ERICOPOLY

Or into TIPS.

I think it matters a lot what type of CRE loans we're talking about. For example, I feel more comfortable with loans secured by apartments. I feel uncomfortable about loans secured by shopping malls. Wells has a nice pie chart on page 22 explaining their CRE portfolio allocation: https://www.wellsfargo.com/pdf/invest_relations/presents/nov2009/baab_110609.pdf

I thought about buying a second home a year ago; fortunately I looked harder at VRBO.COM and that talked me out of it. Just rent a place for 3 months. Eric does that refer to vacation homes in general or just vacation homes in Vancouver. Vacation rentals in Vancouver do not work all that well from what I can see from the owners perspective in some markets however it appears that they can work fairly well. In fact rentals in VCR do not work at all. I have a friend who is renting a new condo and at market rents his landlord is generating a 1/2 of 1% cash on cash return. I don't know his situation but I figure if he only wants a place for a few months a year it's a good way to go. They have worldwide listings. Definately worth checking out for anyone who wants to go someplace for several weeks/months and doesn't want to be skewered by hotel prices. The houses on there are unbelievably cheap to rent by the week/month vs your typical hotel rates is what I mean.

That's not bad. I didn't tell the whole story though as to why I chose the Dec 2011 puts. The story explains why I could just hold them to expiration without it really being any kind of drag -- in fact, I'm going to change my story and just plan to not try to sell the puts at all. First, I went to 130% notional long in my portfolio 1) 20% increase from buying FUR: I think we have a fair chance of astute investors finding a favorable buyer's market for CRE. 2) 10% increase from buying WFC calls: WFC volatility dropped off so I bought back the $30 strike puts that I'd written and wrote $40 strike 2012 instead. I also bought some 2011 WFC calls $15 strike. I didn't change my FFH weighting, which is still 50%. So now I've levered myself by 30% but hedged it with a 40% put on the market. TAXES: 1) FUR is held in IRA/RothIRA accounts so yield compounds without tax. 2) FFH is held in taxable, but is 25% in the form of shares and 75% in the form of 2011 calls 3) WFC calls held in IRA/RothIRA, $40 written puts held in taxable 4) SPY puts held in taxable Due to my use of options, the leverage does not cost me anything (no interest costs). The SPY puts cost me 16% of notional (8% per annum). So basically, the hurdle rate is 8% per annum, but I have more put protection (40%) than I have long over-exposure (30%). I am betting that the 40% short position is ample protection against the 30% additional long position. Now, we've seen certain issues fall much farther than the market, and given that I've got FUR and WFC there is reason for concern (strong names but standing near ground zero for a massive CRE debacle). That's why the 50% FFH position is nice -- in the early 2009 crash FFH merely declined in step with the market, and this time around it starts off with a lower P/B. Additionally, the WFC calls with a $15 strike will show an increase in volatility premium as WFC declines (another hedge). Finally, due to my use of calls and written puts I have a large cash position, my margin equity percentage is 100% so I don't need to distress over that. Much of that cash is allotted to 10-yr TIPS for yield and CPI hedge. CRASH: Should the market crash in a major way, I do not want to be selling the SPY puts and paying tax. Instead, I would rather keep the puts in place and buy some shares of whatever is cheap. I will be able to allocate 10% without getting into a net leverage situation, but I would be happy to allocate 30% and be net leveraged by 20% if the market really coughs up the value. Also, the volatility premium I paid will disappear as the market declines so selling the puts won't give me a full hedge against market decline anyhow! So, I voted against selling 2011 puts after a market decline. NO CRASH: I believe each holding I have will earn more than 8% per annum over the next two years, and I get a tax loss for the SPY puts when they expire. So I think my 40% position will be covered by gains on my 30% position overallotment without being a drag. Everything I have in my portfolio is a long term position now. I have peace of mind this time around. My portfolio in it's present form generates enough income to fund my family's annual spending. So I don't need to sell anything at distressed prices in order to eat. That will make the next crash easier to handle -- that was one thing that made the last crash a little concerning for me as the "what if" scenarios wouldn't leave me alone.

