ERICOPOLY

These special warrant provisions simulate a dividend-reinvestment program (DRIP). It simply says "Hey, here is a dividend and we're going to invest it into more shares at the current stock price". That's all it is. Nothing more. Much excitement was generated in the past regarding this anti-dilution provision -- but it's pretty boring. Just reinvestment of the dividend. That's why the strike price is lowered, to credit you for value of the dividend. That's why the conversion amount is bumped up, to credit you for reinvestment into more shares.

http://www.ft.com/cms/s/0/275f93c0-9b1d-11e3-b0d0-00144feab7de.html#axzz2tzzhpE6j Bank of America just barely exceeds 9% ratio for threshold B3 under the "standardized" approach, but is at almost 10% under the "advanced" approach. So it's significant that they are not being allowed to use the "advanced" approach. BAC therefore effectively has no excess capital to return right now. They only barely meet their self-imposed 9% minimum.

Australian dollar headed to low 60 cents against USD in 2015: http://www.bloomberg.com/news/2014-02-20/china-s-iron-ore-stockpiles-to-stymie-aussie-rally-insight-says.html?cmpid=yhoo The Australian dollar’s rally this month will be short-lived as demand for the nation’s chief export wanes with China stockpiling record amounts of iron-ore, according to Insight Investment Management Ltd.

The odd thing is Thompson's reply to Mayo. He acted like Mayo is assuming the share count won't come down enough to support more than $2 per share. However Mayo is assuming more than 1b shares retired. A $5 billion dividend annually is pretty decent relative to peers. The bank should generate almost $23 billion in capital this year, and close to $26 billion in 2015. Combined, that's $49 billion. Take out $10b for dividends over next 24 months and that leaves $39 billion. That's enough to retire 2.4 billion shares if you bought them all for today's stock price. That takes the share count to 9 billion. I know that sounds like a crazy amount of buybacks, and I feel like it's crazy -- I think only in a pipe dream. However where is the cash going to go? They've met the capital levels with the SIFI buffers. The Fed just began to taper -- perhaps now is the time to let the banks flood the equity markets with capital returns. I am being optimistic here almost to make a joke out of it, but really, at some point they need to let the banks return all of the excess.

There are 11.4 billion shares. 1% ROA is $20 billion on $2 trillion in assets. The share count has to be reduced to 10 billion shares to get to $2 per share. So Mayo's math assumes 1.4 billion shares retired. Or, $22.82 billion dollars return through share repurchases. If anything, Mayo might be too optimistic on there being 1.4 billion shares retired. Plus -- don't the preferred dividends take a swipe at it?

"Tesla Projects Big Increase in Production" http://online.wsj.com/news/articles/SB10001424052702303636404579393391643110198?mg=reno64-wsj&url=http%3A%2F%2Fonline.wsj.com%2Farticle%2FSB10001424052702303636404579393391643110198.html It was announced when they released their financials. Initially when I bought the car there was talk that they would begin charging money after a few months -- so it was a surprise to hear that we will get an additional four years for free. I use the Slacker internet radio all the time.

Wages, rents, and the velocity of money—how quickly it changes hands—are “going to be rising significantly over the course of the next several quarters,” Rosenberg says. He adds that his stance will then seem less “ludicrous” than it does now. http://www.businessweek.com/articles/2014-02-20/inflation-ahead-economist-david-rosenberg-says?campaign_id=yhoo

The Tesla service center manager in Van Nuys left me a voicemail yesterday. They (at their cost) are offering to send a "service ranger" out to my house to fix my glovebox. Another option is they will put my car on a flatbed truck and take it to their service center to fix it. Meanwhile, they would of course leave me with an equivalent fully loaded Model S "loaner" to drive while they work on my car. This is all because I bitched on the Tesla.com enthusiast forum that my glove box won't pop open when I push the button to release the catch -- you have to first push the button and then manually pull the glovebox door open. This problem was even present at the time of delivery. The only reason why I haven't asked to get it fixed is that there is a service center opening near me soon. So I figured, hey, no rush. But really, can you believe they are offering to flatbed my car to their nearest service center, provide me with a loaner, and all because of my glovebox not popping open automatically? I'm a bit amazed.

The positive side is that the further along we get in this deleveraging, the less of it's drag there is ahead of us. What deleveraging? The US is, a little (total debt down from ~390% of GDP to 340%). But the world overall has added 30% to its debt load since 2007. Private sector debt carries higher financing costs than public sector debt. So you may scoff at 390% vs 340%, but I think the difference is more significant than that. Let's say you take a private citizen that was paying 6% interest on his personal debt, and you tell him instead that he only has to pay 3% interest if it is moved to the public sector. I am not scoffing at it - it is a very significant improvement. But I would point out that it is still far above the long run normal, so there will be a lot more deleveraging to come if rates return to their long run normal (and that will be hard given the rising cost of service in that situation). My bigger point though is the global figure. That, ultimately, is what Watsa is fretting about, as I understand it. I think he fears a *global* deleveraging focussed on China with all the deflation that entails. A. Gary Shilling has been saying that there is about 4.5 years left on the deleveraging. He thinks before 2019 we'll be growing GDP at the normal long term trend growth again. I hear that and I get bullish. I mean, that's really good news. It's been a long time since I've heard something so optimistic out of his mouth. More than ten years ago, in 2003, he said we were facing a decade of deflation. His reasoning is that we've already deleveraged so much.

