treasurehunt

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.

nahh. Buffett could care less about tangible book for wells. I am positive there will be a day when people could care less about it and will focus entirely on earnings power. nobody was mentioning the tangible book value of finance companies in 2007. Here's Buffett on Wells Fargo at the depths of the financial crisis in March 2009: http://money.cnn.com/2009/04/19/news/companies/lashinsky_buffett.fortune/index.htm Looks like peter_burke_ceo is absolutely correct. Some excerpts from the interview: Dick Kovacevich specifically told me to ask you your views on tangible common equity. What I pay attention to is earning power. Coca-Cola has no tangible common equity. But they've got huge earning power. And Wells ... you can't take away Wells' customer base. It grows quarter by quarter. And what you make money off of is customers. And you make money on customers by having a helluva spread on assets and not doing anything really dumb. And that's what they do. But back to tangible common equity... You don't make money on tangible common equity. You make money on the funds that people give you and the difference between the cost of those funds and what you lend them out on. And that's where people get all mixed up incidentally on things like the TARP. They say, 'Well, where'd the 5 billion go or where'd the 10 billion go that was put in?' That isn't what you make money on. You make money on that deposit base of $800 billion that they've got now. And that deposit base I guarantee you will cost Wells a lot less than it cost Wachovia. And they'll put out the money differently. So what is your metric for valuing a bank? It's earnings on assets, as long as they're being achieved in a conservative way. But you can't say earnings on assets, because you'll get some guy who's taking all kinds of risks and will look terrific for a while. And you can have off-balance sheet stuff that contributes to earnings but doesn't show up in the assets denominator. So it has to be an intelligent view of the quality of the earnings on assets as well as the quantity of the earnings on assets. But if you're doing it in a sound way, that's what I look at.

Unless they are all going to crowd into a tent, then we are either going to see: a) 4 million new single family home renters (just rearranging the deck chairs isn't it?) b) 4 million new apartments built (lots of new jobs!) c) A mix of both (some deck chairs shuffled, some new jobs too) I'm guessing it's c. Unfortunately, we don't know what percent of those are occupied. Some will be failed second homes, specs, etc. Other folks will extend the family in a single home, move back with parents, move back to their homeland. It definitely won't be one for one. As bmichaud points out, our long term average of 65% home ownership went wonky, fueled by easy money. The 4% added homeowners aren't coming back. Their homes won't get occupied. Building apartments is unfortunately not a sign of strength. The percent that is not occupied is already counted in the supply stats, so why is it important to know this percentage? Homeownership isn't directly relevant to the total oversupply either. Assuming that owners and renters typically live in different kinds of residences, it might mean that the oversupply is more in detached homes and less in apartments. Btw, one of Tom Lawler's articles that I linked to in a previous post indicates that the homeownership rate is back to 1990 levels (he compares the data from the 1990 census and the 2010 census; most articles in the press are still using faulty CPS/HVS data for homeownership). In fact, Lawler says that if you look at homeownership by age group, homeownership for most age groups was lower in 2010 than in 1990. So I don't see why it should decline too much from here. I think folks are way too pessimistic about the future of residential construction in the US. It seems to me that there is a lot of data to support Buffett's view that a turn in residential construction and related employment could happen soon.

The delinquent and foreclosed homes that are currently vacant are already counted in the supply numbers. Those that are occupied have people living in them who will need to find another place to live after foreclosure. So it doesn't make sense to add these 4 million homes to the supply. Perhaps your point is that so many homes going into foreclosure will increase the number of future vacant homes because people who get foreclosed on will have to double up or go stay with their parents etc. I think there is some truth to this, but unemployment is probably going to be a bigger factor determining the extent of this effect. Also, a different way of looking at this is to say that the household formation rate in the near future will be less than usual because of all the homes going into foreclosure. This means that the one million excess vacant homes might take longer to absorb. At normal household formation rates the excess supply should be absorbed in less than a year, but if household formation is slower, it might take two years instead. My guess is that excess supply will be absorbed by the end of next year barring a recession, but vacancy rates may dip below normal before housing construction really picks up.

