strike price for the warrants is $22.82 by December 19, 2018, and the shares are currently trading at over $35, so they’d be worth $13 or so if you exercised the warrant today. The warrant currently trades at about $17, so that means you’re betting on the stock go to up only about 10% over the next six and a half years. I don’t know much about the company, but that also seems a decent bet if they’re able to do as well as analysts expect — they’re profitable and trade at a discount to book value.

I think that, as last time around, most of these TARP Warrants probably provide a pretty nice leveraged bet on a recovering economy over the next six years … and if you make even tepid estimates about the next six years the warrants are almost all very cheap — probably because anyone who sat through the 2008-2009 financial crisis has a healthy but probably now overly pessimistic skepticism about banks. There are a few individual investors who have put up decent listings of most of the warrants now available, including this slightly outdated one at SeekingAlpha if you want to dig into them a bit. If you do decide to every buy into these warrants, I’d suggest reading through their prospectus (should be available in their SEC filings somewhere) to, at the least, check up on their dividend protection and any other conditions — I think they’re mostly pretty straightforward, but I certainly haven’t researched them all.

Also do note that the financial services business is very prone to mergers and acquisitions — and that can sometimes screw over warrant holders, since in most cases that I’ve seen warrants are worthless unless “in the money” if and when a takeover of the company occurs (ie, if the strike price is $40 and the stock is taken over for $38 in cash next year, the warrant may be worthless even if you paid $8 for it hoping for six years of appreciation). And as with all warrants, they tend to lose value over time unless the stock is moving up — so although you do have a lot of time, a shockingly long time in the case of these warrants, keep an eye on that erosion of the “time value” premium.

I went into some additional detail on this stuff when I wrote about a Nilus Mattive teaser on these same types of warrants in a Friday File for the Irregulars back in December, if you’re a paid member of the site you can see that here, but I have not personally invested in any of these warrants so far.

So, what do you think? Interested in the leverage of long-term warrants on some (mostly big) US financial companies? Let us know which ones tickle your fancy with a comment below.

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33 Responses to “Treasury Rights… most controversial investment of the last 25 years”

  1. Hello Gumshoe et .al,
    Just a word to add to your fine response on these bank warrants. The CEO of what was once a retail bank institution recently mentioned to me that the time we are in is analogous to the days when the S&L industry was destroyed — not by markets but by politicians (See also “The Best Way to Rob a Bank Is to Own One” by William K. Black). With one huge difference. The exposure of the industry to the naked inability of the FDIC to cover any of the banks’ deposits is now thousands of times worse than it was when Reagan waded in to avoid public awareness of this situation.
    This CEO tells me that his institution is responding with a product to raise money for banks, since so many are sitting on pins. Make of this what you willl, and caveat emptor. Thanks for your great work !! — CP

  2. “True Wealth” is one of the most remarkable publications of “Mis-direction” that I think I have ever read. I once made the unforgetable mistake of subscribing to it. Most of the information received was only “Advertising to More Newsletters”. This was also the same with “Daily Wealth” , “S A Digests” and all of the various other publications of Stansberry and Associates. Needless to say, I was ‘In Luck” to be able cancel my subscription before the guarantee ran out. I would never recommend that anyone, in their right mind, subscribe to any publication that has anything to do with Stansberry and Associates. It is remarkable that I am a very successful Investor without their publications.

  3. Thanks for the info, but I don’t want to know about what ifs and could be items.. I am more interested in real stocks for now and not 6 years down the road and not for some ridiculous amt of $1500 a year..Right now GLW looks good. POZN,SDRL etc etc..

  4. I think the TARP warrants are a fabulous opportunity for investors to participate in the recovery of major banks in the U.S. I bought a basket of them, and added to my holdings as prices declined. Now they are recovering and I plan to hold for multiple years longer. My simple view is that we will have an economy in 2019 and that banks will be an important part of it. I wouldn’t go overboard with warrants, and I’m comfortable with the 5% of my portfolio that I allocated to them. WFC warrants are already in the money and the AIG warrants I added earlier this year are up nicely. These warrants are like LEAPS on steriods and I believ they will pay off handsomely.

    I believe the offering terms for each warrant are readily available through an internet search. I hadn’t looked into the impact of a merger on their continued validity, but since they are the same warrants that were provided to the government, I’d be surprised to learn that there is a real risk here. Does anyone actually know the answer?

  5. For the record, while Stansberry’s free publications are laced with advertising for the paid services (which is WHY they are free), the paid newsletters I have seen do not contain advertising.

  6. My only experience has been with The 12% Newsletter. It’s an inexpensive, conservative newsletter. Mainly dividend stocks. It’s well written and does not contain advertisements in the newsletter. However, I am also of the belief that $1500.00 is a little steep for information.

  7. The warrants are publicly traded and can be bought through a normal brokerage account. Each brokerage has a different way of listing them, such as wfcw, wfc-w, wfc.ws etc. for Wells Fargo warrants, as an example. Unfortunately, Yahoo doesn’t list them.

  8. I subscribe. My eyes were as big as saucers when I read this. Sjuggerud has had many spectacular losers such as Iceland housing bonds, Speymill Macau, Galileo Japan Property Trust, Rubicon Japan Property Trust, Prospect Epicure J-Reit value fund, and Ambrian Capital. He claimed special knowledge or insight when recommending these. Still he suckered me again with these warrants.

    Gummy you are one for three here. I’ve never seen you miss before. Wintrust is wrongtrust. Dr S recommended two you did not besides the one you bullseyed. Try again!

    • I trade warrants and I believe these do not have to be held until a due date- they can bought and sold like a stock. There is generally leverage to them thus more profit or loss.

    • Perhaps, you mean one of two. Travis mentioned PNC, and WinTrust in the article (not three)..
      With respect to WinTrust there were very few clues.

