ERICOPOLY

A $3m home (near me in California) rents for $100k a year. About 3.3% gross rental yield. It takes almost $200k of pre-tax income in California to pay that rent with after-tax dollars in the luxury home market (where people pay the peak income tax rates). Therefore owners get about $200k a year of imputed income. After covering property tax ($30k pre-tax) and maintenance ($10k of after-tax costs), maybe you are at $150,000 or so. So it's down to only a $50,000 a year pre-tax income difference between renting and owning... that margin gets slimmer and slimmer every year with rising rents. A 5% increase in rent cuts it to $40,000 a year. So in just 5 years, it could be down to zero. That's how homes are priced here... five years of rent increases to close the gap. You start clawing back those funds if rents continue to rise from there.

Hey, I like almonds, get rid of the alfalfa instead. Maybe someone will crack fusion in the next decade and can build a bunch of desalination plants over there. I was thinking about a value-added-tax on agricultural products that gets steeper for high-water-usage crops, and goes to zero for low-water-usage crops. They can then take those tax revenues to pay for the expensive desalinators and their energy costs. This way the farmers can stop externalizing the cost of their water usage to me (my dying landscaping), meanwhile pocketing all of their profits for themselves. I think it's fair that they cover the external costs of their water use.

10% of California's water goes to watering almond orchards. California supplies 80% of the world's almonds. 15% of California's water goes to growing alfalfa. http://www.slate.com/articles/technology/future_tense/2014/05/_10_percent_of_california_s_water_goes_to_almond_farming.html I'm not going to bother saving water in my house anymore. This is pointless and stupid. We have an endless supply of water within a stone's throw of Los Angeles, San Francisco, and San Diego. Time for some desalinators and let the water shortage be the world's problem (no more almonds on your shelves, and grow your own hay). Either cut me in to the almond grower's profits, or count me out for conserving their water for them.

How long is it going to take to lease out tens of millions of square feet? That's very misleading. Say you have 50,000 sqft in San Francisco. It's easier to lease that rather than 500,000 sqft in San Francisco. One is 10x the size of the other. No brainer. You'll lease 50,000 faster than you'll lease 500,000 in the same city. But what if the first 50,000 is in San Francisco, and the next 50,000 is in New York, and Chicago, and Miami, and Los Angeles, and Chicago, and Denver, and Boston, and Houston, and ....? Very misleading to just quote the total number. It's far more interesting to look at each metro area individually... and then ask... can Sears rent out it's space in that particular metro area without saturating the market? I believe that a listing in New York does not affect the pace at which a San Francisco listing can clear the market. Don't you?

My father likes to talk about how much the inflation of the 1970s helped him. He really stretched himself buying a home in 1970, but 10-15 years later his wages had soared and the debt on the mortgage did not. So he had positive operating leverage.

It seems like maybe 2-3 additional people out of 100 were unable to find work during the 70s. I'm looking at unemployment data: http://www.infoplease.com/ipa/A0104719.html Or perhaps 1 in 100 if you compare the unemployment rates of the 1970s to that of the early 1960s.

Out of curiosity, how much of such "stranded capital" is there at BAC that is caused by the legal tab of the past few years? Meaning, over the coming years, how much will be released with the legal storm dying down? http://www.bloomberg.com/news/2014-09-03/jp-morgan-risk-citigroup-cantor-s-next-job-compliance.html?cmpid=yhoo Regulators can point to $23 billion of legal settlements last year and a cyber-attack discovered last month as they push JPMorgan to boost its buffer against unforeseen losses. Wall Street firms including Citigroup Inc. © and Bank of America Corp. that together racked up more than $100 billion in post-financial crisis legal costs are facing similar pressures. At JPMorgan, the largest U.S. bank, that means more than $35 billion that can’t be used for dividends or buybacks, prompting Dimon to call it “stranded capital.”

Hope it works out better than his call on Freddie Mac in 2007: http://seekingalpha.com/article/55846-vic-rich-pzena-freddie-macs-the-cheapest-stock-ive-ever-seen 'Freddie Mac's the Cheapest Stock I've Ever Seen'

2014 Q1 earnings: $0.35 after-tax (excluding 40 cent after-tax litigation expense) 2014 Q2 earnings: $0.41 after-tax (excluding 22 cent after-tax litigation expense) So far, we're on track for about $1.60 in 2014 (excluding litigation expense) Where do the analysts get their $1.50 consensus number from for 2015? The bank executives are saying $2 per share in 2016 with 100bps lift in interest rates, or $1.80 per share in 2016 without a change in interest rates. It's a bit strange that the bank is saying $1.80 to $2.00 per share in 2016, they're making roughly $1.60 pace this year so far, and analyst consensus is for $1.50 next year. Just seems a bit odd. You get the $1.80 to $2.00 estimate from management by taking their 14% ROTCE estimate and multiplying by $14.20 (tangible book). They stated the after-tax value of the interest rate lift is only $2b, so that takes you down roughly 20 cents to $1.80.