The Calculated Risk blog has excellent analysis of housing supply in the US. Both Calculated Risk himself and economist Tom Lawler (Senior VP at Fannie Mae until Jan 2006) have several posts addressing the issue. Calculated Risk's most recent estimate of vacant housing supply is about 1 million units: http://www.calculatedriskblog.com/2011/12/excess-vacant-housing-supply.html Most of the discussion on the web about US housing vacancies and home ownership is based on data from the CPS/HVS survey. Here's Tom Lawler on why this survey likely has significant errors: http://www.calculatedriskblog.com/2011/05/lawler-census-2010-demographic-profile.html and http://www.calculatedriskblog.com/2011/05/lawler-census-2010-and-us-homeownership.html. Lawler's fundamental argument is that the CPS/HVS survey numbers are off considerably from the decennial census numbers for both 2000 and 2010, indicating some sort of systematic error (although he doesn't know what this error is). For example, the homeownership rate according to the 2010 census is much lower than the rate according to the CPS/HVS survey -- 65.1% versus 67%. Lawler's posts are long, but well worth the time in my opinion. Thanks largely to his work, I am fairly convinced that US housing oversupply is not as dire as many people think.

Is it unreasonable for a utility-like business to have a P/E of 12-13? Here's a list of all the utilities in the S&P 500 that have positive earnings and their P/Es according to Yahoo. AEE: 13.98 AEP: 10.30 CNP: 5.90 CMS: 13.54 ED: 15.84 CEG: 19.43 D: 19.22 DTE: 12.31 DUK: 15.09 EIX: 13.15 ETR: 8.90 EQT: 17.34 EXC: 11.83 FE: 17.62 TEG: 15.27 NEE: 15.71 AGL: 15.52 NI: 20.06 NU: 14.85 NRG: 15.71 OKE: 26.68 POM: 16.10 PCG: 15.24 PNW: 14.91 PPL: 10.86 PGN: 20.74 PEG: 11.07 QEP: 15.10 SCG: 14.29 SRE: 9.36 SO: 18.06 TE: 14.05 WEC: 14.31 XEL: 15.06 A large number have P/Es in the 13-16 range. This may go down somewhat in a higher interest rate environment, I assume. Still, a P/E of 13 seems reasonable. This article has a chart of historical P/Es since 1993 that indicates that 13 is on the lower end of P/Es for utilities: http://seekingalpha.com/article/288627-a-look-at-historical-sector-p-e-ratios. But you can certainly argue that post-1993 is not a good reference period.

Both Stumpf and Moynihan presented today at the Goldman Sachs American Financial Services Conference. Stumpf: http://cc.talkpoint.com/gold006/120611a_lr/?entity=2_D2Q0VLC Moynihan: http://cc.talkpoint.com/gold006/120611a_lr/?entity=34_NI1UFU2 You will need to register before you can listen to the presentations. I didn't find anything notable in the WFC presentation, but the BAC one had some interesting information. 1) Investment banking is doing better this quarter than the last, but it's still far from normal. 2) Consumer spending held up well in November (up 5-6% from last year). 3) Delinquency and charge-off trends have continued in the fourth quarter. 4) Regulators appear to be serious about giving banks enough time to reach Basel III capital requirements, which gives BAC more options. 5) Moynihan seemed to back off from the 45-50 billion pre-tax pre-provision earnings that he had mentioned earlier as being reasonable in a more normal environment. He said something about expecting 1% ROA on a 2.2 trillion balance sheet.

