Santayana

Yes, I do think that risk exists. As I said though, I'm long ORH myself, and consider that risk small enough to stomach with some of my investments. However I still have a substantial portion of my capital in Treasuries and FDIC insured accounts as I have since July '07. Inflation is not a risk I'm worried about.

I'm long ORH myself, but don't be fooled into thinking there is any "no risk" investment in this market. We're going to start seeing some Munis default as tax receipts are coming in very low. Yes the Berkshire insurance is a huge plus, but I'm still not putting all my eggs in one basket. I trust FDIC more than BRK at this time....not saying that can't change.

It may not violate legal boundaries, but I disagree that there is not a problem with the ethics. Just because you are allowed to do something does not mean it is right. And it's not hypocritical to say so unless I were doing the same thing myself.

There is a difference between not being a market for certain "assets", and the owner not liking what the market is willing to pay for those assets. There are plenty of people willing and able to buy some of these distressed securities, but the owners just don't like the bid. I also thought the idea behind capital ratios was that the banks had liquid assets to back their loans. If there really is no market, then those assets shouldn't be allowed to count towards their tier 1 ratio. Unfortunately it's become abundantly clear that the taxpayer will end up covering any difference between the marked value and actual realized value. Heads they win, tails you lose.

That's a good point. But it makes me wonder if the historical numbers are on the same basis. Hopefully most of the writedowns are done already, and the difference won't matter much.

It all comes down to what you think earnings will look like over the next couple of years. I think $63 is incredibly optimistic given that we just came out of a quarter where the number was negative. There were a variety of sources listed, do you know where the earnings estimate was coming from?

One other piece to consider in the California housing market is that there are some very large developments that were mothballed in various stages of completion, especially in the I-15 corridor. I think this skews the inventory numbers as many of the homes are done, but not on the market.

The problem with banks right now is that nobody, inside or outside, knows what their assets are really worth. When your balance sheet is made up of a bunch of guesses because there is no bid for the assets you hold, no one can say whether or not the company is fairly valued.

Continue to hold and buy puts.

Now that's a statement I can agree with! Although, one way FFH has managed to have such great returns over the years is by making bets like this. Some may fail, but the ones that work out more than make up for the losses. In terms of generating inflation beating returns, I think that is easier over a longer period of time than a shorter one. That is you could make the statement about the next 20 more easily than the next 5. I'm sure that all the investors you mentioned with great historical returns would all say that 5 years is too short of a time frame for them to make any statement about their expected returns.

Ok, I guess I was just interpreting the word "assure" to mean a sure thing, and thus risk free. I really don't think that is nitpicking, but if that's how you feel, and aren't willing to justify/explain your comment further, then I guess you're right and there's nothing more to say.

FFH holds ABH debentures and other debt. ABH may be having to convert much of its debt to equity to stay afloat. This will leave FFH holding a large amount of common shares of ABH. The risk in this is far higher than the risk in the examples I cited. The whole thread gives the full context of our discussion. I have been following the rest of the thread, but was following up on your point of buying JNJ, PFE and LUK assuring you of 15% annualized gains. I agree they may be less risky than ABH, but still don't see the connection between that and basically saying you can double your money in 5 years risk free.

I thought you were talking about the common. Are you referring to some preferreds or convertibles with the downside protection?

What in the world makes you say this? There are no sure ways to double your money every 5 years!

Oops, guess my quote didn't work... Also, with those asset writedowns will come lower operating earnings as financial institutions have less capital to work with, and will be using less leverage to boot.

I don't know about the S&P500 as a whole, but Microsoft earnings dropped a "whopping" 10%. Big deal. It's a big deal if earnings contraction rather than growth becomes a trend for more than a couple of quarters.

50% cash 15% FFH 10% NLY 5% various long positions (MO, LINE, ORH, ...) 20% SPY puts of varying strikes/expirations

I remember when she was mocked on CNBC last spring for saying that Citi was going to have to raise massive amounts of capital. People on this board generally don't have the same relationship with credit as the broader public. The credit line reductions aren't being spread evenly across all types of customers, they're mostly affecting those people who actually use their full limit. Add in the higher fees and penalties for being late/overlimit, and people will cut back even more.

I don't know. I think the case could be made that nobody really deserves a AAA right now, and that could include the US govt. as well. Whether or not you believe we are headed for a depression, one has to recognize that there is a great deal of uncertainty in the financial markets these days. How many AAAs are still out there?

Well #5 is partly true right now. Too many executives have gotten away with publically misrepresenting their capital situation when they clearly knew better. This should be treated as fraud and people need to go to jail. The sooner this happens, the sooner confidence will return as investors will start believing they aren't being lied to.

I don't think we'll a 90% drop this time around, but I do have a target of Dow 4000, so another 40% from here. 1994/1995 is when many companies really started to increase leverage and prices and earnings started to go parabolic. I think we return to those levels and then start growing again, but this time at a more reasonable pace. Irrational exuberance is one of the few things Greenspan got right, and many people have just forgotten how insane valuations were looking in 96-97. To me the key isn't necessarily how far we'll drop, but how long it will take before we start to see growth again. Even if this is the bottom, or we're very close, it will be years before we see earnings growing at the same rate as the 90s. In the meantime there is money to be made by investing in companies that pay out earnings as dividends, don't have debt, and have consistent sales.

But that rally only came after a 90% fall. Even after the quadrupling between 32-35 most investors were still deeply in the red.

I didn't say anything was wrong with removing the hedges, it was adding new positions after they were removed that I question, especially in the financial space which has far too many questions abounding right now for me to believe that any margin of safety exists.

What you need is to have them trade on a exchange with some regulation. Just as you need to maintain margin to write naked puts, you should need the same to write naked CDS. Many of the problems we're having right now are due to institutions writing contracts that they could never cover. Hence the bottomless pit of govt. funds called AIG.

I know the short term moves are Mr. Market aren't necessarily meaningful, but I think it's worth noting that WFC and GE are both off nearly 50% since the time we were having this discussion. If they were 50 cent dollars when FFH made their Q4 purchases, are they 25 cent dollars now? I remain long FFH, but am increasingly convinced that Prem made a bad decision to remove the hedges *and* add additional positions.