Mungerville

Ucc, This morning, I bought the GE 7.50 strike as well, but bought shorter maturing option - Jan 10 or Sept 09 - can't remember. Looked too cheap. I have not done any dd but the simple argument that the core operations have value and the government is giving GE access to commercial paper for GE capital which means they can take losses as they arise and stay solvent in the meantime. To me, this means bankruptcy is likely not possible in which case the profits from the core operations will fill the holes from the losses in GE capital for a few periods and then normal core profits will resume. That's about all the dd I have done.

Now you are just rubbing it in! I can't wait till I make junior member. Maybe if I keep posting separate posts as I am doing now just talking about making "junior member", I can actually make junior member. :-\

It just gets to a point that its too cheap. The thing ain't going bankrupt unless we have a depression.

I think if you stick to what you know and stick to things - to borrow from Jim Rogers - things that are "unimpaired", and the market continues to panic, that will set you up for great opportunities. ORH may become a good example of this is it comes down more from here. Let them panic, its not impaired. Coca-cola is not impaired either. The dividend yield is now over 4%. Not the lowest P/E but its not impaired.

Anyone know why ORH took such a dramatic drop today? If it comes down another 10-15% this could get interesting.

I've been more or less hedged since 1999. So this is not some new let's call the bottom game. The point here is that yes, we are below fair-value, but the economy is really really in the toilet, there is too much debt, and the market can not think more than a few quarters ahead let alone a few years until strong growth. This was the same market content to buy at S&P 1500. Why should we assume the market can not overcorrect on the downside. It has/is over-correcting on the downside right now - Grantham may be right about S&P 600 sometime in 2009. Finally, yes it is true that treasuries are yielding very low rates whereas in 1981 rates were much higher. However, we have to consider that junk bond spreads just hit a new record this morning and that corporate spreads remain very wide. So how can you have a big jump in the stock market when you can get stock-like returns in corporate debt/preferreds in a more senior position? You might be able to if the view was this recession will end and robust growth will return which would favor stocks over bonds but many view that growth after the end of this recession will be muted. Having said all this, if you show me S&P 600, with a view to the long term, that low valuation will begin to outweigh the likely weak economy coming out of the recession and make me want to take my hedges off and go net long stocks over bonds.

I am jokingly pretending to be irritated but really, how do you get classified here?

And why the F*&CK am I a "newbie"? Not even a "junior member"? What do you have to do to be a "full member"? I've been here since 2002/3 or something like that in the days of bsilly, etc and FFH sub-$100.

Ericopoly, It traded at 32 for part of a day if I remember. I think ORH is tempering buy-backs with maintaining capital to expand in the coming hard market. Also, a lot of the major gains in book value per share came late in Q4 when stocks and long treasury bonds went up so that did not give them that much time to buy at a discount to year-end book. I think if the stock trades back significantly below book, they will start buying it again. At that point, I will add to my position potentially. Remember also that ORH has less downside exposure to the stock market relative to the parent as the ratio of equities divided by common equity at ORH is lower than at the parent. So, I love it that they are not buying it back yet. Let it drop, I'll but more.

No. It means American business could have had real growth since 1996 but that 32% worth of cumulative nominal growth since then could easily have be accounted for by the high market valuations in 1996. The point is not 1996 and Greenspan. The point is that if the market falls by 50%, in order to determine whether it is very very cheap at this point, it depends from what valuation level it fell from. The valuation level of 2000 and 1997 was extreme relative to GDP/GNP - that's the point. Yes, we are below fair-value now which Grantham says is 950. Grantham also says, for his sister's account, in December, he only put 20% into the stock market, rest was in cash. He said in January his best guess/gut feeling/historical data point to 2:1 odds the market is going to S&P 600 in an overshoot relative to fair-value sometime in 2009. He said that 750 November low for a few days vs 950 fair-value did not seem like a big enough overshoot. We should not be surprised to see the market fall another 10-20% from here, nor should we be surprised by a 10-20% increase. That's my point. Remember, we are part of a crowd that think long-term, the rest of the market doesn't think more than a few quarters ahaed - a year at most.

Is that 1.7 inclusive of the one-time gain in the utilities division?

The highs for the stock market in 2000 dwarfed 1929 by a long shot relative to GDP/GNP.

Scorpioncapital, So we had 32% inflation. Greenspan - although he is a total idiot - would not have uttered those words had the market not been overvalued in 1996 by at least 30-40% one would imagine - so there goes the 32%. I therefore don't see how this sets us up for a doozy of a rally.

We are now at 1996 levels on the S&P. That is when Greenspan uttered his only intelligent remark - that the stock market was entering a state of "irrational exuberance".

These are not 1981-style valuations - those were much much cheaper.

- Book value has gone down in Q1 and is going down, so its not a 40% discount. 40% discount is year-end vs price of stock in market today; book-value today has to be estimated to figure out the current discount.

Ericopoly, Sounds like an interesting strategy. Its kinda like you hold a convertible debt position in your FFH position where the yield on the debt is the premium on the puts you sold. And the whole debt position would convert to those underlying stock positions in a huge bear market - which you would likely want to do anyway. Makes a lot of sense to me as long as you like those 5 names at those prices.

