ERICOPOLY

Yes, there is some facetiousness even in my advocation of it. However it was an attempt to answers Sanjeev's question as to whether government support is sustainable... this is a method I found that actually puts a price on it. Not acting has a price too by the way, as those jobless persons are given humanitarian aid by the government. Part of that cost (the one we are paying anyhow) is capitalized in the price of blowing up some inventory -- labor is the largest cost component of building a house and we are paying for that labor one way or the other.

The full price paid for BNI will be carried on the books, even though it represents a multiple-to-book of BNI's underlying assets. In theory, if Berkshire only held KO and nothing else, Berkshire should trade at book value even though KO trades at a huge multiple of book.

Warren weighs in: http://www.huffingtonpost.com/2010/01/20/warren-buffetts-housing-s_n_429850.html "We could have a cash for clunkers program on housing. If we would blow up 3 or 4 million houses today, the housing shortage would be over... if you have an inventory overhang. You have to have demand be greater than supply for a significant period of time. And we're well on our way to that."

I'm glad to see that Warren Buffett also thinks it's stupid. http://www.huffingtonpost.com/2010/01/20/warren-buffetts-housing-s_n_429850.html Separately, Buffett told Bloomberg that he "didn't see any reasons why the banks should have to pay a special tax," and questioned why Fannie Mae and Freddie Mac had not been asked to pay similar fees. Here's Buffett: "If it's some kind of guilt tax or something of that sort because banks were among the [firms] that were saved back in 2008, everybody was taken care of then. And the banks, basically, somebody like Wells [Fargo], it's cost them a lot of money to be in the TARP and it was basically forced upon them. They didn't want to take the money, but really had no choice...The government's made a lot of money off Wells. They've made a lot of money off Goldman. They've made a lot of money off JPMorgan. And where they're at going to lose money, at least where it's possible they'll lose money, is in the auto companies."

That works when an industry is destroyed permanently. Those workers need to learn a new skill. For example, people once were employed for manual labor that is automated today. The homebuilding sector (and related industries like carpets/appliances) is not permanently destroyed. It is just idled while we wait for demographic growth to eat up the oversupply. What are they going to do? Retrain as computer programmers for the next three years only to go back to work in construction when their labor is needed again? Aren't you then wasting a lot of money on retraining them? We need carpenters... we just don't need them right this second. Where is this other industry that is undersupplied for labor over the next few years? Free market? Sometimes the free market is not in need of huge amounts of additional labor, such as when demand is slack.

There are some notable things that make it unique. We'll keep using OIL as the example: Pushing up the price of oil makes the Saudi's happy but increases costs for the so called "Main Street" individual. Oil exploration to replace supply destruction does not put "Main Street USA" back to work US residents who own houses do not feel wealthier and more confident as the price of oil rises Lenders who want 40% down for houses do not feel encouraged by rising oil prices My point about destroying excess inventory is merely to get it out of the "OVERBUILT" status. Then it goes back to the normal place where we would be had it not been for the housing bubble. So then the free market can allocate capital whereever it feels appropriate again, and the government can step back. People who normally are employed by the home construction sector go back to work, they buy bread which puts another cashier behind the checkout line... and they have income which allows them to make their payment on their mortgage again (they are one of the millions who are currently delinquent in paying). I could go on, but anyway... I see your point that it can't possibly make the country wealthier in the aggregate to destroy an asset (which is housing). It does however improve some of the other problems that are leading to much of our current social unrest.

You are right, there is the shadow inventory. But there is also FHA loans, there's Fannie and Freddie which is going to absorb a good deal of those expenses anyhow... I think that if you buy a house for $170k and tear it down... you are then supporting a housing price level. But let's say you don't do that... you let prices fall and in that case prices go lower and Fannie/Freddie takes a larger loss. I think we're talking about some level of government losses one way or the other. Everyone that owns US debt ought to understand that. So buying up the entire 4m of housing inventory would be an overstated cost. Once you get well into the 1-2m buying level, prices stop falling or rise, confidence wouldn't get any worse (likely improve), perhaps some of that shadow inventory dissipates on it's own. But suppose it doesn't and you need to buy and destroy 4m homes. I think once that happens you have normal supply/demand that drives construction and magically people go back to work building houses, selling appliances, selling carpets, etc... Then you have incomes to tax again (vs unemployed people) and that further chips away at the cost. All of the assets tied to house prices benefit... that may mean they are not sold at such steep losses, so there are fewer tax loss deductions and that ultimately means higher taxes collected on other gains. So again, some of the money goes back to Treasury. I don't think that $100b of stimulus spending necessarily equates to $100b of deficit... if the money is spent on destroying supply then it brings recovery a step closer, and that means growth in tax receipts.

