ERICOPOLY

His thesis is at least partly incorrect. Looking at slide 16, he lists six catalysts: http://www.fairholmefunds.com/sites/default/files/120815%20SHLD%20Presentation.pdf Case-Shiller Index, Home Sales, Housing Starts, Residential Investment, Unemployment Rate. I've listed five out of his six "catalysts" that have all improved, has SHLD's operations taken off???? It seems clear that he expected SHLD to improve with the economy -- it got worse! Yet he keeps buying quarter after quarter (economy and housing has been improving for multiple quarters). I think his real thesis is the real estate. In interviews for the past 3 years I've always gotten that impression and anything that was retail was just a bonus. It appears a bonus can be negative in value.

His thesis is at least partly incorrect. Looking at slide 16, he lists six catalysts: http://www.fairholmefunds.com/sites/default/files/120815%20SHLD%20Presentation.pdf Case-Shiller Index, Home Sales, Housing Starts, Residential Investment, Unemployment Rate. I've listed five out of his six "catalysts" that have all improved, has SHLD's operations taken off???? It seems clear that he expected SHLD to improve with the economy -- it got worse!

Diabetes kills.

I thought the SCRIP dividend was merely to avoid Spain's dividend tax. Plus, if you want cash instead you can get it directly from Santander (but you wind up paying the Spanish withholding tax): http://www.santander.com/csgs/Satellite/CFWCSancomQP01/en_GB/Corporate/Shareholders/Shareholders-US/Santander-Scrip-Dividend.html#

My favorite part: Throughout my 32 years of tenure with this great brand, our ability to change has been a key component of our success. These kinds of delusional thoughts remind me of Ron Johnson's quotes during the JCP fiasco. They either don't get it, or they do but spend more time trying to convince you otherwise rather than show you results. Revenue is down, margins are down, profits are down, comp sales are down, market share is down, store traffic is down, costs are not down, and they talk like business is good. It's hilarious. It's not surprising to find salesmen at a retailer.

The name wasn't in the BofA database. It was an offer through a 3rd party's database -- a national Honor Society. She's been an honorable slut apparently since 2004 in their database.

I am wondering how much it will be. They should be building about $22.8 billion this year of new capital from earnings. This number I get from using $1.40 estimated per share net income for 2014 and assuming a 30% tax rate (70% of $2 = $1.40). Then there are 11.4 billion shares (multiplied by $2), so $22.8 billion is my number. So let's say they get approved for $6b of buybacks. That leaves $16.8 billion to spend on dividends and retiring preferred stock. They could put $5b towards a dividend, and it would be 44 cents a year for 2.8% yield. They must be feeling pressure to bring the dividend up near that of it's peers, and this would accomplish that. So $6b for buybacks, $5b for dividend... and that still leaves $11.8 billion excess.

They can probably only grow their assets at the rate of GDP. But per share earnings and per share book values can grow much more rapidly. Per share earnings can grow 10% a year if they exclusively focus on buying shares back at 10x earnings. (but first they need permission from their mommy, so it's not realistic). so if 2014 is 1.34 - 10 years later (2024) id's be 3.47....... let's use 10 multiple so the price tag would be $35... but if 15 multiple then $52 hmmmmm I wouldn't start at $1.34. I would use $1.90 -- that's 14% return on tangible equity, and we're already at that level today really (on a cash earnings basis, you know... including the DTA). They claim it's what they should be able to earn from their current assets (after getting some work done to reposition the business).

They can probably only grow their assets at the rate of GDP. But per share earnings and per share book values can grow much more rapidly. Per share earnings can grow 10% a year if they exclusively focus on buying shares back at 10x earnings. (but first they need permission from their mommy, so it's not realistic).

Well, Home Depot made a $45 billion profit last year. Lowes made about $2 billion in profit last year, as did Costco. $17 billion for Walmart. SHLD has lost over $4 billion over the last couple years. Three days before Christmas, there were no lines at the checkout at the local Sears store in Santa Barbara, and few customers in the store. Less than a minute later I was in Williams-Sonoma next door and there was about a 40 minute wait in the checkout line. The store was mobbed with shoppers. Right, so if retail is in transition, why is the transition happening so much faster at Sears compared to Williams-Sonoma? What are they doing to bring shoppers into their store that Sears is not doing? And why isn't Sears doing that very thing? There were more shoppers in that one tiny store compared to the entirety of the Sears store. And all they do is sell kitchen stuff, so just one category of items.

