ERICOPOLY

Anyways, the 10-Q explained that the long end of the curve rose 80 bps during the first 9 months of the year. So if rates rose a further 200 bps steadily over the next 24 months, or even the next 12 months, they should easily handle it if they just keep doing what they did this year. I also found it interesting that they make 3% NIM on their loans and leases when you exclude the impact of their trading operations. They explain that part of the trading operations is hedging their interest rate risk.

The stock compensation expense... The bank decided at the end of 2011 that they would cut the amount paid to employees in cash, and replace it with stock. This was explicitly stated to us shareholders as a means of rebuilding the balance sheet. In those days, they would issue stock at $6 per share (not to Buffett, but to the general market)... good grief. So can't they go back to cash compensation now?

We do it though eventually. We concentrate the bright students and send them to place like "Stanford". Right.... so do we just eliminate private pre-schools? Only private elementary schools? Only private middle schools? Only private high schools? Or do we also eliminate private Universities? I mean, it's such a good idea to get rid of private schools, so why not go all the way?

I know, but I also didn't give any of their employees a raise -- compensation expenses are probably going to climb of course. So that will eat up some of what you expect to gain from share count reduction. Then they plan to reduce LT debt by $20b next year. And maybe they'll retire $10b in preferred. Their mortgage origination business (not counting refinancing) is very small relative to peers -- they can grow it. It grew 15% this past year. They just have a lot of rebuilding left. Plus, they'll probably cut the corporate tax rate down to 28% at least -- it can't stay at 35% anymore. I mean, we should never have separated from Great Britain in the first place... over taxes! How ironic is that? They've agreed to take theirs down to 20%. A 7% reduction would boost earnings by 15 cents a year, roughly.

Over the last twelve months, servicing income has dropped from $1.6 billion per quarter down to just 600 million per quarter. They reduced LAS expenses from $2.9b to $2.2b over the same period. So that's $1b less servicing income, and $0.7b less LAS expense. This has been a bad trailing 12 months of waiting for LAS cost savings to shine through. PS: They sold off a lot of servicing rights over the past year. How long will it take them to rebuild their servicing income stream back up to $1.6 billion per quarter level? Have they talked about that? And it was $2.1 billion per quarter back in Q4 11. Am I counting the right thing... does servicing income bounce around with the MSR valuation in such a way that is obscuring reality? EDIT: Ahhh.... page 44 of the 10-Q deals with servicing rights. It says the sales have led to $150m drop in quarterly revenue since Q3 2012. Okay, page 44 of the 10-Q claims that the MSR sales have reduced revenue by about $150m per quarter since Q3 2012.

They provisioned $300m for credit losses in Q3 and earned 28 cents a share. Somewhere I saw it suggested that about $1.5b would be the normalized quarterly provisioning. That's $1.2b that effectively padded earnings. At 35% tax rate, about 6.8 cents per share. So that 28 cents net income adjusts down to 21.2 cents. That's only 6.3% annualized return on tangible book... Then add the remaining 600m per quarter of NewBac savings (it adds 3.4 cents per quarter for total of 24.6 cents): 7.3% annualize return on tangible book after pretending the NewBac savings were complete.. Then add the remaining LAS cost savings of $1.7b per quarter (it adds 9.6 cents per quarter for total of 34.2 cents): 10.2% annualized return on tangible book. So there you have it... completion of New BAC, LAS expenses down to only 500m per quarter, and normalized provisioning of $1.5 billion gets you only to 10.2% return on tangible book. You need an additional $1.65 billion worth of pre-tax expense saves per quarter to get up to 13% return on tangible equity. Where can $1.65 billion come from? Well Q3 had $1.1b litigation expense, so roughly 600million in excess litigation expense if 500 million per quarter is considered to be the normalized level of litigation expense. Saving 600m a quarter there would add 3.4 cents per share per quarter, bringing the quarterly total to 37.6 cents a quarter. That's 11% return on tangible equity. Then you need to merely find another $1.05 billion (pre-tax) of expense savings per quarter. It's not coming from litigation. It's not coming from LAS. It's not coming from NewBAC. Where is it coming from? I guess it doesn't have to come from expenses. They could instead generate an extra $1.05 billion in revenue per quarter. But there you have it -- we've got about 11% return on tangible equity if all of the planned expense cuts were already phased in and litigation expense were down to 500 million per quarter normal level. That would be about $1.48 per share in earnings, or $18.50 share price at 12.5x earnings. Assuming $13.50 tangible book value and 11% return on tangible equity. So about 34% increase in share price. But let's talk about 13% return on tangible equity -- they can get there, but they either need to find more expense savings or they need an extra $1.05 billion per quarter in revenue. I guess Q3 was crappy fixed income trading and the mortgage origination business is slow -- they have loans in runoff that will be replaced with new loans, and such. Ideas on how much should be contributed by each of those categories? EDIT: Well, I guess they grew total loans and leases by $41 billion over the past year. Two more years like that at 5% yield, and that's $1b a quarter in revenue. They've already got the deposits just sitting there. Plus, I believe they got rid of some loans that were yielding nothing and yet still added $41 billion to total loans -- all the more reason why they could get $1b a quarter extra in revenue just from the loans... over next two years. So I guess I feel better now... getting to 13% return on tangible equity by 2016 is attainable if they get loan growth similar to last year's over each of the next two years. That would be $22 share price at 12.5x earnings -- it's $1.75 per share earnings based on $13.50 TBV and 11.5b shares. But that doesn't include the money they generate between now and then.