Wells Fargo's presentation: page 11: % of funding from deposits https://www08.wellsfargomedia.com/downloads/pdf/invest_relations/presents/CS_021214.pdf page 12: Net interest Margin https://www08.wellsfargomedia.com/downloads/pdf/invest_relations/presents/CS_021214.pdf page 17: Asset Productivity vs Peers (higher fees as % of assets) https://www08.wellsfargomedia.com/downloads/pdf/invest_relations/presents/CS_021214.pdf So JPM and BAC are nearly tied for asset productivity -- BAC has the edge, barely Their "New BAC" is saving $1.8b a quarter in Q2, and they expect it to hit the $2b per quarter target in Q4. Hopefully, they will launch a new initiative with new targets after meeting their initial goals.

Consumer Real Estate Services should be profitable in Q4 this year. It made $1b in Q2 after backing out $3.8b of litigation expenses.

Wells Fargo's presentation: page 11: % of funding from deposits https://www08.wellsfargomedia.com/downloads/pdf/invest_relations/presents/CS_021214.pdf page 12: Net interest Margin https://www08.wellsfargomedia.com/downloads/pdf/invest_relations/presents/CS_021214.pdf page 17: Asset Productivity vs Peers (higher fees as % of assets) https://www08.wellsfargomedia.com/downloads/pdf/invest_relations/presents/CS_021214.pdf So JPM and BAC are nearly tied for asset productivity -- BAC has the edge, barely

Just out of curiosity, why do you ask? Looking for the next WorldCom? I was thinking that this can be a proxy for knowing which stocks are held by "weak hands". (lots of forced selling on a big swing downwards) You would need to know whether or not they have hedged the leverage with put options. The leverage is then non-recourse, and you'll never get the forced selling.

Eric, I know you've been making this argument for a while but in this short-handy way it's simply not true. I know that you know it but I don't get your point. It's the cost of leverage PLUS the cost of the put. You cannot gloss over this because the put price is the much larger part of the equation. It's paying up for non-recourse debt. This is what makes this kind of leverage expensive. To put it another way: You're cost of leverage is stock price - (warrant price + put price). This will turn out to be the risk free rate, otherwise there would be an arbitrage opportunity. Therefore, I don't get the point of comparing the warrant to the levered ownership of the common. It makes only sense to compare it to the levered ownership of the common plus the puts. Edit: Rereading it, I've overlooked this comment of yours. But how do you reconcile this statement with your statement above? That makes sense to me. Thanks for the explanation. You are correct that you could not argue for a lower margin rate. I was just looking for someway to account for the lost dividend with the calls and not with the warrants. I guess that is impossible without knowing before hand exactly how much the strike price will decrease each quarter between now and 2019. Use coomon+puts+margin instead of calls for comparing with warrants. This way lost dividends don't come into play. The cost of leverage includes the put that is embedded in the warrant. The put is embedded in the warrant, and hence is in the equation implicitly. You capture it by just subtracting the warrant price from today's stock price, and calculating the rate at which the remainder compounds to the warrant strike. It's in there -- all is well. And yes, we're talking about non-recourse leverage all along -- so the value of the put is important to capture. It's a critical piece. This is why it's compared to other forms of non-recourse leverage, such as either calls or common+puts+margin.

Canada is too cold for everyone to want to live there.

Just out of curiosity, why do you ask? Looking for the next WorldCom?

with a narrow moat and high uncertainty. Can anyone comment on that? My comment is that they are focused on the multiple to 2015 earnings, and the current multiple to tangible book, neither of which is terribly relevant to the long term value of the company. One year of earnings, really guys? Don't forget you charge money for this stuff. This equates to approximately 1.1 times reported tangible book value per share as of June 30 and 11 times our 2015 earnings per share estimate.

Seems like he made an error here: Keep in mind that BofA also pays $1.1 billion a year in dividends on preferred stock owned by Berkshire Hathaway.

Or is his point simply that it's innovative to buy it online and pick it up in EITHER Sears or Kmart, whichever is closer. And therefore are they trying to get to a point where you order something online and pick it up from ANY store that partners with SYW. So perhaps you eventually pick it up from Target if that's the closest store with the item (if Target partners with SYW). It's just strange.

Every time I see somebody call "Buy Online, Pick-up In Store" innovative, it makes me think these guys haven't spent a second outside in the real world. They seem to have no idea that their competitors also do that, and that... therefore... it's not innovation. So is this guy the last to find out? Should we tell him? It's embarrassing to hear him mention it as innovative.

I remember the "A" warrants were selling for $2 when the stock was at $5 in late 2011. Since that point up to today, you've made 258% in the warrants and 226% in the common. You had to take on 2.5x leverage in order to make an extra 9.8%. That's pretty sad considering the stock more than tripled over 3 years. The cost of leverage was about 24% annualized back then, for the full 7 years. Ridiculous!

You are supposed to smoke a lot of pot after a head injury because it helps to control the inflammation/swelling.

The secret they aren't telling us is how poorly they've done in these warrants considering the leverage.

Yes.

Just think of it as a a synthetically leveraged portfolio of common that is enrolled in synthetic DRIP. A normal DRIP plan just reinvests the dividend in the stock at the prevailing price. You get more shares when the price is lower, and fewer when the price is higher. That's why you are seeing the same thing going on with the warrants when they adjust upon dividend. It will be exactly the same # of shares adjustment (comparing the plain vanilla leveraged common portfolio to the warrants-only portfolio). It's pretty clever how they just simulated reinvestment into the common stock -- of course, that's the only way you can fully bake in an anti-dilutive provision protection from dividends.