treasurehunt

I like the last bit: "Are there other investments out there? Yes. Better than what's in the fund today? No." Do you think settling with MBIA may have negative consequences for BofA beyond the billion or two in extra money they will have to hand over to MBIA? I wonder if BofA will have to revise up their loss estimates for a lot of other outstanding litigation and add to reserves significantly.

I think it is interesting to see how accurate the poll quants turned out to be in predicting this election, especially compared to pundits and even when compared to the betting markets. Most of the quants had 332 electoral votes for Obama as the most likely outcome, followed by 303 votes for Obama as the second most likely scenario. Couldn't have called it any better. But I am sure this won't stop the pundits from delivering their own predictions with great confidence when the next election rolls around. Math and logic trump biased mumbo jumbo. It seems I have heard that story before.

Yes, Romney's chances hinge on the polls being systematically biased in favor of democrats. Btw, Nate Silver has an article about this issue: http://fivethirtyeight.blogs.nytimes.com/2012/09/29/poll-averages-have-no-history-of-consistent-partisan-bias/ It looks like there is no historical evidence of a pro-democratic bias in likely voter polls; there is one in polls that use registered voters, but that is not relevant. In 1980, 1996 and 2000, there was a significant difference between the poll average and the actual election results (7.2%, 5.1% and 3.2% respectively). A swing of such magnitude would be enough to give Romney the victory, I imagine. But you better have some pretty good evidence to conclude that the chances of this happening are more than 28%.

I still think Whalen is a smart guy, but he seems unable to distinguish between that which he knows well and that which he ought to be much less confident about. He wouldn't be the first smart guy I have seen who has this problem. I mean, in that 2010 video clip somebody linked to -- I think you or Eric provided the link -- Whalen goes on confidently about Russia and the EU joining forces on a gold-backed currency or some such nonsense. He should have the good sense to know that something like that is entirely speculative. Whalen also serves as a good reminder for me not to take predictions from pundits seriously (with very few exceptions). So I have found him quite useful, even if he has been horribly wrong on US banks. :)

It's not just Nate Silver's model that suggests that Romney's chances are a lot less than 28%. Here are a couple of other sites that use sensible statistical techniques on poll aggregates. http://votamatic.org/ http://election.princeton.edu/ These sites do discuss the possibility of systematic bias in the polls skewing their conclusions. It looks like systematic bias cannot be ruled out, but it is not likely. Romney at 28% does not look like a value play at all.

Berkshire earns close to 5 billion pre-tax each quarter, and it is very unlikely that damages due to Sandy will come close to that number. Buffett has mentioned five percent or so of insured losses as Berkshire's typical share. If that number holds, losses due to Sandy should be no more than a couple of billion and probably much less than that. I think book value is much more sensitive to equity market levels. With 88 billion in stocks and the equity index puts on the balance sheet, a five percent decline in the S&P from Sep 30 levels could lead to Berkshire's book value going down.

Assuming the numbers are reliable, there are a couple of shockers here for me: 1) Japanese banks had an ROE of 7.3% from 2007 to 2011. This is much higher than I would have guessed. Maybe this implies that US banks will do okay even in a prolonged low-rate environment with global instability? 2) The return on Spanish banks from 2007 to 2011 is better than the return on US banks during the same period. I would have guessed that US banks did better than Spanish banks over this period.

How about Meryl Witmer, general partner at Eagle Capital Partners? She has been on the Barrons Roundtable several times and I have found her comments interesting.

The following article that appeared on the Motley Fool a couple of years ago has some details on why Buffett turned Lehman down: http://www.fool.com/investing/general/2010/03/15/revealed-why-buffett-turned-lehman-down.aspx One excerpt: The letter is ready to go, Mr. Chairman Furthermore, Buffett found it odd that Lehman had prepared a draft letter to Lehman employees announcing a deal -- complete with deal size and price -- the day before he and Fuld had even spoken over the phone. Odder still, Fuld didn't know the genesis of the letter, and it appears that he never even saw the draft. It appears this letter is old news.