I think it's at 9% on TBV these past two quarters (averaging 30 cents a quarter). Those quarters were both aided by reserve releases. It is still pretty ugly right now, although I don't believe it's ugly to the tune of $75 billion dollars which is the current discount to book.

New public offerings are sexy, but beware when they split -- that really keeps you up at all hours of the night/morning. You get a better night's sleep going with a mature stock, but not as sexy.

It was $13.62 at end of September. By this time next week, you have another 1/2 quarter of earnings. Maybe another 15 cents the way the last two quarters went. So that's $13.77. Today stock hit low of $13.85. You've only got 8 cents or so above next week's estimated tangible book. EDIT: Okay, it hit low of $13.80 towards the end. So 3 cents above next week's estimated tangible book value.

Well... $2.3 billion. That's slightly less than 1/2 of what they generated in Q3 pre-tax. So this is like getting a 6 week "time out" by your government/parents.

Compared to "historical valuation", the float is worth less today because of the interest rates. A 2.6% 10 yr Treasury bond taxed at 30% only generates 1.82% after tax. My view of a lot of these insurers is that they would be most attractive if purchased at the peak of the interest rate cycle, not at the bottom! So that's also worth somewhat of a discount compared to historical P/B trading levels.

What is the P/E of MKL if you take the look-through earnings of it's equity holdings? I can understand a somewhat lighter valuation for MKL given where we are with general equity prices. Less upside to book value if markets don't keep rising. So if you take out rising equities from the equation and just look at how much they actually earn on a look-through basis, how much would the forward 12 months earnings contribute to today's book value, expressed as a percentage of book?

It's also just plain common sense that there will be more wealth disparity as the boomers get older. Demographically, who are millionaires? People over 55. Where is the age group of the boomers? Oh yeah, people over 55. So should we or should we not have more wealth disparity with the boomers being over 55 versus 20 years ago when it was merely 35 year olds? Damn right we should!

There are no expenses to pay if everyone is retired. No police, no firemen, no teachers. No property tax collectors. No prison guards. Nobody on temporary unemployment. The have roads, fireman, cops, etc... etc... in Australia too. They have high sales taxes, high income taxes, etc... etc... But these are all things that tend to cost you less when you are in the dumps financially -- you don't pay sales taxes when you have no money to spend, and you don't pay income taxes when you have no income. So when you can best afford the tax, you pay it then. They don't prey on the weak broke homeowner like a sick society.

The have roads, fireman, cops, etc... etc... in Australia too. They have high sales taxes, high income taxes, etc... etc... But these are all things that tend to cost you less when you are in the dumps financially -- you don't pay sales taxes when you have no money to spend, and you don't pay income taxes when you have no income. So when you can best afford the tax, you pay it then. They don't prey on the weak broke homeowner like a sick society.

One thing that is positive about property taxes is that people who can't afford to pay the tax can sell the property and move to an affordable place. This keeps the properties cycling through the system. A low ( or non-existent ) property tax causes old world problems ( ala the lords and counts of England who keep passing their titles and land to their heirs) which I think is not desirable. Australia has a land tax, but it only applies to the land value. Plus, everyone is exempt for their primary home, and you get a $400,000 land value exemption which allows you to have a small holiday home without taxation. But that land tax is only for land, it doesn't apply to improvements. So that fixes the argument about people hoarding parcels of land all over the place -- if you try that in Australia, you are hit with the land tax.

Property tax though really just funds schools - Texas has no state income tax. Strangely enough I dont see property tax as a housing expense. Its more of a general tax, similar to a medicare levy, gas tax, or anything else. Property tax is embedded in rents so pretty much everyone pays it. Remove property tax, and add back a higher sales tax or Regarding real estate, I think RE can make a good investment if you can find something that cash flows. You can get a great cash flow return on properties in Houston State income taxes at least make more sense because they tax you in the year you make the money. They take it right out of your paycheck before you blow it on a bad investment, a new car, gambling, drinking, whatever... you settle the bill when you can afford to, in proportion to your means of income. Where did the money come from to buy the house in the first place? Income... after-tax income. A lot of people work and retire with their only asset being their house (paid off). So that is the sum total of all of their after-tax savings. And then they just keep taxing that same pot of money over, and over, and over again. I'll tell you why it's messed up -- once you retire, where does the cash flow come from to service the ongoing tax bill? That's just the thing... replacing the property tax with an income tax would give people a secure retirement by allowing you to plan what your expenses will be. You can plant a little garden, walk to the stores (get rid of the car), cancel cable TV.... but the property tax is the thing that just keeps coming after you every year, and keeps rising with property inflation.