The positive side is that the further along we get in this deleveraging, the less of it's drag there is ahead of us. What deleveraging? The US is, a little (total debt down from ~390% of GDP to 340%). But the world overall has added 30% to its debt load since 2007. Private sector debt carries higher financing costs than public sector debt. So you may scoff at 390% vs 340%, but I think the difference is more significant than that. Let's say you take a private citizen that was paying 6% interest on his personal debt, and you tell him instead that he only has to pay 3% interest if it is moved to the public sector.

The positive side is that the further along we get in this deleveraging, the less of it's drag there is ahead of us.

I bought a 'Gnaraloo Fatty' several months ago. Nice and stable for beginners. http://www.surfindustries.com/surfboards/gnaraloo_fatty.php I am blessed in that I live less than a mile from Hammonds Beach.

On the other hand... An FFH investor could buy index calls to hedge Fairfax's index hedges. That way, the company is safe and so is the investor.

But look, if people will invest their money in government bonds at 1% interest rates and 20% tax rate, why would they hold back if interest rates were 3% at 73%. In both cases, the after-tax income is 0.8%. It doesn't disrupt their earning and spending power at all. The United States had a top-end tax rate of 70+% for quite a while after WWII.

The bonds being mostly held by Japanese, then most of the interest paid goes back to their tax base. So while it's true that all (current level of) tax revenues would be used just to service the debt, the private sector would see a massive surge in govt bond interest income cash flow. The government could tax this increase of interest income, and put it back into the programs it currently spends money on. So the private sector would in theory see no change in cash flow. Bond holders would get the same as they get today, as would the beneficiaries of government programs. So it would in effect be defaulting on interest payments to it's domestic bond holders, but foreign bond holders wouldn't get hurt (there are so few of them). And it's private bondholders would just keep on seeing the same level of bond income that they see today. Net of tax. I'm not convinced this wouldn't lead to some sort of dumping of bonds by the Japanese. It's just that it appears if you are increasing payments to your own people, that seems to open a door to raising taxes. Just brainstorming. In short, if you pay too much interest to your own people, take it back! Otherwise, it would be somewhat like an economy without taxation if all the money taken in taxes were given right back again. Taxes in Japan are already high, for both individuals (40% for income above $180K) and corporates (around 38%). On top of that there is service tax (which will be increased to 8% in April) and a special surcharge of around 3% for rebuilding program post 2011-earthquake. Interest income is already taxed at around 22%, so increasing it would naturally put off investors investing into bonds. Govt can only tax and take back a certain portion of the interest income, so the deficit will keep growing if the government is using all of its tax revenues to service the interest. Rising interest rates will have a massive impact on the book values of banks(e.g. below) and pension funds (which is already running a deficit due to ageing population and life expectancy rate of 80+). So the choice for pension funds is to sell the existing bonds at a big loss to pick up new bonds at higher yields or hold the existing bonds until maturity with a negative real yield creating bigger hole in the deficit. The country's second-largest bank, Mizuho Financial Group Inc., 8411.TO +0.95% said in May 2013 that a one-percentage-point rise in the yield of the 10-year bond would result in paper losses of ¥100 billion-¥200 billion ($1.1 billion-$2.1 billion) on its loan portfolio Alright, where does the money go? The government starts paying interest income through a firehose onto the private sector. Private sector income is ballooning. Does this show up positively somewhere in the economy? Can the government see rising tax revenues when income is flooding into the private sector (via higher interest). I mean, you suddenly have the situation where all tax receipts go right back to the private sector. Does that... have any... impact? It's not like it won't. People won't have to save as much, for example, if they can reinvest at higher rates. That means pensions won't need to be funded as heavily (for one example). There must be some knock-on effects from the government suddenly flooding the private sector with interest income. Inflation? 22% tax rate on interest income??? Seriously? Interest income is taxed at like 40% top personal federal tax rate in USA, and over 50% top rate in California. Large banks probably pay more like 30%+.

