ERICOPOLY

Put it this way, the only way to get the full $65 per share was to wait it out for the actual Fairfax buyout to occur. The bid/ask was lower than that price all along since the date the buyout was announced. Anyone truly desperate to cover could have offered anything between the ask and the $65 final figure for over a month now. People would have been tripping over themselves to sell at $65 to a short several weeks ago versus wait for the Fairfax cash today. The time value of money dictates this.

These days I figure the 'goodwill' from NB & ORH takeovers washes it out...

The foreign bonds in large part are invested reserves. Take the $1.4b cdn gov for example... are you pocketing this gain without counting the increase in forex liabilities?

Depends on who you pay your tax to. Let's say you are a US investor and pay the IRS (you are not one of the many Canadians here). http://invest-faq.com/cbc/trade-short-box.html Then, you can take advantage of constructive sale rules: For those who have read this far, there does appear to be a small loophole in the 1997 revisions that permit shorting against the box to delay a taxable event. If you have a short against the box position and then buy in the short within 30 days of the start of the tax year and leave the long position at risk for at least 60 days before ofsetting it again, the constructive sales rules do not apply. So it appears that you can continue shorting against the box to defer gains, but you have to temporarily cover the short and be exposed for at least 60 days at the beginning of each and every year. Bottom line... this is why I don't owe tax from when I hedged my FFH position to go long ORH. I wrote $240 strike 2011 calls to hedge against a 30% pullback and used the proceeds from the calls to buy $40 strike ORH calls which were implicitly hedged beyond a 20% pullback. Booyah! (sorry, Crameresque joke) ORH goes up 30%, I sell the ORH calls and buy back the FFH calls. I'm now unhedged FFH and I just need to keep it that way for 60 days and I'm golden (no tax on the FFH hedging). The rules may be stacked in our favor, just take advantage and don't complain :D

+20% 2008 (short selling ban helped a lot) +80% 2009 The past month (moving into WFC puts) marks the first time I've been less than 100% notional FFH (and it's subs) So, mostly this is due to HWIC being smart. I think of it like this -- if you had money in the Buffett partnership early on and today you are rich, did YOU make the return or did Buffett? I'm just lucky I didn't get wiped out by an unforeseen event while being 100% concentrated. I leveraged up with extra calls when FFH fell, and sold the extra calls when it rallied. In Feb/March 2009 I wrote 2010 out-of-the-money puts on a basket of names and used the proceeds to buy at-the-money 2011 $250 strike FFH calls. Then those underlying stocks rallied and I bought the puts back for practically nothing, and sold the FFH calls for roughly what I paid (and the stock was trading near strike at the time). Then I bought deep-in-the-money FFH calls. So I was basically unimpaired (down by 3%) when FFH began to rally from $250. Then I flipped it into ORH and got another 30%. A couple of other small gains here and there. I learned this year that I should have been buying something like WFC at $8, sold at $27 in May, and then bought FFH -- that's what I should have done, that's what I learned.

Funny you should say that, because I was in Walmart, Target, Macys, and Sears today. They all suck if you are looking for a suitcase that doesn't have any give to it (I have a special purpose for it and soft luggage doesn't cut it). So here I am at home tonight, struck out trying to get something so basic as a piece of luggage that isn't soft. I just wanted a big suitcase to cram full of flyboxes and reels without worrying about the suitcase itself getting crushed. I'm leaving tomorrow and now I need to pack my carry-on bag with this stuff which is not what I had in mind. Two years ago I bought a 65" Mitsubishi DLP television from Costco and had it fail a few months ago (20 months after purchase). The manufacturer had a 1 yr warranty on it but Costco automatically bumps all electronics warranties up to two years. So, thank goodness for Costco. And their telephone support lines are incredible -- they're open from like 5am until 10 or 11 at night and it's available every day of the week I think. They had a local repair company pick up the TV from my house, fix it, and bring it back to me. Costco is great! Anywhere else and I would have been paying for the repairs myself, because this was past the 1 yr mark. Today I walked past a wall of televisions at Sears and Walmart and thought, "The only place for that is Costco." Last year I read a book by David Halberstam titled The Best And The Brightest. I've been trying to find a way to think of Lampert as McNamara and Sears as Vietnam, but I haven't been able to make it quite work yet. I need to think more about whether whiz kid number cruncher Lampert is at all like whiz kid number cruncher McNamara. McNamara was pretty convinced in his numbers based strategy but reality really kicked his butt. He isn't a stupid person either, and he had a reputation for greatness at Ford. I don't get any feeling that Sears is on any upswing or anything. I didn't like Target either, it's just too small... Walmart is the place I'd go before either of those two places, simply because it has everything (except hard luggage) and it's huge. This Walmart is gigantic and it's only a few years old. Maybe we're just looking for a garden hose... we'll go to Walmart and get some groceries at the same time, save a trip to another store. Can't do that at Target. Once you have a couple of little children, you'll understand why making just one stop is important. My fascination with SHLD is that the shareholders seem to be making more money from lending the shares -- that appears to be the real business here. They're flat out printing money if Eddie can just keep treading water slowly enough to keep the shorts engaged.

