zarley

Im kicking myself. I was early on WDC in late 2010 and managed to make no money on it. Almost bout huge at $26 due to flooding using leaps...... I recall we had a brief exchange about WDC about a year ago (when I first bought). We had the same perspective on it, so I naturally thought you were pretty sharp. :) The Thai floods did worry me a bit, but also gave an opportunity to buy really low (~$25), which I did a little of. After FFH gets hammered in the morning, WDC probably be my third largest holding.

I guess I've managed to forget the last 6 months, but what catastrophes were driving the 4th qtr combined ratios? Reinsurance was brutal. Edit-- Thai flooding for one. Ironic that it slipped my mind since Western Digital (WDC) is one of my holdings.

I haven't done that analysis, but looking at historical P/B ratios I see a normal range from 0.6x to ~1.5x. There was an extreme low around 0.4x in 2009 after an extreme high in 2008 around 1.7x. Current P/B is around 0.8x. Given that BV per share has grown in the high single digits, if that continues and P/B moves back up to 1.0x in three years, you would see mid-low teens growth from $38 to ~$60. Overshooting 1.0x on P/B back to some historical normal high, would obviously be a nice cherry on top. CNA's underwriting has improved in recent years, but investment income is hampered by the low rate environment. Plus, the natgas exposure is a real wildcard. It's so low right now, and much lower than when L bought a lot of their assets there. Does it stay below $3-4 or does it move back up to high single digits? Can we dare to dream of double digit natgas prices? It's a full position for me (~12%), but maddening to watch. The non-answers about Q4 stock buybacks on the conference call was curious. It may mean that they have something in the works for their excess capital, or it may just be a sit and wait approach from management.

Great story. Let the speculation begin . . .

Fortune has a preview of the BRK annual letter. Buffett argues in favor of productive assets (like quality businesses) as the best bet for maintaining purchasing power in the face of inflation. http://finance.fortune.cnn.com/2012/02/09/warren-buffett-berkshire-shareholder-letter/

Not sure about my 2+ month returns, but I'm up ~10% for January. Going back to Oct/Nov my gain is probably mid teens. Trading SHLD, and owning MSFT and WDC have been the most profitable.

Instead of focusing on why Sears isn't a great retailer, think about how Lampert got control of KMart and Sears and then think about maximizing the return on a collection of assets which were acquired for pennies on the dollar and which are now allocated to generic big-box retail but might be better allocated in different ways. Would you continue to spend liberally on stores that are destined to lose money year after year, or would you work on transitioning away from those stores while minimizing costs? And, if you know you need to reallocate stores to other uses or just sell them outright, how would you manage that in the face of the macro environment of the last 3 years? Yes, the story was better 3-4 years ago when the retail operation turned out $1 billion in cash flow and the real estate values trumped most everything else, but the capital allocation from SHLD has been, IMO, appropriate. Yes, SHLD would be much better off if the retail execution was better and the retail operation was incredibly profitable. But, at the right price the retail doesn't need to be Target quality to make a decent return.

I will admit to not considering options strategies because I am simply out of my depth there. I've spent little time thinking about these things because they seem overly complicated and I fear the unknown. But, if you'll indulge me a little learning exercise, I'll see if I can't sort out the math on your suggestion just to see where it takes me. Let's say i have $8,000 in capital to invest in SHLD. I can buy 174 shares at $46 or Keep $8,000 in cash, sell 2 of the jan 2013 $45 puts for $2,870, and buy 2 of the jan 2013 $45 calls for $1,790. This leaves me with $9,080 in cash and my two sets of options. ************* If SHLD goes to $40 by expiration I lose $1,043 on the common (-13%) or my puts get exercised at $45 costing me $9,000 and my calls expire worthless, netting me $80 in cash and $8,000 in new SHLD common, or total assets of $8,080, a gain of $80 (+1%) ************* If SHLD goes to $70 by expiration I gain $4,174 on the common (+52.2%) or my puts never get exercised and my calls are now worth something like $5,000 ($25 x 200). With my cash of $9,080 I have total assets of $14,080, a gain of $6,080 (+76%) Is that the general gist of the math? It ignores commissions and assumes you can execute at the prevailing quotes, but I think that is it. Is there some shortcut way to identify when the options trade looks to be clearly better than using the common, or is it just a matter of doing simple scenario math like this each time you consider a trade? Thanks in advance if you are kind enough to assist in my education.