Didn't Eddie tell them that he had expected the company to turn around in 2013, and that last year's results surprised him? His actions so far have not led to the turnaround he was expecting. So they say he doesn't have a clue if he expected the current state of his stores to have been the catalyst for improved sales.

;D ;D ;D Ah! Well, you have a good point!! Though, I was thinking more about something like “confidence in the management of a business”… Gio They don't have to be dazzling to earn 13% on tangible equity. As for the risk of them being too aggressive (trying too hard to dazzle), that's where put options are handy.

Let me put it this way: if you truly had your “just 10 investment in life” scorecard, and you truly knew the stock market would be closed for the next 10 years, were you still interested in Citigroup? Though I know that mind frame is way too rigid and will surely make me overlook many great investment opportunities (like C probably is today), I cannot escape from it… Guess that’s just the way I am and my brain works… No wonder, Eric, my returns are so much more lackluster than yours! Gio Since you asked... how well is Fairfax going to do in a severe Depression if the markets are closed for 10 years and therefore they can't trade their hedges? Do they just expire worthless? How do you make 15% gains in book value when they can't buy and sell equities for 10 years?

A couple of days ago Citigroup would be trading at 15% operating earnings yield if they can earn 13% return on tangible equity. I see that as the more likely outcome. Plus, the market will put a P/E on operating earnings, so there is a lot of room for valuation expansion. Easy to see 20% returns from Citi for the next several years. I find it much harder to make that sort of case with Fairfax, even if it made 15% returns on book, because the market wouldn't value the earnings in the same manner (due to their nature as capital gains).

I don't think so. The hedges are for providing losses to temper the gains on the the stocks in their portfolio providing gains to temper the losses on the stocks in their portfolio. Potential upside from equities begins after they've dropped the hedges -- until that point, the gains would likely be on the bonds and other things they may have (like potentially the deflation CPI thingies).

For the cost conscious, notice that eblontech seems to be in India where you pay much less for engineers.

One year doesn't make a thesis for a value investor. We look for the track record over 5 years or longer. It's been more than 5 years. During that time, things have improved? What metric are you cheering about after this period of greater than 5 years? How fast has value per share been compounding?

"Headlines shout of Sears’ disastrous 2013 loss of $12 per share. A longer history shows that since the merger of Sears with Kmart, about 9 years ago, sears has distributed over $66 of cash per share via buybacks " Al Bundy talking about his high school glory days? Over the past year, there were $12 per share in losses... and I'm no scientist but I presume that's why over the past year there were no buybacks. Cheers for the years when there were profits and buybacks. Why is that relevant to Bruce's thesis today?

I have a lot at stake with BAC. I don't really mind if they have to retain a lot more money -- has very little impact on IV per share if they are forced to hold it for another year or two. Meanwhile, the shares are less risky because of it. Thicker fortress walls. I had a thought regarding the 2008 bailouts today. Over the prior decade+, the banks had returned all of these earnings as dividends. The US government (and taxpayers) benefited from all of those taxes collected on the dividends. Had the banks instead retained all of those earnings for that decade+, the government would never have collected all the taxes, and the banks would never have needed the bailout. So... the bailout actually may have been less than the total tax collected on dividends paid out -- well, probably not on the biggest bailout recipients, but across the entire industry. Really, who subsidizes whom? Berkshire never needed a bailout, but never distributed any taxable dividends either ;) They do no favors for the Treasury, and get none in return. In fact, they need none in return because all of those retained earnings serve as a fortress of diversified earnings to protect itself.

I understood AIG to be trying to use this settlement as leverage in other negotiations with BAC ... but it doesn't make sense, because all AIG is doing, is hurting themselves - it's neutral to positive for BAC (though it's probably annoying to some shareholders which would like to see a resolution). Does outstanding litigation factor into CCAR?

A US taxpayer should take a look at "constructive sale". Sometimes it proves useful.