It is just weird. 2x upside and 1x downside (if you write puts at-the-money and use it to buy calls at-the-money). Leverage is just wonderful as long as your downside isn't levered and your upside leverage comes at zero cost.

At times he was funny though: "A lot of the crowd were waving... some of them with all five fingers," - George W. Bush

Whoever keeps the rednecks stirred up I'll vote for. Greg Mortenson deserves it more though. He has made it possible for me to fight the war on terror with my checkbook (payable to Central Asia Institute). Those of you who have read Three Cups of Tea probably know what I mean, otherwise maybe not.

The difference is that with WFC you can buy the shares and write the calls for the same return as writing the puts. But with SHLD if you buy the shares and write the calls you are relatively a big loser compared to writing the puts. In fact, it would seem really dumb. There is a specific reason why I am better off writing the WFC puts instead of going the share/covered-call route -- I needed to preserve my cash to buy my TIPS. Otherwise, with WFC I would have been just as well off by writing covered calls. This is just weird. In the first place, if people are so certain that SHLD is going belly up why on earth is the stock up so high? And why isn't a large shareholder switching out of the shares and drilling the bid on the puts? Pretty inefficient market -- hope that guy isn't seriously getting the Nobel Prize. Unless... there is a very high yield that shareholders are earning by lending their shares to shorts... in that regard buying the shares might not be so bad, unless you are not lending them.

Suppose you don't want to use leverage, then you need to have enough cash to take delivery if the shares get assigned to you. Okay, you write the $70 strike put for $22. When that settles in a few days you'll have $22 per share in the account. So if you write 1 contract, that will be $2,200. Because somebody is paying you $22 per share, you are really only risking $48 per share of your own money. So your maximum return on equity is 45.83% if the shares run "all the way" to $70. And yet you have a natural downside hedge where if it pulls back to $48 you've lost nothing. Let's say they pull back to $35, which was the March the low - that would bring you a 27% loss.

You meant to write 0+%. You only begin to lose money as it drops below $48, 100% loss doesn't come until stock is at $0.

Another question: How can it be that you can write the 2011 $45 strike put for $8.30 and then buy the $70 strike call for $9.90????? That gives you basically all of the upside potential while taking only downside risk under $45. Once again, securities lending distortion?

I'm trying to figure this out -- these prices look very strange. Scenario #1 -- buy SHLD stock at $67 1) Shares remain at $67 you make nothing 2) Shares go to $100, you gain 49% 3) Shares go to $150, you gain 124% 4) Shares drop to $48, you lose 28.4% Scenario #2 -- write $70 strike 2011 put for $22 and purchase 2011 $100 strike call for $2 1) Shares remain at $67 you make 34% 2) Shares go to $100, you gain 40% 3) Shares go to $150, you gain 140% 4) Shares drop to $48, you lose NOTHING Question A: Why on earth are people buying the shares when the options route provides more downside and more upside? Question B: Is this distortion caused by securities lending income that accrues to the buyer of the shares? And is that why the puts are expensive while the calls are actually rather cheap? Question C: If you are a shareholder and not lending your shares, why aren't you selling and going the options route? Perhaps the answer is that shareholders don't think it is going above $100, but in that case, isn't it safer from a risk/reward perspective to write the put only (and not buy the call)? That way you'd be making 45.8% once it hits $70, but be safe on the downside all the way to $48. Didn't FFH option market kinda look lopsided like this in 2006 where puts were expensive but calls not? And that was when securities lending was really attractive for that stock.

I think you can measure the hate by looking at volatility pricing. SHLD -- if the stock advances 3% by Jan 2011 you make 46% return writing the $70 strike put. That seems a little excessive for basically treading water. Only useful if you are comfortable with SHLD.

