constructive

Maybe that graph includes financial companies. The increasing financialization of the economy over the past few decades could explain declining ROA. Of course in that case the graph is poorly made and doesn't really illustrate what Denning claims it illustrates.

Did anyone understand this graph? It doesn't line up with my understanding of ROA and ROIC levels and trends at all. http://b-i.forbesimg.com/stevedenning/files/2013/07/Shift-Index-ROA13.jpg Compare: http://people.stern.nyu.edu/adamodar/New_Home_Page/datafile/roe.html I guess the difference could be "economy-wide" versus public companies?

The critique depends on the assumption that maximizing shareholder value means crossing ethical lines and Welchian short-term manipulation of earnings. Not that I agree with Friedman, but it's pretty unreasonable to blame him for that. My theory is that opposition to the theory of shareholder value creation exists because management is constantly trying to justify paying themselves more. When they discover that they aren't creating much value, they find a consultant (i.e. Steve Denning) who will invent fuzzy theories about radical management.

Sony has a lot of capital tied up in entertainment - they better be close to the top of the league tables each year. But revenue isn't as important as income for shareholders. Revenue matters more for George Clooney and others whose incentives aren't aligned that well with shareholders. Why do you think Loeb only wants to make "safe" blockbusters (which aren't really safe at all) and not smaller indie films? I don't think he's actually said that.

I don't think Loeb has implied that Sony should do anything different with Smokehouse/Clooney. Sony produces more than their share of flops, that suck artistically and commercially. Clooney probably doesn't watch most Sony pictures or look at their numbers - he doesn't have a grasp of how poorly the business is being run. It takes an owner to have a big picture view of a business.

Cool, thanks guys!

Also, is it just me or does text size change once or twice as you're loading the new board page? The page load may have a few kinks to work out.

Nice work Sanjeev. May I suggest a potential improvement? I'd like it if there were 20 posts per page instead of just 10. I feel like 10 posts per page visually breaks discussions up quite a bit. Of course there might be good reasons for 10 as well, faster load time, etc.

The nice thing about the discussion over whether banks or insurance companies are more dangerous is that unlike many arguments on this board, it involves a testable hypothesis. In my opinion, data almost always proves more effective and more persuasive than rhetoric. And gio, I always appreciate your thinking. You've almost convinced me to invest in Fairfax and Lancashire, which is not an easy task. Maybe a few hundred more posts will do the trick. :)

Interesting idea. I think the main source of the rental car oligopoly is just airport real estate. Not brand, scale, technology, business processes, etc. If an automated car network can be efficiently distributed throughout the entire city, new entrants may appear and drive down profits. Especially if Google is providing the platform.

Well, I certainly don't agree with them! :) Really, I don't think common sense has much to do with this investment at all.

The government was issued Government Preferred Shares. Perry Capital and Fairholme Fund own Private Sector Preferred Stock. You and I don't disagree that the government provided aid to the companies in 2008 -- the point is that they were provided with compensation for that aid via the Government Preferred Shares and Government Warrants (amounting to 79.9% of the company's common stock). Yes, sorry if I wasn't clear but I'm aware of the capital structure. I meant that the government poured billions into the companies in exchange for the Senior Preferred Shares. But they did not just provide aid in 2008, they provided $188B over 13 quarters. Of course if you pour enough money into a dead business it will eventually be solvent and profitable. But the fact that it's solvent and profitable now certainly doesn't prove that it was solvent and profitable before pouring money in. In 2012, Fannie & Freddie were both solvent & had a combined net income of $27 billion -- that amount being more than enough to pay the 10% dividend on the liquidation preference of the Government Preferred Stock. (Correct me if I'm wrong, but I think the liquidation preference is something like $188 billion.) Based on the capital structure, it would seem like the residual would cause the Private Sector Preferred Stock to be worth a positive number that I'm going to say might even approach par. Yes, that's correct. When the senior preferred stock was amended in Q2 2012, FNMA and FMCC had a combined equity of $5.1B, of which $189B was senior preferred (3700%). Together they made $6.9B in Q2 ($27B for the whole year). Now subtract $4.75B quarterly for dividends, shrink the balance sheet by 10% per year (required by the original terms), and subtract the liquidation preference of $189B. How is that a positive number? In order for public preferred and common to have any residual value, income would have to be a lot higher than $6.9B per quarter. More like $13B per quarter. I think that particular lawsuit has very little substance to it -- read the complaints for Perry Capital and Fairholme Fund -- those have to do with the amendment to sweep 100% of profits. I can tell this is not the right investment for me, so I'll leave those complaints to the lawyers. But as a taxpayer, I have to admit I'm rooting for the economic interests of US taxpayers over private shareholders.

