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Liberty, I have read the Economist report but I think the data it is based upon may be flawed. There is no third-party verification and no incentive for others to verify the data. As I recall there was no discussion of this in the Economist report. Chancellor quotes two examples from the RE sector when the numbers go bad the reporting stopped. It reminds of the OPEC estimated reserves numbers (which are also self-reported). You are correct if the assumptions are true but I am skeptical due to the lack of transperancy and incentives for checks and balances. If there were so many blow-ups of Chinese reverse merger stocks associated with reporting, what makes you think the "official" data does not contain the same flaws? We will see when the tide goes out, if the Chinese have been skinny dipping. BTW that is why I stay away from Chinese companies because the success of value investing is based upon having transperent disclosure you can rely on. If this is not present, the market becomes a casino with investors being the patsies and the insiders being the scalpers. Packer

It may be true but his observations appeared to hold in Japan and for the SE Asian RE bubble. The gov't may be able to defer the decline (like the US did with the housing bubble) but the deferral cause problems of its own (increased inflation of a bubble) and a drawn out decline. A chapter in "The Devil Takes the Hindmost" about the Japanese bubble describes a similar situation with the Japanese and others cliaming the uniqueness of the Japanese system. In the end it was not so unique. If the basis of economic growth is the market system bubles and busts are just part of the way the system works. Packer

I would not discount Chancellor's points. He is a learned historian and economist and the Economist has reporters learning economics as they go versus economists/historians commenting on the news. Below is an interesting perspective of the RE cycle and its application to US and China: https://www.gmo.com/America/CMSAttachmentDownload.aspx?target=JUBRxi51IIA1YdxRKKPedFi61O2OglanIRVoizJpKZd2dGP3C21iwmdNBThDJxxZFF9ysrk8Jg1eLI%2b6M6F%2fBFNwmfMFN9NRiq3W81KPaIUKTo%2b3vT%2bj8A%3d%3d I think those of us in the West have to take everything that comes out of China with a grain of salt because most of the incentives in place to make thing look good and there is no third-party verisifcation of statistics. As a case in point, look at the all the fraud in the Chinese "reverse merger" firms with the Chinese looking the other way. I agree that the Chinese people have great potential but will the planned goverment and mis-allocation of capital and associated corruption more than offset this potential. That is the question. Packer

I was disappointed with Grantham's response to the question about higher moat firms representing a larger portion of the US economy. He basically said all firm values approach replacement value which is true for most firms but appeared to be an theoritical/academic resposnse to a practical issue. Packer

I think one the reversion to the mean folks fail to realize (in addition to the LL point) is that historically there has always been some thing that has caused a labor shortage which has increased wages (and thus squeezed margins). Before the 1920s, it included war, famine and disease. Between the 1920s and the 1990s, it was communism and to a lesser extent war, famine and disease. Since the 1990s, we have not had any of these factors in the developed and most of the developing world which has led to a labor surplus in most fields. Most of the products and services we consume have large labor and IP components as portion of the price we pay. Therefore until labor costs rise significantly there is no reason to expect margins to decline as they have in the past (as conditions have changed). Packer

Is this showing the housing rebound is imminent or just a bunch of funds trying deploy capital looking for yield. 5 to 6% unlevered returns do not sound too high as RE investment returns to me. Could they just be bidding the prices up short-term and reducing the long term potential for returns? Housing will return when folks can afford to buy houses with good incomes not when investment funds invest. Packer

How many of you use Graham's outperformance benchmark? It basically states that security analysis is not worth an investor's time if they cannot outperform an index by 5%. It can be found on page 15 of the Intelligent Investor. The funny thing is that very few mutual funds can pass this test. Packer

I think for a planned objective like war a planned economy is required. However, for a peacetime eceonomy the planned economy causes allocation issues as the planners do not know the future. This can be seen in post WWII Europe as many countries tried to plan there way to prosperty. It can work up to the point of current levels of technology but actually retards innovation beyond the current levels and can cost alot of money as planned projects are borrowed for. I think if you look at the Anglo-Dutch coutries and colonies, I think you will find their stock markets have outperformed more planned ecnomies of other countries. I also think alot of China's growth is catch-up growth and it will slow considerably once the country has caught up with US, Western Europe and Japan. Catch-up growth can be planned like war because the objective is clear. However, all the planning has a side effect of following the state plan. At that point, growth will be based upon innovation which the Anglo-Dutch economies have a comparative advantage.

