Cardboard

I think that you have to be a good and experienced investor to make it worthwhile and that the loan amount needs to be reasonable vs your net worth. You have to forget about yields matching or exceeding your loan cost and focus instead on great investments. Reaching for yield is the risk here. Also, going all in is dumb IMO since you need at least a place to live and shouldn't risk that. Your family life could be hurt permanently if you screw up. At the same time, when I look at my portfolio, my house has the highest price to value ratio. Said differently, I figure that it can only appreciate by roughly the rate of inflation. It is a lot of capital being tied up at such a low rate, but should also be a good hedge against it. So I would not exceed 80% of the house value to stay with a conventional loan which is cheaper, but a lower percentage might be more appropriate depending on your volatility tolerance. So I think that investing a portion of its value via a loan at FIXED rate is a good way to lower this cost of ownership (capital being tied up, municipal taxes, repairs, etc). I put emphasis on fixed since you want to remove this uncertainty from the equation. You can always borrow variable in your margin account so what is the point of saving a few basis points because you are giving your home as collateral? With a fixed rate, which is low because your home is given as collateral and being non-callable, you end up with a very attractive financing vehicle to invest. One issue with the structure, is that fixed rate loans require principal repayments monthly or otherwise, in Canada anyway. So you need to think about recurring amounts coming out of your brokerage account to pay them off. If you have a salary, it is likely less of an issue. If you are interested at only making more money, the best option is to sell the house and to rent a 1 or 2 bedroom appartment. House utilities, taxes, maintenance, insurance and other costs will roughly match your rental cost and utilities. Then use the house proceeds to invest. That is roughly what I did in my early years. I did not need a house, so I figured that it was better to stay in an appartment which met most of my needs and to save the difference to invest. It worked out very well. You have to be disciplined however and to really save the difference. For most people, money burns a hole in their pocket so they are better off creating an obligation to at least save something aka mortgage. Later on I bought a home and I am now strongly thinking about a loan against it to invest. Rates are so low, I can't borrow cheaper from any other source and I don't manage other people's money. So to create float it seems like my best option. I figure that if society goes into really dark times and my investments all go to zero, that the worker who is barely able to pay for his house will likely lose his job and his house. I will have at least some equity left in the house. I could then take a small loan against what is left and buy guns, ammo and canned food. ;) You need to be optimistic to use such strategy. So is Buffett with his levered structure which is Berkshire float (possibility for unlimited claims on limited premiums), so are fund managers with the always present possibility for massive redemptions. Here it is just yourself and Mr. Market being part of the equation. Cardboard

Isn't AIG the perfect take-over candidate for Berkshire? He could likely get this thing for $50 or under book value and would generate at the same time a nice gain for the American taxpayers who is desperate to sell. It is an elephant with massive float which he could deploy better while cutting investment staffing and get his hands on a premier insurance company generating strong recurring revenues and earnings. He has owned the shares before or until early 2000 (maybe it was Simpson who bought it, but he sure knows it). The only issue I see are concerns around monopolistic power. Cardboard

"I don't know if anyone has noticed, but recently it has become a lot harder to find mispriced large caps (which actually turn out to be mispriced) than nanocaps or microcaps. This is because the systems or bots often operate above certain liquidity thresholds." I think it has always been the case, anyway since I started investing or about 15 years ago. There is simply more people involved in the big caps weather bots or not due to their large liquidity. They also generally grow much more slowly than the smaller outfits. Because of this lack of attention and larger growth, I have always found double and mutliple baggers in the small cap area. I could only find typically 50% upside in big caps. Here I am excluding periods of excessive stress, where some big caps can offer more, but so too can small caps with double turning into triple, etc. There is a caveat however. Even if you are alone studying the company, there is a higher chance for these firms to go belly up than for the big ones. So the triple or quadrulple more than made up for those who I thought were good investments, but ended up flat for years or down for the count. IMO, I am not sure what a robot would do more for me. It would be programmed like I am and would then suffer from the same flaws. Looking at the market now, it sure looks as stupid as it did in 1999/2000 when it was dramatically overvalued. I am kind of hoping to see the bots overvalue the market in the not too distant future. :) Another question on the topic. When do you re-program the bot to adjust for new elements or data points? It seems to me that once you disrupt the program that you effectively kill the systematic approach since humans are now messing up with the bot's brain introducing higher weights on this and that at possibly moments of fear and greed. Cardboard