Hey, Berkowitz has 68% of his portfolio in AIG, BAC and SHLD. He's no sissy! :)

Fairholme has filed their 13F for the last quarter: http://www.sec.gov/Archives/edgar/data/1056831/000105683112000002/submission.txt Positions in AIG, BAC, CIT, LUK, MBIA, SHLD and JOE stock have changed little. Berkshire has been cut significantly. BAC warrants have gone up from 8.5 million to 9.8 million. AIG stock and warrants were almost 40% of the portfolio as of 3/31. BAC and SHLD add up to another 28%. Berkowitz is definitely sticking to his guns!

Did you consider buying the JPM treasury warrants? They are currently trading at just over $10 with a strike price of $42.42 and almost six and a half years till expiry. I think the warrants should provide a much better return than the stock and 6.5 years is probably enough time for price to catch up with intrinsic value. I bought some warrants this morning.

I don't think anyone here is suggesting that Dimon should buy back shares when they are not trading at a significant discount. The question is whether buying only below book value is too conservative, given that Dimon threw out 23-24 billion as JP Morgan's normalized earnings. Even if JP Morgan buys back shares above book, if the purchase is done at a share price below intrinsic value, eventually the purchase will be accretive to book value. It might just be that Dimon's estimate of JP Morgan's IV is lower than mine; and his number is certainly more likely to be right than mine! :-) It is interesting that JP Morgan bought back shares at over $45 per share in early 2011, which was greater than book value at the time. It sounds like Dimon has gotten more conservative with buybacks.

His commentary on buybacks was absurd. He said that he has no interest in buying back the stock at or above $45, yet he has normalized profit pegged at $23-$24 billion or a little over $6 per share in earnings. So at $45 he's talking about a 7.5x multiple and he won't buy back the stock? Even on current earnings of $19 billion at $45 per share he would be buying in at 9x earnings. Someone needs to talk some sense in to him. In my opinion they should cut the dividend back to $0 and buyback as much stock as the gov't will allow them to do until the stock runs up ~$60 (unless they've repurchased a ton under that by the time it gets to $60, at which point this number goes higher). I wasn't impressed by Dimon's commentary on buybacks either. Buffett's idea of buying back stock when the stock price is below conservatively calculated intrinsic value provided there are no better uses for cash, is much more logical. Maybe Dimon is just using book value as a conservative proxy for intrinsic value. But this does seem overly conservative given his estimate of JP Morgan's earning power. I liked the letter in general. Good discussion of market making, but it might be old hat to some of the folks here.

San Diego, CA

Bernanke is giving a series of four lectures to students at George Washington University. He is going to talk about the history of central banks, their function and the actions of the Fed during the recent financial crisis. Video of the first lecture is now available: http://www.ustream.tv/recorded/21242022. I believe the second lecture is scheduled for Thursday and the last two are scheduled for next week.

A very interesting paper with a lot of historical data. Thanks for posting.

Couldn't agree more. I even find Joe's mannerisms and voice annoying, not to mention the actual content of his questions and comments. It's a mystery how he has managed to hang on as a host on the show. Luckily both Becky Quick and Andrew Ross Sorkin are pretty good, in my opinion. I thought it was a very good interview overall, even if a lot of it was spent talking about taxes. Interesting that Buffett thinks American banks are in their best shape ever, although ROEs going forward will be less than the historical numbers. Apparently he has continued to buy WFC in Q1 2012.

I signed up as well. Thank you, Miguel and Augustabound.

Oh man, I hope you are right--I was thinking more in the 40-45 range than 60. Any reason you have it that much higher? http://variantperceptions.wordpress.com/2012/01/24/charting-banking-xxiv-pre-tax-pre-provision-earnings/ My estimate is also in the 40-45 range, but I am rooting for PlanMaestro to be right. :-) PlanMaestro, in your write-up you say that 10x PTPP corresponds roughly to 15x earnings. This doesn't look right to me. Taking WFC as an example and assuming 1% normalized losses on about 800 billion in loans, I get the following: PTPP -> 30 billion (your estimate) Loan Losses -> 8 billion Earnings -> 15 billion (assuming 7 billion of taxes on 22 billion of pre-tax earnings) So 10x PTPP equates to about 20x earnings, which is rather optimistic. At 15x earnings, the IV is about $41 per share.