Does anyone else have a self-directed 401-k? If so, which firms support this option? TIA Packer

I also agree that possibility of a decline is also priced into the prices of some stocks. How else could there be some many stocks for less than 5x FCF and for banks selling at good sized discounts to book? For these to be fairly valued their earnings are going to have to decline by 2/3rds or book value decline by 50 to 60%? I could be wrong but I don't think that is in the cards given the already negative sentiment for stocks. Packer

No one really knows but the question was asked at the AM and the best guess was that it will be based upon a weighted average of the reamining post euro currencies. Packer

Probably one of the best accounts of early speculative bubbles (South Sea, Mississippi, canals, tulipmania, railroads) out there. Packer

Does anyone know if these types of plans force the participants to sell shares on a specific date? Does the participant have any discretion as to when to sell the shares or to cancel the sale? TIA Packer

I think the difficulty depends upon the level of customer lock-in. I don't like the title of high-tech industries becasue it includes firms that are capital intensive and require large amount of investment (compter hardware) and some that are the opposite (software). Many private equity firms have run off software firms successfully due to thier lock-in and low re-invesment. Packer

It will be interesting to see how thus plays out as management has one view and the market is pretty skeptical about it (as can be seen by the analysts questions and the current stock price). Packer

I would buy some battered media firms like SALM, TVL or maybe some newspapers in addition to an insurance core. Look for cyclically depressed businesses that aren't capital intensive. Also some leasing types of businesses like pipelines, SSW or AIQ that you can invest capital and get an adaquate yield as alternative to bonds. Packer

You can see the impact of ACS, the ROIC peaking in Dec 2011 (including the ACS acquisition). Since that peak, it has declined. The service margin has declined however, see page 8 of attached presentation. The difference must be from D&A. I would expect ROIC to increase including ACS or they would not have any goodwill in the acquisition. The trends since the acquisition have in my opinion have not been good. Packer Xerox-First-Quarter-2012-Earnings-Presentations-Slides.pdf

My outlook for the printing business is much like the print imaging business. You have alot of legacy capacity and new technology makes the old machines obsolete in a few years. My dad runs a digital printing shop and has carved out a niche but can't find much growth. The large printers (Donnelly, Quebcor, etc.) are all in terminal decline. The printing business is tied to print advertising/publishing which is is a terminal decline. Newpapers may survive by providing content via a different medium (video/internet/mobile). The reason I like Salem and Glacier is they have the content and will find another channel to provide it and they are not capital intensive. I am not sure I can say the same for XRX. The hardware business is a commodity in a declining market where they used make money on cosumables which can be provided by others for a lower cost. As I remember BPO contracts are typically 3 to 5 years but you need to know the number of contracts up for renewal. The only observation I was making is if the renewal is so high why is the revenue bearly budging and the margins declining (ie they have to spend a good amount to prevent revenue decline) and the fact that the rate appears to declining based upon ASC's purchase accounting. The margins have been declining every year since they bought ACS. CSC is an example of a firm that is having problems with its BPO business. If XRXs business ends up like CSCs then in can to be priced at less than 3.0x EBITDA. Implying a decline from today's 5x EBITDA. As to Safeway and Kroger, I agree that they need to something similar to Wegmans or what JC Penney is attempting (making the stores an experience) to differentiate themselves or they will consumed by Walmart, Target or Costco. I am not saying XRX should no have purchased ASC. They were dealt a bad hand (like Kodak and IBM at one point) and tried to compensate via a services business. I think the big difference is IBM had an organic service business, XRX bought one and Kodak had none. For IBM the service business was part of the customer purchase not as much so for XRX. Packer