Funny, I added to SHLD last week at $45.60. It's still my smallest position at ~5%, but the price does seem quite low. Operational concerns aside, the current price offers pretty good odds as I wait for Eddie the python to swallow this pig.

Wait. What does any of that have to do with LVLT?

A perfectly succinct synopsis.

I hadn't heard the characterization of the equities as being US based. UPS seems a really good candidate though.

Well, the linked story is an abbreviated p.o.s. I would presume that the SN analyst had more thoughts that just the reserve release. In any event, that's more thoughtful than the fluffy Tilson cheerleading also included in the piece. The equity purchases really are, for me, the interesting little story in the 10Q. Spent a few million buying back BRK shares, but $7 billion buying other things. As I said, I'm dying to know what that other stuff is.

There's really not much there (at the linked article). But, it's fair to observe that $800 million of after-tax earnings benefit (a direct offset of insurance losses in the quarter) from the loss-reserve release is a noteworthy caveat to the quarter's earnings. That $800 million is almost a third of the reported earnings and is unlikely to be a reoccurring event -- it's part of the lumpy earnings thing from a great insurance operation. A cynical observer might think they released those reserves just to reduce the sting of the insurance losses they did incur during the quarter. I still want to know what equities BRK has bought with that $10 billion they put to work this year ($7 billion in Q3). Blue-chip European industrials would probably be my best guess.

Bought something like $7 billion in equities categorized as "Commercial, Industrial, other" since June 30, 2011. Dying to see what they've been buying.

This is an interesting request, as there are over 1,300 Sears and Kmart stores in the US and a total of 4,000+ locations in all. Have you looked at the list of locations (by state) in the 10k? The information in the 10k will let you make some estimates of total owned sqft and total leased sqft and with a little work you can break that down a bit more by format. Are you planning on trying to value these individually? The guys at Fairholme claim to have done so, but it would be one hell of a project.

The big problem for RIMM is that their products are not really competitive for the discretionary consumer. Only enterprise inertia is keeping them viable. Given enough pressure by users who don't want to carry two phones, and prefer non-blackberry devices, CIOs are going to have to consider moving away from Blackberry (perceived network security and data efficiency advantages notwithstanding). Plus, if they continue to have the execution problems they've had lately, I don't see how they survive as a stand alone. Someone may come in to gobble up the IP and kill or sell the hardware business.

Great link to the full discussion. I think I'd have liked just Eric Schmidt and Eddie Lampert on the panel and less of everyone else. Schmidt's point about incentives is important and maybe overlooked because it seems so obvious. But, it does really help explain how people make decisions if you know how they'll be rewarded or punished as a result. Of course, our favorite investor in Omaha makes that point often as well.

Could be supply chain concerns due to flooding in Thailand. A large percentage of the the hard drive manufacturing capacity is impacted. Western Digital has been getting killed the last week or so as a result. As much as half of some critical components for WDC hard drives is off line indefinitely as a result of the flooding. http://seekingalpha.com/article/300739-western-digital-s-ceo-discusses-q1-2012-results-earnings-call-transcript

