CFA Institute

More on WarrantsAuthor(s): William SchwartzSource: Financial Analysts Journal, Vol. 27, No. 4 (Jul. - Aug., 1971), p. 100Published by: CFA InstituteStable URL: http://www.jstor.org/stable/4470835 .

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fossil and nuclear plant costs have risen hand in hand. When we look at fuel costs, however, we see that coal has moved to around 42 cents per mil- lion Btus, as Mr. Bretey correctly notes, but that nuclear fuel costs have stabilized at around 20 cents per mil- lion Btus.

One can argue whether, as Mr. Bretey states, utilities were oversold on nuclear power in the 1960's, but there is little evidence for his con- tention that they have given up on nuclear. Plant orders picked up dra- matically in 1970, reaching 16 by our count, and all forecasts agree that nuclear power, given its present rate of expansion, will indeed account for 50 per cent of the nation's power gen- eration by the turn of the century.

Nuclear plants have had their con- struction and startup problems, to be sure, but recent experience in this re- gard with large fossil-fired stations is by no means reassuring.

As to the need for a fast-breeder reactor: this need is unquestionably

strong from a resource - conservation point of view, but I do not think that even the most pessimistic forecaster would predict that "those plants al- ready committed to nuclear operation face problems of adequate fuel sup- ply" if the breeder is not developed.

Finally, I would argue with Mr. Bretey about the nature of the con- troversy over therm.al and radiation effects. Far from being a dispute over a serious health problem, as he implies, this boils down to an old-fashioned tug of war between the states and the federal government. State radiation standards, which are for the most part more stringent than federal stand- ards, are being devised somewhat arbi- trarily; there is no scientific evidence that they produce a materially higher level of safety than the federal stand- ards.

CARI, A. GOLDSTEIN Assistant Public Affairs Mgr. Atomic Industrial Forum, Inc. New York, N. Y.

441st Dividend

Pullman Incorporated

Quarterly Cash Dividends Consecutively Paid For Over 103 Years

A quarterly dividend of fifty cents (50?) a share will be paid on June 14, 1971, to stockholders of record May 14, 1971.

SAMUEL B. CASEY, JR. President

Divisions Transportation Equipment Pullman-Standard Trailmobile

Engineering/Construction The M. W. Kellogg Company Swindell-Dressler Company

Principal Subsidiaries Pullman Transport

Leasing Company The Canadian Kellogg

Company, Limited Kellogg International Corp. Trailmobile Finance Company Canadian Trailmobile Limited Societe des Remorques, Semi-

Remorques et Citernes Trailor Empresas Tecnicas Asociadas

Pullman, S.A. (Mexico) Berry Metal Company Aloe Coal Company F. C. Torkelson Company Unimation, Inc.

MORE ON WARRANTS

Stuart Crane's comments (FA J, Jan.-Feb. 1971.) about my article: "Warrants: A Form of Equity Capi- tal" raises several points that demand a response.

1. He states that warrants to "the general investment public" are "a pig in the poke". Warrant prices have long been set by the most sophisticated investors on Wall Street, including some knowledgeable institutional port- folio managers. There has been some large block trading of warrants in sizes of 10,000 to 100,000 warrants. This is serious money flowing in and out of warrant positions. These are the same warrants that the little guy buys and sells, and at the same prices.

2. He considers warrants to be "de- preciable assets". If General Motors buys a $2 million machine tool that depreciates at the rate of 10 per cent a year, are they buying a rash specu- lation? All admit that warrants are speculative, but so were many bonds and stocks in recent years. Anyone who purchased AT&T warrants in July 1970 and sold them at a 50 per cent profit in January 1971 considers himself a better investor than the fel- low who bought the common stock for a 20 per cent profit.

3. He writes that I define premium as exercise price divided by the com- mon market price. A look at Chart VI

of my article will disclose that the premium in all six examples was cal- culated by using the correct formula as shown in Mr. Crane's letter.

4. I did indicate that warrants hav- ing several years to run will retain their premium value. Crane says that this is contrary to the facts, but no facts are put forth by him. Elsewhere in my article the observation- is made that as the expiration date approaches and as the common price advances to about 300 per cent of the exercise price, the premium tends to disappear. Absent an early expiration or a sub- stantial upward move in the price of the common stock above the exercise price, warrants sell at substantial pre- miums. I stand by the warrant pre- mium curve in Chart V which shows that the lower the common stock falls, the higher will be the per cent pre- mium if the warrant is not approach- ing expiration.

5. He states that warrants very f re- quently offer less leverage than the common. Yes, I agree. Frequently warrants misbehave. But far more frequently warrants do have leverage. Ask anyone who bought warrants in 1968 and held them until early in 1970. Warrant leverage on the downside was universal and devastating. Since mid- 1970, many warrants advanced at a faster rate than the common stocks. A few did not. In isolated instances, the warrant declined while the com- mon advanced slightly. If warrants seldom had leverage, there would be no purpose for anyone ever taking a long position in them.

6. As for Mr. Crane's vote in favor of shorting warrants, this definitely requires some careful evaluation for it may be dangerous advice. Since war- rants are often very low priced, the reward/risk factor in a short sale is particularly unfavorable. How much can you make on shorting a $3 or $4 warrant compared to the risk expo- sure? If a long position in a warrant is considered too speculative, it surely follows that "the general investment public" should not be lulled into short- ing these volatile securities.

On the whole, I do appreciate Mr. Crane's comments because warrant discussion always stimulates and en- riches this neglected field.

WILLIAM SCHWARTZ Vice President Institutional Department Cantor, Fitzgerald & Co., Inc.

100 FINANCIAL ANALYSTS JOURNAL / JULY-AUGUST 1971

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