vinod1

Ratings agencies as a policy in general and historically in practice have limited a corporations debt ratings to its country's credit rating. The basic theory is that the corporation is dependent on the country's legal/institutional framework and therefore never a better credit risk than the country itself. (Dusting off old CFA notes :) ) S&P and Moody only make specific allowances i.e. under particular circumstances where a corporation has higher rating like a multinational that has the support of a parent company with a higher rating. Vinod

S&P is predictably overcompensating for their earlier failures in all the securitization ratings. Vinod

I agree with lower growth rates but that implies lower rate of growth in standard of living - not declining standard of living. If you take out the expected increases in Medicare and Medicaid costs US does not have even a tiny bit of problem in meeting commitments over the next century with roughly existing tax rates, expected economic growth and sustainable debt levels. So the main issue that needs to be dealt with is improving efficiency, limiting fraud and restricting some of the treatments at end of life in Medicare and Medicaid. Many have proposed solutions to these issues but it is more a matter of political will. I guess the public has to feel some pain before there would be a push to solve this problem. I do not really have any concerns on the long term future of US. The current problems are puny compared to that faced by US in the past. Civil war, Great Depression, World War 2 where the very existence of the country is up in the air. We might get a slightly lower increase in the standard of living. So what? I would very happily take this compared to say facing the GD or WW2. Bailouts, money printing, deficits? So what? We get some inflation for a few years (70s) or maybe at worst be like Japan (in 90s) but very unlikely. I see some turbulence in the next few years, but personally if given the choice of the country or the century to live in, US or any of the developed countries at the current time as a no brainer. Just my ramblings, but you asked. :) Vinod

Thanks guys for your valuable feedback. Vinod

I have recently moved towards using LEAPS (primarily in the money Jan 2013 Calls) in my portfolio. Where as in the past I have primarily invested directly in stocks. At this time I am long nominally about 80% of my portfolio size. This uses up about 30% of cash - 15% directly in stocks and 15% in LEAPS. I have the rest of about 70% in cash. I am using LEAP's for four reasons (1) To get around the fact that I have about 30% in a retirement account where my only options are index funds and cash equivalents. (2) Use what seems to be not too expensive non-callable leverage at this time. (3) As an alternative to buying put options to hedge some of the portfolio. Buying LEAP's seemed to me to be better than using up the cash to buy stock + buy put options to hedge some of that exposure. (4) As a way of locking in an attractive price in the future for stocks that I would be happy to own at that price. Board members have commented on their cash levels in a recent thread and it got me thinking on how they are measuring the cash levels and how I should view my own cash exposure. I would really appreciate if you could comment on a few items 1. How do you measure your cash levels? In the above do I really have 70% cash or should I really be thinking of my cash level as only 20% (100% - my nominal 80% long exposure)? 2. How net long as a percentage of portfolio would you be willing to go if the specific stocks in your circle of competence get to once in a generation level of cheapness? I have a roughly 150% net long as my own maximum and wanted to clearly think through the risks in this approach. 3. A 15% of portfolio in LEAP's is giving me about 65% of portfolio net long exposure. I am not sure if this is incredibly conservative or incredibly reckless. Looks like good times (sharp market declines) are coming our way and I realize it would be easy to lever up very easily and get wiped out. In the Great Depression, it is said the really smart people waited for the stocks to get down 50% and loaded up only to then see the stocks fall a further 80%. I am hoping to learn from the experience of fellow board members and any recommendations you have on using LEAP's. Thanks Vinod

I do think we would have QE3, it is just a matter of when. I hope this time they target the long end of the maturity curve (10 year treasuries) unlike QE2. In any case I think the actual effect on the economy is going to be pretty slim. If Ben announces QE3 and all that it entails is shaving his beard, the market would still respond very positively. Vinod

Bad omen :) The last time he brought CEO of Pfizer on just such a call, he sold out of the position in a few months. Vinod

It is "deficit". It is mentioned in the book in one of the first few chapters. Vinod

BAC has changed very significantly in the last few years so I would not put too much emphasis on the reported ROA, ROE of the original BAC. We have Fleet Boston, MBNA, US Trust, LaSalle, Countrywide and Merrill Lynch. Merrill Lynch itself is valued at over $50 billion in early 2000s before much of the housing boom. It might be more useful to look at current and potential PTPP earnings given the built in cost savings that are only a matter of time before they would be realized - foreclosure resources and other costs, retirement of more expensive Long term debt, etc. No need to factor in any synergies at all. They dont need growth, they just need to work through existing problems to generate pretty attractive returns on whatever metric you care about ROA, ROE, etc. Vinod

Try this link http://www.federalreserve.gov/generalinfo/basel2/npr_20060905/npr/section_5.htm Vinod

This is speech that might be of interest to you. Shows a study on how banks calculate risk weights differently and that it might impact the capital ratio calculation by about 2%. http://www.bankofengland.co.uk/publications/speeches/2011/speech484.pdf Vinod

Risk weighting is done at a much more fine grained level - using loan level data. So I do not think you can calculate it from the data in financial statements. Also there are lots of off-balance sheet items like derivatives and standby letters of credit, etc that need to be included. Finally it is not just a cumulative weighted addition but it has some complicated (means I do not understand :) ) calculation that takes into account the correlations. Different companies can come up with different total RWA for the same balance sheet. Dimon has complained about this in the past. Vinod

From the comfort of living in N. America it is easy to romanticize India from afar.

