ERICOPOLY
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Perhaps you meant this Eric: I don't have enough confidence to answer definitively. I already paid the 2010 tax on Roth Conversion, but I think I will spread it over 2011 and 2012. I haven't filed taxes yet for 2010, and I normally don't do so until around September or October. The past few years I have fallen into a pattern of asking for an extension in April -- just because I am lazy, and it also helps my tax preparer smooth out their work load. My understanding on the estimated tax rules is that, based on prior couple of years' earnings, there is a calculator that tells you how much estimated tax you owe each quarter in the current calendar year. No matter how high your tax bill for 2010, your estimated tax payments in 2010 should only have been as large as that calculator told you. So even if you make $1m in earnings this year you'll owe no estimated tax payments if you made nothing at all in the past few years. So if you converted in 2010 but you are spreading into 2011 and 2012, then I don't think any earnings are reported in 2010 and thus it won't impact your estimated tax for the 2011 tax year. But the amount you pay in tax in 2011 due to the conversion might bump up your estimated tax payment for 2012.
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Their race car carried a couple of airbags (wholly owned ships) -- but from what I can tell they've already blown out the airbags in the sale-leaseback transactions and seem to be disinterested in having them replaced for the next crash. They may still prove my worries unfounded on this point, so it's too early to say.
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Well I saw one of the interviews where Wang was talking about China and how it's growing and people are optimistic and etc... Then I think about the amount of ships they ordered in 2007... It's funny because the Washington family is already beyond ridiculously rich... what's up with all the risk for the extra couple of percentage points of compounding? They could be unlevered and just sail into the sunset. But that's the problem with me as well.... sailing into the sunset is boring. These guys just seem to seek maximum excitement. Maybe it takes one to know one. They've offset their aggression with long-term contracts, strong counter-parties, interest rate hedges, and whatnot. So they probably feel like the race car has a nice roll cage and thus they won't get hurt. And it's true that race cars with roll cages are much safer... but just driving the car slower has it's benefits too. So I just want to be paid for the risk. At these prices at least the stock is still priced at roughly (for the cost of buying the existing fleet per share) the same as where fresh money buys a new ship. But once the stock is like up to the mid-20s then you are holding at a cash flow yield that is much lower than where the market is pricing new ships in the current rate environment (ships become overvalued on a per-share basis). So I don't think the risk-adjusted metric at that point is anywhere near as good. However it will be interesting when they trade at a premium because they will likely issue shares to raise capital at this lower cash flow yield per share and then reinvest the money into yet more ships... taking advantage of the cash flow yield delta -- but that delta only exists if the new ships ordered are similarly leveraged (the max). But look, there's just no way I'd have anywhere near this much SSW at those prices.
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But yes, it evolved due to low valuation. Was 20% initially -- a good deal of which I'd bought a bit over $12. Then in July it went to $10+ change and I bought more, then under $10 I bought more. Average cost comes to $11. I should really have more of a process but I don't -- I react emotionally when stocks drop. But I get a greed reaction, so I tend to overdo it. Then I whip out the calculators and figure out how much I'll make when SSW restores their full dividend -- then I get anchored to that level of expected dividend and don't want to sell any shares. Now that the stock has rallied somewhat, I then lose much of my emotional argument for buying in the first place so I get an urge to sell some. I tend to load up on seemingly obvious winners because I lack the ability to understand the more complex ones? Once the discussion turns to inventory turnover and all kinds of MBA metrics I glaze over and I'm lost. I understood the logic behind FUR, SSW, FFH, C, BAC, and I tend to believe I understand MBI. Very simplistic, which is why I'm willing to concede that it may just be relative ignorance and psychological faults that are the real cause here. One of the investors that come to mind is Forrest Gump -- the guy just plowed all of his money into an fruit company and held on until he was ridiculously wealthy. Most people are scared by tech stocks, but not him. His advantage is that he didn't realize it was a tech startup. I don't think I'm quite as bad as him, but it's shades of grey.