The 8K filed by BofA says this: "In total, through December 1, 2011 and including those agreements previously reported on the November 17, 2011 Form 8-K, the privately negotiated exchanges have covered the exchange of approximately $4.0 billion aggregate liquidation preference of Preferred Stock and Trust Preferred Securities into 311,011,300 shares of Common Stock and Senior Notes with an aggregate principal amount of approximately $1.4 billion. In the aggregate, the Registrant expects that the exchanges reported in this report and in the November 17, 2011 Form 8-K, together, will result in an increase of approximately $2.90 billion in Tier 1 common capital, and increase the Registrant’s Tier 1 common capital ratio by approximately 21 basis points under Basel I." So 311 million shares were issued to retire 2.6 billion in preferred stock and TRUPs. This works out to $8.36 per share, which is well under IV by my estimate, but at least well above where the shares are trading right now. This transaction and the recent CCB sale have boosted Tier 1 Common (under Basel I) by 45 basis points. Add in the impact of earnings and some other transactions that closed recently, and BofA's Tier 1 Common ratio should be close to 9.5% by the end of this quarter. This ratio was 8.65% at the end of the last quarter.

Another data point on the economy: light vehicle sales in November were at a seasonally adjusted annual rate of 13.6 million, the highest since Aug 2009. Aug 2009 was artificially inflated by Cash-for-clunkers, and if you ignore that month, November's rate is the highest since June 2008. Calculated Risk has details: http://www.calculatedriskblog.com/2011/12/us-light-vehicle-sales-at-136-million.html

Fairholme posted its 13F for the third quarter. Berkowitz has increased his position in both AIG and BAC by buying warrants on top of the common stock. Total value of the portfolio was down to 8.2 billion from 12.9 billion. A lot of positions -- Berkshire, Goldman, Morgan Stanley, Citi, Regions, etc -- have been trimmed, presumably to meet redemptions. Berkowitz has completely sold out of Morgan Stanley. The Goldman position is down to almost nothing. There is a small new position in Wells Fargo.

No doubt transistor feature sizes will hit the wall at some point, but the limit is probably well below 16nm. Intel has plans to introduce 14nm chips in 2013 and 10nm chips in 2015: http://news.softpedia.com/news/Intel-Technology-Roadmap-First-14nm-chips-in-2013-10nm-in-2015-198612.shtml. Feature size shrinkage plus 3D technology should keep Moore's law going for a while yet.

I have the same opinion that you do about Whalen. He has been calling for a restructuring of all big banks for a while now. For example, here's a presentation where he says that the big banks are going to be overwhelmed by the amount of foreclosures that they will need to handle and will have to restructure soon: http://www.businessinsider.com/chris-whalens-foreclosure-crisis-2010-10#subprime-losses-have-been-hidden-by-bad-accounting-1 Whalen seems to be a smart and knowledgeable guy, but his arguments in favor of restructuring the banks are underwhelming, in my opinion. The numbers in his presentation don't even make sense. For example, slide 7 shows total noninterest income of 60 billion for US banks. But Wells Fargo alone had over 40 billion of noninterest income in 2010. Also, noninterest expenses have not gone up significantly this year like Whalen claimed they would (for the first six months of 2011, YoY comparisons are flat for Wells, up 6.5% for JP Morgan, up 8% for C, up 16% for BAC and up 5% for USB). Anyway, we'll find out in the next couple of years if Whalen is right about the banks and foreclosure issues really are unmanageable. I am betting that he is not.

I am not sure how you calculate that the PC business makes up 80% of Dell's revenue. Here are some numbers for the last six months from Dell's last 10-Q. Revenue Servers & Networking $4,027 Storage $983 Services $4,020 Software & Peripherals $5,136 Mobility $9,477 Desktop PCs $7,032 Total $30,675 Even if you count Servers & Networking and Storage under PCs, that's 70% of revenue. But Dell sells more than just hardware in those two categories, so really only a little over 50% of revenue is from PCs. Less than half of net income is derived from PC sales. I think Dell is well on its way to transitioning away from being just a seller of PCs. Also, HP had total revenue of 126 billion in 2010, of which 40.7 billion came from the Personal Systems Group. That is 32%, not 5%. I own some Microsoft and Intel in addition to Dell. I agree with you that these companies have a bigger moat than does Dell, but Dell is quite a bit cheaper. TxLaw has already articulated -- in a different thread -- better than I could why a position in Dell makes sense. It seems to me that there is a substantial margin of safety at current prices.

