value-is-what-you-get

"And incidentally, the one thing that's very important now is banks--and this may come as a surprise to you. Banking has never been better in one sense. I mean, the banks are getting their money very cheaply, deposits are coming in, spreads have never been wider, all the new business they're doing is terrific. They will earn their way out of it, in most cases, overwhelming number of cases. And they should not be spooked by the idea they're going to have to issue tons of stock at some very low price under the circumstances where the very actions of--that that may be coming keep pushing down the price. So that's spooking, you know, people in the banking business. But the banks can earn their way out of this. I mean, the average cost of funds for Wells Fargo, for example, the fourth quarter last year, was 1.44 percent. I can earn money with money at 1.44 percent. I mean, it's cheap. It's abundant and the spreads are terrific." - Warren Buffett March 9, 2009

I'm not an Accountant but my understanding of Goodwill is that the rules changed as a result of the dot-com scenarios which saw one company acquiring another for more than it was worth but the acquired company already had $x of Goodwill on the books so you got values after two or three takeovers which got a little out of whack. The example that comes to mind was when I shorted Laidlaw back when it was $10.75 a share. They bussed 80% of all the kids in North America to school every day and yet carried Goodwill on their books greater than the value of the buses!! They had made a crummy acquistiton of a company that had made crummy acquistitons (Safety Kleen). It seemed like a prime candidate for a short and it was. The rule change meant that a company has to look at the Goodwill number every year and adjust according to reality. For instance if they were to re-buy the same asset today, how much Goodwill would be attached? That is the new number and they adjust it accordingly on the Balance Sheet but only downwards if necessary. So you're right, Goodwill is a non-cash charge (although at some point it was paid for!!!) and it does reduce the tax liability but it is only partially discretionary in that it has to have some basis in reality. I think the write-downs are simply a case of the reduced prices of everything causing estimates of the cost of acquiring similar assets to also be reduced and hence the Goodwill charges.

That's some drivel all right! Obviously Ms Francis works for the voting machine, I keep score on the weighing machine.

From the annual report Warren says "It’s often useful in testing a theory to push it to extremes." This is under the section describing the Black-Scholes model's shortcomings in valuing long-term expirations. Inspired by this, I thought it would be a fun exercise to push the Derivative case to the extreme. The general theory in the market is that Warren made a mistake with derivatives - drank the Kool-Aid as it were. From the Income Statement, the stated Derivatives losses were 6.821B. (mark-to-market - no actual cash paid out, simply a required accounting entry) Somewhere above that is approx 4.5B in revenue recorded for the premium received. Net loss for period on derivatives is 2.321B for income tax and reporting purposes. Actual cash cost is -4.5B ->premium received. Looks like the short-term voting machine wins that round. Now pushing this to the extreme, suppose Warren had really swung for the fences and sold 47 of these (assuming buyers were available of course). The Mark-to-Market liability would wipe out stated shareholder equity and our company would be worthless according to the stock market. The net loss for the period would be in the order of 300B and the headlines would scream and the stock price would plunge! And yet we'd have all the existing operating companies, divisions, talent, stock positions, plus an additional 211.5B in CASH premiums to invest in underpriced stocks. It's just a question of whether or not the American version of the capitalist system will survive which determines any ACTUAL liability due in 15-20 years time. The numbers win - Mr. Market is wrong once again!

Does the Call Spread pay off if the stock price goes over 350 at any time between now and expiry or only if it is above 350 on or after a certain date?

The author is merely a cheerleader cog in the crazy cobbled-together manic depressive psyche we call Mr. Market. These sort of articles are particularly amusing (sort of a "Spot the Glaring Untruths and Blatant Ignorance" game) and quite valuable too, as over time I am a net purchaser of value priced at a discount. We need guys like this! 8)

I own some of this in an RRSP. I bought in January after the price had dipped and then began to recover. My reasons for buying were I liked that they had cut their distribution to preserve cash, I liked that insiders had made some decent purchases on the open market after the declines in December and I really liked that Fairfax had increased their position but what I liked most was that monthly distribution which amounted to about 2% per month based on my average cost. Now obviously a furniture retailer can not continue to pay out 2% per month in the current market as I am sure sales are way down, but it would have been nice to get more than one payment! A final metric I used was the number of stores. They have 228 stores Canada-wide. At the market Cap when I bought, this placed an approximate value of $590,000 per location which seemed low to me. There's no real estate portion here - just the brand and their abiltiy to move furmiture, mattresses and home electronics. At current market cap that number is down to $373,000 per store. The negatives I can see are that the entire operation loses money regularly. So how much is a money-losing machine worth per location anyway?? The stated equity on the balance sheet is pretty well all Goodwill when you boil it down, however I don't think there's much Goodwill in the brand. Quite frankly I couldn't care less where I buy my furniture if it's decent stuff at the right price and when I do buy, I check out all the retailers anyway and they all seem the same to me. The only real moat they have is that their size allows them to buy well. I don't know what I'll do with my position but I'm not going to add to it (average down).

Let's not forget about the tax implications here too. From "The Snowball" someone was quoted as saying that not only does WB know the tax laws inside out but he can play them like a fiddle! When the puts are marked-to-market annually, the difference is a loss on the income statement. A current expense for which we paid negative cash (received a premium). This protects income generated from other sources from paying tax. I think this put option is a real work of art. In one fell swoop it highlights the voting vs weighing aspects of Mr Market (recent negative commentary linking it to a reduced stock price), the greed vs fear aspects regarding purchase motivations (someone bought it!) and a nod to the sometimes odd benefits of accounting rules and the tax man who "requires" Berkshire to shelter income from taxes by marking-to-market. A University course could be taught on this one transaction. I almost want to applaud!!