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I just think it's a form of ignorance -- like, I don't fully understand the risks so therefore I'm not scared away. But here is what worried me about the company, and the second point is what still worries me about it as a long term hold (although not in the near term): 1) Wang is a deal maker. He isn't going to endure years of doing nothing while patiently de-leveraging. I think that's the real reason behind the new partnership (or at least it might be what got the discussion started). They've levered SSW so high there just isn't enough money left for him to swing big and regularly recurring deals with. 2) Not sure about the lifetime of these ships. Historically oil has been cheap. Long term, dramatically higher oil (if that happens) will lead to huge efficiency innovations in ship design. That would render the legacy fleet obsolete, perhaps a decade early? Fuel is after all the highest cost in shipping. Short term oil being high means slow steaming and need for new ships. But in 15 years will there be a demand for these fuel guzzlers?
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I would have preferred the full dividend with no growth in new ships. However, that's because I had a 50% position (of my net worth) at the time I initially bitched about the prospect of new ships instead of the full dividend. I figured I would be much better off at the implied discount that I was buying the current ship fleet at ($11 per share), and then having the full dividend repaying me (so I have cash flow to diversify into new things). And I had 60% of my SSW in RothIRA accounts. Heck, that's the way to go if you are a small shareholder and want to optimize wealth. But the company strategy of course that they've taken benefits the bigger boys primarily (like the Washington family) who already own so much that they can't materially (double for example) their position. Then the MBI opportunity finally gelled in my head so I sold some of the SSW (only in RothIRA) at $15.75-$17.70 and today SSW is still 33% of my net worth. I won't be selling more until the fat lady sings (roughly $24 per share unless I'm selling to go into perceived-better-value things). The upside of the lower dividend policy is that most of my SSW is now in my taxable account. Come end of July, all of the shares will be long-term so a trip to $24 by end of this year will make me very happy. The reason why I'm happy at $24 is that at that point I don't think there will be much further tremendous upside compared to what else is likely out there at the time -- something always seems to come along. I don't want to wait a long time to squeeze the last few drops out of the lemon. I also don't think it should trade at IV. IV is not fair price. You can boost IV just by adding more leverage -- fair price should be some risk adjusted number (well below IV in the cash of a highly levered operation). I figure the return they get when adding new ships is probably equivalent to buying the existing fleet of ships (including newbuilds to be delivered) at about $18 per share -- so it is worth more than that for the convenience of being a passive investor, but how much more?
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Pardon me, would you have any SSW? But of course.
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I just own the stock. The only "research" I've done myself is to read all of the conference calls I could find and the letters to owners. In there I found confirmation of everything valuecfa wrote. I owe him big time for condensing the information. It makes it much easier to sort out -- as I wrote earlier, cliff's notes for Anna Karenina.
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I don't think I'm smarter than you. I do think I take on bigger positions than most people, but it might be just a form of brain damage that prevents me from getting too scared... but I leave enough bread on the table to remain fed if the investment burns in the oven. I guess some professional managers would worry about losing all of their clients if they had a 30% down year, but I don't have that risk -- I only need worry about whether I can live with the losses myself. I generally just understand the gist of things. It's the way I roll. Stumbled a long way through life this way. Another way of saying it is that I have too much humility -- but even in saying something like that I'm being somewhat arrogant because it's quite a compliment to be called humble. Maybe it's not humility, just realism. Really, it's that I know my limitations. So I piggyback on the decisions of people far more competent -- it's my way of expanding my circle of competence... or "borrowing" somebody else's. Once I get the gist of their argument (and agree with it), it's enough to keep me from getting too uneasy when the stock pulls back. Somewhat like when you have an important medical decision to make, in the end you take the doctor's advice. You might get a second and third opinion, but you still wind up inevitably going with what the experts think is best. You sort of read a little about it yourself, and come to a decision once you understand what the recommended procedure is and why they recommended. The experts are sometimes wrong and misdiagnose, or they make mistakes and leave a tool behind. You live with those risks and accept them. Or if you are the hiring manager of a group of engineers at Microsoft, you may not be the best engineer yourself or not be fluent in every specialty of programming, but you have highly trusted engineers that help you in the interview loop and they give you their input and best recommendation. You rely heavily on their input to determine the competency of the person you are about to hire. Your decision is then simplified to basically whether you feel you can trust the candidate and whether they are a good cultural fit. This is what happened with FFH in 2006 -- I didn't really know that much about the insurance industry or weather forecasting, but I understood the gist of it. I knew a lot about the character and skill of the players involved that were long (including some of the posters on this board), and I had figured out the character of Prem and his close team by who they associated with and the characters of competent investors who were sticking by them. It's a form of competency I suppose to be able to assess the qualitative aspects of individuals and looking for aggregations of them around a particular investment.