I am not Munger -- far from it -- but here are my thoughts anyway. Dick Bove has to be the most manic-depressive analyst I have ever listened to. He seems to switch from "Sell everything!" to "Buy the banks, they are dirt cheap" with great rapidity. Also, he has made some truly horrendous calls in the past, while the financial crisis was unfolding. So for me personally, Dick Bove's endorsement means very little. Also, his recent refrain that "banks are cheap because they are selling below book value and book value is all cash" doesn't make sense to me. Why would the liquidation value of a bank be equal to or more than the book value just because it has a lot of cash on the balance sheet? The remaining assets could still be worth a lot less in liquidation than indicated on the balance sheet. Why not keep it simple and say that most banks are cheap in comparison to normalized earnings and they can get to normalized earnings without diluting shareholders significantly? If this is not true, having a lot of cash on the books is not going to help shareholders.

The BofA press release says "This month alone, through non-core asset sales and other actions, we expect to generate approximately $5.8 billion in additional Tier 1 common capital and reduce risk-weighted assets by approximately $16.1 billion under Basel I." As of June 30, BofA had Tier 1 common capital of $114.7 billion and risk-weighted assets of $1393 billion. Assuming no other changes, these numbers go to $120.5 billion and $1377 billion. The Tier 1 common ratio increases from 8.23% to 8.75%. That's pretty good progress.

I did take a look at Citi's financials, but found it much more difficult to get a handle on its normalized earning power. Part of the problem has to do with so much of Citi's business being outside the US, where I don't have any familiar comparisons that I can make. Nevertheless, I did buy some C stock during the recent crash based mainly on two factors: one, the stock is trading at less than 60% of tangible book value, and I assume that Citi should be able to make a good enough return to be worth more than tangible book; two, management seems to be making excellent progress with whittling down the problematic assets in Citi Holdings, so chances of really unpleasant surprises that will reduce tangible book significantly are fairly low. What is your estimate of the value of C stock?

Not at all. I don't think a capital raise is needed or likely. But as the stock price drops, more and more bad stuff gets discounted into the price; I was just pointing out that the stock price is now low enough that even 50% dilution won't affect the bullish case for BAC.

When a stock temporarily falls in price in the first twelve months after purchase, it's "clearly" due to a change in the long term prospects of the company? Or if a stock doesn't fall in price in the first twelve months, it's confirmation that the analysis of long term prospects is correct? Of course. This is why Buffett's purchase of Washington Post stock in 1973 was such a disaster. :-)

I don't believe the buy thesis has "dramatically devolved" recently. Regarding reps and warranties, I think it's quite possible that BofA is under-reserved. But as PlanMaestro points out, if actual losses are higher by say $20 billion than what BofA is assuming currently, that can be covered in just six months out of pre-provision earnings. The other numbers that Blodget provides -- for second loans, commercial mortgages, exposure to Europe etc -- are all highly exaggerated, I believe. Looking at the most recent 10-Qs and 10-Ks for delinquency rates and charge-offs, there is no basis for these assumptions. BofA's reserves are likely sufficient or close to being enough. But let's assume that these losses turn out to be $50 billion more than currently anticipated. Even then, BofA won't need to come up with $50 billion overnight. They will be able to raise their provisions over time. If they do this over two years, BofA will generate $80 billion of pre-provision earnings in the meantime. My calculation is that given the immense earning power of BofA's franchise and its decent capital position, the company will be able to overcome its significant short-term issues with putbacks and legacy mortgages. Even if the share count goes up by 50% as a result of a capital raise, the stock is a good investment at this price.