      Did I miss something?
      Raja

  9. Do these warrants (like options do) get reduced in price for dividends received during their life before being exercized?

  10. Please explain the calculations leading to 20% needed for PNC by 2018, and 10% on WinTrust by 2018. Thank you.

    • That’s just a quick back-of-the-envelope — assume that the stock has to rise that high to make an investment in the warrant at today’s price “break even,” doesn’t include any kind of time series discounting, just the flat performance needed. If PNC goes up by 20% then the stock price would equal the (current) warrant price plus the strike price of the warrant, making it “break even” to then exercise the warrant and buy the stock.

      • Here are the breakeven prices for the warrants I track:
        AIG – $52.13
        BAC-A – $13.30
        C-A – $11.64 pre-reverse split (Warrants did not change in price when the 10:1 reverse split was done, so I assume they convert to 10 shares rather than 100, at a strike price of $116.40. Does anyone have different information?)
        CMA – $29.40
        COF – $42.13
        JPM – $42.40
        PNC – $67.33
        WFC – $34.01

      • Well, I guess I should have listed the strike prices for the warrants, since everyone’s breakeven depends on the price they paid. Here’s are the strikes:
        AIG $45
        BAC A – $13.20
        C A – $10.61 (pre-reverse split)
        CMA – $29.40
        COF – $42.13
        JPM – $42.40
        PNC – $67.33
        WFC – $34.01
        SORRY

  11. Having dabbled some in Leaps, (currently hold Kinross Jan. 2014 $15. Calls at cost of a buck, I personally can see the appeal of these warrants. It is easy to reason that surely in 6 1/2 years the financial companies can easily close the gap and become profitable. As Travis has pointed out however, there are also a lot of things that can go wrong in that timeframe, besides mergers, and time erosion. The precarious state of the world economy, unstable nature of fractional reserve banking, and in particular out of control government spending in the U.S. and just the general level of debt in so many countries makes this a much riskier investment than may be apparent on the surface. I see potential for any number of events that could bring the whole Central Banking fiat system to a point of breakdown. Should that happen in the next few years any potential profits in these warrants could be wiped out in a flash, to risky for me, but then others would see greater risk in what I invest in.

  12. The only stock I bought on Steve Sj’s advice was Great Southern Plantations which grows trees in Australia. It is now close to worthless. When I was visiting in Australia I learned that there was a scandal in that management basically milked all the value out of the company.

    • Quite true but doubly so. Dr S recommended Great Southern Plantations on two widely separated occasions. Both produced big losses, and the second time was a catastrophic loss. Fool me once…fool me twice…stop it already!

  13. I agree with Myron regarding the risks inherent in these long-term warrants given the current economy and predictions by so many of a bleak future for that time frame–I would agree that sticking with one yearr leap options is a much safer bet. As for Sjuggerud’s “True Wealth” advisory (the cheap version), I let it expire after a lackluster year, at best, of investment advice. His recommendations such as BAC and others were generally ill -timed, and while they eventually made money, buying them at the time of his recommendation would have resulted in losses. Stansberry, who grades his editors for their performance at the end of the year gave him a “C” for 2011, though to be honest, I believe he earned an “A” for 2010.

  14. For me, a longer time period for an option repreents lower risk because I have more time to be right. I do not believe the merger concern applies to these warrants, so the only question is, will the banks be in better shape in 6 1/2 years than now. I believe so, and have put some money where my mouth is, and by limiting my bet to no more than about 5% of my portfolio, I believe it is a risk I can bear. I suppose we can all check back in 5-6 years and see who was right. ;-)

  15. If you have any questions about Stansberry and Associates, please do not hesitate to call customer service at 1-888-261-2693. We would be happy to assist you. We are open Monday – Friday 9-5 EST.

  16. A little internet searching shows that Dr. S’s message about TARP warrants is not actually original. This free essay on Morningstar provides similar information:
    http://opp.morningstar.com/BlogArticle.aspx?postid=349829

    One interesting risk that Dr. S does not mention is BUYOUT. If a company gets bought out in the near future, and the price is not much higher than it is now, the warrant becomes worthless or close to it. Of course no one is going to buy out some of those companies but others might be bought out.

  17. I am keeping a journal of my trades based on the different newsletters I have subscribed too, all are S&A newsletters. I get lot’s of advertising email mixed in with the newsletter delivery but not any advertising in the actual newsletters. I’ve learned how to quickly filter it but it’s taken a bit of time. I am ahead on most of the trades made based on the newsletters. I have learned alot from them about trading in general and have some very good strategies that I never had before such as no more than 5% (rule of thumb not iron clad) in any one trade and a 25% stop loss (not in the market but mental). As with most things the price should not be the focus, if you have enough in the market that a success rate increase over what you do now of (pick your number in percent) will pay for the subscription at least 4 or 5 times (room for error there) then try a subscription and see if you hit your number. If you do then the cost of the newsletter is irrelevant, it can be a million dollars if your 100 million will grow at 5 million a year more than it would have otherwise.

  18. I use Dr. Steve as a contrary indicator. In early 2011 he sold all stocks but later had to admit it was the wrong thing to do. He has also touted buying residential real estate for about as long, but that hasn’t really panned out.Now just last week he said he sold SLW and seea precious metals going down from here. We’ll see about that

  19. I’d just like to say that reading the posts here is every bit as good as reading one of the newsletters – better, in fact. Finally a place where intelligent and informed investors talk about their experience. Thanks, everybody!

  20. Can warrants be shorted?
    See Ed Thorp: Beat the Market. If his analysis is still correct (and was not arbitraged away –easy enough to check) shorting warrants and buying the stock creates a risk-free (yes, I know) investment.

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