ERICOPOLY

I recognize that people are worried over what's becoming of the net interest margins in the US banks, but does that really affect the margin earned in Latin America and Asia where they make more than 1/2 of their profit? Down to 55% of tangible book value now. They grew tangible book value by 16% the past 4 quarters. Will be interesting to see what can be sustained going forward, but buying back shares at this price will go a long way. So suppose the stock does linger at these levels for quite a while -- they begin returning capital to shareholders next year. Buybacks at 1/2 of tangible book should boost the growth rate. I mean, just a 3% buyback can add 3% to the tangible book value per share. That seems like ample compensation against slower than usual earnings. Like if they payout 1/2 of their earnings, and they make 12% return on tangible equity, then it's really an 18% growth rate in tangible book per share (or the equivalent of the same thing if you use your dividend to buy more shares). And those tax losses carried forward make the 12% return increasingly likely.

Damn, I guess we younger guys that have seen two 50% declines in 10 years and a sideways market are just spoiled. Those older guys were battle hardened by the bull market, of which we have yet to see!

You need to watch the share count to calculate the real dividend. Yes sir! I read your full post four times and contemplated it. Maybe that's one of the reasons? It's more difficult to grasp than if they were doing less stock buy back and just declaring they are doubling the dividend or something. That should get some attention. Then again, it took me four readings of your post and farther pondering so perhaps I should not be thinking about it :) Reading about all the years that MSFT has gone nowhere, the last thing shareholders need is a tax on something that can be had tax-free (for the people who bought in this price range). Fortunately the dividend tax is still relatively low. Should Obama (or his successor) succeed in the "Buffett tax", I hope companies stop paying dividends altogether and just buy shares back. Then I'll have the last laugh, because it really will be a tax... on Buffett!!! He would pay 35% capital gains tax if he wants his laundered-dividend instead of the 5% - 10.5% dividend tax he pays on cash dividend distributions (most of his money sits in Berkshire). I have a very strong suspicion that this is the real reason why he has been so vocal over the years about companies only buying shares back when severely undervalued. For his own tax reasons (or acting as a fiduciary for Berkshire shareholders). Mathematically he shouldn't care all that much otherwise.

You need to watch the share count to calculate the real dividend. Over the 12 months period June 2010 to June 2011, they reduced the share count enough where you can sell 3.75% of your holdings to bring it back in line with your % ownership at the start of that 12 month period. That was pretty typical of most years since 2005, with the exception of 6/2009-6/2010. Add in the 2.5% dividend to your 3.75% share-buyback-laundered-dividend and you have an income of 6.25%. That's the same dividend you would have received if they had paid cash dividend instead of a buyback, but the buyback gives you tax advantages (unless you are Buffett who loses on corporate tax rules). Over the following 12 months (with new dividend increase) it will now be 6.875% income if they keep up the share count reduction. That's like getting a 10% raise. It's not that bad. And if you aren't sitting on a capital gain, then the 3.75% dividend from the share buyback is entirely tax free! Better, you might even get a tax deduction if you are below cost basis! Put that in your pipe and smoke it Obama! Bill Gates Says Tax The Rich! (The buybacks are probably Ballmer's idea, as he opposes the rich tax) http://www.businessinsider.com/bill-gates-state-income-tax-2010-9

I'm on Morningstar looking at the Tilson Focus Fund. It has a bunch of call options in things like JC Penny, Goldman Sachs, Berkshire Hathaway, Microsoft, and JPMorgan warrants. I figure that's magnifying the decline. Now, if the market goes all the way to zero he'll beat the market as those call strikes will protect him. It's -14.85% vs S&P500 as of Aug 31. However a lot of those names I would think will do very well going forward (vs the S&P500).

I think the theme here is that the only investors that survived to be rich and famous did so with margin only if it was non-callable (like with Davis and Munger).

$10 million is that magical point where you could just hang it in things like JNJ, collect $1,000 per day in dividend, and watch your $1,000 per day payout grow faster than inflation. Just ignore the advice about diversifying into bonds at that point. Depending on how cheap your thrills are, you can get by with a lot less without needing any fancy returns. $1m is certainly too tight, definitely need some skills or luck.

Well, truth is Tilson probably (certainly) would school me in terms of business knowledge. But I'd rather invest with Parsad before putting money with Tilson, even though the media has never heard of Parsad (doesn't promote himself as Tilson does).

I've never met him, but his media image reminds me of the realtors in my area who work their butts off to promote their name -- which brings in business, and make them money, so good on them.

I live 10 minutes from Clearwater Casino Resort, but I've never gambled there. I prefer the CBOE.

What the hell does the market price have to do with his being right or wrong?

No it isn't different. Look at what the bears said about banks back in the early 1990s.

To be more precise, do you know of any 'superinvestor' that used margin on a personal account (not float in a company or whatever) when they were young? I can think of many leveraged companies, but I'm drawing a blank when it comes to these investors borrowing in their name to invest. I'm sure some did, though.. I read The Davis Dynasty. It claims he used the "maximum" amount of margin.

Well Buffett and Watsa still use leverage. It's called float, but it's leverage. They are rich enough to just sit in their underlying equity portfolios without any float to juice it. Why reach for that extra couple of points? Well, they like it I suppose.

I'm reading this WSJ article and wondering how much more unhappy the Greeks are than the average US citizen: http://online.wsj.com/article/SB10001424053111904199404576538261061694524.html?mod=WSJ_hp_MIDDLENexttoWhatsNewsSecond Suicide rate (now): Greece: 6 per 100,000 (doubled recently due to austerity/collapse) US: 11.1 per 100,000 Are things that much worse in Greece? What's really important in a society, when it's so bad you kill yourself? They have 16% unemployment. Some say we have that too (counting underemployed and those who have given up looking).