I think it is a TARP event or the old Morgan stopping a bank run. BAC did not need this money and $5 billion means nothing with $2.2 trillion of assets. At stake is the global recovery. Equity destruction in the stock market kills confidence and eventually the economy. When I went to Subway the other day and heard a regular 50 years old worrying with his friend about the market you realize how important it is nowadays. There was much more at stake here than weather Buffett or BAC is getting a good deal. IMO, the Fed, the White House and possibly the Europeans strongly encouraged BAC to do this. Tomorrow we have the Fed at Jackson Hole and it would not surprise me to see some big move. They may finally get to the root of the problem and do something to directly impact house prices and their sales. If they can reinstill confidence there we may finally see the economy recovering for good. Cardboard

I know that BAC is getting a lot of attention these days, but have some of you done a comparative analysis with C? It seems as cheap as BAC on a price to tangible equity and very close on a price to earnings standpoint. It is much better capitalized and much more profitable on ROE, ROA and pretax earnings to revenues. It has a fine international operation. BAC only seems cheaper, and not by so much, on a price to book and price to 2012 forecasted EPS. BAC stock price has dropped more and is now into the single digits which creates a lot of fanfare, but C might be a better deal at this point. Pandit has done a very good job and legacy issues have largely been removed from their financials. It is also much, much cheaper to buy options on C than BAC currently. Cardboard

I have not watched the video yet, but I could not resist mentioning the following: S&P earnings would have to collapse by roughly 78% from their current level and stay there for 10 years to match the current U.S. 10 year treasury yield. This is fear at its extreme guys. I am convinced that many will look back at this period and wonder wtf they were thinking. Waiting to buy the many bargains out there is simply trying to squeeze more returns. It is as risky as not knowing exactly when to cover a profitable short. Cardboard

I believe that what we have here is manipulation. Given macro data has been weak recently, 2nd quarter earnings report were terrific and completely forgotten because of this stupid debt ceiling debate. I recall that something like 80% of S&P 500 firms did beat earnings forecast while we were supposed to see much more misses and forecasts revised lower. Growth in earnings remain strong and the S&P is now yielding 8.5% or a P/E of 11.7 and some call that expensive??? IMO, big funds have been shorting this market into oblivion while some funds got stuck with margin calls. I also suspect that some big boys got wind of this S&P downgrade ahead of time and took advantage of it. Look at this chart and you will see what I mean. You have sell on the rumour and buy on the news. Clearly the futures got cheaper Friday morning than they have been since the downgrade was announced. http://money.cnn.com/2011/08/08/markets/premarkets/index.htm?iid=Lead Based on all the fundamentals, this looks like a buying opportunity. It takes some stomach I must say. Some people have introduced panic and it sure looks like it has worked so far. Expect them to take profits and try to ride the rebound while mom & pops are being screwed once again. Cardboard

Regarding Buffett, he is still on limb predicting that their will be no recession: http://www.bloomberg.com/news/2011-08-06/buffett-says-s-p-s-downgrade-mistaken-still-doesn-t-see-another-recession.html I sure hope he is right this time around vs completely denying/missing the housing bubble... at least publicly. Who knows what he really thinks these days. Trading last week has been awful and reminiscent of the fall of 2008 when stocks kept plunging day after day without much of a rebound. The trading feeling is the same, but I think that the reality is quite different this time around. First, everyone will be paid in full. I see no one missing an interest payment from their treasuries due to this debt ceiling debate fiasco. Second, no one saw a major hair cut to the value of their holdings in treasuries or should see one even after the S&P downgrade. With all the talk about a potential recession, they actually should be in position to book major gains. Stocks look very attractive on an earnings yield standpoint vs treasuries and many stocks have dividend yields exceeding 10 year treasuries at 2.56%. Compare that with 2008 when banks and institutions saw a large portion of their mortgages stop paying interest and when subprime mortgages and CDO's became near worthless. That is enough to create a panic and force major selling of other assets (stocks) to raise cash to avoid a balance sheet destruction. On top of that you had money market funds breaking the buck! Then you had a complete freeze of liquidity and a recession ensued cutting earnings in half. So what the market needs to price in this time around is the possibility of another recession and I can't see that debate ending now with the little amount of data being available. There is simply no justification for the market to go into a complete free fall as we have seen in 2008. Sure, there should be fear and volatility with the downgrade and the European situation, but what really counts or the materialization of a recession should be resolved in months and not days by the market or via a crash. Cardboard

Here are the 16 still in the AAA club for whatever it is worth. http://money.cnn.com/2011/08/06/news/international/sp_rating_countries_with_aaa/index.htm?iid=Lead Also, another interesting article that I found today regarding the Chinese take on all of this. http://www.cnbc.com/id/44043828 "China also urged the United States to apply "common sense" to "cure its addiction to debts" by cutting military and social welfare expenditure." IMO, social welfare expenditure seems to be a common problem to all developed nations. It is hard for me to comprehend how a nation offering safety nets for its out of favour citizens can compete with others who offer next to no benefits to its citizens. At some point, there is a cost for empathy and it goes into the country's debt load and ultimately against its "cost of goods sold". It cannot be that different from analyzing competing companies. The sadness of the system is that even if we want to do good (assuming that we can eliminate all abuses which sounds like explaining part of the failure of communism), we can't because someone, somewhere isn't in this interconnected global economy. The other quote that I find perplexing is the following: ""China will be forced to consider other investments for its reserves. U.S. Treasuries aren't as safe anymore. There is a class of assets out there that are more risky than AAA, but less risky than AA+. " What is that? AAA rated things like Microsoft, but that are not nations? Cardboard