Everytime I catch the fearful/cautious side of myself asking that question, and sometimes I worry about it for days at a time, the calmer side of me settles the dispute with "rising population vs declining population". We'll grow ourselves out of the current housing inventory overhang, and then construction ramps up and house prices will be held up by the cost of building new ones. And if the dollar is weaker the cost of building new ones will rise. It's what I tell myself. We'll see what actually happens. All of us will die. That I can promise.

It is in Chapter 15. I have the Kindle edition and they have "location" references, not page numbers. It's at Kindle location 2085-87, but a lot of good that will do you :-)

Personally I like the insurance co with TIPS idea quite a bit because the TIPS pose no risk whatsoever from deflation -- it benefits from deflation because you are guaranteed to get back the original principle of the bond at par (so long as that's what you paid for it, you get your money back). Now, if you have out-of-control deflation the value of your guaranteed principle rises in real terms. And then if the CPI rises you earn (pre tax) a leveraged multiple of the CPI. So you benefit from inflation. High inflation -- good. High deflation -- good. Price stability -- very mediocre (unless your insurance company has a terrific combined ratio).

I do like the book. Mostly because I like to read quotes like the ones above and there are things like that stuffed throughout the book. I like books that center around a particular individual's life, because I typically get a little bit of historical background in a fun format. The tidbits I enjoyed the most were the quotes like the ones above, where the experts thought a depression was around the corner. Good grief, I was in 9th grade in January 1988, and I don't remember any depression. Maybe I was a bit upset that Prom night didn't conclude quite the way I'd always dreamed, but that didn't cause the markets to close down.

Are there any insurers buying TIPS? 3:1 leverage insurer, CPI jumps 10%, 30% pre-tax return on CPI adjustment (plus interest income). Presumably combined ratio takes somewhat of a hit from higher nominal claims.

Right, we've been pretty well pounded by experts on what we're going to expect the next decade. I am just finishing The Davis Dynasty by John Rothschild and in it I found something from a Barron's Roundtable in 1988 that I thought could just as well be published today, except by comparison I think today Jim Rogers is relatively bullish. "A bear market has started that will probably last several years," said dour Felix Zulauf. "We have had the first down leg." "The questions to me," chimed in Paul Tudor Jones, "are not so much... will we have a bear market, but will we be able to avert a worldwide depression like we saw in the 1930s?" "Most stock markets around the world," echoed TV commentator and motorcycle buff Jim Rogers, "are going to go up dramatically ... but no longer than six months, at which point we are going to have a real bear market. I am talking about a bear market that is just going to wipe out most people in the financial community, most investors around the world. And in fact there are many markets I would short but which I will not be short, because I think they will probably close them down."

Suppose you started your own "business" where you merely used conforming 30 yr loans at today's low fixed rates and bought 4-plex apartments? If you do this with a certain amount of leverage, you can structure it so that your rental income roughly covers maintenance/repairs/expenses+taxes+interest (cash flow neutral). Initiallly, because you used a lot of leverage your interest payments are the dominant form of your outgoing cash flow. Now, suppose this inflation comes along that pushes rents up at 10% a year. Your interest payments remain flat so you now become cash positive. This business benefits from inflation. Deflation is pretty bad though.

Lets say inflation wipes out debts. Some people are going to get hurt along the way (consumers who don't get raises in step with inflation). But after the dust settles (inflation subsides), there is going to be a lot of room for growth in consumer spending as consumers won't have meaningful mortgages anymore. Is that what happened in the later 80s/90s?

Thanks for posting this. I have been reading The Davis Dynasty recently. That book had a story about Shelby Davis getting a tip from the man himself in 1974. Ben Graham told Shelby to buy GEICO. It was Graham's largest holding, and I think it was a very significant amount of his personal net worth at the time. Shelby Davis did not buy any. Two years later GEICO was a $2 stock and only survived because Buffett revived it with capital. So, the story goes that if you have all your eggs in your basket you should watch it very closely. Apparently, even the directors at GEICO were not aware of the problems. So much for that strategy.

It is not meant to be a measure of general price increases outside of the prices of the specific basket! Alright then, end of story. ShadowStats says nothing about the general trend of inflation, only a specific basket. It is not a means of suggesting that the BLS numbers are wrong, only that they measure different things. And from what I can tell, the BLS numbers more accurately reflect consumer price inflation and that is exactly what whey told John Williams (who makes money selling his numbers, regardless of their usefulness today).