I thought about buying a second home a year ago; fortunately I looked harder at VRBO.COM and that talked me out of it. Just rent a place for 3 months.

I bought hedges last week -- something I never did before. Dec 2011 at-the-money SPY puts. They expire in 24 months, will decay relatively slowly for the first year, I will likely close them out a year from now. I am doing this because of: 1) warnings of an impending CRE debacle 2) warnings of dollar carry trade unwinding My hedge is 40% notional of my net worth. I also pick up some hedging by proxy via my 50% FFH position. I was one of the people who poo poo'd the impending financial bubble crash pre-2007. I was lucky that some responsible people at HWIC hedged on my behalf. Now I'm going to be a big boy and take care of myself going forward. I aged a decade over the past two years.

I have IB, and had them complete a "northbound transfer." All that does is makes the FFH shares I have show up as FFH.TO instead. It cost $11 for them to do, but I know FFH.TO is marginable right now day 1. Your advice is invaluable. Thank you very much!

I have my 2010 & 2011 FFH calls with Interactive Brokers now. That went pretty smoothly -- I initiated a partial ACATS transfer on Monday and it was completed on Thursday, yesterday I exercised some of the 2010 calls. I assume they will become FFH-U shares, given that they are currently USD shares on the NYSE. The only open question I have is whether FFH-U will be marginable from the start, or whether there will be a lag before Interactive Brokers updates their list of marginable Canadian securities. So that's why I'm waiting to exercise the rest of them. Also, as for the off-topic discussion, it looks like the private lending department at Wells Fargo will give me a home loan based on my assets... as long as I transfer my brokerage assets to Wells Fargo. Jeez... I guess I have to smile and say "you guys are good".

"What would you do if you had a million dollars?" "I would relax... I would sit on my ass all day... I would do nothing." "Well, you don't need a million dollars to do nothing, man. Take a look at my cousin: he's broke, don't do shit." That movie was terrific by the way... especially for a tech worker.

Only 2 million? That's a butt load of money to most people. I would retire on that amount if I had it right now. I think it boils out to 60K/year for 25 years. Well, yes, I suppose it is however a point was made about $50m or $1b inheritances making it easy for people to do nothing. It only takes $2m to ruin a young person's life.

I have a brother-in-law that sits on his ass and does nothing. Oh wait, no that's not entirely fair. He works as a bartender in Big Sky during ski season -- his shift is only 3 nights a week. Then he skis the rest of the time. He lives on an income from a trust but it's only a couple of million. He is 40 yr old and I think the money will run out but I think he's too stoned to do anything about it. The trust is invested in mutual funds that charge more than 1% in fees, and on top of that there's a 0.5% trust management fee. So let's say the fund is invested in 3% dividend payers... right there fully 1/2 of his dividend income go to the fund managers for doing pretty much nothing (it's basically no different from an index fund). He didn't finish high school -- forget about college. Just party party party. The money is 3rd generation, so he is blowing it right on cue.

Yes, I understand the empty nester problem and that they are a huge generation. But how about the young people who are looking about for a nest? Echo-boomer demographics are increasingly moving into the upsizing stage. Perhaps they buy the McMansions at a discounted price, but either way there is a dam of pressure building for family-sized homes. The Echo-boomers ("generation Y") are nearly as big as the boomers, yet were born in a tighter band of years. They range from 18-30 yrs old, and they are 3x the size of generation "X".

