ERICOPOLY

Well Eric, I think you are right. But only if you don’t look at cash as a strategic asset… There are not many people out there I trust to invest my free cash flow in my stead… And those whom I trust do not buy back shares at these prices… So, if someone instead is buying back shares at these prices, I don’t trust his judgment and I would much rather have the money to invest myself… Even if this means starting with 67% of the original money (assuming a tax rate of 33%). Do stupid things with $1, or do smart things with $0.67… which would you prefer? :) Gio I would prefer starting with the $1 rather than with the systematic destruction of 33% of value. Especially since it's the democratic way. People like you who don't want the stock buyback can just sell an offsetting amount of shares -- quite possibly tax-free if your cost basis is at or above where you are selling the stock. So everybody wins.

Rising US consumer spending: http://www.bloomberg.com/news/2013-11-12/bank-of-america-ceo-says-u-s-consumers-are-spending-more.html?cmpid=yhoo

You only get a dollar back through dividends if you don't pay taxes. Supposing the dividend rate is 33% (like mine), the stock has to be 50% overvalued before the dividend is the better option on a relative basis. Some people pay 45% on their dividends (an Australian holding a foreign stock). That would be a situation where the buyback is always better unless the stock is overvalued by more than 81%. Just run the math.

What is her interest rate on the student loan? Even if it is 5%, that's only $12,500 per year. All that matters really is the cash flow. Her problem isn't the $12,500 she pays on the debt... it's the $25,000 she is bringing in. Get one of these school teacher gigs that start at $50k over on that other thread. A teaching job is a great gig for a working mother, as you've got summers off when your kids are at home with nothing to do.

So we're finally getting to the end of 2013 -- another year of obscured earnings power and the stock still trading low. Good riddance. A few analyst EPS consensus forecasts: 2014 $1.33 (20 analysts) 2015 $1.59 (11 analysts) 2016 $1.81 (2 analysts) On a pre-tax basis at 30% tax rate (as long as the DTA lasts) it translates to this: 2014 $1.90 2015 $2.27 2016 $2.58 So the stock today is effectively stuck around a P/E of 7. But if you put a P/E of 12x on any of those earnings, you get at least $22.80 on the stock. So the current discount is $8.40 per share, or $96.6 billion on 11.5b fully diluted shares. So that's practically $100 billion dollar discount. Market bubble? Froth? This is no latte cart or hot dog stand. EDIT: It's roughly $140 billion pre-tax discount (at 30% tax rate). So you could say the stock is discounted for some elevated legal costs, but really? $140 billion for that?

Wouldn't the OCI hit to the balance sheet repair itself as the securities move closer to maturity? I remember Bruce Thompson saying the average duration of the portfolio was a couple of years.... This makes me think that any OCI hit would be temporary, assuming the securities continue to perform and then pay off at maturity. You can either look at the OCI hit as repairing itself through maturities, or you can look at the increased NIM on the repriced portfolio and watching it pay off the OCI. I think it's like looking at the same thing from different points of view.

There was some confusion as to how much of a hit the balance sheet will take from rising interest rates. I take it a 200 bps rise in rates puts about a $21 billion hole in OCI, because he seems to be suggesting that it takes 3 years to earn it back (using the incremental boosted earnings to fill the hole). Elsewhere, they suggested roughly $7b per year improvement in earnings from 200bps rise (so if you multiply by 3, you get the $21b estimate). This is from the Q3 CC: Bruce R. Thompson - CFO: Yeah. I think I want to think we're in the same zip code both on 100 basis point steepening as well as 100 basis point parallel shift in the guidance that we had given, whether it takes us about three years to earn back any impact of OCI, and we're a touch better than that this quarter. And if you look at the supplemental, you will see that the level of debt securities is down modestly, is we're very sensitive to managing that OCI risk.