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Cummings and Steinberg each own 10% of the company. Were there more partners in the beginning? Or did they reduce their ownership over time? I believe they have been selling down throughout, but they also get options. I think they buy when cheap and sell when high. Also I think they bought whole companies vs. investing in partials. I would find a company, buy another company, and then trade with some of the excess capital, then buy another company - rinse and repeat. Probably also issued shared to make acquisitions. They might have started with financial companies too (not sure).
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Cummings and Steinberg each own 10% of the company. Were there more partners in the beginning? Or did they reduce their ownership over time?
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I hope that's the case. Personally, I think the law is on the side of MBI, but this is really the only thing that worries me. Anyhow, I added more shares on Friday and at open today. It ought to get into the $40s in a few years if the courts are on their side. I wouldn't worry about Jay Brown settling for peanuts. He won't do that. He may do one or two of the smaller settlements for a haircut to add to liquidity, if need be, but i doubt that too. He has the majority of his wealth in MBIA, and i'm sure he is fighting hard on litigation efforts and negotiating settlements. It is difficult for him to settle the large putback cases with the large remaining banks because the majority of them are suing MBIA for the transformation. By settling, pre-transformation trial, they would in effect be hurting their case against MBIA regarding the transformation. This is why at the very least i don't expect any large putback settlements (from banks that are also suing MBIA) until the conclusion of the transformation trial, if there is a trial. In my opinion, the thing to be worried about is the remaining commercial real estate exposure. Despite an improving CRE environment, the extent of the exposure is still large- though rapidly decreasing with settlements and contract amortizations, and very healthy today. They have a pretty fantastic municipal insured portfolio, so i am not worried about their muni exposure on the NPFG side of the business. Looking forward to the conclusion of the separation trial. I've never read so many court filings in my life! As for the GSEs, it was anticipated by myself and frankly most of the investment community that the GSE would settle for peanuts. At the time it was unclear if the private label investors were even able to sue until recently. These are all very different types of cases, where in MBIA was insuring these deals, while private label was investing in them. I think it is likely that private label will settle for a haircut as well (though in my best guesstimate not at the same extent of a haircut as the GSEs (though for a large haircut nontheless), as that trial would go on for ages, and for other reasons. The monolines' trials are well underway and are in fact near conclusion in some cases as trials are soon to begin, so there would be no large pre-litigation haircut if a settlement were to occur. The CEO has his money where his mouth is. He is doing a fabulous job negotiating commutations, and so far MBIA has made a great deal of progress on the litigation front. I'm looking forward to the next 3-9 months. He certainly has the incentive to win. I don't know what's up with the GSEs, except that their fiduciary duty is not (incredibly) to their shareholders, but rather to the US Government. So that's why I suspect it was political pressure to settle -- after all they've been through, they don't want another financial crisis to derail confidence. MBI was the Berkowitz pick that I just couldn't get comfortable with due to the complexity -- but your commentary has helped me understand it (the gist of it). I wouldn't say I understand it better now, because that would of course imply that I understood some of it to begin with. It is a big position. I've had bigger positions in the past, but this is getting up there. Good point about their not wanting to settle before the transformation decision -- the proceeds going to MBIA would torpedo their insolvency argument. These guys are bastards but I own a lot of BAC too.