Eric, why do you say the levels are unsustainable? With autos, I don't see why we need to have any production in this country. With housing, the current building rate may be unsustainable over the very long term, but I think we have years before the rate would need to increase in order to accomodate new household creation. New cars are being purchased at a rate below replacement needs, that's why I said it. Whatever the long term trend, production fell by 40% by Feb 2009 over a period of just a few months. That's a sudden shock, more than twice the rate of decline in the 1982 recession. Some people who could afford payments on cars could not buy them due to unavailablility of credit -- if the govt pumps money into the financial system so that these able borrowers can buy a car, it's not "unsustainable stimulus". Unless one believes that the "new normal" will be an environment where banks refuse to lend to people who can afford to make the payments... I don't think so. The stimulus buys time for the banks to earn themselves out of their losses, after which they will be able to lend without stimulus assistance. Housing... I think a similar situation. Just look at your brother... he couldn't find anyone to help him build a home even if he wanted to -- he had to set up an LLC to buy the house with a commercial loan. That's not normal.

SD, You are right, a bubble is something that cannot be sustained. You are right, the stimulus cannot be sustained as it would eventually break the government. But hold on there a minute... A simple sanity check would suggest that we are building houses at an unsustainably low pace. There is also an equilibrium level of automobile production, and without the stimulus we were producing cars at an unsustainably low rate. There are unsustainably low levels of activity in the economy that are the very reason why some of this stimulus is necessary in the first place. Are we, with the stimulus, now building cars and houses at an unsustainably high rate? I'd say no. There was a bubble in house construction a few years ago, but today it's quite the opposite. Rather than a downwards correction (what we were facing a few years ago), we now face the inevitable upwards correction... with a couple of years of waiting for the inventory overhang to clear. So I can't agree with you on a bubble being a no-brainer here. The no-brainer to me is that production levels of major sectors of the economy (autos/housing) are operating at unsustainably low levels, not high levels. - Eric

I think gold is currently becoming popular to discuss for the same reason. Looking back 12 months, gold has been no better than AUD. But people must look up the price of gold more frequently or something, because I hear a lot of talk about gold but not much chatter about AUD. Maybe it's because we can't melt our jewelry into AUD. I don't know. http://finance.yahoo.com/q/bc?t=1y&s=AUDUSD%3DX&l=on&z=m&q=l&c=gld

Those are prior to the seven lean years. My point is that, sure, the stock sucked on the NYSE up until late 2006 but these were all lean years (runoff sucked up all profits). Then there was a big restatement in July 2006 that just made people so happy to run out and buy the stock! But then people collected their heads and realized that runoff really was fixed, there was some short covering, and it traded between 1.75x -1.2x book up until August 2007. Then it went downhill but things were no better over on the TSX for NB. Would a TSX-only FFH have fared any better than NB late last year? I just question the theory that FFH is only cheap due to it's NYSE listing. I think if they generate more underwriting profit people will bid the price up. I think MKL's premium is really just due to the generally better underwriting profit -- the market capitalizes that as extra income and it shows up as a premium to book... or so I believe.

I don't believe a TSX-only listing is going to solve the valuation problem because I remember NB trading cheap. There will still be times when it will trade at book value, even below book value, same as NB. NB mostly traded above book but only during good times... once the markets blew up it went down to book and even below that. Fairfax was broken during the good times and enjoyed a premium in late 2006 and early in 2007 only to see the premium disappear once the markets blew up. So having a "fixed" Fairfax we only really have late 2006 and 2007 data to go on -- sort of a small sample. The markets I think won't pay a premium until it senses that the next hard market is here. There's no telling how much smaller the insurance operations will be once the soft market is over (it keeps shrinking), and it's these insurance operations that the market pays a premium for (that's my understanding). Personally, I am willing to be patient because we are making excellent money as we wait. Sure, the markets might crash and pull down book value again, but if I sell out and buy something else that isn't going to help me at all with that risk. I hope they boost the dividend again. I feel more comfortable knowing what my actually income is (as opposed to look-through), especially given the turmoil (my other alternative is to use my margin as a pay-day lender, but the dividend is clearly a safer strategy).