So the 10% B3 figure comes from the "advanced approach", where they use internal inputs for credit risk: http://en.wikipedia.org/wiki/Advanced_IRB And the 9% B3 figure comes from the "standard approach", where: "Under this approach the banks are required to use ratings from External Credit Rating Agencies to quantify required capital for credit risk." http://en.wikipedia.org/wiki/Standardized_approach_(credit_risk) So anyways, I'm not sure which one the bank plans on using when they say they want to operate at 9%

Let's say their normal earning power is $23 billion (11.5 x $2). They retain 30% to support future organic growth, and payout $15 billion as a dividend. I guess there is an extra $1.5 billion there... let's say they repurchase stock with that. The severely adverse recession comes along and it knocks them down from let's say, 8.5% B3 to 6% ratio. Don't they need to cut the dividend at this point to rebuild back to 8.5%? That's what I mean by needing to keep the dividend at a level to support the recession scenario. I believe the Fed would like a substantial amount to be returned via share repurchase, because it's easier to cut when capital rebuilding is needed. Yep... I also thought it was nearly 10%. But there are apparently different approaches to calculating it. I'm thinking it's barely over 9%, since that is the "standardized" approach, and I figure standards are standards -- I've seen the bank state it two different ways, with the higher 10% figure and this lower 9% figure. But without knowing which one is the right one, I'd put my money on the word "standardized": From the Q3 CC: our estimate of the Basel 3 Tier 1 common ratio on a fully phased-in basis under the standardized approach would be just over 9% So that leaves no "end of Q3" excess to dividend out, because the bank has that self-imposed 50 bps cushion that brings the minimum from 8.5% up to 9%. Additionally, there's that new leverage ratio that they need to meet at 5%, and they only just barely exceeded it this quarter. I'm not sure if they can shift things around easily to exceed that ratio. But on the surface, and given that I'm no expert, it looks to me that being just above 5% sounds like there isn't a dam full of capital to return to shareholders, and same with the 9% ratio that has no room to return more capital if they intend to uphold their statement of keeping a 50 bps cushion. So that leaves them with the incoming earnings from here on out. It seems based upon their 9% B3 number that they don't have any excess to return yet... but rather as it rolls in.

Here is a macro musing for you... I see parallels of today with the 1970s.

This ought to help: http://www.amazon.com/Winning-Moves-1175-Classic-Ouija/dp/B00EFDXAB4/ref=sr_1_1?ie=UTF8&qid=1384133913&sr=8-1&keywords=ouija+board

Let's say their normal earning power is $23 billion (11.5 x $2). They retain 30% to support future organic growth, and payout $15 billion as a dividend. I guess there is an extra $1.5 billion there... let's say they repurchase stock with that. The severely adverse recession comes along and it knocks them down from let's say, 8.5% B3 to 6% ratio. Don't they need to cut the dividend at this point to rebuild back to 8.5%? That's what I mean by needing to keep the dividend at a level to support the recession scenario. I believe the Fed would like a substantial amount to be returned via share repurchase, because it's easier to cut when capital rebuilding is needed.

I'm finding what I need in BAC. It just clicks.

Regarding share repurchases, I wonder if it will go something like this: Q2 13: ~$1b Q3 13: ~$1b Q4 13: ~$1.5b Q1 14: ~$1.5b Q2 14: ~$2b Q3 14: ~$2b Q4 14: ~$2.5b Q1 15: ~$2.5b So far it fits the pattern. Except Q3 came in $100m light. I'm just trying to make sense out of why they've steadily held to just $1b per quarter so far. They might have been told to meter it out over the year as earnings come in, and to cut it back if they don't. After all, the whole point of the buyback instead of dividends thing (from the Fed's point of view) is to make sure they can cut them back in onset of recession. It would defeat the purpose if the banks were to buy it all in the first week of the year. In fact, that makes such perfect sense that I'm certain this is what is going on.

I agree that if they return $15b with Fed approval (as dividend no less) it will be a clear indication that both the Fed and BAC believe that things are so good that it can go on in relative perpetuity. I also, however, believe that by the time the bank is in that kind of shape where they could get such approval the stock will already be up there. You know, it's funny because I've heard people say completely the opposite -- that buyback programs are just there to drive up stock prices so executives can cash out. So here you are arguing totally the opposite. I don't claim to be right, it's just I don't follow the reasoning. Many times I am wrong so don't take this as if I pretend to know everything simply because I argue. Alright, so they approve a $15b dividend which cannot be easily retracted. This can go on as long as the economy goes well -- I agree. Then, beginning in June, we tip back into recession and NIM gets squeezed as long rates fall again. Perhaps the 10 yr drops to 1%. Also, they have to boost reserves. So that's why I don't think they'll approve $15b in dividends. It cuts it too fine when you throw in recessions. I think the Fed will let them pay out a dividend that takes recessions into consideration. Then they will approve extra capital return above that through share repurchases -- with the intention of cutting them if recession pops up. I doubt they will take into account the tax benefits when they approve the dividend -- the tax benefits will be all used up, and then what? So they will base recurring payouts like dividends on the after-tax income IMO.

