ERICOPOLY

Yeah, I've made my views on that pretty clear I suppose. Where is Bronco? I guess a lot of shareholders who bought high are happy at least that they can capture a tax loss at the same time that they get their laundered dividend. One of these days the government is going to get smart and tax this stuff the same as dividends.

I agree. I have absolutely no clue as to why people think SHLD is going sky high. There are probably some better vehicles to bet on a real estate bounce. The only other value driver here seems to be the cash flow from the stores. And what does he do with it? Buys more SHLD shares. No, he's not diversifying into better streams of cash flow, he's just effectively dividending it out. So what do you get left with if the cash flow keeps on dwindling? So basically the only play here seems to be KMart getting up and kicking everyone's butt in retailing. But it ain't gonna happen unless he invests heavily in the stores, instead of dividending it all out. So I don't understand where the upside is unless you reinvest in the stores instead of returning it all to shareholders.

options market makers reflect what's going on with the underlying, and in this case some weird technicals (supply and demand). I don't believe they have any more predictive power over where stocks go in the short term than anybody else does. Here is how I understand the pricing: 1) I write a $45 strike put for $14 --the option market maker buys it from me 2) He is hedged with a put now, so the option market maker buys the stock and lends it out to shorts, collecting huge cash flow from shorts. 3) He can also write a covered call So the reason why the call is cheaper than the put is that the market maker makes up the excess value by lending his long position in the stock to the shorts. Oh, and anytime somebody wants to buy the put for more than what he paid me, (the wide bid/ask spread), he can just unwind it all for a tidy profit. This has absolutely nothing to do with the opinion of the market maker on the stock's long term or short term price movement. He doesn't need to care about that -- he's just market-neutral, making money regardless.

Where do they take liquidation value of the real estate into account? They just seem to be capitalizing the EBITDA number and then subtracting liabilities from it. And after doing so they are saying it's worth $591m ($6 per share): 1x their FY11 EBITDA estimate 3x their "net adjusted" EBITDA. Quoting: Our midrange enterprise valuation is approximately $6.514bn, which is 11x our FY11 EBITDA estimate of $590.7, 32x our FY11 net adjusted EBITDA estimate of $203.7mn. After deducting $3.474bn of secured debt, $765.9mn of unsecured debt and the pension/post-retirement liability of $1.68bn, we estimate value to the equity of just $591.8mn, or $6 a share, down 91% from the current share price of $60.49.

Interesting comment from Pandit regarding CitiHoldings. The unit (including the toxic Special Asset Pool) has been profitable across all of 2010 and 2011 if you exclude the mortgage portfolio (which is their entire US mortgage portfolio, inclusive of home equity loans): Losses in Citi Holdings have been predominantly driven by the Local Consumer Lending segment, whose largest asset is the legacy U.S. mortgage portfolio. If you exclude Local Consumer Lending, pre-tax income for the rest of Citi Holdings was positive for 2010 and thus far in 2011 as well. And within Local Consumer Lending, pre-tax losses in these periods were driven primarily by U.S. mortgages, as shown here on the right. - Pandit, 12/6/11 quote taken from page 2: http://www.citigroup.com/citi/fin/data/tr111206a.pdf?ieNocache=478

So far I've written some SHLD puts and used the proceeds to purchase puts on my BAC position. So I have a large BAC position, to me it's easy to figure out how it goes up 4x from here in 4 years. To others it's easy to see SHLD at 4x in 4 years. SHLD puts cost more than BAC puts. So I like the dynamic there. Especially since there is risk of BAC being a zero overnight according to the contagion theories on global financial collapse, but no such risk overnight for SHLD.

Anyways it looks like we have a new source of greenhouse gas emissions to contend with as the permafrost thaws: http://www.nytimes.com/2011/12/17/science/earth/warming-arctic-permafrost-fuels-climate-change-worries.html?_r=1&scp=1&sq=permafrost&st=cse

What Hester said... IBKR does lending now for small accounts. Also, the bonds offer a wide range of ways to play this as well... true, not fully applicable to holdco, but sure provide some nice YTMs depending on what price you get. Ben What steps need to be taken to lend out shares from an IBKR account? Is this something you do from the workstation, or do you fill out a ticket asking them to help you? And what lending yield are you getting?

Korea Investment Corp has a new position as of 9/30/11 http://www.foxbusiness.com/industries/2011/09/22/korea-investment-corp-to-buy-more-bank-america-shares-reports/

My options strategy gives you 1.59x leverage without increasing your downside. Reinvest all of the proceeds from writing the put into purchase of the call. Same downside. 1.59x upside.