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There is also a "personal holding company tax" of 15% that your C corp has to pay on retained earnings from passive investments if you do not pay them out. You can avoid it if the 5 largest shareholders put together comprise less than 50% of the shares, or if the majority of the corporate income is not from such passive investments. Anyways, the suggestion that I just start my own corporation has this headwind to contend with. And when in my example the man buys 60% of a company he should do so perhaps with an insurance company (more on that later) or an offshore company. http://wraltechwire.com/business/tech_wire/opinion/story/2458989/ You can avoid the personal holding company tax if the corporation is offshore -- it only applies to domestic companies. Also, if you acquire an insurance company or similar financial based business where the business model is designed around income from interest/dividends, then you do not have to worry about such a tax.
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Curious why so many start partnerships instead of closed end funds? It looks like partnerships lock out so many interested investors due to the SEC restrictions on net worth. What is unattractive (from a money manager's perspective) about running closed end funds? Why do you all do partnerships? Is it something simple like, for example, trying to sell into an illiquid market that scares the investors away? Are the expenses too high (sending material out to every fund holder)? Do regulations make them bureaucratic nightmares?
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The 2010 annual report and letter to owners is out: http://investor.mbia.com/annuals.cfm
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I like the idea of buying my own portfolio below NAV... but I'm wondering how we go about taking over a closed end fund. You'd need to have knowledge of who the shareholders are so that you don't have someone else playing the same game (or just sitting on a big chunk and unwilling to sell at a reasonable price). Why not start a new closed end fund instead of taking over an existing one? I don't know anything about how hard it is to start one, so if that sounds naive I'll apologize in advance.
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I hope that's the case. Personally, I think the law is on the side of MBI, but this is really the only thing that worries me. Anyhow, I added more shares on Friday and at open today. It ought to get into the $40s in a few years if the courts are on their side.
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I found the following thoughts from the CEO of MBIA insightful in explaining their low putback success (Q1 2010 conf call): We have received money in the past, a very limited amount of money on a limited number of putbacks before the litigation was initiated. We haven’t received any funds on any litigated cases since we began the litigation. In terms of other actions out there, as you would expect the bulk of the recoveries that have been actually observed for putbacks have occurred with the Freddie, Fannie and FHA. I’ve been asked by a number of investors how come they are being successful and getting their putbacks at this point in time and you have not yet been successful. And the answer is that very simple, is that Freddie, Fannie and FHA have a very powerful incentive which is that if you don’t place loans going forward with them – if you want to place loans going forward with them, you probably have to honor past contractual representation and warranties. And we have discussed the process that Fannie and Freddie use with their folks to see how it compares to the process that we use both from examining the loans and also in terms of the accounting and both approaches are consistent with our own. The main difference in our case is the majority of the people who originated mortgages for MBIA in the pool that we securitized, have chosen not to honor the putbacks at the level that we put the loans back to them, which is why we were forced to initiate litigation against them. The trouble of course is that despite the leverage that the GSEs hold, they still settled the put-back litigation for peanuts. Could that be explained away with "political pressure"?
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Did you bring your swim diapers this time?
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Here is a product that pays you a fixed sum. Not great if interest rates rise though (unless you are the insurer). So this has me wondering, given the current low interest environment... Does anyone on this board follow any companies where a substantial amount of their business is derived from providing fixed annuities? This seems like the kind of business to get into when: 1) interest rates are relatively low 2) interest rates will go substantially higher. 3) portfolio is positioned to expect a rise in rates The idea of investing in such company has never occurred to me before -- I know nothing about this sector. Just looking for means of profiting from potential rise in rates -- thinking of out of the money calls on such a company as a form of insurance.
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Glad to see someone gets it. People are funny. If you insult the Republicans only, they'll get mad. If you insult the Democrats only, they'll get mad. If you insult both, everyone remains happy.
