ERICOPOLY

Then they didn't mark them to fair value -- so they violated the accounting rules. Is that legal?

Or at least, what legal problems would arise if they deliberately refused to mark to reasonable fair value in the merger?

I'm really dense and usually just misunderstand plain English... So given that, why is this not clear evidence that the real estate has been marked to fair value in the merger? After all, doesn't GAAP mandate that they do so?

The Kmart in Goleta is pretty vacant of customers despite not even having a Target nor a Walmart to compete with. Now that is pathetic! The nearest Walmart/Target stores are like 45 miles away in Ventura. The Goleta KMart also serves the neighboring city of Santa Barbara. So no, to believe that Walmat and Target are killing them would be delusional. I heard Santa Barbara is a rich city, no? If there are no Walmarts there to compete with Kmart, at the minimum, SHLD should close the store and rent it or sell it to Walmart. :) How would you evaluate the value of this Kmart property? It sounds like it is in a good location. There are plenty of struggling people here that clean houses, wash dishes, mow lawns for a living. The store is just hideous inside. It is located across the street from Home Depot and Costco, which are both inviting and thriving. Goleta's Kmart -- if it can't thrive without Target and Walmart, then what possible hope is there for the rest of their stores?

Last night I tried shopping for clothes on Amazon. Sort of hard to try them on. And the traditional stores don't often have what I want in my size/color. What I need is a store that has a "demo only" inventory, where they won't sell the demos. That way I could go in there and try it on, and then close the deal online. Sears could be that store overnight if they had the widest "demo" selection at the best online pricing.

The Kmart in Goleta is pretty vacant of customers despite not even having a Target nor a Walmart to compete with. Now that is pathetic! The nearest Walmart/Target stores are like 45 miles away in Ventura. The Goleta KMart also serves the neighboring city of Santa Barbara. So no, to believe that Walmat and Target are killing them would be delusional.

Two years ago, with a net worth of more than $5m, I couldn't get a loan for $100k. I was trying to purchase a $200k property in Sacramento, a 4-plex with $32,000 gross rental income. The property was fully occupied, the rents were below market. Wells Fargo and Bank of America, plus other local banks. None would bite. They wouldn't loan me under 2% of my net worth! On a property where I was putting 50% cash down in a market that was already crushed in valuation! The loan amount was roughly 3x the gross rent! And then John Stumpf (Wells Fargo CEO) would get on TV and claim they wanted to make loans but there were no creditworthy opportunities. What an unbelievable statement. Their chief excuse was that I didn't have experience as a landlord. I lived a thousand miles away in Seattle and, as I told them, was going to hire a property manager (with experience). Idiocy at its best.. and yet the banks have turned it around and we are buying shares in them? I wonder who is crazy!!! maybe I should be getting rid of my shares in BOA.... Would you loan me lots of money at these rates fixed for 30 years. Or would you rather borrow from the fed at practically nothing and loan it out short term for a better spread? It seems to me that as a shareholder longer term they are doing what is best for me. Plus what gets them to better profits now. When rate go up I can see them starting to loosen. I wasn't looking for anything that long term. I would have been happy with a 25% down, 3 yr fixed at 7% rate. The gross rental yield was just so fat it was ridiculous. Anyways, you probably heard stories about how it was all cash buyers bottom fishing in markets like that. From my point of view and experience it had nothing to do with a lack of creditworthy borrowers. Rather, just banks that wouldn't lend. On a rental, cap rates in the teens with a big down payment should be credit enough. The cash flow and risk comes from the property itself. $100k loan, $32k in gross rents... 50% downpayment... that's not a creditworthy situation Mr. Stumpf?

That seems to illustrate a problem with the "Store within a store" concept. I believe those items were in the "Humble Brothers LLC" storefront, but it's all within the Sears.com domain. Might not want to bring your kids to Sears.

Well, admittedly I had no idea that Sears sold this kind of thing: http://www.sears.com/morris-leather-string-bra-g-string-w/p-SPM7505343902?prdNo=27&blockNo=27&blockType=G27 Go to their website and browse the "ELEGANT MOMENTS" brand. Bizarre. 1) Leather spanking skirt 2) Chain leash with leather Unfortunately when actually clicking on these items you get errors claiming "Whoops, that wasn't supposed to happen".

