ERICOPOLY

I understand how to get the money back out of the house (cash-out refinance or just sell it)... but how do you get the money back out of the pension plan? It feels like a sunk cost because the pension will be paid out to pensioners. My understanding is that low interest rates mean the pension can't earn it's own way to future solvency, which means it has to come out of shareholders' pockets instead. I guess you can make assumptions about interest rates going higher and therefore you're getting it back at some point. But some of it is gone for good since the low interest rates mean that literally the pension plan is earning less, and the shortfall must come from shareholders.

I think it's a reference to A Gary Shilling and his predictive abilities. I'm basing that off the Macro Musing thread. Yes, because A. Gary Shilling is not too far from a "Madame Tarot" -- I mean, he sells predictions of the future... how is that too different? That's his bread and butter. Sort of like the same business model as a tarot card reader. So I wanted to find out more about Madame Tarot, so I googled the name. It came up with the usual image search, where I found these really cool "fortune cards". The new avatar is a fortune card. Sort of a tribute to the macro forecasters.

The odd thing is... they appear to be building their capital level this quarter despite the settlement. 43 cents a share charge in Q3 is less than they are building, using their NOLs and disallowed DTAs. That's pretty cool.

In an alternate fantasy world... He could do a sale-leaseback of the properties and dividend out all the sale proceeds. The remaining entity would then have some mega-problems as the new lease obligations would be a sudden death blow. Then he could let the creditors take over the failing retail operations, liquidate what's left, etc... Somebody else is then the bad guy. Lampert didn't fire them, he just exposed the retail operations for what they really are at this point -- just a private sector welfare program to keep people in their jobs.

Yes, Shilling predicted a decade of deflation. He made that prediction in 2003. So, maybe I should consult Madame Tarot.

I found it very interesting from today's point of view. Towards the 3:35 mark Berkowitz states that BAC is generating 45-50bn pre-tax pre-provisions. While I don't know what numbers is he exactly referring to (and was to lazy to look it up in the 2011 reports), it got me thinking about future earnings along those lines. In their Q2 earnings presentation they break out legacy asset servicing costs and litigation expenses. Assuming they go away mid-term and therefore adding them back to the earnings this is how it looks like in Q2 2014: Total revenue, net of interest expense: 22.0 bn Noninterest expense: -18.5 bn Litigation: + 4.0 bn LAS: + 1.4 bn Adj. pre-tax income in Q2: ~ 8.9 bn @ 11.3 bn fully diluted common shares: ~ $0.78 per share Extrapolating it for the whole year: ~35.6 bn or ~ $3.15 per share (~$2 per share @ 35% tax rate) – I don't come anywhere near Berkowitz's $45-50bn per year, though. Since we've derived the $2 EPS in other ways this seems to be a realistic mid-term assumption. Litigation won't be zero, and neither will LAS. They've guided that they can get LAS down to at least $500m quarterly, perhaps lower. There is also a $1b compensation expense that comes in Q1 each year -- so that's $250m per quarter. So you need to add back $750m per quarter and then some more for normalized litigation. It comes out to roughly $1.83 after tax per share. So roughly a 13% ROTE. But that's before litigation expense. However 35% is too high of a tax rate -- I think they normally run at around 31% (getting you to around $1.90 before litigation).

At least the Oct-Dec quarter should be clean.

The cash portion consists of a $5.02 billion civil monetary penalty and $4.63 billion in compensatory remediation payments. Does this mean that "only" $5.02 billion is not tax-deductible?

Perhaps he's expecting a bulk transaction where the premium real estate properties all go to the mall operators in a mega-deal. They can then redevelop that space and make their malls more attractive to shoppers. It's not that many store closings compared to their current pace of closings. It would be handy to move Lands End out of the way first... things like that. Perhaps try to build an online brand by signing up the loyal shoppers before the stores close.

Why is anyone expecting them to return excess cash to shareholders? How much excess cash is there to return? Excess cash doesn't really seem to be piling up, yet people still seem to expect it to be paid out. I don't get it.

There is no "excess cash" to return to shareholders. There won't be a buyback until there is.