The $45 strike 2013 put has a bid of $14.20. The $45 strike call has an ask of $8.95. Meanwhile the stock is $46. Why are you guys buying the shares?

I would be surprised if he is buying bac common. he got the slug he wanted and the structure he wanted. You might be right. I'm surprised there are no other deep pockets buying up the common. I would've expected some of these sovereign wealth funds to put their dollars into BAC. Maybe they're not because of the way they've been burned in the last couple of years. I think Korea has been buying BAC.

Everyone should look at the charts on this Wells Fargo report before talking about "recovery". And as always, be careful with seasonal adjustments -- "On a not seasonally adjusted basis, single-family starts totaled 32,300 units in November, which is slightly below their year-ago level. On a year-to-date basis, single-family starts are down 10.2 percent from last year and are on pace for their weakest year on record." Quoting from the Wells Fargo report: We expect homebuilding to improve modestly in 2012, with most of the gains coming from apartment construction.

As I said in July: "Somebody has to build those 6 million apartments (and all the rest of the jobs that construction drags along with it)."

I meant to say, the rate of positive surprise is mostly multi-family construction. building one more house in this sea of supply is idiotic. Depends where the demand for housing is vs where the oversupply is. I mean to say, not all localities have a supply problem.

Last summer when the stock was $8 the warrants were $3.62. Stock is down 38% since then and warrants would be $2.25 if they had declined by an equal percentage. These warrants are weird. They are supposed to be leverage but they have been trading in almost in equal percentage gains/losses as the common.

It's mostly multifamily. The pessimists forgot that we don't have enough apartments to house the people who can't afford a house. Either way Buffett doesn't really care -- he still sells carpet.

Regarding this tender offer, the $15 per share number seems oddly similar to the conversion price from that dilutive capital raise a couple of years back. Second, they have 2 ships to be delivered this February and another 2 in April. After that, no more ships for roughly 2 more years. So regarding this progressive dividend policy, where they stated that they will raise the dividend as ships are delivered... I take it they will raise the dividend in the next 6 months but then not again for two more years. So it might be a big dividend raise. I'm long SSW but I did so by writing the Feb $15 put.

Pandit is sounding very upbeat about the new Fed stress test. Apparently the stress scenario is for 4%-6% emerging markets growth. A large part of Citi's loan book is tied to emerging markets. http://www.citigroup.com/citi/fin/data/tr111206a.pdf?ieNocache=371 VIKRAM PANDIT: Yeah. So let me start by saying, I think transparency is a good thing. We are in favor of putting out information exactly of that sort so you get to see what that information suggests. And we’ve actually gone one step further to say, you know, these stress tests are not necessarily comparable. And why don’t we even have a benchmark portfolio where everybody stress tests a given benchmark portfolio, so not only can we put out our stress tests, but then you get everybody to put a stress test out against this benchmark so that you can actually compare apples to apples. So we’re in favor of this kind of disclosure. I think the banking system, Richard, in general, is in much better shape than it was the last time the Fed went through this exercise. So in general, I think the banking system is going to look – it’s going to do fine through this particular stress test. For us, we have 11.7% Tier 1 common. When you look at the details of the stress test - and you not only have to look at the detail of the stress test, but you’ve got to array it against their assumptions - we have a large emerging market portfolio. They think, in a stress, that the emerging market grows at 4%-6%. We have a smaller mortgage portfolio, which is reflective of some of the stresses here in the U.S. they want, and so, you know, I think we haven’t done the work – we’ve started doing the work – but we’re happy with being able to publish those numbers and sharing what those numbers say with everybody.

I have a few cousins in Sydney who feel that their real estate won't go down. So I'm familiar with what you are hearing. We are looking at the Frenchs Forest area as a possibility -- about $40k annual to rent an $800,000 house. Originally I was thinking of Lindfield which is where my grandmother had her home near the rail station (her home sold in October for $2.05m). But she had a double lot so the price set a record for her street -- double lots are very rare. $1.4m is more typical. Anyhow I discovered rentals are about $70k annual in Lindfield. That home that sold for $2.05m -- my grandparents bought that right after WWII for $4,500 and never changed the house. Now that much money covers 1 month rent! Just sort of an amusing story about what you could buy in the late 1940s. Yes, that's better than 10% annualized increases for a 60 year stretch. I'm not sure how much areas like that will crash. My parents house in Los Altos Hills, CA has declined maybe 10% if that even during the past few years. And that's during our "Great Recession". The house was worth about $50k in 1970 when they bought it, then about $900k in 1990 after the big real estate boom, $2m in 2000 after the tech bubble, and it's still about $2m today. So not all areas are going to implode. I just figure looking at Australia as a whole the median price will fall considerably.