Why then is the price of gold continually rising? Why are central banks (like India's) paying more and accumulating more of this worthless relic? That kind of sounds like central bankers are infallible. After all, they are... so their actions must mean something about the value of gold.

You also ask a good question... how sustainable is the tax credit? The housing market is oversupplied by 860,000 units: http://newobservations.net/2009/12/27/housing-inventory-still-dramatically-oversupplied It would cost $146 billion dollars to buy 860,000 units and scrap them. Kind of like cash for clunkers in a way (scrapping houses instead of cars). $146b is well within the remaining unspent stimulous budget. My assumption is that the average price paid is $170,000 -- that may be fallacious because median is not the same thing as average price.

On Australian television a couple of nights ago there was a psychologist explaining why some individuals get sucked into believing in apocalyptic scenarios from "the book of revelation". Apparently, as aweful as it is to contemplate armageddon, some people actually find relief in believing it because it provides them some certainty... finally, they know how it ends. So it gives them relief... relieved that they know how the world is going to end, and when... I know, silly as that sounds the psychologists were saying it anyway. But what immediately struck me is that people probably find the same relief when they reach the conclusion that the financial world is going to end... and that probably encourages people to step onto the hell in a handbasket bandwagon... notable investors included.... permabears.

I think that buy low and sell high is the best method to apply. Value investing works because it includes the appraisal process... without which you have not a clue where "low" and "high" fall. I heard of buy low and sell high long before anyone told me about "value investing". Later I realized they were the same.

I wish the government did not pursue this any further. They forced companies like Wells Fargo to take the TARP money for cosmetic reasons, and it's clear that they did not want to take it. Every single quarter they have made progress towards rebuilding their capital levels through profits. Now, they are punishing Wells Fargo and behaving like it was a "bailout". Why do they have low capital levels? Because their took the writedowns on Wachovia before buying it... a lot of the other firms only look better capitalized because they are dribbling out the writedowns instead of doing it in one big bang. I also take exception to the idea that the remaining banks need to recapitalize the FDIC with special assessments. The mistake was made several years ago by not requiring all banks to pay a higher insurance premium to the FDIC to ensure that it was capitalized enough to withstand the storm we are going through right now. Instead, the politicians wait until the crisis hits, they wait until the bad banks go under, and then raise the premium and impose special assessments. In other words, if you are a good bank Wells Fargo, you need to pay for the sins of the bad banks. That's just insane in my opinion. All the banks, good and the bad, should be paying equally, but instead we have it rigged so that we wait for the bad to fail, and then concentrate the costs on the good banks. Why punish the good banks who did nothing wrong? The FDIC exists to save the depositors, I think the tax payers should ultimately bear the cost of the special assessments, it was their duty to put the right people in office in the first place and they failed at that... their elected representatives did not get the FDIC adequately capitalized in the first place. The tax payers (in my opinion) need to feel some pain when they elect the wrong people... When the politicians failed to regulate the CDS that AIG wrote, did they re-elect those same people? Did they push out the people who deregulated or failed to regulate, or did they elect them for an additional term? How many letters did they write to their congressmen demanding that AIG's CDS get regulated, and that the FDIC was undercapitalized? I think it's disingenuous to just blame Wall Street for "greed" when really the problem here (IMO) is taxpayers voting in the wrong representatives. We talk about how hard it is to remove a director when it comes to CEO compensation, but how about getting your elected officials in government to do the right thing? If the elected officials would only manage risk appropriately in terms of things like CDS regulation, discourage (through regulation) the kind of lending practices that got us into this mess in the first plac, and ensuring the FDIC is big enough to handle failures at large banks... Nah... couldn't the taxpayers that voting these people in that allowed the crisis to happen... the tax payers and their elected representatives have framed the debate such that they are not responsible.... Wall Street is. I don't buy it frankly... the taxpayers (through their elected officials) had the power to stop this crisis dead in it's tracks long ago. They failed to act and now they just blame somebody else... Wall Street greed "fat cats".

17F in Gainesville. Low 30s in Miami. 42F in Key West. Brrrr! FYI Publix is hands down the best run supermarket chain in US. It's privately owned and likely the most profitable too. There are @ 300-500K Canadian snowbirds in Fla this time of year. You can run, but you can' t hide from Ol' Man Winter. :) Your snowbirds are just going to the wrong place. It is stinking hot here in Sydney today.