I read this guy's article a while back. It sounds convincing too -- except it sounds convincing that the settlement should NOT be approved because of BONY's conflict of interest: http://www.subprimeshakeout.com/2013/07/objectors-siren-song-enchants-during-article-77-proceeding.html But I'm not a lawyer and I don't understand what the important points are.

So let's say you buy a $500,000 home in Texas, and pay 2.2% tax on it every year. You've got a first year tax bill of $11,000 which will grow every year at the rate of increase in the market price of your property. So... How much money do you need to put in an extremely conservative fund that generates 2.2% income every year to service the tax? And that 2.2% yield is going to predictably rise at the pace of the market value of your home? This has got to be one hell of a blue chip investment! You probably need to set aside at least another $500,000 more in this investment fund just to be sure that it will service the tax in perpetuity. But again, where is this investment to be found? Well, probably have to buy your neighbor's house too and rent it out.

Florida got into a lot of trouble -- it too is full recourse. But it's been one of the worst markets we have. So I feel like the recourse/non-recourse argument is full of holes.

Sickeningly true. It seems to compound capital, you need to do your best to avoid purchasing real estate. I live in Texas, in an area with crazy demand for housing at the moment (Austin). I calculated all in costs for the house we have a mortgage on versus renting and then investing the principal amount. I realized that the low interest rates + leverage from the mortgage was hard to beat from an investment standpoint, especially when taking into account the cost to rent. Here is what I calculated: cost to own = interest portion of mortgage + insurance + taxes + other costs versus cost to rent = monthly payments For a comparable place, we would be paying much more in rent, so we would not get the increase in equity every month (excluded from the cost to own above). then comparing possible appreciation of the home leveraged 4:1 (I own 25%) versus my own investment returns using the 25$ of the house, which are unlevered, I was concerned that I couldn't match the levered returns. Additionally, the house diversifies the investments and the low interest rate is somewhat a hedge against inflation. Prices are currently very high in Austin for real estate (and rent), so if someone has a better way to think about the above, I'd be glad to hear it; I kind of wanted to sell the house this summer and move downtown. I think it is just too cheap to live in my house right now, versus renting. Nutty! 2.2% of the current market value. So if you bought the following home in 1972 and raised your kids in it, you are now paying $22,000 a year in property tax: http://www.realtor.com/realestateandhomes-detail/3505-Country-White-Ln_Austin_TX_78749_M79473-84242?row=6 How much social security do you have left after you pay that $22,000 of tax? There is something missing from the state flag of Texas: A hammer and sickle! You might be 90 years old today and bought that home when you were 49, thinking you would retire there on your pension. Now the state says it's theirs because you can't pay your taxes and they come with the sheriff to kick you out of the home you already bought and paid for!

Suppose you buy a house in Texas when you are 30 and you live in it until you are 85. You wind up paying 1.8% every year in property tax. So you buy the house twice. They don't assess property tax on your primary home in Australia. So like, when you Texans say Australia has this bubble and that bubble, look at the bubble world you live in. Every 10 years you have to pay another 18% for your house.

You can still purchase many of them through their US wrappers. For example, FFH is an international stock, but you can still purchase it in a Fidelity IRA -- you just buy the wrapper... FRFHF: http://finance.yahoo.com/q?s=FRFHF&ql=0 Is it a US listed stock? No! Can you buy it in your Fidelity IRA? Hell yes you can.

I'm just explaining what I did and what I'm thinking about doing... but I have my own risk tolerance and it may not be right for you. I'm completely OKAY with losing the entire put premium, you have to be if you play this game. Note than I'm an amateur, self-taught, etc... etc... We may very well be on the edge of a bad recession that could eat up all of their earnings for a couple of years. Or it could earn $2 a share and still be priced at $12 in two years. That would be only 6x earnings but that multiple happened to the market index back in 1981 or 1982... So don't ask me what you should do. Hell if I know.

The put gives me the right to sell the stock at $12, no matter how low the stock is trading. I put the trade on when the stock was at $12, so I had none of my own equity in it, thus the trade has no recourse against my own equity (the only cash of my own that I sunk into the deal was for the cost of the put, which I regard as part of the cost of the "non-recourse" financing). Right. And here is something else to chew on... you can write covered calls to defray the cost of the put. But that might get expensive if the stock soars above the strike price on the calls. But the $25 strike 2016 call is selling for 30 cent bid. You can write that call and use it to pay for roughly 1/2 of the incremental cost of rolling to the 2016 $12 strike put from the 2015 $12 strike put. I'm just a bit greedy -- I want to see if the stock can spike up to $16 or so over the next 4 months, then roll to the $12 strike put for less incremental cost, and write the $25 strike call for more than 30 cents. But that's my greed -- maybe it will never happen.