twacowfca

I think our outcome will be about one half to one third as extensive as the situation has been in Japan in recent decades or the situation in the US was in the 1930's. It will depend on when the inflation in the money supply allows a substantial amount of the debt to be paid off with depreciating dollars. This assumes that a future administration will stop throwing money at nonproductive or counterproductive uses.

Van Hoisington has a good Q2 letter on this topic. He says we will eventually have a potential for major inflation. But the drag on the private sector from all the stimulus being directed to the expansion of debt and nonproductive uses will be a huge drag on productive expansion for quite a while, leading to low interest rates for many years as the stupendous debt expansion and overhang will have unintended consequences like the situation in the 1930's. Buffett and Watsa may both be right. The relevant question is: how long?

I agree. This seems to be the most likely outcome, eventually. But it may not happen while there is a stalemate in Congress. The probability goes up dramatically if the Democrats win the White House and both houses of Congress in 2012.

Are the shares on "special"? In other words, is the cost to borrow steep? This is often the reason for the asymmetry you describe. If so, an optional deal might be to buy the shares and rent them out to the short sellers.

Are we looking at the same stocks? I am seeing plenty of that "single digit P/E 10" stuff? ??? edit : Nvm, you were talking about Schiller's PE... 50% seems crazy. Many companies are already under 2009's low valuations. People seem to be looking at price ("All that downside!!!!") but don't see value. I don't get it. Do you truly believe we can get to an S&P500 of 560 without any major depression? I am just not seeing it and the market acts like it is a serious recession already and some things will never recover. not saying we will see S&P 600, all i am saying is, be realistic, don't think that today's market is cheap, it's not, based on historic standards, the market is still overvalued by roughly 20% and we have only corrected 20% sofar from a 50% overvalued situation..... regards rijk Agree. Also, regime changes typically overshoot. In this case, a reversion to the mean is not an approach to a limit. The only thing we've bought recently is FFH because their investments are contracyclical. There are lots of apparent bargains out there, and the futures markets predict that a bounce is coming, but the only serious tire kicking we're doing is arbitrage situations where the spread is now abnormally wide.

It's interesting that everyone seems to think that this is a minor market decline and a buying opportunity. This blasé attitude scares me. Except for our core holding, LRE, we've been at about 80% cash for some time. If the wisdom of the herd proves to be right, and the markets bounce back, we should still have an opportunity to buy P&C cat exposed insurers at bargain prices because a bounceback for them is likely to be attenuated by the hurricane season being yet to peak. Best wishes to all. Blase attitude=Just my way to deal with adversity. Still almost 40% in cash, scaling in as the market declines as I have never had any luck at all trying to time the bottom, I have tried believe me in the past + managed to miss all of them. I wish I had some LRE. It has not lost anything on the pink sheets i.e holding their value Actually, I wouldn't mind if LRE dropped a lot. I would rather add to our LRE holdings at close to book than buy many other good insurers at a big discount to book.

My blase attitude comes from the discounted prices in the things I own. I own some WFC calls for example, 2013 with strikes $15 and $20. I expect they'll be earning nearly $4 a share by then and thus on that contract we're looking at forward expiration P/E of practically 5x right now, with probably at least $4 in earnings cumulatively before then. HPQ is at $30. Okay, that's only about 5x forward 18 months consensus earnings. This is just ridiculous. You're probably right. On the other hand, the stock market is the best leading indicator for the economy. If the decline proves to be deep and extended, the economy may follow. There aren't any more magic bullets in B&G's ammo bag.

It's interesting that everyone seems to think that this is a minor market decline and a buying opportunity. This blasé attitude scares me. Except for our core holding, LRE, we've been at about 80% cash for some time. If the wisdom of the herd proves to be right, and the markets bounce back, we should still have an opportunity to buy P&C cat exposed insurers at bargain prices because a bounceback for them is likely to be attenuated by the hurricane season being yet to peak. Best wishes to all.