Sanjeev, Canada is AAA rated according to S&P website. Cardboard

http://www.cnbc.com/id/44039103 Cardboard

I have been wondering over the last few weeks/months if there is a fix to the financial situation of developed countries. I am serious here, this is not a joke. Basically, we have an aging population which will require more and more care and will spend less and less being always afraid to run out of it (most are anyway). Then we have workers who are becoming commoditized within the global economy. Skills are being tought in developing countries and they are now capable to do what we do. In theory, it should mean lower growth rates and a declining standard of living. This should result in less income at a certain tax rate for our governments and likely no more income even if they were to increase the tax rate since it would mean fewer dollars available to its population to sustain growth. All the while, they have made promises to pay for the aging population and they have racked up enough debt at current conditions that they barely can afford any increase to the interest rate on that debt. Infrastructure in many areas are falling apart and there is no cash to just maintain it. I see very few solutions and they all seem really hard to apply: 1- Stop paying for medication and care past a certain age and for some very expensive and questionable treatments at any age. This may sound terrible, but when you have no more cash to extend life what do you do? 2- Stop paying old age pension. Again a drastic measure, but once again what is the alternative? 3- Inflate the currency like crazy. I am not even sure this is a solution looking at Zimbabwe and Weimar Germany. It could lead to war with countries who hold that debt and would certainly not be great for the citizens facing massive inflation. The U.S. has one solution mostly unavailable to other large developed countries and it is to massively curtail its defense spending. I am just wondering what you think on the subject. I have heard many commentators, but very few coming up with real solutions to the problem or at least very few explaining in plain numbers what their proposals would do in dollar terms to the debt and to the imbalances. I sense that no one has a clue and that we may be past the point of no return already or getting back to things as described in 1), 2) and 3). Cardboard

"The CDN dollar sliding back won't hurt them either." Unless of course this is accompanied by a decline in commodity prices. Pretty strong correlation there. It appears that people have lowered their expectations to more realistic price targets (where are the $5 a share predictions?) and with it becomes obvious that Fibrek is not that attractive at these levels despite the recent drop. The risk vs reward ratio is simply too high. A potential 28% gain considering the current selling price of pulp which will undoubtedly bring capacity increase is not worth it vs what is available out there in the marketplace. You have to bet on some sort of take-over and based on their economics it seems unlikely. It seems more fun to play black jack or roulette than waiting all day in front of your computer for the event. Cardboard

My apologies Hester... I thought you were agreeing with matjone. Cardboard

matjone and Hester, Why don't you start by looking at the 30 components of the Dow? Once you realize that many of the prime companies in the U.S. trade at well below normal valuations or between 7 and 10 times earnings then maybe that we will talk about cheaper, but lesser known companies. Cardboard

Other than making a negative macro call, what is making so many of you guys so negative here? Please give me an example of a well known, well established company out there that is trading at nose bleed valuations? We have all heard about the CRM, LULU and of a couple crazy IPO's but, other than that, I see fear everywhere, not greed. It is not hard to find many really cheap stocks today. Cardboard

http://finance.fortune.cnn.com/2011/06/20/europes-sickly-banks/?iid=HP_LN I know that it is only one set of numbers, but it just shows how little European banks have done to reinforce their balance sheets since the financial crisis. Having followed Citigroup for a while, the difference is simply amazing. While I was getting more and more encouraged by the private sector finally helping the economy recover, it seems that a small bad event is all that it would take to bring us right back to the depth of the Great Recession. With it the disappearance or significant reduction of corporate earnings. Tough to invest in this environment. You really need special situations or events capable to make you money without the effect of macro. Unfortunately, it starts to feel like 2007. Cardboard

IMO, what he said about Microsoft and Ballmer is spot on. It is not because someone has helped establish the company that he should have a permanent seat at the top. The "original" idea that started it all after a few decades gets really old and one needs to adapt, not entrench and cultivate an environment where new great leaders and ideas are born. He has not demonstrated any of that. Cardboard

