ERICOPOLY

LOL. You are always so optimistic. Let us ballpark this. I think publicly traded stocks total profits are something like $1200 billion very roughly. This is at a profit margin of about 10%. Say profit margins drop by 2.5% that is about $300 billion or before tax about $400 billion. This amount would go to either consumers via lower prices or to employees via higher compensation or higher costs of raw materials. Let us assume all this goes to either higher compensation or to raw materials for simplicity. I would think of this about 25% would easily go to foreign exporters/subsidiaries as either compensation or raw materials. So at most we have $300 billion in additional money in the hands of consumers. Does this give enough of a boost to bank's profits, given that non-financial businesses that are major customers of banks have lost about $400 billion in pretax earning power? Vinod Hire 6 million people and pay them $50k each. That's $300 billion. Nice dent in the unemployment rate. What drives bank consumer losses BTW? Hire them? For something productive? Don't bet on the government doing something productive. On the other hand, a $300B cut in the most regressive tax of all, the employment security tax, paid by both individuals and employers would stimulate hiring in 1001 productive (translation profitable) ways. The unemployment rate would soon come down to normal as increased profits by the forgotten engine of the economy, the small businessperson,would bring into the workforce less desirable workers that big businesses won't hire. Then, GDP would increase sharply as it has not with handouts. It's been a long time since January, but I believe I was referring to private sector, not government hiring. The discussion was of what would happen if profit margins came down due to competition from upstart competitors. I was reasoning that if the upstart competitors hired workers and research labs/factories, etc... well then it would translate to wages/hiring, GDP growth, etc... Translation: instead of one company employing 1,000 workers enjoying fat profits without competition, there might be a second or third company each with 1,000 workers slaving away attempting to steal market share. Profit margins fall due to competition, but people are getting back to work too. So when will the hiring boom happen? Don't people keep forecasting that competition will take away the fat profit margins? Mechanically, how does that happen if not from new competitors?

Ericopoly, You wrote a post which I remember was quite delightful in its definition of life's happiness coming from making other people happy. Do you remember in which thread it was? Sorry but I don't.

It's always possible that Arden doesn't view his diatribe as condescending.

It is okay to feel depressed when your portfolio is down 50%. I do. It is okay to feel euphoric when your portfolio is up 50%. I do. It is important to invest rationally despite these emotions. That is what i try to do. Not okay -- insulting others, acting condescendingly. I've done it, but I'm not proud of it.

The very name of the thread ought to have been a tipoff. However an emotionless person likely wouldn't have understood the nuance. Lighten up! Enjoy the journey, investing isn't a destination.

Hal2000 has spoken. You've got the wrong handle.

At some point last year I read a statement from Moynihan on this topic. He said about 1/3 dividend, 1/3 buyback, and 1/3 retained for organic growth.

The Fed has been saying that buybacks/dividends cannot be 100% of projected earnings because they want the banks to be consistently building capital ratios. But if you are already at your 2019 projected target ratio of 9%... then why cannot you return 100% of projected earnings? For what purpose would continued capital retention be necessary if not for satisfying regulatory ratios?

Their solution: Australia Post is required by law to provide a universal letter service which is reasonably accessible to all Australians http://australia.gov.au/directories/australia/australia-post

The Australian Post charges 60 cents for a small letter (vs 45 cents at USPS), yet it still loses money on the mail delivery. However it does generate an overall profit due to the delivery of profitable parcels: http://www.smh.com.au/national/australia-post-increases-profit-20111012-1ll38.html UPS and FedEx -- of course they look good. They don't deliver letters! They're taking away the profitable business from USPS and leaving them with the loss-making letter business. Basically privatizing the profits and socializing the losses. Go USA!

Yes. :) That was a good quote! I like this comment from Jeremy Grantham: The idea that a bigger safety margin is better thana smaller one, that cheaper is better than more expensive,that more cash is better than less cash, deserves, in modernparlance, a “Duh!” It is just rather obvious, and going onabout it for 850 pages can get extremely boring. http://www.scribd.com/doc/30407102/GMO-Grantham-Quarterly-Apr10

Because it is nothing at all more than... buy low / sell high. Implicitly you must be doing a valuation appraisal to understand "high" vs "low", therefore... value investing. So the father of value investing stumbled upon something that had been known for a very long time...