Median household income seems more reliable in terms of housing affordability. In Seattle, dual income households are the norm. I would expect the price/income ratio to be higher in dual-income situations simply because... after buying food and clothing you have more money left for housing... and this tends to either drive prices higher in cities where it is trendy to live, or in suburbs you wind up with larger houses that are more expensive to build. That's how I think about it. There must be some way that housing can be priced at 5x or 6x incomes... it can't be fully explained by low interest rates, although certainly that plays a large role. Low interest rates lead to higher principle payments on amortizing loans -- so having 1/2 the interest payment does not dictate 1/2 the mortgage payment.

Ericopoly, Actually, the lower qualified dividend rate (in the U.S.) expires at the end of 2010--so next year your dividends will be taxed at your ordinary income tax rate unless the tax code changes. GaliPart Then I will be back in the "no dividends please" camp. That is really BS -- getting taxed 35% after already having paid tax on the corporate income? I am in Sydney right now for a month, just enjoying the beach, seeing the extended family, and being away from the wet Seattle climate. I love their tax code here. Australia has a dividend franking system. Australian residents aren't taxed on their dividends so long as it's an Australian company paying the dividend and the company has already paid tax on that money. Additionally, their corporate tax rate is 30%. Then they have no gift taxes, no inheritance taxes, and much less in the way of property taxes (they have a land tax in some areas but it's only applicable to the land assessed value). It seems the only people who really pay the high taxes are the wage earners (not only are income taxes high, but there are high regressive "GST" sales taxes). For somebody living off of dividends though, this is a much better situation than the US. Plus, I'm a dual citizen... the only thing holding me back is my wife's family (in Seattle).

A little while back (2003?) Bush dropped our dividend tax rate to 15%. So even if I make $1b in dividends, my tax is only $150m. But I think the shares need to be held at least 1 yr before that lower tax rate applies -- so next year my dividends will be at 15% unless the tax code changes.

Agree completely with you on the compensation bit. As for "raising the dividend to the moon", there is no reason why ROE should rise on what's retained except to the extent that leverage has increased because of the higher payout. The same ROE effect could be achieved much more efficiently through share buybacks at discount to book. Moreover, as a US tax resident, you should not be happy about the unfavourable tax treatment of Cdn dividends. Also, I wonder whether you have considered, as a LEAP holder, that you are adversely affected by a high dividend (although this should clearly not factor into mgmt considerations). You are right, buybacks are just as good from an ROE standpoint. And yes, it only boosts ROE because it leverages up the company... after the big gains in the past two years coupled with shrinking underwriting, it seems like a decent way of increasing a flagging float:equity ratio. I don't hold the LEAPS anymore... I exercised them to get the dividend. A year early on some of them, but they were low strikes so the dividend represented a quite high percentage return on the cash I deployed in the exercise. CDN dividends don't impact me any more than US dividends (as I understand it) -- I get a foreign tax credit to reimburse me. My dividend preference is simply because I want more cash flow -- I felt a little bit hostage to Mr. Market last March. This year going forward I can at least live on the dividends and not worry about selling anything to fund my lifestyle. I'm in equities only but my dividend is now more than I earned when I had a job -- and once Wells Fargo restores their dividend things are really going to be awesome.

That's right, obvious as it would otherwise seem. (it would be obvious to most Martians at least).

Dividends are not compensation. Stock grants are compensation, salary is compensation, bonuses are compensation. But dividends, that's not compensation... it's just their rightful slice of what they already own. Let's compensate them... pay them more. These guys are underpaid and if cash flow is what they need, then let's pay them appropriately. As for the dividend, I like the dividend and I hope they raise it to the moon -- it will increase the ROE of what gets left behind.

The rate of inflation after 1965 is far higher than that of the period from 1913-1965. In other words, it would make far more sense to only count inflation post 1965. In doing so, it will alter your outcome quite a bit I think.

Sprott's July letter points out that we're in a depression right now (according to Sprott) and that S&P500 at 189 level is possible in a depression. http://www.sprott.com/Docs/MarketsataGlance/July_2009.pdf These are his three fearful scenarios. 1. Earnings stay constant; P/E ratios hit cycle lows: We assume a scenario where investors are nervous, people need to sell stocks to pay for lost wages, or for retirement, but the companies continue to perform as of June 2009. Assuming a P/E of 6, which is close to the all time low, and using an earnings value of $63.04 for the S&P 500 Index, we derive an S&P 500 Index value of 378.16 2. Earnings get halved; P/E stays constant: Earnings have been half of their current value three times over the last 30 years – so it is entirely within the realm of possibility that they could be halved once again. In the late 1970’s, early 1980’s and early 1990’s the S&P 500 Index generated half the earnings per share that it did this year in 2009 dollars. Using today’s P/E multiple of 16.08 results in an S&P 500 value of 506. 3. Earnings get halved; P/E ratios hit cycle lows: double trouble. If we combine these cases where earnings are cut in half from today and the P/E ratio drops to a cycle low, it implies an S&P 500 Index value of 189 (depression territory).

