ERICOPOLY

Hahahahahahahahahahahahahah Yeah, that would go over really well on the national news -- Obama orders it an emergency and uses national funds to restore $3m homes in Montecito. Well that was NOT a joke. Ok my use of the acronym FEMA may be incorrect. But when the fed government approves $3.5B in assistance to repair earthquakes, the fact that the funds are helping multi-millionaires in their beachfront condo is hidden from the taxpayer. That's my impression what happened in the 1989 quake. I just saw one article that said California paid $1B, and the Feds paid $3.5B, and elsewhere I read the cost of the quake is $5B. So there you go, seems like the math says the damage was 100% borne by the taxpayer. A friend of mine (when I was in high school) lived in a Los Altos Hills home that was knocked off it's foundation. No FEMA money. It was the Loma Prieta earthquake. Well, we are going back and forth on this, I stated that $5B was spent by the taxpayer to repair the damage from the Loma Prieta quake (I NOW live where the quake hit so this is not just a intellectual exercise). So let's invert the statement, are you saying none of that $5B was used to repair a home, or just none was used to repair a $3Mil home? Here are some facts regarding the financial assistance from the state/federal government with regards to the 1989 Loma Prieta earthquake: http://nisee.berkeley.edu/loma_prieta/comerio.html Repair of Single-Family Houses Individual homeowners with repairable damage found a variety of resources in federal and state housing recovery programs. The majority of the single-family housing reconstruction funding came through the SBA loan program. Other programs include:a $5,000 minimum home repair (MHR) grant from FEMA for limited repairs to primary dwellings, and Individual Family Grants (IFGP) combining FEMA and state funds (maximum $21,500) for real and personal property replacement. Mortgage assistance and Additional Living Expenses (ALE) were also available if needed through a FEMA program. Finally, if a homeowner’s needs were not met through these programs, they could apply for a loan from the California Disaster Assistance Program (CALDAP), administered by the state office of Housing and Community Development (HCD). The CALDAP program was initially set up on two tracks:CALDAP-O for owner occupiers, and CALDAP-R for rental housing owners, and initially funded with $23 million in each track for loans and grants. Four years after the event, CALDAP-O has provided $43 million in loans to homeowners, but there are still some loans applications pending.

I'm looking at it with interest in Eddie's psychology. He recently said he expected the retail business to turn around in 2013. He also recently blogged about how true innovators aren't recognized as such until afterwards, and everyone doubts them, etc.. etc.. Actually, he just blogged about an article on leadership which said those things (so he said them by proxy). So he sees himself as a trailblazer/innovator that is going to turn the retail around. He might. I'm just pointing out to you that yes, he really is intending to turn around a "hopeless retailer". So just accept it and get used to it.

Are you ignoring his statement that he expected it to turn around in 2013? Eddie said that.

Right, I don't think it will happen for sure. I lean towards it getting up to fully profitable over time. That either happens through "retail transformation", or via liquidation. It's that "over time" part that deserves a discount. I do believe though that it is A FACT that for a period of time it (NAV) won't be earning what it should be earning -- this fact has been obvious for years now. Bruce's NAV is useful to know what it is worth on the day that the assets earn their keep. Meanwhile, we're not there yet.

Commercial real estate should be discounted if it only appreciates and doesn't generate rental income. They effectively have an owned real estate portfolio that has a singular deadbeat tenant (Sears). I guarantee you the stock price of SPG would drop if the tenants collectively signed a pact not to pay rent for the next N years. SHLD is like an SPG where the tenants don't pay any rent. This is why the retail operations are more important than "just gravy". They are sapping the value from the real estate until they can at least pay the frigging rent! Real estate that collects no rent is worth quite a bit less than otherwise!

Eric, not necessarily saying this is the case, but as a thought exercise: What if no one is counting inventory as part of SHLD's NAV, and what if every year the company needs less and less of it? Is it possible that selling inventory (an asset people essentially value at zero) at an accounting loss is actually adding to rather than subtracting from the NAV? Like I said, it's obviously not that simple, but I think this is worth considering. -T-bone1 I'm not sure what your exact point is regarding inventory... that's probably more because I'm retarded impaired than anything else. But if Bruce Berkowitz is right, and if there is NAV of $140 per share, then they should be earning $14 a share if they are generating 10% return on their net assets. That's net assets... in other words, they are using leverage, so 10% isn't unrealistic. But they aren't returning $14 a year. So it... should be... discounted. That's my only point.