From one of the "leading deflationists", A. Gary Shilling. I believe he went to the Fairfax dinner in Toronto a year ago, and was hailed as one of the economists they respect: The Boom Is Coming, and Sooner Than You Think http://www.bloombergview.com/articles/2014-07-18/the-boom-is-coming-and-sooner-than-you-think I disagree with the economic pessimists who believe, as I outlined in yesterday’s column, that persistently slow growth will be the norm for years to come.

Interestingly, he doesn't mention the elevated profit margins anywhere in the story... which I find strange considering it's sort of like the core reason why some people argue that the market isn't all that high relative to earnings (as well as the core reason why people argue the earnings will fall) Yet valuations remain high, and it would be comforting if they made sense. So I’ve been trying to come up with a theory to explain today’s elevated stock prices — and maybe convince myself that they could remain lofty for some time. One factor to consider is that bond prices are high, too.

I still don't really even know who that is. It is like a Charlie Munger or someone of similar caliber?

It looks like about 75% of original capacity after 8 years: http://www.teslamotors.com/fr_FR/forum/forums/battery-warranty-model-s I've seen it written that one aim of the Gigafactory is to recycle Tesla batteries. So they'll probably offer a reduced replacement price for trade-in. You would drive to a service center, and the battery swap only takes about 5 minutes.

Let's say you buy a BMW with a 5 yr warranty. Does this mean that they're estimating the BMW will die in 5 years?

Proof by desire? I've heard that argument often, and it never made sense to me. What's the logic that makes it follow that because we have desires that can't be satisfied, that it means that some magical way to satisfy them exists. How about some things just can't be satisfied? How about our imagination is powerful enough to think of things that aren't real (which you can clearly see by looking at the world of fiction)? We can also dream of un-assisted flying and magic and dragons and other dimensions and superpowers and immortality and such, and that doesn't mean they're real. Seems like bad logic and wishful thinking to me. Well, that particular quote would be a good one for a fortune cookie. As kids, we would always add "in bed" to the end of every fortune. So it then becomes: “If I find in myself desires which nothing in this world can satisfy, the only logical explanation is that I was made for another world... in bed”

Pretend that you have the cash to buy it outright. You can choose to: a) buy it outright with your cash ... or ... b) invest your cash in fixed income and pay the rent with the after-tax yield 1) How much cash do you need to meet the rent, on an after-tax yield basis? 2) Is this a secure yield? Same risk profile as just owning the home? ie... zero default risk 3) Are you absolutely certain that this investment yield will rise at least as fast as future rental inflation? 4) Are you positive that the income tax rate on your investment yield won't climb? You have to answer all of those questions before you can smugly proclaim that people are insane to buy. 1) After tax probably slightly more than the cash needed for buying the house outright, so a 2% yield at best if you need it to be absolutely safe. 2) There is a cost to owning a home hidden in repairs etc. Wouldn't have that with fixed income. Also no risk of renters that don't pay, damaged property,... 3) Absolutely not but I'm concerned about what my 'investment' in a home bought with cash would be worth 10-20 years out. To go back to a more reasonable yield of 4.5% rental yield over time, prices would have to half, rents would have to double or a combination of both. Here in Europe with a lot of people having a hard time making ends meet and poor economic growth, I doubt much of that correction will come from higher rent (after inflation). There simply isn't much room for it. The example I have shown isn't even top real estate, just ok and new. 4) It's 25% tax on fixed income here already, I can't be sure of anything but I doubt they could get it much higher. All in all, prices are waaay above long term averages, helped by bad government policies (tax advantages from a few years ago were meant to make buying cheaper, all they did was boost prices up higher. Now they are cutting back on those tax advantages). Makes the chance for permanent loss of capital quite high. If you believe owning property is equally risky as fixed income, that's fine by me but I'll have to disagree. It doesn't even come close. Wow! 25% tax on fixed income. And you think it's high! It is, but we've never had it that good in America in my lifetime. It's taxed the same as regular income here in the "land of the free and the brave". So in California you get up near the 50% tax rate level for non-Treasury bonds. Treasury bonds are exempt from state tax and so roughly at 40%. So yes, after-tax you can expect to lose money after inflation. It makes owning a home relatively more affordable.