Investors who did not protect their investments or businesses from the asset bubble across all classes are getting burned. We had a wealth effect with increasing asset values inflating the economy and now we have a reverse wealth effect on the economy and declining asset prices with both feeding on each other on the way down just like they did on the way up. An investor should take this into consideration before buying a security. He should wonder how long this dynamic may continue, will it mute equity returns for the next 2-3 years relative to a normal economic cycle where equities shoot up prior to the recession ending?, he should consider this and choose carefully, given his assessment of the yield, between an equity security of a company he knows well and the debt securities of the same company. If he does not consider the dynamic carefully, he may be too fast to choose the equity position in this environment. Clearly, Buffet is acting on this dynamic currently.

I agree with Parsad re debt if you are selective and I agree with Santayana on stocks that just because they are not expensive, it does not mean they are cheap. In terms of horizon, why don't we extend it to 1000 years and say price doesn't matter at all - like Jeremy Siegel argued in 1999 in "Stocks for the Long Run". Well, Jeremy, I guess its now "Stocks for the very very long run". Stocks won't do more than 7% real or 9% nominal per year over the next 7 years in my opinion. Sanjeev, this is NOT one of those periods you heard about for stocks in value investing circles in terms of the overall level (they are currently moderately cheap overall) of valuation. Although I am sure that given the velocity of the fall in the overall level and the scare that the potential financial system collapse of October caused, you can find mouth-watering opportunities in individual equity securities which were affected by the reverberations consistent with these periods you have heard about.

And your point is? ....what? like Bernanke knows anything about stock market valuations. That might be a clear sell signal actually. Sorry, I have a gripe with his predecessor Greenspan who said in 1996 there was irrational exuberance and then in 1999 and a P/E of 40 that we had entered a new economic era. Bernanke also said in 2005/6 that housing reflected the strong economy and essentially was no in a bubble. If they say go one way, I go the other.

I would like to emphasize that we aren't talking about just volatility here. Instead, in too many cases, we are talking about permanent loss of capital for investors: that capital is gone and the market will not gain 100% in short order to make up for the 50% drop back to these more normal valuations for equities. Too many value investors became relative investors. Unfortunately, they were focused on performance relative to a benchmark that was a clear bubble to anybody paying attention and with some sense of market history. They were unaware of, or ignored, that risk - the risk of poor absolute performance in order to chase that benchmark - and now they face their legacy of providing multi-year losses for their investors. There were too many of these types of investors and not enough folks focused on protecting the downside.

George Soros made a hell of a lot of money in 2007 and made 8% in 2008. He also has a good longer term record. Scorpion - I've been having this discussion since 1998/9, its not because the market dropped 50% that I am making remarks. This was a long time coming. What I find interesting is all the people coming out of the woods now stating that the S&P will go lower - which I agree they would not be talking about if it was double its current market quote.

I understand there is too much debt which created too many retailers, too many car manufacturers, too many houses, too many banks and too many investment banks and provided the illusion of a strong fundamental economy from 2003-2007 when the underlying US economy was weak. This is reversing and the weakness has spread globally and unless we get major protectionism or a sharp currency decline, it will be very hard for inflation to take hold for some time.

Counter-intuitively, I am going long highest quality and generally higher P/E stocks. E.g. KO, JNJ, some BRK, that type of thing - trying to get them near their lows. Staying out of small cap for now. Eyeing up eBay. Picking up these things but my main position remains ORH. Remaining hedged and expect quality and ORH to outperform the indices. Also looking at debt. Bought a bit of gold - don't ask me why, I'm not an expert but it just felt right as the US dollar seems to be the strongest currency right now and that just isn't right. Jeremy Grantham expects quality to outperform despite higher P/Es in a calamity (a calamity as opposed to just another recession and a normal stock market decline). Watsa seems to be doing some of this as well. Buffet alway buys quality at a decent price. Julian Robertson is buying high P/E stocks as well. There is no risk KO cuts its dividend.

We have had the greatest bubble in equities ever with the peak in 2000. It started coming down in 2000-2002 and did deflate a bit, but it was not permitted to burst as interest rates were cut and the velocity of money increased with structured finance and the mortgage boom and this created a fragile, finance-based economy with bubbles in real-estate, credit and other asset classes. Then in 2008, the equity bubble (as well as other asset classes) does burst and it goes very briefly to 15% below fair-value in October/November to 750 on the S&P (fair value being around 900 plus or minus). So after a high of 1500 on the S&P and it plunging 40% to 900 (fair-value more or less), why would there be a higher than average probability that the bubble just stops gingerly at around 15% below 900 or the lows of 750 reached in November briefly for a day or two? Why would the odds not favor it going 30-40% below fair-value. This seems like the better bet. The only question is how does it get there and the answer is 1) either it goes sideways for quite a few years, or 2) it does it in the next year or so. To bet on the latter, one would need a good "trigger" for 2009. Maybe the worst global economy since the depression would do the trick combined with the market's misconception that the governments will be able to stimulate the economies out of this very deep recession in short order would qualify as a trigger. Add on the odds of some blow ups along the way or a misstep or two by a sovereign creating a currency crisis. That's the way I see 2009 - hopefully I am wrong but I remain fully hedge despite the increased costs.