It's not clear to me which one is better. There are scenarios where one way is better than the other, and vice versa. I had a greater bias to one scenario over the other ten months ago when the stock was at $12. It does seem clear to me though that as the company accrues earnings, settles liabilities, runs off bad loans, grows earnings, etc... etc.. etc... The $15 put is more likely to be in the money over the shorter term than over the very long term. You'll get another $2 of cash earnings throughout 2015 -- likely only a minority portion of that will be returned via dividends throughout the 2015 year. So one thought I've been entertaining is that perhaps a $15 strike put for 2015 is the rough risk-adjusted equivalent of a $14 strike put for 2016, and perhaps a $13 strike put for 2017. Unfortunately though, they are not offering a $14 strike put for 2016. Not yet anyway. This isn't advice, but have you looked into writing covered calls as a way to reduce your time premium risk? The only one I see incredibly unlikely to be breached is the $30 strike call. It traded for 30 cents today. Of course, if you are thinking of selling the stock after a quick pop that would prove to be a mistake (you'd be likely buying it back for a loss), but if you intend to hold the position until maturity for tax reasons (like me), then perhaps it's not so stupid -- after all, it reduces the net risk I've exposed myself to from option premium decay. I could take that money and buy back some of the puts that I've written on other names, for example. Thanks. Yes , I have been looking at covered calls as a way of generating some income while I wait. But the 30c you noted I believe is in 2016... Why not sell them on a short term basis every two months ? (Not asking for advise. Just want to see how you think about selling covered calls.) Thanks. The shorter term calls (like the August $22 strike) tend to be at prices which could be breached if the stock traded at 11x cash earnings. The $30 strike 2016 call requires more like 13x (in addition to $2 per share per year accrued between now and then). So that's the reason why I jumped right to discussing the $30 strike 2016 -- just a valuation thing. I don't want to get called out of the stock, but if the valuation is quite decent it would be a tolerable outcome.

That's precisely why I used the 25% figure (that's the increase in the actual share count of SHLD over the past two years). I was being charitable to him by not taking into account the drop in the price. How did they increase the share count by 25% (and the share price went down) and not have it fall as a percentage of the fund? The fund appreciated 84% over the same period, not counting new capital flows into the fund. Were there net capital outflows? I think at one point there were $7 billion in outflows, but not sure of the exact number. He went from like $20B to $7B AUM -- but some of that was due to declines. Sure, there were those big declines in 2011. But these numbers are since early 2012. The fund was doing so well the past two years I can't imagine flight of capital. Maybe funds leaving FAIRX and instead going into his hedge fund?

That's precisely why I used the 25% figure (that's the increase in the actual share count of SHLD over the past two years). I was being charitable to him by not taking into account the drop in the price. How did they increase the share count by 25% (and the share price went down) and not have it fall as a percentage of the fund? The fund appreciated 84% over the same period, not counting new capital flows into the fund. Were there net capital outflows?

What's stopping him from buying more then? You don't think he's buying enough? Here are the number of Sears shares he's held in his 13Fs.... 11/2013 20,758,173 8/2013 20,392,973 5/2013 19,508,773 2/2013 18,146,573 11/2012 16,934,080 8/2012 16,829,880 5/2012 16,813,480 2/2012 16,108,492 I would be shocked if his 13G/A that he files on 2/14 doesn't show that he bought a bunch more of SHLD. I am fascinated by SHLD, but definitely do not have the same level of conviction as Bruce. The Fairholme Fund grew in asset size over the last two years. He holds 25% more shares today versus two years ago. Has his Sears position as % of net assets in the fund been getting larger or smaller over these past two years? In other words, let's say his fund grew 100x in size and over that time he bought 25% more SHLD. That wouldn't be too impressive. So I know Fairholme didn't grow 100x in asset size, but did it grow more than 25% over the past two years? It wouldn't be all that bullish if it were getting smaller as a % of the fund. It depends on whether the fund is growing faster than his SHLD position. He's actually pared his BAC position slightly. BAC was up 20%. SHLD down about 40%. If SHLD was up 20%, and BAC down 40% SHLD would be his 2nd largest position. SHLD is the only position he's been consistently adding to. (Of course part of this is that AIG and BAC have been steadily growing in value). So according to Morningstar, FAIRX returned 35.81% in 2012 and 35.54% in 2013. That doesn't include new money going into the fund (I assume there were net additions by investors). So SHLD must be shrinking in importance within the fund if he only boosted the share count by 25%.