Perhaps treading water and avoiding a depression is quite a lot! Perhaps not. How do you know there hasn't been much effect from QE? I can't say. Had we instead experienced a lot of deflation, we might very much hope for some treading water. S&P500 multiple expanded last year from 12x to 15x (forward multiple). That's the historical mean. It was below the mean a year ago, and low and behold, it reverted to the mean. I'm concerned for the market if earnings disappoint, but I don't think the market multiple of earnings is high. It's just at the mean. We're at the mean with low top line growth and the bottom only beating because margins are at record highs. Margins are mean reverting. Now, we're not seeing any wage pressures which would be the most likely reversion to the trend, but it's very clear to me that earnings are inflated. On top of that, inflation expectations are extremely low. Falling inflation expectations is generally what leads to P/E expansion. Without this tail wind, and with inflated earnings, it's hard for me to believe that we're in a long-term bull market. Rather, it's just a question of when this will turn. So we agree -- it's just a question of whether earnings will go down. That's really the primary risk.

The bonds being mostly held by Japanese, then most of the interest paid goes back to their tax base. So while it's true that all (current level of) tax revenues would be used just to service the debt, the private sector would see a massive surge in govt bond interest income cash flow. The government could tax this increase of interest income, and put it back into the programs it currently spends money on. So the private sector would in theory see no change in cash flow. Bond holders would get the same as they get today, as would the beneficiaries of government programs. So it would in effect be defaulting on interest payments to it's domestic bond holders, but foreign bond holders wouldn't get hurt (there are so few of them). And it's private bondholders would just keep on seeing the same level of bond income that they see today. Net of tax. I'm not convinced this wouldn't lead to some sort of dumping of bonds by the Japanese. It's just that it appears if you are increasing payments to your own people, that seems to open a door to raising taxes. Just brainstorming. In short, if you pay too much interest to your own people, take it back! Otherwise, it would be somewhat like an economy without taxation if all the money taken in taxes were given right back again.

Perhaps treading water and avoiding a depression is quite a lot! Perhaps not. How do you know there hasn't been much effect from QE? I can't say. Had we instead experienced a lot of deflation, we might very much hope for some treading water. S&P500 multiple expanded last year from 12x to 15x (forward multiple). That's the historical mean. It was below the mean a year ago, and low and behold, it reverted to the mean. I'm concerned for the market if earnings disappoint, but I don't think the market multiple of earnings is high. It's just at the mean.

This guy? "Prem Watsa bend over the hedge funds have something special for you." http://www.cnbc.com/id/42035716

Is there enough liquidity in out of the money puts for a multi billion portfolio? I'm sure there is. They can deal directly with the bank(s). In 2007 they had a multi-billion dollar hedge via call options (a hedge against the market climbing). Or they can deal with BRK. Buffett happily wrote multi-billion dollar puts a few years back. I've spoken to them about this. Apparently, it has more to do with cost than liquidity. Either the time premium or the cost of rolling would be too high to make OTM options competitive. Seems to me the liquidity issue could be solved by a market maker. Certainly when they hedged using S&P options they would have contacted a market maker -- which was costly. Russell is less liquid, and there costly. So they effectively want to do it the way I want them too, but they think the expense outweighs the benefit.

Those two men are not in agreement with each other. Watsa has deflation hedges and Klarman has inflation hedges. So, why don't they understand each other?

Sure, but did he get that idea from Bernanke? Of course the economy would crash without the drug. That's the whole point of taking the drug. The sickness is deleveraging. The sickness will pass.

It looks like S&P500 trades at about 15x forward earnings estimates. That's pretty normal I believe as long as the earnings continue to meet estimates. So, I think to say the market is in a bubble is the same as saying the earnings are in a bubble. So why not just go ahead and say what you mean. Then, where is the imbalance. Too much housing being built? Too many autos? What? Where is the false demand? Which way is credit blowing? I read Wells Fargo is dipping back into subprime again -- but it's the beginning of that phase.

I'm not saying there won't be a huge negative future problem, but just stating there doesn't have to be one (and the lunch would still not be free). Clearly not printing would have been bad too -- lot's of deflation. Didn't you see Space Cowboys where they landed the shuttle without the computers? It can happen :) I was a bit disappointed that Klarman made the "no free lunch" comment without recognizing that every day without deflation from this huge credit collapse, we are in fact incurring inflation from the money printing. It was a pretty major collapse after all. It's not like every dollar of money printing is still left to hit us -- how much is left, we don't know. Prem seems to believe deflation is still in store for us. So there you go, maybe not enough money printing.

The negative consequences may have already happened. A credit bubble produced inflation. Popping it should have produced deflation. So left to it's own course, the negative (inflation) from the credit bubble would have been (at least partially) reversed. Printing lots of money (perhaps) prevented the reversal. Therefore, there's your cost! So no free lunch. There may be worse consequences yet to come, but cementing in the already-incurred inflation cannot be ignored either. And for those who hate deflation, this is one case where a negative is a positive. It's therefore entirely possible that money printing can have a positive effect without a "negative" consequence, while at the same time produce inflation. It has the illusion of calm before the storm (inflation offsetting deflation), but that calm is perhaps the storm itself.