Very thoughtful post, Vinod. Some thoughts: Leaps are a good way to lower the risk of permanent loss of capital, but there are good leaps (bargain priced, favorable terms) and not so good leaps (pricey). Cash levels are what they are. If you had $100 available and used $20 to buy leaps, your cash would be 80% of your portfolio, although your exposure to the market would be levered. If the leaps lost half their market value, the portfolio would lose only 10% of it's value, and cash would represent 89% of the reduced portfolio value. The cash represents most of your margin of safety. It doesn't matter a great deal how much you are levered up in notional exposure with whatever percentage of portfolio assets you are comfortable having in leaps, assuming the leaps aren't way out of the money. What matters most are how long are the leaps. One year? Five years? The longer the leap, the more time you have for cream to rise to the top. It also helps if leaps are on companies that generate lots of cash and are willing to use most of it to buy back stock if the market price drops way below IV. Regarding how much if any to increase your exposure when the market melts down: no more than you can afford to lose. One way to limit risk when tempted to double down in a market meltdown is to buy the stock instead of buying more leaps which would be very pricey in a high volatility regime. Then, you can hold the double down position for many years if necessary without attritional losses from time decay until the intrinsic value is reflected in the market price.

I've been to Oregon, California and Nevada -- I bought one of the Sprinter van RV conversions that Roadtrek makes. The past two weeks on the road. I was active a lot on this board back in April/May/June when I couldn't walk following a foot&ankle surgery. Now I can get around much better, so I've been out doing other things. How do you like your Roadtrek? We've been thinking of one.

My bad. My hat is off to plan maestro. Thank you very much. The key to understanding the risk/reward was the fact that something substantial was left for equity in all three POR's prosed by different classes. The final plan that was confirmed also preserved something nice for equity, an expected outcome all things considered. Dimeq has many variables, but they appear to have a stronger case than the Debtors. Nevertheless, what the judge who tries the case post POR confirmation decides probably will hold up on appeal. Therefore, the case is not a slam dunk for the Dimeq holders. I think it's very likely that there will be a settlement once a POR is confirmed before the Dimeq case will be tried. The WAMU BOD has major potential liability in how they dropped the ball in their duty to the DIMEQ holders, and I would be very surprised if they didn't lean on their lawyers to settle once a POR is confirmed. A settlement should be favorable to DIMEQ holders, provided that the Cpt 11 doesn't drag out for many months until the burn rate would eat into Class 12 recoveries.

Many, many thanks, Josh. A small gain on 52% of our shares and a 3.5 times gain from our adjusted basis to the market price of the remainder. :)

Recall WEB's definition of a great business: "a business so good that any idiot could run it.". Go USA!

The business does better if not micromanaged because we have a great experienced team and close alignment with extensive profit sharing, major keys to success. :)

Most of the time 50+ hours per week, but this may sometimes drop to zero if I'm editing a book or involved in a project such as scientific research or an outdoor adventure. Investing returns before 2001 were about 20 % per annum, but this wasn't much better than the general returns in the bull market. The greater time spent studying investing since 2001 has paid off with increased returns, even as the market has been flat on average. :)

Now, let's see. Which party was in complete control of congress in December, 2010 when the Bush tax cuts were extended and lots of other goodies handed to high income types? Was it the same party that has the Lion's share of ultra high income financial supporters? Hmm. Could it be that the Bush tax cuts were extended because the Republicans threatened to block permanent tax cuts for the middle class unless Congress also made the tax cut for ultra high income Americans permanent? Could it be that the President brokered a compromise that was deeply offensive to the progressive wing of the Democratic party for the good of the nation? :o The Democrat Party had a huge majority in the US House of Representatives and a rarely seen filibuster proof supermajority in the US Senate when the income tax cuts and the huge Roth rollover provision were extended. Oh, let's not forget the $10,000,000.00 exemption from the estate tax. Correct me if I'm wrong, but the Dems did not have a 60-vote supermajority in the Senate or a majority of House in late 2010, did they? I recall the Progressives in the Democratic Party being pretty pissed off at Obama for compromising on the estate tax and Bush era tax cuts in late 2010. Also, the specter of a Democratic filibuster-proof supermajority was something cooked up by GOP strategists and the WSJ editorial page at the time of the Presidential election. The fact of the matter is that there is enough variability in the two parties to where a 60-seat block in the Senate doesn't result in the party agenda being rammed through the Senate come hell or highwater. There are a lot of moderate Senators who wouldn't sign onto legislation that is too left or right of center. (I believe in the GOP, those moderate Senators are disparaged as RINOs.). Heck, even Fox News felt the 60-vote supermajority was a mirage. See http://www.foxnews.com/politics/2009/07/01/democrats-senate-supermajority-strong-advertised/ You're probably right about the limits of the supermajority. Nevertheless, the majority party controlled the legislative agenda, and the tax cuts would have expired if the Majority hadn't taken initiative to extend them. The extension of the huge Roth rollover was an unexpected bonus. This, plus the huge exemption on the estate tax are inexplicable without reference to the fact that the great majority of Silicon Valley and hedge fund megamillionaires supported the party in power, IMHO.