Very nice article. The bit about the adjustments to make to reported numbers was very useful for me. I am curious why the estimate of USB's PTPP earnings is so much lower than the difference between their revenue and noninterest expense. For USB, revenue - noninterest expense = $9.2 billion roughly for the last twelve months. Yet PlanMaestro's estimate of their normalized PTPP earnings is only $7 billion. PlanMaestro, could you elaborate on your calculations for USB? For Q4 2011, USB reported ROE of 16.8% and ROA of 1.62%. I believe Richard Davis has indicated that these are close to normal numbers. At a tax rate of 30.5% for Q4, the pre-tax ROE and ROA numbers -- after provisions for losses -- are 24.2% and 2.33%. PlanMaestro estimates ROE and ROA computed using PTPP earnings to be 22.9% and 2.3%. So either USB's Q4 numbers are way higher than their normalized numbers, or PlanMaestro's estimates are too low.

Are they just pulling number out of a hat? As an owner of Microsoft stock, I hope IHS is right, but these predictions are worth very little. Take a look at this IHS prediction from August 2010: http://www.isuppli.com/Mobile-and-Wireless-Communications/News/Pages/Googles-Android-to-Outstrip-Apples-iOS-by-2012-iSuppli-Forecasts.aspx. Here's their main prediction: "Android will be used in 75 million smart phones by 2012, up from 5 million in 2009. Meanwhile, iOS usage will amount to 62 million in 2012, up from 25 million in 2009. This will give Android a 19.4 percent of the global market for smart phone OSes in 2012, up from 2.7 percent in 2009. Apple’s iOS for the iPhone will see its share rise to 15.9 percent in 2012, up from 13.8 percent in 2009. In 2014, Android’s share of global smart phone OS usage will rise to 22.8 percent, while iOS will decline to 15.3 percent." So IHS was way off on Android market share just a couple of years out. IDC and Gartner did no better. But I guess these guys have to put out forecasts regularly to justify their own existence.

I am down 10% this year. The rout in financials was responsible for practically all of my underperformance. On a positive note, the IV of my portfolio is at an all time high! :-) A Happy New Year to everyone.

Wishing everyone happy holidays and a wonderful 2012! I am thankful to be part of this amazing investing community that Parsad has put together.

I guess the indirect mention of Ireland to avoid a direct discussion against the master was lost (he had Bank or Ireland and Allied Irish Banks). If you invest in banks, the big risk is a financial collapse and the very real possibility of nationalization or at least large scale government intervention. It has happened a lot (Chile, Mexico, Argentina, Scandinavia, IRELAND...) and remember that the master was heavy in financials at the time and nationalization of some financials was a real possibility. Bankers risk taking is expressed both in high leverage and bad loans. But leverage is easier to detect and confirm. Those that have fallen shall be restored. Now is the time to focus on earnings, but do not forget TBV (and loans-to-deposits). http://variantperceptions.wordpress.com/2010/09/08/charting-banking-xvi-loans-to-deposits/ http://variantperceptions.wordpress.com/2010/09/08/charting-banking-xvii-loan-to-deposits-history/ I wasn't trying to imply that tangible book value is unimportant. But the fact that Buffett himself does not seem to pay attention to TBV in valuing banks supports peter_burke_ceo's point that at some point in the future banks will be valued on earnings and not on TBV. Besides, doesn't Buffett's method make a lot of sense? Sure, you can use TBV and other metrics to ensure that a bank is safe, but it seems to me that the best way to value a bank is by using normalized earnings. Note that Buffett does say that the profits have to be earned conservatively; presumably he won't invest if he doesn't think operations are conservative.