Well, they certainly appear profitable now. But that's only in the context of the Treasury's enormous financial support over the last 5 years, in exchange for the preferred shares. Take the Treasury's support away at any point between 2008 and 2012 and the companies would have immediately imploded. What do you think public shares were worth in 2012 before the preferred share amendment? I don't think the math ever worked out to a positive value, with the 10% dividend. I haven't read all the shareholder lawsuits, but here's one that claims placing the companies in conservatorship in 2008 was an unlawful taking. http://dealbook.nytimes.com/2013/06/17/lawsuit-tries-creative-approach-against-fannie-and-freddie-bailout/?_r=0

I suspect the shareholder lawsuits will claim both events were unlawful takings. But if anything, public shares were worth less in 2012 than in 2008. (Hard to be worth less than $0 though.) The government had to shovel in billions of equity to make up for losses in those years.

Well I'm not a lawyer but I think it's a perfectly good legal argument. Conservatorship is more of an ad hoc framework. Some people think it implies a return for shareholders, but it doesn't say that anywhere.

It seems to me that the government's case is pretty easy to prove. Have people really forgotten that Fannie and Freddie were placed in conservatorship because they were insolvent? If the intrinsic value of the securities was $0 in 2008, there was nothing to "take". It's only now, as a result of an accounting mirage, that they appear to be valuable.

At 2:50 he says "including Lukoil and Gazprom that we talked about" indicating those were both discussed as attractive investments on the way from the airport. Thanks for the links.

I got the numbers from FT.com. Feel free to correct them.

I agree with the previous comments. It's a good idea to take your time before entering into new investments. But with many of these companies (Fairfax, Leucadia and Lancashire in particular), I think most people who are familiar with them consider their current valuation reasonably attractive. P/B P/TB P/E 5 Yr Average ROE FFH.TO 1.0 1.1 13 7% LUK 1.0 1.4 11 9% LRE.L 1.6 1.6 9 19% BRK-B 1.4 1.9 17 7% MKL 1.8 2.4 18 5% BAM 1.3 2.5 20 7%

http://www.firstnational.ca/ http://www.firstnational.ca/docs/aboutus/IR%20Fact%20Sheet%202012.pdf They appear very sensitive to the normal functioning of the Canadian mortgage securitization market.

Simple tangible leverage ratios NA.TO 28.2 CM 26.6 LB.TO 25.4 RY 24.2 TD 23.7 BNS 23.2 BMO 22.9 CWB.TO 11.9 FN.TO 53.0 ETC.TO 22.2 HCG.TO 19.3 MKP.TO 16.5 Generally higher than the US. One name jumps out. Is anyone familiar with First National Financial?

"Orr proposed that unsecured creditors with $11.5 billion in claims receive notes worth about $2 billion. ... [Jonathon Carmel] cited the example of Assured, which he said faces a potential of $360 million of obligations for its $12 billion of claims-paying resources." http://www.businessweek.com/news/2013-07-11/detroit-s-20-percent-offer-jeopardizes-insurers-recovery-muni-credit MBI and AGO down slightly today.

So in a little over a month they went from CCC to bankruptcy. It seems to me that ratings agencies have even less credibility in the muni market than they do in corporate and sovereign markets. AGO's Detroit exposure, page 37: http://assuredguaranty.com/uploads/PDFs/Equity_Presentation_1Q-13_v052313.pdf MBI's Detroit exposure: http://www.businesswire.com/news/home/20130305006625/en/National-Public-Finance-Guarantee-Corporation-Comments-Exposure

Do you do a lot of merger arbs? I do very few because my target is well above 10% annualized. Do you prefer this trade to VCBI - USBI and MFLR - INDB? It looks like both have slightly larger spreads. http://www.sinletter.com/merger-arbitrage/

It's hard to tell, but my impression was that they bought it at 6x normalized earnings. In which case, the quality of the business doesn't matter nearly as much.