Now, let's see. Which party was in complete control of congress in December, 2010 when the Bush tax cuts were extended and lots of other goodies handed to high income types? Was it the same party that has the Lion's share of ultra high income financial supporters? Hmm. Could it be that the Bush tax cuts were extended because the Republicans threatened to block permanent tax cuts for the middle class unless Congress also made the tax cut for ultra high income Americans permanent? Could it be that the President brokered a compromise that was deeply offensive to the progressive wing of the Democratic party for the good of the nation? :o The Democrat Party had a huge majority in the US House of Representatives and a rarely seen filibuster proof supermajority in the US Senate when the income tax cuts and the huge Roth rollover provision were extended. Oh, let's not forget the $10,000,000.00 exemption from the estate tax.

Tea party? Or tempest in a tea pot? Default? Schmalt! Check out the not so ancient history of Clinton's debt limit spatt with the Republicans in the 90's. Change the names of the players, and there is a play by play of current events. ;) Next topic: Unimaginable Horror of Son of Y2K. :o

Now, let's see. Which party was in complete control of congress in December, 2010 when the Bush tax cuts were extended and lots of other goodies handed to high income types? Was it the same party that has the Lion's share of ultra high income financial supporters?

The concept of eliminating one's ego, to allow flow of creative innovation and ideas, sounds like a great value and a good principle to instill. His quoted comments and described attitude seem more like Scientology than merely the words of a man encouraging objective discourse. ???

Cwericb, my comment was directed at Sanjeev's post re: logical to write a report, than to drag it through the court system. Regarding Sino and accusations I have said that I believe the truth lies somewhere in the middle regarding Sino, although to be fair, Block's work has exposed definite frauds that have now been delisted. So does he have credibility? absolutely. As far as Wellington goes, that 11.5% stake is money that the company found under the mattress. It means nothing given Wellington's size. I am not familiar with Richard Chandler to comment. As for the poster above me who's name I forget: Yes, one thing that bothers me about the MW report is that he messed up on the standing timber model. At the same time, something that bothers me about Sino is the "we let other people worry about our taxes". Like I said, the truth is somewhere in the middle. Somewhere in between? Let's see, if you mix stinky fraud with raisins, what have you got? Also, for the sake of argument lets grant that Block messed up on the nature of the timber sales. ( by the way, I don't have a horse in this race, and I know nothing about Mr. Block other than what others have posted ). However, lets look at the undisputed fact: Sino says it sold a huge amount of timber. But they didn't do it the way timber companies usually sell timber, by cutting it and selling it. They say they sold it through a paper transaction that's not potentially verifiable through industry sources ( loggers, truckers, sawmills etc. ) as a physical harvesting and sale would be. So, here we have a huge timber company that apparently isn't engaged much at all in what timber companies usually do. That doesn't prove fraud, but I find that fact most peculiar. ???

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 VAR (value at risk) is what is usually used. The problem is that it's biased toward a normal distribution even though Monte Carlo simulations are frequently used. Most financial markets exhibit "fat tails" , especially skewed toward the downside, and the phenomenon of supposedly uncorrelated assets suddenly becoming highly correlated when markets are stressed. VAR is useful in making short term predictions, but it can be misleading if used to predict the risk of permanent loss of capital.

I strongly disagree. The limit on the national debt is like having a limit on a credit card that is lower than what one's credit could support. Bumping against that limit forces one to reconsider the consequences of potentially excessive borrowing. The limit makes the decision to increase the level of borrowing intentional rather than inadvertent, thus giving the frog a chance to jump out of the increasingly hot water before being boiled alive.

But, unless you are a market maker, doesn't shorting eat up your available capital or margin?

Nice day on NABI. Down 69% so far today! I know Hester's not a fan, but if you look at the list, which is probabilistic in nature, overall, it's done very, very nicely! :o Your black box predicted their phase 3 trial would fail? Actually, there is a black box that can predict something similar to this, but Harry obviously didn't use that particular black box because his prediction was issued at he wrong time of the year. :o