I really like your market logic Sanjeev. "In MSFT's case, our position is through in the money call options...nominal value is 3%, and notional value would be 20%...so we are pretty long! If the price gets hammered, then we will step in and buy equity." Another strategy that I have been experimenting with is to sell a put with same strike, duration and notional value once the stock gets hammered at or slightly below my strike on the call (the call is in the money when I buy it to minimize premium cost as you mentioned before, close to equity). The position becomes automatically a synthetic long. An advantage over buying the equity at that point is that I receive a nice premium to sell my put or much larger than it would have been when I bought my call. Fear premium could also be elevated at that point. And I am still not investing a dime more, actually receiving money (note: the impact on margin/buying power is identical to buying the equity). The issue is that I still have to deal with the expiration of the contracts. At that point, I will be forced to buy in the equity or settle if below strike (due to put) or cash in a nice gain if well above strike (due to call) or realize my likely loss if above strike and decide what is next. Of course, this strategy won't work if the notional amount on the call bought at the beginning is much larger than what one could afford to buy. 20% of a portfolio could be significant if no cash is on hand. However, I guess you could still sell fewer puts than the number of call contracts or the equivalent of buying the equity in an amount that one is comfortable with. You would still receive some premium or lower your cost of ownership. I like using options especially with U.S. stocks since it minimizes the currency impact having very few dollars involved to replicate an equity exposure. Cardboard

I am warming up a lot to Microsoft as well. Very unusual for me to look at the mega caps. Apple looks also very attractive in the $330 range. I recall vividly the "brick and mortar" vs "Internet" saga Sanjeev. Times rhyme, don't they? Looks to me like Karen Finerman did not see the parallel with her short on BKS. Ouch! Cardboard

The marketing expense is an interesting excuse for CRM, but there again some cracks are starting to appear. Take Microsoft for example which is well past its high growth phase and still spends 20% of revenues in Marketing and Sales. Same range of number at Oracle which is growing faster than Microsoft, but getting mature. Then take Coca-Cola and Philip Morris and you start to realize that Marketing and Sales still need to exist past the high growth phase if you still want to maintain your sales stable. I have never seen a company escaping that reality and I don't think that SalesForce.com will be any different. Now, assume that a more reasonable on-going spending rate for CRM on Marketing and Sales is 20% like MSFT vs the current 50.4%. That brings operating income up to $150 million for the latest quarter. You can agree or disagree with this rate, but here is something more interesting since it works for different rates. If you assume that same 20% for the 1st quarter of last year, it brings operating income up to $133 million. If we go with percentages, it means that sales have grown by 33.8%, but this adjusted operating income has grown only by 12.8%. Moreover, operating income margins have decreased from 35.3% to 29.7%. It is a simplistic way to look at it, but I think that they will need to justify at some point that their spending on Marketing and Sales is effective on both the top and the bottom line. Once that happens, I think that the Street view and expectations will be completely different for the company. I think that I will wait here a bit longer to see what happens with the chart. It has been going sideways for 6 months now. If this new attempt to break through the $144-148 level fails again, it will tell me a lot about the sentiment out there on the company. Things could get crazier still, so I want to see how far they are willing to take this. Then I may short via in the money puts. Cardboard

Hoodlum, How deep in the money, if at all, are your puts? Sanjeev, Do you mind sharing the duration and strike of your puts? I am asking since I bought puts on CRM last Fall on the same thesis and I did not make a whole lot despite being right on the share price short term. They were with a strike price roughly 10% above the underlying. Puts on that company usually trade under high implied volatility making them expensive. Cardboard

Again on DELL, I can't believe how smart are the analysts... These guys have beaten their average estimates by 6.7%, 36.4%, 43.2% and 25.0% respectively in the last 4 quarters. Stock down today. Go figure! Cardboard

Not a single question asked from analysts or other on the conference call... Cardboard

"FBK is free-cash-flow, and they continue to generate ~$15M/qtr, or ~$60M/yr " So that is about 6 years to repay debt and current market capitalization. Of course, it will get shorter as debt is repaid reducing interest payments and as the energy contracts come in place. However, is that so great for a company that is highly cyclical and likely to lose money if the economy tanks? The P/E is also not supportive at all of the share price. While it is true that depreciation is high will it always be so? IMO, at some point they will need to reinvest more. I have reduced my position prior to the earnings release and now I am tempted to get out clean. The best they could do with the RBK issue is to come up with a new contract that will start in 2013!!! The only thing that annoys me is that they will likely get sold/do some asset sales the day after I sell. On the other hand, waiting for the take-over homerun is not a proper way to invest. The other thing that really annoys me is that we could have made a fortune investing in something like Tembec to benefit from the same pulp price increase. Tough to stay invested in this thing when companies like Microsoft are selling around 9 times earnings, sitting on moutains of cash, paying a nice dividend and showing earnings growth even if analysts refuse to see it. Cardboard