The "miscreants" (as described by Byrne) don't borrow shares: they naked short them. Your suggestion for cash accounts as a means of cracking down on legal shorting prevents honest participants like Watsa from shorting... and he is not a "miscreant". Cutting back on shares available for lending might increase the demand for naked shorting... as naked shorting is a means of avoiding the high cost of borrowing shares.

A little while back LVLT took a hit to their NOLs due to a 5% ownership change. I didn't realize the rule was at 5% until it was mentioned in a LVLT annual report that I read. I suppose I could have a better memory and actually cite at least the year of the annual report, but it was certainly within the latest 2 or 3 years back if one is really interested.

This is from Q4 2008 -- it sounds like Wells Fargo communicates with delinquent borrowers at a higher rate than this anecdote from your builder friend suggests. Through our active communication programs, Wells Fargo Home Mortgage has reached 94 percent of its customers who are two or more payments past due. For every 10 of these customers, we have worked with seven on a solution, two declined help and one could not be reached. Of those who received a loan modification, one year later, approximately 7 of every 10 were either current or less than 90 days past due. https://www.wellsfargo.com/pdf/press/4Q08_Recorded_Comments.pdf

There is so much to talk about. I assume you've already read the Q2 & Q3 transcripts? There is a lot in there that addresses the question of how they are going to grow while the consumer is deleveraging -- one can start simply by observing how much the business is growing this year, in spite of the increase in the savings rate and contraction of credit: https://www.wellsfargo.com/pdf/press/1Q09_Recorded_Comments.pdf https://www.wellsfargo.com/pdf/press/2Q09_Recorded_Comments.pdf https://www.wellsfargo.com/pdf/press/3Q09_Recorded_Comments.pdf In a nutshell (from the Q1 transcript): The consistency of our revenue growth is also due to the fact that we did not participate in most of the problematic businesses and activities that have reduced the level and stability of revenue at many of our peers. As our peers are busy dealing with the problems from these activities, and with replacing the lost revenue, we have been successfully gaining customers and market share that will add to revenue and earnings well into the future. https://www.wellsfargo.com/pdf/press/4Q08_Recorded_Comments.pdf While many other banks – and almost every other large bank – retrenched from lending since the start of the credit crisis, Wells Fargo has remained open for business, providing over half a trillion in mortgage originations and new loan commitments to our consumer and commercial customers. And, on a net basis, increasing on our balance sheet over $119 billion in loans and securities by year end 2008. The opposite was the case during the irrational exuberance of 2006 to 2007, when asset spreads were at all time lows and were not priced for risk. At that time our asset levels were relatively flat - in fact declining in 2006 - while other financial institutions were leveraging their companies – in some cases growing by double digit rates - at low or no economic return. We were building our capital in that period waiting for the dam to break and it sure did. We were also prepared to lose market share and in fact we lost mortgage market share because we maintained our disciplined lending standards throughout that period. Earning Asset Growth vs. Peers – slide 5 In the last 1 ½ years, as others needed to retrench, Wells Fargo accelerated it’s growth taking market share in our chosen markets, increasing the number of households and businesses we serve and actively working at building relationships that will last forever. Wells Fargo’s growth in average earning assets, adjusted for acquisitions, from the beginning of the credit crisis through year end 2008 - 25 percent - was the highest among our large bank peers and also the highest among the top 9 peers in the U.S. In terms of just loans, Wells Fargo’s acquisition-adjusted 22 percent growth was the highest among our peers. Keep in mind that while Wells Fargo has been fully extending new credit, we were simultaneously reducing high-risk loans, including exiting indirect channels, tightening credit standards and pricing for risk. Our solid pre-tax pre-provision profit growth is largely fueled by strong revenue growth. In addition, we have grown revenues at a faster rate than expenses – creating positive operating leverage. In 2008, Wells Fargo grew revenues by 6.1 percent organically, while reducing our expenses by 2 percent. None of our large bank competitors had positive operating leverage last year, adjusting for significant acquisitions. Relative to our peers, we have had the highest and most consistent growth in top line revenue net of expense growth over either 1 year or 5 year time periods. Adjusted for acquisitions, none of the large peers had positive pre-tax pre-provision profit growth last year. Our relative performance is due to our faster loan and deposit growth, as well as the fact that we have not had the revenue losses that all of our peers have had in connection with problems from “covenant-lite” leverage lending, structured investments, proprietary trading, or market making in sub-prime or exotic securities because we have never had material exposure to those activities.