For me, that remains the biggest uncertainty. What is Lampert's plan, and how might that unfold? I suspect he knows exactly what he's doing and will be successful in unlocking the value in SHLD. I think the economic downturn has impaired whatever operational improvements he had hoped to make in the retail business and probably put a little crimp in the real estate values. Given that he holds over 60% of the shares (directly and through ESL), I'm curious about why SHLD continues to buy back shares--he doesn't need to solidify his control. So, he either still sees the shares as significantly undervalued or he has designs on just methodically reducing the share count until he and Berkowitz are the last guys standing (maybe both). If he does want to take it private, it would be in his best interest to have it undervalued in the market when he moves to buy out the minority shareholders. Not to impugn Eddie's character, but I bet he didn't get as rich as he is by going out of his way to be nice to the little guys who happen to be in the way of his plans, so I don't expect an overly generous offer if and when one comes. SHLD is a small position for me ~5%, but has been much larger in the past. I've opportunistically sold at pretty good prices in the past year or so. Considered buying more recently under $60, but passed. The retail end is pretty crappy and the uncertainty about Eddie's plans make it hard to put more into. Besides, there have been some other good bargains around in companies that are in better businesses.

Mine is an estimate. I took a breakdown of owned vs. leased stores by type (K-Mart, K-Mart SuperCenter, Sears, Sears Essentials, etc) and multplied by an average size per format. As I recall, the data came from the 10k, the sears website, and probably google searches about the size of each format. Looking at the feb 2011 10k, there is a lot of good info in the business description section. And, the table of owned vs. leased is around page 13. I haven't updated my spreadsheet in a while, but it looks like a lot of what is needed is right in the 10k. Interestingly, the number of owned stores has actually gone up a little bit since I did my estimates.

Hard to say what the brands are "worth". They paid close to $2 billion for Lands End in 2003. I have in my notes that Lands End does around $1.6 billion in annual sales (no citation though). So, $2 billion seems a little generous, but probably fine as a ballpark. It seems unlikely that the real value of the brands is anything close to $19 billion. Although, the new licensing deals will probably provide a lot of good data for what the potential of those brands really is. Owned land is a little under 100 million sqft. I haven't updated my spreadsheet on that in a couple years though, so it may have dropped a bit more recently. The value of the real estate is tricky though. Owning 100 million sqft and having leases of various lengths and terms for another 200 million has significant value. Is it more than $10 billion? Maybe. But, the trick is how and when you monetize it. Right now the real estate is trapped inside a relatively poor retailer. When and how they unlock the value will determine how good a deal SHLD is at current prices. I think the current economic environment will postpone or limit the upside to that unlocked value. The $100+ per share of real estate that got value investors all excited 5 years ago, is still locked up. Until recently, I didn't worry much about exactly what the real estate was worth because the retail operations were actually not too bad from a cash flow perspective. That's changed in the last year or two, so the hidden break-up value is becoming more important. It's still there, but how and when does it get unlocked? I'd guess Lampert has his own timeline, and has the luxury of doing things at his own speed. As a minority shareholder, though, I want to see it unlocked sooner rather than later -- because that later may very well be after Lampert takes the whole thing private.

Regarding the change of heart: http://mediadecoder.blogs.nytimes.com/2011/10/10/netflix-abandons-plan-to-rent-dvds-on-qwikster/ WTF is going on there? Did they really give the split so little thought that they'd overlook the value to their customers of having one site with one account? Really?

Transcript of his CNBC appearance this morning here: http://www.cnbc.com/id/44730157 Interesting part about buybacks and finding opportunities: So, they've been busy buying equities in the last 6 months. Will be very interesting to see the filings on the new holdings when we get a chance to see them. Something like $8 billion in equities so far this year.

I think it's hard to read too much into the volatility of SHLD. Today's move could be a little mini-squeeze. It wouldn't shock me if Lampert played his buy-backs in such a way as to cause problems for the shorts and induce squeezes from time to time. I don't think today's move is really about leasing SHLD store space to third parties. That's not really a new thing and a few hundred thousand sq ft of subleased space isn't a big deal one way or the other. I still own a small amount of SHLD. Given the poor operating results over the last year, I think the most interesting question is still - what's Eddie's end game? He controls over 60% of the shares, so he could stop buying right now and retain full control over the company. So, why keep buying/retiring shares? I'd guess he wants to own it outright at some point. But, when? And, how do the minority shareholders get treated when he takes them out?