And without knowing details of Guarantor v/s Non Guarantor everything you said is meaningless. Person "B" pays $1 NAV for Sears Shares which consist of $1 of Real Estate. This Real Estate goes up in value with Inflation irrespective of whether it produces returns or not. The retail could lose money for the next 100 years but if the Real Estate is in a good location and is bankruptcy remote from the retail explain how Person "B" will lose money? Let's take a long term view... let's say, last 5 years. What has the return been on the NAV over the past 5 years? Has this "bankruptcy remote" thing been there all along the past 5 years?

We don't need Shiller to tell us that. Of course there is no "proof" it will happen. There is no proof that Shiller will live another week. Or me. Or you. There is just, "life expectancy".

"Duh" is right, this is basic. I just thought you were saying something different and was surprised as it was coming from you, but reading back over your posts I can see what you were trying to say and I just misinterpreted what you were saying. Right, so I get that. The internet is hard. My point though is Berkowitz is never mentioning that the shares should be worth less than NAV. He only puts up the relatively high number (NAV) and says nothing more. It's almost like he's trying to talk up the price, because we all know he knows better. We all know he understands that underperforming assets are worth less than NAV. Yet he never goes there. It disappoints me (as a fan of Berkowitz, which I am on balance).

NAV is most definitely not the value of each share. The value of each share is... well you know, the current discounted value of all future cash flows (including those from potential liquidation). Therefore, if you incur negative or sub-par cash flows (compared to what those assets should be earning), then you have to discount those assets! No big revelation here. You can have net asset value of $100 a share. And you can have intrinsic value per share of $5. And you can have BOTH AT THE SAME TIME! All depends on how quickly you burn through that $100. In other words, you are only in the situation where the shares are worth the NAV if the assets actually earn their keep! In Eddie's own words, they don't! That situation might not persist forever, but there will be a time span for which it does. Thus, it is not worth NAV! No way! Eric, I meant "share value" in the most basic sense: (assets - liabilities) / oustanding shares. That's what Berkowitz is getting at... he wasn't saying assets are $150/share, he was saying assets minus liabilities are $150/share. That's exactly what I am saying he means. I agree, asset minus liabilities is the way to calculate NAV. But that means TITS! It isn't what the shares are worth. Then you have to discount it to the present, because those assets are not earning what they should be earning. The market isn't stupid. An asset earning a negative return or a break-even return is not worth as much as an asset earning a positive return. And an asset should be earning a positive return, or it will be discounted. This deserves a resounding "Duh".

Person "A" pays $1 NAV for an asset that returns 7% a year, and he has $1.07 a year from now. Person "B" pays $1 NAV for an asset that loses 7% a year, and he has 93 cents a year from now. Person "C" pays $1 NAV for an asset that breaks even, and he has $1.00 a year from now. So, which guy(s) made the mistake? That's why Sears Holdings isn't worth NAV if it's assets don't produce any return -- in fact, especially if they produce a loss.

NAV is most definitely not the value of each share. The value of each share is... well you know, the current discounted value of all future cash flows (including those from potential liquidation). Therefore, if you incur negative or sub-par cash flows (compared to what those assets should be earning), then you have to discount those assets! No big revelation here. You can have net asset value of $100 a share. And you can have intrinsic value per share of $5. And you can have BOTH AT THE SAME TIME! All depends on how quickly you burn through that $100. In other words, you are only in the situation where the shares are worth the NAV if the assets actually earn their keep! In Eddie's own words, they don't! That situation might not persist forever, but there will be a time span for which it does. Thus, it is not worth NAV! No way!

A few years ago (I think 4 years ago) Bruce said that Citigroup is worth $10. That would be $100 per share (after the reverse 10x split), but it's been 4 years! So how far off do you figure he was? Remember it's been 4 years, so $100 4 years ago is $146 today (at 10% a year). But is Citi worth $146 today, or more like half that? Three years ago he bought BAC for about $15. Compound that by 10% per year and you've got a $20 stock price. So he paid pretty darn close to IV for BAC when he bought it. The man makes mistakes. Now, that said... I believe he said the assets at SHLD are worth $150, not the stock! Take Eddie's word for it -- they are not earning an acceptable return on their assets (actually, they earn a negative return). So assets that return less than they "should" are going to be discounted in the stock price. So Bruce knows that too, but he's only talking about the assets per share without mentioning what they should be valued at in the stock.