So basically they are saying they only expect 5-10 loans to recast all of next year? And why don't they mention 2011? I think there has to be a bit more too it than this. Remember that: 1) they are only talking about the number of loans reaching the 125% recast trigger 2) it's pretty hard to grow the original principle balance to 125% if we're talking about a loan that's only a few years old and where the interest rate was very low to begin with (a very low interest rate means that even if you pick the minimum payment option 100% of the time, it will still take a while for the original balance to grow to 125%). And they do in fact mention 2011. Here is the full quote (inclusive of 2011). I'm also including the part about their portfolio of ARMs recasting: Based on assumptions of a flat rate environment, if all eligible customers elect the minimum payment option 100% of the time and no balances prepay, we would expect the following balance of loans to recast based on reaching the principal cap: $1 million in the remaining quarter of 2009, $3 million in 2010, $1 million in 2011 and $6 million in 2012. In third quarter 2009, the amount of loans recast based on reaching the principal cap was minimal. In addition, we would expect the following balances of ARM loans to start fully amortizing due to reaching their recast anniversary date and also having a payment change at the recast date greater than the annual 7.5% reset: $2 million in the remaining quarter of 2009, $39 million in 2010, $44 million in 2011 and $72 million in 2012. In third quarter 2009, the amount of loans reaching their recast anniversary date and also having a payment change over the annual 7.5% reset was $9 million. They are also proactively working with the obvious train wrecks to keep them on the rails: We also are actively modifying the Pick-a-Pay portfolio. Because of the writedown of the PCI group of loans in purchase accounting, our post merger modifications to PCI Pick-a-Pay loans have not resulted in any modification-related provision for credit losses. We also have taken steps to work with customers to refinance or restructure their Pick-a-Pay loans into other loan products. For customers at risk, we offer combinations of term extensions of up to 40 years (from 30 years), interest rate reductions, to charge no interest on a portion of the principal for some period of time and, in geographies with substantial property value declines, we will even offer permanent principal reductions. In third quarter 2009, we completed 19,148 full-term loan modifications, up from 18,465 in second quarter 2009. The majority of the loan modifications are concentrated in our impaired loan portfolio. As part of the modification process, the loans are re-underwritten, income is documented and the negative amortization feature is eliminated. Most of the modifications result in material payment reduction to the customer.

Is this an IRA account or just an individual brokerage account? Fidelity now has an "international trading" offering in the individual brokerage account. This just went live in the past month. So you can now trade FFH.TO if you want. But you have to enable the feature in your account. You go into the "Account&Trade" menu and choose "Update Accounts/Features". Then "International Trading" is listed 2nd from the bottom. But they still don't allow you to margin foreign stocks.

You've got a problem there. Here is what you get in Seattle for nearly the same price: http://www.windermere.com/index.cfm?fuseaction=listing.listingDetailUpdated&listingID=66377289&paginate=true Awesome city views.

Once supply runs out people will either need to buy whatever is on the market or break ground. Supply will run out in a couple of years because the pace of new construction is too low. A big sore spot in the economy is all the lost construction jobs, and the lost business selling carpets, appliances, etc... So how will the economy look when construction rebounds to meet the demands of the growing country? As far as I can tell, the cost of building a new home is higher than the homes presently on the market. Here is a tongue-in-cheek example from Newport, RI -- only $277 per sqft but look at the craftsmanship and materials. That's a value investor's home: http://www.realtor.com/realestateandhomes-detail/659--Bellevue-Av_Newport_RI_02840_1108974953

I haven't been thinking about it.

Ok.. let's back up a wee bit here... It was humor. The rest of what you said is true, I agree with all of that. I guess you didn't catch my sarcasm. The funny thing (to me anyway) is the line about the big bad bank bully who wants to take advantage of me by offering me super low rates with no money down.

There is the $9,000 or so standard deduction that a married couple foregoes in order to chase the mortgage interest and tax deductions. For a median home, it's nearly a wash.

The present situation is not pretty. You're right, people can easily find an extra $1,000 in their pocket each months from just walking away. I find the term "predatory lending" to be curious... it would seem that the lenders were the rubes here, and the zero-down I/O crowd are the savvy ones who are taking no loss. Predatory borrowing is perhaps more like it.