And then if you pull up a 5 year chart, you might take a guess at why I decided to buy it back at $42-$43. I feel like making 25% to 50% in a year is not unrealistic. But it's just speculative.

Probably a long wait. Just like if I had to dig a deep hole with a spoon. Meanwhile the money I deploy could be earning cash elsewhere. So whatever that real estate is worth if all sold today, is not what it's worth in today's stock price if liquidated not until far out in the future. So I believe if Eddie could communicate with his investors what the time horizon is, and whether full monetization is even on the docket, then the stock could price it in. The complete mystery of this thing leaves it in volatile trading land.

So my more complicated view on SHLD is one of mostly speculative behavior -- like I said, it's what I do most of the time is speculative-like behavior :) The stock gets driven down: 1) This happens because lack of clear horizon at relatively higher price allows stock to be knocked down to lower price by traders. 2) At lower price, people feel comfortable that SHLD had lots of assets that far exceed the liabilities + market cap. The stock gets driven up: 1) This happens because at lower price people are attracted by the downside protection of the assets, shorts then cover 2) It rises in price until it's unattractive to the bottom fishers without a clear horizon. Some of them sell and this is exacerbated by short interest rising. So without a whole lot of things to do that make perfect sense like the BAC investment in 2011, I'm acting like a trader here. There's the ugly truth. I really shouldn't have bought any at $60 because I know myself better than that -- without a clear understanding of catalyst, I just don't have the patience to hold for years and years. But I'm glad that I can be honest with myself about the game I'm now playing in the stock.

BAC and FFH were far easier to see the path to success. A financial (post runoff bleeding) like BAC can earn 13% on tangible equity. On $13.50 of equity that's $1.75 of earnings and you are only paying $5 for the stock in your example. So that's more than a triple in value once those earnings show up. Then you only have to ask when the earnings will show up. They were well enough capitalized to survive during the interim and therefore the only thing to do was to wait for the expenses to come down. A bonus is that the company is highly visible -- it's not some obscure little microcap that the market can ignore for a while after earnings rebound. So this catalyst (expense reduction) had a two year or three year timeframe. Compare that to SHLD -- there is no nice tidy 2 or 3 year timeframe that I'm aware of that will assuredly bring a triple in price.

That was a good one. And in my case past performance is truly not indicative of anything. Once again I find myself sitting here full of self-doubt. I am having an internal dialogue about how whether I see in SHLD what I want to be true. Regarding the real estate, I have been asking myself how much a gold bar is worth buried a mile in the ground and with only a spoon to dig it out.

Agreed, it's just circumstantial evidence at best. But it's one of those little tidbits of info that I think the average investor will look back 5 years from now and say to themselves "how the heck did I not see this company for what it was with all those signs they were giving us?" Once you add up all the little things that are going on it starts to paint a picture. A picture I consider more beautiful than any Rembrandt I've ever seen. Isn't that typically the neighborhood where such wealthy people would tend to live? I live in Montecito and we have a lot of Hollywood types here. They don't live here for the purpose of collaboration with each other. Buffett and Munger live nowhere near each other.

Two years ago, with a net worth of more than $5m, I couldn't get a loan for $100k. I was trying to purchase a $200k property in Sacramento, a 4-plex with $32,000 gross rental income. The property was fully occupied, the rents were below market. Wells Fargo and Bank of America, plus other local banks. None would bite. They wouldn't loan me under 2% of my net worth! On a property where I was putting 50% cash down in a market that was already crushed in valuation! The loan amount was roughly 3x the gross rent! And then John Stumpf (Wells Fargo CEO) would get on TV and claim they wanted to make loans but there were no creditworthy opportunities. What an unbelievable statement. Their chief excuse was that I didn't have experience as a landlord. I lived a thousand miles away in Seattle and, as I told them, was going to hire a property manager (with experience). So how did you pay for your current home in CA? Did you pay cash? I leased for the past year, and two weeks ago I signed a purchase option expiring in late July 2016. Thus far, I've paid cash for 10% of the negotiated final sale price.

Thank you for making it rational. I too read Klarman's letter and I found it bizarre when he fixated on this. I wonder if it would be interesting to him to check on whether the market has been up on 20 consecutive full moons? Failing that, we could look for crescent moons, etc...