The increased cost appears to be replacing lost business (as the total revenue is flat). Therfore, it may be a permanent cost of business. I know from valuing the recurring revenue streams of these types of businesses that 86% is not a good retention rate. If you look at the purchase accounting for ACS, the estimated retention rate acquistion was closer to 91% (implying a 11-yr expected life for customer relationships). These guys do have increased cost at the start of projects with the hope they can make it up after the start and on renewals. But if they are loosing 14% of the contracts per year, I would want to wait until my renewal rate is up into the low 90s before I lever up. These types of buinesses have operational leverage. So if they lose revenue, the hit to cash flow is higher. This is just prudent. If you are right and the renewal rate increases then they can lever up. If it becomes a cost of business then this business might become a levered CSC type business with a declining business attached. If the leverage is high enough it could tip over the ship. I don't think equipment sales are directly tied to BPO. BPO is a service while equipment is selling hardware at times to support the service. I wasn't referring to integration. I am sure they are integrating fine but some local suppliers who provide productivity solutions have stated that ACS does not provide these solutions to customers that Xerox has supplied to in the past and thus may not be provding the best of class to clients. I also think the outsourcing to India of software development is an issue from a competitive perspective. Are they outsource their core that will be copied by Indian firms and drive prices down further in the future. Packer

How do you get a FCF yield of 25% for Glacier? My TTM FCF is closer to $32 million which is closer to a 17% FCF yield. This in line with other mature media firms like SALM - 18% and SGA - 16% but below others like LTV - 42%. I have about a 6.5x EBITDA valuation in line with other mature media properties (TV/radio) but above declining properties like newspapers. I think this is a good return with a good jockey. Packer

I think the main reason the levering up thesis is a mistake is due to Xerox's lack of growth potential at the current reveue levels. If you look at the growth area, services, it is growing with declining margins to the point in the last Q the overall profit dropped. Its renewal rate on BPO contracts is only 86% which in my experience with software and other recurring revenue streams is on the low-end of others I have seen. The equipment and other areas are in secular decline so levering up may create a problem longer term. From what I have been hearing, ACS is running the business to maximize cash flow and is not investing to create LT cash flow. This may be reflective in low renewal rate. In these types of flat to declining markets more leverage could be deadly. They also continue to lay-off and outsource to India local jobs here in Rochester, not a good sign. Just some thoughts on why it is cheap and why leverage may make the situation worse (especially if the equipment or services hits a bump). Packer

Some of these statements are totally out of left field. In corporate securities, stock and bonds are tied to the same set of cash flows. The label stock and bond doesn't matter its the cash flows the securities have a claim on. They are right in their observation. For example, look at LinTV. Bonds are trading at yield of 8.0% but equity has a FCF of 42% (before acquisition) and 67% (after acquisition) and 4.3x Debt to EBITDA ratio and 3.0x EBITDA coverage. So you have a modestly leveraged firm where the FCF yield is 5x to 8x the bond yield. Just incredable. Packer

I just don't see how hyper inflation in wages is going to happen. What has happened and probably will continue is an increase in the nominal prices of commodity inputs. Since wages are probably the majority of the price in items we buy (if you include transportation and selling costs) and in most sectors we have a labor surplus, the commodity price increases get reduced by the lower cost of labor component. Also the main factors which have historically led to labor shortages (and thus higher real wages) of war, famine and following an less productive economic system (communism) have been largely eliminated, I think we are in for a longer period of increases in commodity prices (due in part to looser monetary policy) but not consumer prices with shrinking labor costs being the major reason. This BTW I think is why margins will not revert to the mean as the cause of the reversion has been higher labor costs. The only way AT margins will decline is of the gov't increases taxes. Packer

There are some interesting small caps that are getting cheaper like SALM, SGA, TVL, MGAM, VSH and AIQ. EMMS is approaching fair value. However, when you get firms like BAC and SD selling for attractive prices with similar quality firms selling at premium prices I think the focus should be on these names. The discussion on the smaller firms has declined however. Packer

In a good number of the small businesses I have come across, the value is tied to a key persons ability to either know the customer well or be known in the industry as an expert in a niche. This is a point you need to do good due diligence on. For example in the tool and die business, a lot of the jobs are one off jobs for specific clients and relationships are important. In this business, alot of firms have founders who have spent a lifetime developing relationships and you need to think about how or if these can be transferred to yourself. They may not be but working in the business can give you a feel if that is the case before you spend money in the business. Just my 2 cents. Packers