It's interesting that people think it will take 5 years for Citi to pay a full dividend. Going forward, we have three sources of capital generation, as we expect our core Citicorp franchise to generate earnings in excess of the capital needs to grow that business. In addition, we have unique additional sources of capital, both in the wind-down of Citi Holdings, as well as the monetization of our deferred tax asset. Only $11 billion of our $50 billion in DTA is currently included in Tier 1 common. We can grow our capital by utilizing our DTA and reducing that disallowed amount. Additionally, a significant portion of our regulatory capital is supporting risk-weighted assets in Citi Holdings. And, as I mentioned earlier, adjusted for the transfer of Retail Partner Cards into Citicorp, roughly 22% of our risk-weighted assets are in Citi Holdings, and therefore about $25 billion of our Basel I regulatory capital should be eventually released as Citi Holdings winds down. Or, put another way, between $39 billion of disallowed DTA and another $25 billion of capital supporting Holdings, there’s nearly $65 billion of capital, supporting either wind-down portfolios, or simply unleverageable, because it is excluded from our regulatory capital. And so, it shouldn’t come as a surprise that I’m excited about the prospects of delivering this excess capital back to our shareholders over time. - Pandit, page 5 http://www.citigroup.com/citi/fin/data/tr111206a.pdf?ieNocache=105

Yes we are planning on moving for 2 years minimum -- it will be permanent if it works out. "stamp duty" is known as "excise tax" here in Washington state (only ours is paid by the seller): http://dor.wa.gov/content/FindTaxesAndRates/OtherTaxes/tax_realestate.aspx My house in Washington state is worth roughly $500k (or so I think) and I will have to pay 1.28% tax on it when I sell it -- that's $6,400!

It works differently than it does here. I live in Washington state. My property tax is based upon an appraisal of the entire property. So if I built a $50m home on my property, my annual tax bill may actually be higher than the value of the underlying land! Australia doesn't tax you on the improved value. New South Wales has a "land" tax, and if it's your primary home you get a $400,000 land valuation exemption. So if you have an $800k home but the land is worth only $400k or less, then you pay nothing in land tax. EDIT: actually that exemption might be for homes you own that are not your primary residence. I believe it may be a 100% exemption for your primary residence. They have "rates" that pay for basic services, but they don't scale up the way our property taxes do. I mean, a $2m house is not uncommon in Sydney. Here in America it would not be uncommon to pay $20k a year in property tax on that house.

He thinks it should be 100bps but you reckon even still he doesn't expect them to earn that? Or are you taking exception to the choice of words "expects" instead of what I might have used instead "can earn"? Which cut of mystery meat are you thinking is going to sink the ship? Here is the CitiHolding mystery meat locker as it stands today: see page 7 http://www.citigroup.com/citi/fin/data/p111020a.pdf?ieNocache=737 Are you talking about the Special Asset Pool which houses $45 billion in assets? This number has fallen 53% over the past year, where are the huge losses? Isn't this the place where they have been hiding all of their losses according to the skeptics? Here are the numbers for Special Asset Pool size over the past 3 years: 2008 Q3: $239b 2009 Q3: $163b 2010 Q3: $95b 2011 Q3: $45b

This is a good exchange from the DebtDeflation blog: Hatless March 22, 2011 at 7:53 am Hi Steve, Great talk as always. Just one question. Do you think there is a big difference in how everything plays out given that the RE bubble in Australia consisted mainly of bidding up existing house prices, compared to the US and say Ireland, which had a lot more additional building? I’d be interested in your thoughts on this. Cheers, Ben Steve Keen March 22, 2011 at 8:05 am | # Thanks Hatless, And yes I do think that’s a significant difference in how things will play out here–though not as the spruikers see it of course. Their argument has been that since we didn’t build as many houses here as in the US (true), there won’t be the same overhang of unsold new properties depressing prices (true). Therefore our prices won’t fall (false). What they’re omitting from their thinking is that, given that Australians borrowed more money to gamble on housing than even the Americans did, our bubble was more of a purely speculative one than theirs was. They at least did some “investment”, even if it was inappropriate to needs in the medium term. We did far less, so far more of our money went to gambling on house prices than increasing the quantity of housing. This is one reason our price bubble was more extreme than theirs, and therefore potentially has much further to fall. It also will spread the pain of a price fall more broadly. Whereas we will have less losers among property developers, we will have more losers amongst those who bought an existing property for capital gain as a retirement investment. Something like 30% of market demand came from “mum and dad investors” at the peak of the bubble. If a significant proportion of them think that the longer they hold a property, the less they’ll have for retirement, then–with a large lag–they could switch from the buy side to the sell side.