ERICOPOLY

People who build houses for a living (and related industries) are unemployed. They go back to work when the housing supply is gobbled up. I think I've read that it's 3 jobs for every house built. So if we build 1.5 million homes again, then it's 3 million more jobs (that's 1 million homes more than we currently build). That alone cuts unemployment by nearly 25%. Then those people spend more and yet more jobs get created. Takes a lot of stress off of government revenues and jobless benefit expenditures as well. 1.5 million was about natural trendline demand -- 1.2 million from household formation, and 300k from destruction.

The situation that scares me is the counterparty default. Same scare I had with Fairfax in 2008. Large reinsurance recoverable hedged with CDS. AIG goes down and no bailout. Barclays, Citigroup, DeutcheBank, BofA go down. The Fairfax CDS portfolio is kaput. AIG's reinsurance is worthless -> most reinsurers go down in daisy chain style. Fun isn't it? Junto's post does help me feel better.

Do local small banks face higher severity floods? Meaning, didn't the local small banks in the oil patch fare the worst vs the large and geographically diversified?

I'm not sure he ever said they wouldn't dilute. I remember him saying that they could get to Basel III in time without needing to raise capital unless the economic outlook materially worsened. A) He could have been misleading on purpose by skillful choice of words or B) Regulators might have pressured the bank to get their act together faster given the new worries about Europe and lower expectations for economic growth It's not really lying if the situation changes. My initial reaction was to not trust him anymore after the Buffett deal, but then that WSJ article about the regulators setting them straight over the summer helped me forgive him.

Wells Fargo's ratio will also be about 9.5%. BAC's performance on getting the ratio up: 7.6% in Jan 2010 8.6% in Jan 2011 (100 bps improvement) 8.65% at end of Q3 (an improvement of only 5 bps) ~9.5% in Jan 2012 (close to 100 bps improvement) The dilution was painful but I guess the authorities want to see consistent improvement in the ratios so they can brag that all the big banks made it to 9.5% at EOY.

Why? The balance of a mortgage with a 25 year amortization declines by about 3% in the first year of the mortgage and a higher percentage in subsequent years as the principal progressively declines. If the market value of housing declines by roughly the same percentage over the course of a year (ie, 3%), is it reasonable to believe that bank reserves would be any more or less adequate at the end of the year? Or am I missing something obvious (wouldn't be the first time ::))? SJ Not as high as 3% in the first year, and of course it's very interest rate sensitive. The lower the interest rate, the faster the principle pay-down in the early years. Of course this is why it's important to have low mortgage rates for refinancing -- while it doesn't change the payment as much as one would think at first impulse, it does increase deleveraging pace. And that helps cushion the banks from further real estate decline. So not only does it increase cash flow to the consumer, it also helps the banks better survive declines in asset values. Interest rate 4%: Principle on a 25 year amortization will decline by 2.37% over the course of the first year. Interest rate 8%: Principle on a 25 year amortization will decline by 1.30% over the course of the first year.

The chart on page 10 shows the important role that charge-offs have played in consumer de-leveraging: http://files.shareholder.com/downloads/ONE/1550254602x0x515337/85746b44-384f-4eab-8c22-498b7d509acf/BAAB%20Conference%20Presentation%20Final_11.4.11.pdf

JP Morgan chart on page 9 shows "household debt service ratio as % of income" -- at nearly the lowest levels since 1980: http://files.shareholder.com/downloads/ONE/1550254602x0x515337/85746b44-384f-4eab-8c22-498b7d509acf/BAAB%20Conference%20Presentation%20Final_11.4.11.pdf

Okay, the company was selling 125.5 million new shares into the market during this period -- report mentions 9 days in late November into December: http://www.reuters.com/article/2011/12/02/bankofamerica-swap-idUSN1E7B117K20111202?feedType=RSS&feedName=financialsSector&rpc=43

Not quite true, as they could suffer a huge insurance loss in any given year like many other insurers. It's just a testament to their skill of pricing insurance contracts, especially Ajit, that they haven't been slaughtered in any given year with a massive insurance loss. That in itself indicates how good they are at risk control, and their ability to view economic and societal risk better than anyone else. People talk about Sokol in the past, and Coombs presently about who should run Berkshire or its investments, but there would be no one better than Ajit who has done probably one of the best jobs in history mitigating insurance risk. There should be a case study on exactly how he prices insurance contracts and what he scrutinizes when doing so...perhaps an entire book written on him and his conduct! Cheers! Just add some AIG FP managers circa pre-2008 and kaboom! I should have just said that his consolidated financials temper the volatility. His WFC stock is down this year but if he owned the whole thing he'd be reporting a consolidated gain as WFC's book has grown. That's really what I meant to convey.