If you don't even know what constitutes bank capital, are you really qualified to make any pronouncements on banks? The real Munger emphasizes the importance of knowing the limits of one's circle of competence... A quick look at a bank's 10-Q or 10-K will tell you that market capitalization has nothing to do with a bank's capital. It is weak to say "Karl Denninger usually knows what he is talking about" when you can check the financials directly yourself. Here's a breakdown from Citi's latest 10-Q, for instance: Tier 1 Common Citigroup common stockholders' equity $176,052 Less: Net unrealized losses on securities available-for-sale, net of tax (603) Less: Accumulated net losses on cash flow hedges, net of tax (2,567 ) Less: Pension liability adjustment, net of tax (4,065) Less: Cumulative effect included in fair value of financial liabilities attributable to the change in own credit worthiness, net of tax 243 Less: Disallowed deferred tax assets 35,392 Less: Intangible assets: Goodwill 26,621 Other disallowed intangible assets 5,023 Other (649 ) Total Tier 1 Common $ 115,359 Qualifying perpetual preferred stock $312 Qualifying mandatorily redeemable securities of subsidiary trusts $15,949 Qualifying noncontrolling interests $965 Other $1,875 Total Tier 1 Capital $134,460

I own both the stock and the warrants, but I think the stock is a better deal right now unless you are very bullish on WFC's business over the next seven years. The warrants only adjust downward for dividend payments that exceed $1.36 per year. Assuming that the dividend reaches this number by 2013, the stock will pay out about $9 of dividends till Oct 2018 that won't apply to the warrants. I calculate that for the warrants to beat the stock, WFC has to be close to $60 by Oct 2018. Adding in the $9 of dividends, this works out to a return of 15% per year. The warrants are a better deal if WFC stock returns better than 15% per year. Why not play it safe and just buy the stock? I am ignoring the possibility of the warrants spiking up in the interim for one reason or another.

Interesting! The press release says that you can email questions for Brian Moynihan to askbrian@fairholmefunds.com. Any takers here? I emailed the following questions, for what it's worth. 1) Consider an adverse economic scenario with GDP dipping by 3%, home prices declining by a further 20% and unemployment rising to 10.5%, all by the end of next year. What will be the impact on BofA's capital levels in this case? What levers does BofA have that can be pulled to keep capital levels up while minimizing the issuance of equity? 2) Some commentators, including Joe Stiglitz just today, have been clamoring for (i) even higher capital levels than dictated by Basel III and (ii) faster phasing in of higher capital levels than the current schedule. Do you see any evidence of regulators agreeing with this viewpoint? Will BofA have to issue stock if it has to reach a 9.5% capital ratio by, say, 2016 rather than 2019? 3) It appears that most of BofA's mortgage losses, and legal issues related to securitizations and foreclosures are due to vintages from 2005 through mid-2008. How far along is BofA in terms of digesting the loans and securitizations from this period?

According to Morgan Housel of the Motley Fool, Charlie Munger had this to say on the debt ceiling: "This raises the question of why the U.S. even has a debt ceiling. No other major nation has one. The popular argument is that a debt ceiling prevents the Treasury from engaging in out-of-control spending. But this is short on logic: The Treasury doesn't spend money. It simply pays the bills Congress racks up. If overspending is the issue, that's what Congress should be debating -- not whether it should tie the hands of the bank that pays for its spending." Sounds like Munger feels the same way that Buffett does about the debt ceiling. Here's the original article: http://www.fool.com/investing/general/2011/05/10/charlie-munger-on-berkshires-future-taxes-and-the-.aspx

Why would you include the value of BNSF's debt in a calculation of BRK's equity value? Would BRK be worth even more if BNSF had 50 billion of debt rather than 10 billion?

This seems optimistic to me. BYD's auto sales are down year over year so far in 2011. According to this article from Reuters, sales are down 27.5% through March: http://www.reuters.com/article/2011/04/07/china-auto-idUSL3E7F70A220110407. Margin reversion to 8% is also a stretch, I think. BYD cut prices on several models in February: http://www.cnbc.com/id/41656075/China_s_BYD_Says_Cuts_Car_Prices_by_Up_to_19. I'll be happy if the margin stays at 5% this year without falling further. :) I do own some BYD, but that is basically a speculative bet that they will be a big player in the future in electric batteries or solar energy.