How did you get to those values on each brand? at least $4.4b Die Hard at least $4.4b Craftsman at least $4.4b Kenmore Collectively worth at least $13.2b EDIT: For example, are you using the $10.5b market cap of Whirlpool (WHR) as an input for the value of Kenmore, or some other method? Ericopoly - I think what Luke meant was that Kenmore, Craftsman, & Diehard all together are worth more than market cap. Also, the real estate by itself is worth more than the current market cap and the inventory next of payables is worth more than current market cap. That how I read it. Buckeye is reading it correctly. I don't know how I read it that way -- I went back and read it again and you worded it pretty well. Slow brain this morning.

How did you get to those values on each brand? at least $4.4b Die Hard at least $4.4b Craftsman at least $4.4b Kenmore Collectively worth at least $13.2b EDIT: For example, are you using the $10.5b market cap of Whirlpool (WHR) as an input for the value of Kenmore, or some other method?

Two years ago, with a net worth of more than $5m, I couldn't get a loan for $100k. I was trying to purchase a $200k property in Sacramento, a 4-plex with $32,000 gross rental income. The property was fully occupied, the rents were below market. Wells Fargo and Bank of America, plus other local banks. None would bite. They wouldn't loan me under 2% of my net worth! On a property where I was putting 50% cash down in a market that was already crushed in valuation! The loan amount was roughly 3x the gross rent! And then John Stumpf (Wells Fargo CEO) would get on TV and claim they wanted to make loans but there were no creditworthy opportunities. What an unbelievable statement. Their chief excuse was that I didn't have experience as a landlord. I lived a thousand miles away in Seattle and, as I told them, was going to hire a property manager (with experience).

Depending on inflation, 6% or 7% earnings yields could be just as good as getting 15% earnings yields. PE of 20 is a 5% yield and PE of 15 is a 6.7% yield. So a 170 bps movement in inflation can make a large difference to market levels (a 33% increase) without having any impact whatsoever on real earnings yields.

Okay, so let's throw out the PE analysis since it is easy to be misled into thinking the market is cheap when things like rising deficits can pump up profits. Let's instead go with the old standby, market cap to GDP. First, here is Japan: http://www.vectorgrader.com/indicators/japan-market-cap-gdp It looks like the Japanese market has traded above 80% of GDP at least once during every 5 year period dating back to 1990. That's what a period of deflation has done to them. Then there are those brief periods where it bounces off of 50% of GDP. Most of the time it's in-between.

Yeah that was good. I hope I'm not distorting things by pointing out that competition won't be driving margins down if ROIC is at such low levels today. Presumably companies are investing capital into competing with each other, but getting nowhere in their efforts? One would tend to think that ROIC would be high if there were such fat low hanging fruits to be had. Then the paper goes on to point out that profits were driven up by falling interest rates and falling labor costs. Again, not something that Watsa sees rising on either count. The only explanation left from Ned Davis is the bit about the falling rate of savings and high deficits.

I asked this question before and couldn't get a very satisfactory answer. How do margins come down from competitive forces without competitors expanding/investing/hiring? Suppose a company is making fat margins, and further suppose this is widespread so that margins are fat in the aggregate... then shouldn't there be some boom in hiring and investment before the margins come down? You can't launch a competing product without a lot of investment... isn't that true? I'm interested in understanding the mechanics of what happens in order to bring about the lower margins. I doubt the margins are coming from optimal leverage of existing productive assets -- I thought I heard that we have idle capacity. Or are we getting away with paying too little for labor -- are there pressures that will bring up the labor costs? Or is debt too cheap? But isn't this a period of very low rates for a long time, per Watsa and Company? Or are commodities too cheap? I thought Watsa and Company believed their pricing went hyperbolic. Is energy too cheap? I hear we have natural gas cheap for a lifetime ahead of us, and solar prices will soon fall below cost of fossil fuels. So I would like to hear how competitive forces are going to spring into action without first igniting an investment and hiring boom.

The catalyst was on the long side, as I argued back when it was a $30 stock. Sure, they were bleeding cash... because the Model S hadn't been released yet! I'm kicking myself for not spending more time to realize that the shorts couldn't see a few months down the road and were looking only at the prior quarter's results.