I trust Buffett more than the ECRI. He has that private window into all of his diverse businesses. Plus he is good at judging human nature. However Buffett could do even better if the goal is to not have a down year. Just sell what remains of the equity portfolio and focus entirely on purchasing wholly owned businesses. Then you can record increase in book value every single year no matter which way the S&P 500 trades. The consolidated financials make it pretty hard to get beaten.

How do you figure that? Workers will demand much more monopoly money inside the country, and costs will rocket higher for products sourced outside the country. The only benefit would be to those buying the products internationally, but the companies would need to do all business overseas and use only non-Yen currencies, plus would need to have had stashed tons of working capital in other currencies just to stay afloat. A crashed yen would not help the Japanese companies. I don't believe that currency collapse equates to immediate and commensurate raises in wages of local workers. That's where we disagree. The company may also have long term debt denominated in Yen -- easily washed away with the rapidly rising nominal value of the export business. You only have to look at recent history in the US to validate what Eric is saying. Weakening dollar, but stagnant wages for quite some time now. The US worker just doesn't realize he can "demand" more money :P

How do you figure that? Workers will demand much more monopoly money inside the country, and costs will rocket higher for products sourced outside the country. The only benefit would be to those buying the products internationally, but the companies would need to do all business overseas and use only non-Yen currencies, plus would need to have had stashed tons of working capital in other currencies just to stay afloat. A crashed yen would not help the Japanese companies. I don't believe that currency collapse equates to immediate and commensurate raises in wages of local workers. That's where we disagree. The company may also have long term debt denominated in Yen -- easily washed away with the rapidly rising nominal value of the export business.

Which Japanese corporations have a majority of revenue from international sales? 1) R&D/production costs massively devalue (Yen is destroyed) 2) International revenue keeps pouring in Translation: better profit margin after Yen falls Hahaha--and how does the production cost drop when they need to buy commodities to produce products? Will miners accept monopoly money for their goods? The labor costs are where the savings are, not the commodities. "ha ha ha".

Which Japanese corporations have a majority of revenue from international sales? 1) R&D/production costs massively devalue (Yen is destroyed) 2) International revenue keeps pouring in Translation: better profit margin after Yen falls

28th straight month of manufacturing gains.

BAC started underperforming peers after that Fed stress test news came out. My guess is that the stress test is freaking somebody out regarding dilution risk, so their impression is that BAC is not really as discounted as it looks (market is adjusting for the large perceived share issuance that's coming). Just a guess.

I thought we were both on the same page that these people were already in the position of not being able to borrow more.

Why not? One might say that the banks are involuntarily pitching in to pull us out of this... essentially using their would-be profits to rid the common person of debts. The 99% should be very happy about this.

Things are getting better at some banks: Bank of America on Tuesday reported slight dips in the rates of default and late payments by its credit card customers for October. The rates for both measures for the Charlotte, N.C.-based bank's credit card division are at their lowest points since before the economic crisis began. http://finance.yahoo.com/news/bank-america-oct-defaults-payments-170615577.html

Household debt in the July-to-September period fell by 0.6% from the previous quarter to $11.66 trillion, the Federal Reserve Bank of New York said Monday. The driving factor was a drop in mortgage balances, as foreclosures, depressed home sales and lower housing prices reduced the amount outstanding on home loans. Excluding real estate-related debt, consumer debt rose a slight 1.3% from the previous quarter. http://online.wsj.com/article/SB10001424052970204753404577066682927300346.html?mod=WSJ_PersonalFinance_RightMostPopular

So a guy with <= $100m can't go out and buy that many shares worth of BofA acting on his own? Instead he wants to partner with others and overpay? Makes no sense.

I'm surprised he can't just buy it in the open market for less than $6.

Yes, and I think this is saying after Lehman and 2009 TARP preferred/equity infusions, no bondholder in JPM, C, BAC, WFC is ever going to have to take a haircut. Equity on the other hand... TARP was 2008. Your argument should have been applicable in March 2009. The fixed income market however didn't remember TARP at that point?

More interesting is the TRUPS are $20+ when back on that date they were $5-$8. Where do you find more information about these preferred? Yeah, sometimes when bonds get cheap people say that the bond market knows something that the stock market doesn't. Are we now going to hear someone claim that the stock market knows something that the bond market doesn't?