They purchased large positions in US banks in 2008/2009. They chose WFC and USB. I think they paid about $20 for WFC. Then in 2011 WFC went as low as $22 and they didn't purchase more, so I reason they are not interested in adding more to that sector yet (US banks). They added Bank of Ireland last year. Mr. Watsa gave a speech a couple of years ago where he described valued investing as purchasing shares when companies run into a "temporary" problem. Then the reiterated the word "temporary". Okay, now I can see where BAC's problem is "temporary" (legacy loans + interest rates), I can see where AIG's problem is temporary (interest rates), but I can't see where RIM's problem is necessarily "temporary" (need to keep inventing in a very competitive space to survive). Eric, are you still close to 100% BAC, or have you branched out at all? 60% now.

They purchased large positions in US banks in 2008/2009. They chose WFC and USB. I think they paid about $20 for WFC. Then in 2011 WFC went as low as $22 and they didn't purchase more, so I reason they are not interested in adding more to that sector yet (US banks). They added Bank of Ireland last year. Mr. Watsa gave a speech a couple of years ago where he described valued investing as purchasing shares when companies run into a "temporary" problem. Then the reiterated the word "temporary". Okay, now I can see where BAC's problem is "temporary" (legacy loans + interest rates), I can see where AIG's problem is temporary (interest rates), but I can't see where RIM's problem is necessarily "temporary" (need to keep inventing in a very competitive space to survive).

ERICOPOLY, I wasn’t talking about BAC. I simply won’t invest in mega-cap financial companies that I do not understand. No matter what their shares’ price is. If you understand BAC, the way certainly Mr. Berkowitz does, you will make a lot of money, along with Berkowitz and others. Glad for you! Instead, I was talking about market valuations. Fair enough regarding the overall market valuations. However, I replied with the BAC example because of your "greater values elsewhere" comment -- it sounded like you are surprised that others believe they are finding greater values elsewhere, so I wanted to illustrate for you an example in BAC. During mid-2006 through early-mid 2009 I was 100% in FFH (most of the time) -- but today, I literally believe there are greater values elsewhere: Nonetheless, I keep reading sentences like the following: “I sold my shares in FFH, because I found greater values elsewhere.” So I ask you: Why on earth won’t you be invested in Fairfax Financial in 2017?

My thoughts exactly -- it's been in large part a matter of recovery from a state of undervaluation. I put little faith in the buyback plan preventing a return to undervaluation. Many companies have buyback plans -- are they safe havens too? This buyback plan is unique. A pledge by the world's most respected investor to buy BRK "aggressively" whenever it drops below an objective price, 110% of BV. That's not all. BRK is lightly traded, perhaps about 10% to 15% of the proportional daily weighted volume/market cap of BAC, for example, plus a lot of cash on the BS to make good on that pledge. Plus the self interest of the Gates Foundation to continue to make good on the pledge when Warren is no longer at the helm to ensure that they won't have to make their mandated, regular sales of BRK at a price that greatly undervalues the stock. Light trading has long been a hallmark of BRK, including 2008 and 2009-- still the price fell. As the whorehouse burned, even BRK came running out . They can purchase only up to 25% of average daily volume though (I think that's right). Unless they do a tender offer, which he might. So the effective volume is 75% of what is already considered "light volume". It's weird though, in past years he said he would never try to support the stock -- nothing wrong with a person trying something new, if that's indeed what he intends to do. ORH was a lightly traded stock too. I remember when FFH sold more of their ORH stake and people thought it would be good for the stock as it would make it more liquid. I thought huh? Anyways, it didn't help the stock. But I think right there in the ORH annual report they stated something to the effect that more liquid would improve the stock performance. Anyway, less liquid improves it too? I don't know. I tend to believe that supply/demand sets prices, but I'm so naive I guess because I argued that point back when ORH shares float was increased and nobody agreed with me -- liquidity being more important because it would attract more serious investors, I think they argued. Or maybe ORH was unique because even so, it was still just a minority stake.

I think Berkowitz has been saying $2-$3. The funny thing is that even Mike Mayo was saying $2 per share last year. Oh how quickly they run after the stock drops (Mayo, not Berkowitz). I frankly have a low opinion of him, but here it is anyway: http://www.cnbc.com/id/41891291/Sell_Citigroup_Buy_Bank_of_America_Mayo "Bank of America — No. 1 — is you don't even need revenue growth for this company to earn to earn $2 dollars a share," he said, "No. 2, half of Bank of America is the old Merrill Lynch with a little bit more capital markets that's a very nice business fix. And No. 3, no question that expectations are low on Bank of America management team, but I think they can exceed what is already pretty low expectations," Mayo added.