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This makes the assumption that the criminals are unsuccessful in their endeavours. It appears that they were attempting to kill FFH , put it out of business . It smacks slightly of hubris not to understand that the good guys do not always win. Come June of 2006 that game was already won by the good guys. Runoff was breaking even as posted months beforehand in the annual report, big gains were being booked on Indian equities, the only catalyst left for the hedgies was a major hurricane season. But the people who do this professionally were still writing business in Florida, albeit at higher rates (insurance companies). The expectation as we discussed at the time was to NOT have a repeat of 2005, which of course is exactly what happened. The hedgies overstepped when they became dependent on natural disaster as their sole recourse -- I remember we were discussing the company otherwise trading at a P/E of 3 for the year due to the big gains coming in. I think they got too emotionally caught up in their lie -- too hard to give up and admit that the good guys has already won. I remember one of those hedge funds was still trying to short the company even when they had all the CDS hedges during the financial crisis -- was killed in the short ban.
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Of course, as of the date of publication, the price of the S&P was roughly 28% lower than the current level. The markets have risen 12.5% annualized from the closing price of the day that article was published. It's been 2.5 years to the day.
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1) In your scenario the tax deferral benefits on the rest of the retained earnings are now zero -- this is meant to be a tax-deferred investment holding company. The annual tax-laundered-dividend payout in my example is only about 1%... but one can assume this holding company earns far more than that (it only pays out enough to fund his consumption and retains the rest of the earnings to reinvest). The retained earnings over time push the stock price up -- but you keep turning it over every quarter at 100% so you are paying capital gains tax every quarter on those retained earnings and therefore on a quarterly basis paying far more in taxes than you'd pay if you just took a dividend in cash. 2) The person has a 60% stake in the company. He can't sell and then immediately buy back a 60% stake. For one thing (liquidity aside) he loses control of the company -- what if somebody doesn't sell it back? You're right, the wash sale scenario doesn't work. Without the wash sale rules, the only offsetting tax benefit is the dollar value of (t)(dividend) when you realize the capital gains in the future, so you've effectively paid all the interest on that money to the government. How shitty is this deal?! I added an "ASIDE" to my last post. I am disheartened at our prospects of turning the US economy around as a jobs creation engine unless they cut the taxes on capital way back. And that lunch conversation came up when he had just finished saying that BHP is buying back shares -- so I had to ask why in the hell BHP would buy back shares when Australian get the dividends tax-free??? I mean, Australian shareholders (in order to get their cash) will need to take a capital gain, where they will be owing tax... versus the tax-free alternative of just getting cash dividend! Amazing -- what stupidity. Must be that they are either trying to push up stock options or else they love their non-Australian shareholders a whole lot more.
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1) You are completely eliminating the tax deferral benefit on the retained earnings -- this is meant to be a tax-deferred investment holding company. The annual tax-laundered-dividend payout in my example is only about 1%... but one can assume this holding company earns far more than that (it only buys back enough shares to fund his consumption and retains the rest of the earnings to reinvest). The retained earnings over time push the stock price up -- but you keep turning it over every quarter at 100% so you are paying capital gains tax every quarter on those retained earnings and therefore on a quarterly basis paying far more in taxes than you'd pay if you just took a dividend in cash. example: Company compounds shareholder value at 10% annually. With 100% turnover of the shares, you're paying 10x as much tax with your proposal versus just taking the 1% dividend. And it's more than 10x the tax when compared to my dividend-laundered-buyback alternative with non-zero cost basis -- he is going to take the tax-deferral on retained earnings to the limit and leave his shares to his heirs with the step-up in cost basis. 2) The person has a 60% stake in the company. He can't sell and then immediately buy back a 60% stake. For one thing (liquidity aside) he loses control of the company -- what if somebody doesn't sell it back? ASIDE: I was at a lunch yesterday with a local businessman (local to Sydney). He says it's actually a zero personal income tax for Australian taxpayers for fully franked dividends on Australian shares (before I thought it was 9%). Translation -- his maximum tax rate is 30% (paid by the corporation). He can then pay out any post-tax corporate earnings to himself personally without getting taxed a second time. This validates what my Australian grandmother says "The rich do not pay any tax". In America they do at least pay some tax... not in Australia. I believe the day the US Government gets serious about wanting more jobs in America, they will stop treating capital like it's something to be punished.