To me it's interesting because $35 from an $8.50 MBI share price today is a 300% return. With BAC today at $7 we need to get to $28 to have a 300% return. However it can be a 300% return when only getting to $20 in BAC if done using MBI as the downside risk (writing the covered $10 strike MBI and buying the $10 strike BAC with proceeds). Sort of the same return you'd get if you could pick up BAC for $5, which you can't (thus far anyhow).

Anyways, since we both own BAC and MBI, here's a question: How high do you think MBI will trade by Jan 2013 and how high do you think BAC will trade? For example, you can get at least $2.50 for the MBI $10 strike call, and turn around and buy the BAC $10 strike call for just under $1. So if BAC gets to $20, that would be the same as MBI at $35. Or you can buy one BAC call at $10 strike for every MBI written at $17.50. Or more than one BAC $12.50 for every MBI call written at $20.

At the top of page 84, it appears that the base case for normalized earnings is calculated based on a 15% return on tangible common equity. Tangible common equity as of Sept 2010 is listed as $114 billion. So that gives a normalized net income of $17 billion, or $1.70 per share. We bought a ton of BAC in March, 09 a little above the bottom and sold it a few months later for more than a double. Our back of the envelope calculations then were something close to the value above or a little higher. However, we may be approaching a time when their spreads are squeezed. Therefore, it may be sometime before their IV is reflected in the market. Their stock looks interesting for patient value investors. :) Yeah, I don't know about such methods of valuation. I'm looking at page 8 of their presentation from 9/12/11: http://investor.bankofamerica.com/phoenix.zhtml?c=71595&p=irol-presentations They made $10b in the first 6 months of 2011 if you ignore their real estate problems. That's $2 annualized per share earnings. So in a year when they make money in real estate? It ought to be more than $2 I reckon.

Personally, I don't believe stimulus will fix it, but I feel it will make things more pleasant until final demand returns. Robert Shiller believes in tax and spend (stimulus) as a way to get things moving again. He doesn't see why people believe that stimulus spending implies deficits.

Thanks.

I just finished reading the Oct 29th 2010 issue (free link). Using the closing stock price of BAC on the day the issue was published ($11.45), and the stated valuation of BAC in the publication 6.7x normalized. I guess the author came to the conclusion that BAC will earn $1.70 per share in a normalized year. Is there any chance the author can explain how only $1.70 is calculated to be the earnings power of BAC in a normalized year? Berkowitz was this past week saying $3 is the earnings power.

Depends. They might just be laundering the dividend as a capital gain for tax reasons. In which case, it actually is value enhancing on an after-tax basis. Buffett wouldn't agree though, as Berkshire pays 5% dividend tax on many of it's holdings vs 35% capital gains tax.

(Unless you guys are planning to continue to hold the shares after they become overvalued) why do you care if the manager is overpaying for the shares you are selling back to him? They seem to be working in the best interests of value oriented shareholders who buy cheap and sell dear.

I have liked what both of the men are saying in general. However if you look at actions taken, Pandit shows to be more prudent thus far IMO. Moynihan wanted to start returning capital to shareholders long before he is even meeting the Basel III requirements, and long before he even knows what his ultimate putback costs will be. Lo and behold, now he's diluting the shareholders giving a sweetheart deal to Buffett. All along Pandit has been saying no dividend until they exceed Basel III by a large cushion. As he pointed out, they also needed to wait to see what the regulators are actually going to require! That doesn't stop Moynihan though. I am heavily long BAC though. I like Moynihan's plan for the future: no more acquisitions. Given a slow growth lending environment in the US, this means we'll be getting our hands on the earnings via dividends and share buybacks. Citi on the other hand has tremendous growth opportunity in Asia and Latin America. Perhaps it will be the one trading at a higher multiple to BAC years down the road for this reason.

Possibly, but the charts of C and BAC are almost identical. And BAC has basically no exposure to Europe. Here is a summary of C's exposure:  As of June 30, 2011, Citi’s net funded exposure to the sovereign entities of Greece, Ireland, Italy, Portugal and Spain (GIIPS), as well as financial institutions and corporations domiciled in these countries, totaled $13B based on our internal risk management measures  Of the $13B in existing net exposure: – About $2B is in assets held in trading portfolios and Available-for-Sale portfolios, which are marked-to- market daily; trading portfolio exposure levels vary as we maintain inventory consistent with our customer needs – The remaining $11B is net credit exposure, mostly in the form of funded loans comprised of:  a little more than $1B to sovereigns;  approximately $6B to financial institutions of which 70% represents parent guaranteed short-term, off-shore placements with these financial institutions’ non-GIIPS subsidiaries or fully collateralized by high quality, primarily non-GIIPS collateral;  and approximately $4B to corporates of which 2/3rds is to multi-national corporations domiciled in the GIIPS  We also have $9B unfunded exposure, primarily to multinational corporations headquartered in these countries. Like other banks, we also provide settlement and clearing facilities for a variety of clients in these countries, and are actively monitoring and managing these intra-day exposures  Citi also has additional, locally-funded exposure in these countries to retail customers and small businesses, as part of our local lending activities. The vast majority of this is in Citi Holdings (Spain and Greece) and has been previously disclosed  The sovereign entities of Greece, Ireland, Italy, Portugal and Spain, as well as the financial institutions and corporations domiciled in these countries, are an important part of the global Citi franchise. We fully expect to maintain our long-standing relationships with these entities going forward, and to continue to maintain a presence in these markets to service all of our global customers