Pretend that you have the cash to buy it outright. You can choose to: a) buy it outright with your cash ... or ... b) invest your cash in fixed income and pay the rent with the after-tax yield 1) How much cash do you need to meet the rent, on an after-tax yield basis? 2) Is this a secure yield? Same risk profile as just owning the home? ie... zero default risk 3) Are you absolutely certain that this investment yield will rise at least as fast as future rental inflation? 4) Are you positive that the income tax rate on your investment yield won't climb? You have to answer all of those questions before you can smugly proclaim that people are insane to buy.

I am interested at the moment in the idea that praying can bring psychological benefits even if it's just a trick on the mind that you are talking with God. For example, the Dos Equis "Be Thirsty My Friend" commercial is trying to get you to think that if the World's Most Interesting Man drinks Dos Equis, then you will get more enjoyment from it as well. There is something in there which I think is related... that we all somewhere yearn to make contact with very important people... and that we'd feel good if we could believe that we've established that ultimate social connection and that he was with us everywhere, and that we talked to him daily, etc... I found a website that has quotes taken from CS Lewis' "Mere Christianity": https://www.goodreads.com/work/quotes/801500-mere-christianity example: “If I find in myself desires which nothing in this world can satisfy, the only logical explanation is that I was made for another world.” Personally, I don't come to that sort of conclusion. I think that "want" creates motivation, and that drives us to invent tools, etc... However if I were to speculate on why "all roads lead to Rome" with his conclusions, I would suggest that he is benefitting from the situation I described before -- the more he believes in God, the more feel-good drugs he gets in his brain when he prays to God. It tends to make sense that the more you believe, the more it would reinforce the effect. Thus he would tend to see God everywhere and everything would be viewed as evidence of such. The motivation is there. The question is... does prayer really simulate conversation in the brain, and does it really deliver the feel-good drugs... or am I just guessing. I would be very motivated to read C.S. Lewis' works if he was delving into that topic. Suppose it works in the brain like a drug. You mentioned that he was a skeptic, and now he is a believer. Okay, but I could think coffee tastes bad as a child, but later start drinking five cups a day after being persuaded by the caffeine. It's easy to say that about caffeine, but I know less about the effects of prayer on the mind. I'd like to know more. Just some 1 cent video on the idea that brain scans change after prayer: http://www.wltx.com/story/news/health/2014/05/15/studies-show-the-physical-effects-of-prayer/9151157/

I'm trying to figure out what if any benefit there is to super-large banks. Will they just keep piling on more capital requirements, thus more pressure to break up? They are all relatively quite-cheap versus the market. 1) It's legal risks... not so much anymore. 2) It's we just hate them... come on, that's too infantile. 3) It's because their capital levels are going to go higher and higher and higher.... until they break themselves up? After which the accumulated capital gets returned, so it's mostly a wash anyhow. What's the deal here?

So what don't you like about excessive leverage and unregulated derivatives? I understand that their insurance regulator had no say-so over their derivatives transaction. The firm wasn't too big, IMO. Rather, their liabilities were too great relative to their lack of reserves. I think the insurance company was not weakened by it's size before the derivatives came along... I mean I think due to their size their customers perceived them as stronger. But they shouldn't be allowed to tie the ship to such a big, unregulated anchor.

Or does that mean that today's small banks would have to pay an increased FDIC fee if the mega-banks were split up?

I suppose a shortened view of my point is that the small banks pay dividends (privatize the profits) when times are good, and socialize the losses (FDIC) when times are bad. It just doesn't look like they are paying their own way here because they get help from the mega-banks in establishing those FDIC reserves. However the mega-banks have more self-insurance coming in the form of diversified geography, diversified product, and less leverage. That's a condensed view.

So the solution to small bank problem is to create a larger bank (transfer it to another). This is how JP Morgan got bigger taking WaMu. But bigger is worse according to the rest of what you said... and I don't dispute those other points except for the one about the faster turnaround... you don't have to turn anything around if it's not failing in the first place.