Hahahahahahahahahahahahahah Yeah, that would go over really well on the national news -- Obama orders it an emergency and uses national funds to restore $3m homes in Montecito. Well that was NOT a joke. Ok my use of the acronym FEMA may be incorrect. But when the fed government approves $3.5B in assistance to repair earthquakes, the fact that the funds are helping multi-millionaires in their beachfront condo is hidden from the taxpayer. That's my impression what happened in the 1989 quake. I just saw one article that said California paid $1B, and the Feds paid $3.5B, and elsewhere I read the cost of the quake is $5B. So there you go, seems like the math says the damage was 100% borne by the taxpayer. A friend of mine (when I was in high school) lived in a Los Altos Hills home that was knocked off it's foundation. No FEMA money. It was the Loma Prieta earthquake.

It accounted for as "gravy", or "a bonus". Something you get "for free". (I'm still long SHLD btw, it's just that I recognize the parts that lose money may not be bonus)

That wouldn't be allowed in Montecito.

Hahahahahahahahahahahahahah Yeah, that would go over really well on the national news -- Obama orders it an emergency and uses national funds to restore $3m homes in Montecito.

Only to the extent that you have equity in the home is it your liability (it's somebody else's liability now if you have no equity in the home). I'm not sure there are many people anymore with 0% equity in their homes -- my point (I think) is valid as long as there is somebody with little of their personal wealth in the home, who is contemplating tying up the bulk of their wealth in the home (paying down a huge chunk of mortgage). My point was that if you have no equity in the home, then you have none of your own money at risk in the event of uninsured damage to the property. I'm assuming a non-recourse mortgage here -- you just turn in the keys to the bank and walk away. You lose only damage to furniture and belongings (and hopefully no injuries).

I'm renting. I signed a purchase option in July 2013 -- expires in July 2016. I view the non-recourse language in the mortgage to be a nice way of protecting yourself if you can finance as much as possible of the property (preferably 100%). There's nothing risky about zero-down mortgages. They are in some ways less risky as you have nothing at risk (no risk of house price declines, no risk of uninsured losses, etc...). Unfortunately, they became hard/impossible to obtain after the crisis. It's like having a put, sort of (you suffer only credit ratings hit if you walk). EDIT: I forgot to mention, I made my landlord purchase earthquake insurance as a condition for the option agreement. I was worried that he might not be able to rebuild a damaged home, making my option worthless in the event of a serious earthquake.

Paying off the house has some risk as well, although very small. House burns down and your insurance company is insolvent? or You don't carry earthquake insurance? Maybe you thought it wasn't necessary in Seattle? I think for example most in Seattle do not carry it, although there is a risk of a large quake there. I don't know where he lives, but I'm familiar with Seattle. Even here in California many don't carry it. I presume the mortgage is non-recourse... that can be very handy!!!! Although not very likely. Kind of like a basket of munis being worthless is not very likely.

The issue is I'm having a hard time finding stocks with a large discount to fair value right now without a lot of risk (I'm not really looking to put all our cash into companies like SHLD and JCP that have the potential to be insolvent within a few years). If I was in the same position in 2007 this putting the money into stocks vs paying off a mortgage wouldn't be a question. What's your tax bracket? I'm assuming you have a 30 yr mortgage... So invest in tax-exempt muni bonds -- maybe 7 yr duration. Here in California your after-tax mortgage cost would be lower than your tax-exempt muni income (our tax rates go all the way to 50%). Then in 7 years, you can reinvest at (likely) higher interest rates. Maybe even Treasuries will yield more than your mortgage 7 years from now. Then you'll effectively have a mortgage with negative interest rate!

I was in a similar position in 2006. I had about $200k to invest in my taxable account -- this money had come from selling a rental property. I had a home mortgage at the time (only about 10% equity in my primary home). The $200k was enough to pay off 50% of my home mortgage debt. Instead, I sunk the entire $200k into Fairfax calls. Well, good look with whatever you decide to do.

We don't think our current house will be our permanent house, and will likely try to sell it in probably about 3-6 years from now, but we're not sure about that. How would you afford the next house if all of your money were sunk in the current house? Get a cash-out refinance? A HELOC? Sell the one you own before buying the next one? Does this put you in a hurry to buy the next house after selling the first? Does it mean you need to get a bridge loan to buy the next house -- sellers don't like that so you might lose out bidding on the house you want. Seems like a pain in the butt.

Let's say you made that statement two years ago. Since then, mortgage rates on the 30 yr have climbed significantly (30%?) as did housing prices (20%?). So from this point, for the statement to continue to hold true... housing needs to drop 30% from here if mortgage rate climbs another 54%. A 30% drop is almost as big as what happened in the Great Depression.

I'm not worried about that. It's also worth pointing out that 1/3 of the cost of these puts would otherwise go to taxes, so at least I'm getting something of value for that money which is otherwise taken from me.