"Robber baron". The mantra would be "Dream with conviction and corruption".

Very interesting that one can like Security Analysis but be turned off by Aggressive Conservative Investor. I spent the better part of 6 months going through the first 4 editions of Security Analysis line by line and summarizing the essence of each chapter. So I am definitely not looking to be spoon fed :) Somehow I quite did not get all that much out of the Aggressive Conservative Investor. Perhaps I had high expectations going in. My detailed notes on the Security Analysis are at http://vinodp.com/documents/investing/security_analysis_index.html Vinod

His books are classics. Whitman is a very smart man. All that being said, I have found his books to be impenetrable. I rarely don't finish a book, yet found his to be very difficult to get through and didn't finish the Aggressive Conservative Investor. He spends the first 50-100 pages telling the reader what he is going to be telling them, but never provides too much detail. The rest of those pages is in rants about others in the market and how his approach is much better. Personally, I would stick with his shareholder letters which are fantastic and have his views distilled into something that is actually readable. Just my 2 cents. I second that. However good he may be as an investor, the Aggressive Conservative Investor is a series of rants about EMH and other things. He does have a good nugget of wisdom here and there but it is extremely frustrating as it lacks in coherence and I would likely not read any book he authors in the future. Vinod

WD-40 has been mentioned and it is a good example. Also See's Candies is a good example of a very small company with moat - not public but Buffett has commented on this quite a bit and addresses your question. Vinod

BAC estimated interchange fees to be reduced by about $2 billion annually. This revenue loss would be mitigated partially via other fees so I do not see this as the main issue for the Big banks. My guess is that the market is pricing lower ROE due to potentially higher capital ratios. Vinod

I agree, I just do not get the fuss about the new capital rules. WFC, BAC, C have Tier 1 Common ratios at 8.3%, 8.6% and 10.8%. Even if the risk weighted assets shift a little bit with the new rules, earnings are going straight to Tier 1 common capital in absence of any share buy backs and token dividends. Any increases would be phased in as well so I do not see any big concern about equity dilution which I think Fed would try to avoid as well given that management would slam the brakes on loan growth. Vinod

That is exactly the argument merchants like Warmart's make. The card companies and payment processors (visa, mastercard) do not agree which reminds me of a quote: Man is incapable of understanding any argument that interferes with his revenue. Vinod

Capital One had $500 million in interchange fees on about $13 billion in revenue in 2009. Vinod

This isn't quite true; it depends on the facet of the credit card business that you looking at. Visa and Mastercard make their revenues based on transactions, not based on balances. It's primarily banks and retail locations (think The Home Depot Card or The Macy's Card) that make their big bucks off of those who don't have a strong understanding of compound interest. Pure-play credit card businesses such as Capital One and American Express are also directly exposed to this segment of borrowers. Regardless, all players take a cut of transactions executed. So even if their customers get wise (as they should), they will still make very nice revenues on the transactions side. Not as amazing as the retail loans business, but still nice. I do not even think of Visa and Mastercard as credit card companies. I am referring to the card issuing lines of business like Capital One's US Card segment where most of the money is made on the spread and various fees/charges. The cut from executing each transaction mostly is balanced via rewards so this alone makes up only a small fraction of the revenues. Thanks Vinod

Credit card companies business model does not work on the subset of people who are very knowledgeable in finance and are disciplined like you. This however is a good statistical bet for the company across the broader population. What proportion of the people would pay on time say 36 consecutive times (just in the first three years)? I would bet a decent chunk of people would end up paying high rates. Vinod

From what I read, Japanese managers would go to great lengths to avoid layoffs. Once read a story of how a manager committed suicide and left the insurance or some money that he would get upon his death for his workers. So I think this is mostly cultural. You might find some charts on the data you are looking for by googling "The First Cuckoo of Spring? Is Japan A Buy?". It has profit margins, ROE, div yield charts going back 30 odd years. Vinod

In the end they are going to raise the limit. We might get a replay of the TARP vote. Congress votes down the increase, markets drop 20%, Congress votes for an increase. Good times.