To clarify: I expect EPS to move to at least $2 over that timeframe before taking into account share reduction. So the idea is that P/E will be no higher than 3.5x if the price hasn't changed. Right, so that is lower than the market has ever been, I believe... including 1982. But then I'm actually expecting it to happen in 3 years, so by 2015 I'm expecting to be holding a stock trading at 3.5x earnings per share if price still is stuck at $7. Others aren't quite so enthusiastic, but I figure if the company hits their 9% Basel III ratio at the end of this year and are then able to return AT LEAST 50 cents per share (dividends and buybacks combined), then by seven years from now I'll only have $3.50 remaining on the table per share, or far less than that (because I expect return of much more than 50 cents per share as earnings climb). Right, so $3.50 left per share -- maybe I now own 150% as many shares if I kept on reinvesting at $7. So I'm not scared of 1982 in 2019. Maybe it will hurt a bit if 1982 valuations happen later this year, or next year, but the odds of that are not certain. Keep in mind that BAC is nearly already at 1982 valuation. I mean it's hardly anywhere near these 22x Shiller PE10 ratio that's been casually tossed around. Sure, the Schiller P/E ratio scare is all about earnings profit margins reverting to normal. However, if BAC profit returns to normal then the stock goes sky high from here :D So look, mean reversion is basically the last thing I fear.

I might mention that Fairfax had hedges galore and a buyback plan during the 2008 period. Stock was dropping even as AIG cds hedges (and all CDS hedges) were soaring. Market just sells whatever is liquid. It all burns.

My thoughts exactly -- it's been in large part a matter of recovery from a state of undervaluation. I put little faith in the buyback plan preventing a return to undervaluation. Many companies have buyback plans -- are they safe havens too?

Buffett put? The stock is up more than 70% since the 2009 lows. I didn't know the IV was growing that quickly! In other words, the market can still knock it down from here.

So, what if Jeremy Grantham is right, what if Hugh Hendry is right, what if John Mauldin is right, what if John Hussman is right, what if many other “macro-guys” are right, and in 2017, or 2018, or 2019 will be 1982 all over again? And a new secular bull market will be finally launched? By 2019 I expect BAC to have earned $7 a share even if their earnings never improve from here. However I expect the earnings per share to more than double by 2019. So I hope they are able to find values again. I have found what I need, I don't care if they are right or wrong. I wish them success as well. Hope their ship comes in. In fact, I expect BAC to be much higher in 2019 when their ship comes in, and then I can sell and plow the proceeds back into other cheap stocks that will be everywhere to be found.

That's the optimistic projection. The pessimistic projection is that Basel III type requirements will constrain a lot of their holdings to Sovereign debt with low yield that will limit profits if the economy is stagnant without robust margins on loans. This includes the potential loss of principal if interest rates increase a lot. Cheers. :) A few weeks ago your pessimistic projection was that they still need to raise more equity, so it feels to me like you are actually getting more bullish. Actually, I'm a optimist. I do think, however, that BAC and many other TBTF banks could take a lot longer to work out than many assume because the world is in a super credit cycle crunch. There is no way out other than stagnation, default, or inflation ( default by a thousand cuts ). For the US, my bet is stagnation followed by stagflation. That's more optimistic than what Europe may experience. :) I just think that if the stock stays at $7 and they keep on earning $1 per share (the falling expenses get eaten up by negative revenue developments), hey, 14.5% isn't a bad earnings yield. Fine, torture me with beautiful women wielding feather dusters. Yet the future I think will be better than that.

I can't see why a share repurchase would cause any reduction in warrant strike price. The warrants benefit from share repurchase every bit as much as the common. So why would there be any special provision?

I think I read somewhere that his preferred investment didn't contribute to Basel III capital. So mentally I figure if he exercises the warrants then BAC will get his $5 billion and effectively use it to buy shares back up to $14. So his $5 billion will wind up initially bumping up the share count by 700 million shares, but potentially it will only really hurt us to the tune of 350 million shares or less (depending on whether the shares are retired for less than $14). So I mentally just plan on 350 million share dilution from his warrants.