I agree that if they return $15b with Fed approval (as dividend no less) it will be a clear indication that both the Fed and BAC believe that things are so good that it can go on in relative perpetuity. I also, however, believe that by the time the bank is in that kind of shape where they could get such approval the stock will already be up there. You know, it's funny because I've heard people say completely the opposite -- that buyback programs are just there to drive up stock prices so executives can cash out. So here you are arguing totally the opposite. I don't claim to be right, it's just I don't follow the reasoning. Many times I am wrong so don't take this as if I pretend to know everything simply because I argue.

There is also correlation between improving company prospects and rising dividends. But hiking the dividend doesn't raise the company prospects.

It might be rare to have one trade with dividend yield in excess of 5%, but I think you are drawing the wrong conclusion from that. I believe you also need to check the dividend payout ratio. Is anyone on the DOW paying out enough to support a dividend yield in excess of 5%? Take At&t for example which already pays a 5% dividend. Your theory suggests that the stock would jump 20% in response to a 20% dividend hike (paid for by cancelling share repurchases), and with no change in business results to justify it. I would bet heavily against that if this were something we could wager on.

A $300 bn market cap for BAC suggests that they already earning $2 per share and trading for 13x earnings. By contrast, JPM pays a 3% dividend and trades for only 9x forward earnings. So do you reckon that JPM would soar 44% if they raised their dividend 200 bps?

I'm in favor of not paying a dividend, instead using the "would be" dividend cash for retirement of all of the preferred stock. Californian BAC shareholders will pay about 33% top rate on dividends. That leaves only 67 cents on the dollar. The preferred in aggregate yield 7% after-tax. So... in terms of after-tax dividend value, calling in preferred stock would give Californian shareholders slightly more than 10% after-tax returns. And meanwhile, there is the add-on effect of reducing risk to the common stock. I prefer buybacks too. No argument there. I disagree about the dividend. I don't think it did anything for Fairfax's valuation (it's not my only example). I think stocks trade primarily on earnings and if you have them, you get the price you deserve (a lower valuation if there is uncertainty, or a full valuation if there isn't).

I'm in favor of not paying a dividend, instead using the "would be" dividend cash for retirement of all of the preferred stock. Californian BAC shareholders will pay about 33% top rate on dividends. That leaves only 67 cents on the dollar. The preferred in aggregate yield 7% after-tax (it is paid with after-tax profits that otherwise belong to common shareholders). So... in terms of after-tax dividend value, calling in preferred stock would give Californian shareholders slightly more than 10% after-tax returns. And meanwhile, there is the add-on effect of reducing risk to the common stock. I would need to find a corporate bond yielding 18.5% in order to replicate a 10% after-tax return. (top income rate at 46% paid on bond income is higher than the 33% dividend rate)

For a more exact hedge, you should just buy the product that prem shorts. Otherwise, if the equity price stays the same, you would lose on your calls (the time component) and break even on the index. Way too dangerous. FFH could go down with the market at the same pace. Then you are doubly screwed.

This hindsight hedger says that he should have just bought an at-the-money index put and rolled it. That would have cost a lot less. Similarly, any private owner of FFH shares that didn't like the hedges could have done the same (purchasing at-the-money calls to offset the onslaught of losses from the look-through index shorts). Next time he hedges, and you disagree, just buy index calls to put a max cap on your share of the potential hedging losses.

There are a lot of intangibles that go into a "good school". My daughter is in second grade public school and she has a violin assigned to her that she takes home and practices with -- brings it back in to music class once a week. Right, whereas at a lot of schools they don't do that. This is for all of the kids in second grade. Also, optionally you can sign them up for enrichment classes that meet for an hour after school each day. Take a look at the variety here, it's totally awesome: http://www.montecitou.org/cms/lib/CA01001556/Centricity/Domain/67/Fall%202013%20After%20School%20Program.pdf So I went to a private school that wasn't anywhere near as good as this public school. I remember class sizes being 20 or so, whereas here at this public school it's about 15 kids per class (and to top it off, there is a teacher's assistant in each class).

So there were $255 million preferred dividends declared in Q3. That eats up $400 million in pre-tax profits at 35% rate. Okay, so eliminating the $16billion of remaining preferred would leave only $600 million of pre-tax quarterly revenues needed to bring things up to 13% return on tangible equity. Yes they should be able to do this without much magic.