ERICOPOLY

However 75% of Coke's sales are not in the US.

The tax brackets weren't adjusted in the 1970s and early 1980s. So incomes got taxed more and more as the nominal wage was rapidly pushed upwards by inflation into a progressive tax structure. It's unclear to me how much of the pressure on households came from this issue. Mortgaged homeowners lost much of their positive operating leverage to this problem of taxation. So it was like a powder keg of demand building up that was set off when Reagan brought the tax rates back down. This time around, if they let the tax brackets adjust annually for inflation it won't be the same kind of situation. I'm not sure if they will though -- it sort of defeats the purpose of using inflation to bring down the Govt's debt.

Housing in the US (median home prices) never once declined during the 60s/70s/80s. There were years when they lagged inflation. A typical homeowner who started with 20% down payment before rates spiked, I believe, had real gains in home equity nearly every year if not every year (levered 5:1 initially against the nominal rate of appreciation). My father remembers those years fondly because he bought his home in 1970 and inflation eviscerated the real cost of his mortgage. He was an engineer with a secure job -- wages climbed with inflation, mortgage payments did not. His largest annual expense rapidly declined in real dollar terms. Inflation improved his purchasing power. We enjoyed more luxuries because of it. Inflation gave our family positive operating leverage.

I can't remember who it was, but some famous RE guy was asked why he did so well in the 70s and/or 80s. He said it's hard to do poorly when you borrowed at 5% and then had a period of double digit inflation. Wouldn't that be the best time to invest for real estate? If you think inflation is coming shouldn't you borrow now at low single digits and buy an inflationary resistant asset like RE? I guess what you are saying make sense if we are buying in all cash. He was just thinking of the price. However, people who are renting face higher rents every year. The imputed rent for the heavily mortgaged homeowner is fixed (nearly, property tax increases, but the interest costs are fixed). A landlord, unless there are rent controls, gains positive operating leverage from inflation if he is heavily leveraged at a fixed rate.

This isn't for me, but if you really want to bet on inflation with both TIPS adjustments and GLD as a combined tailwind: Say you start off with $10,000 in the account -- account is 100% in cash. 1) You write a deep-in-the-money GLD put, then purchase a GLD call with the same strike. You now have a $10,000 notional long GLD position Thus, you have not used any cash yet. 2) Use $10,000 of cash to purchase TIPS. When hyperinflation hits, you get the CPI adjustments from the TIPS as will as the skyrocketing price of gold. You really high margin allowance for TIPS, given that they are a government security.

I find it amazing that a person can put their last penny into their 20% down payment, walk out with a 30 yr mortgage based on their income, and be 65 years old. Are they going to work until they are 95? I work in the mortgage business in the US and feel it best to clean up some misconceptions. Eric's scenario is not wholly correct. Yes, someone who is 65 can get a 30 year loan provided the income/credit profile is acceptable. The irony is that a lender cannot use common sense that the borrower will almost certainly NOT be earning the same income 15 years hence, let alone 30, as that would be age discrimination. The part I will take issue with is that they would be hard pressed to get this loan using their last penny as reserves (assets AFTER the loan closes) are required. Now, if this same person wanted to only put down 10% thereby holding the remaining 10% in reserves, and they were OK with paying for mortgage insurance, then they would be golden. I appreciate being corrected -- if nobody does that for me I'll just remain ignorant. That's worse!

I find it amazing that a person can put their last penny into their 20% down payment, walk out with a 30 yr mortgage based on their income, and be 65 years old. Are they going to work until they are 95?

The problem with solving alternative energy and global warming is it's perceived to be not in my generation's backyard. NIM"G"BY Jack Welch said something to the effect that "10 years ago Al Gore made a prediction that doesn't show up yet". What a douchebag. What happens in 100 years, 500 years, 1000 years, 10,000 years??? Planetary genocide. All for saving a buck.

That's pretty much the way I look at it too.

Yes, Sanjeev was right about the rally and he got paid today.

No, the warrants do not adjust for the buybacks today. Neither do the LEAPS. Both benefit from more intrinsic value per underlying common share, but that's as far as it goes. I invested my approximate 60 cent "default dividend" in the stock at $12 though :D The 3% I'm saving in interest costs over two years with the LEAPS is where I come up with my "dividend". One might say the warrant holder speculated on greater than 60 cents of dividends cumulatively for this year and next -- they purchased them upfront hoping to get more? Backfired so far. Oh, I see what you are saying. I didn't understand the 13% and 10% costs for the warrants and LEAPs. I thought you were using the cost of capital over the six years respectively for each, but your actual cost to buy on margin is 13% and 10% respectively. Or am I even more confused here now? Cheers! Scenario we all find a reasonable possibility: Over the first two years, warrants and at-the-money LEAPS are pricing in their leverage like this: 1) warrants 13% cost 2) LEAPS 10% cost In two years' time (the second two years of warrant life) stock is above $20. 1) We use margin to exercise the LEAPS 2) we hedge the margin loan with $12 puts You and I both know that $12 puts cost a lot when the stock is trading at $12 (like today) but will become very cheap when the stock is trading at $20. So, under the scenario that we are all gunning for, the cost of hedging the $12 strike embedded leverage will plummet for the last 4 year lifetime of the warrant. So why the f**king he** do people want to lockup the cost at 13% for all six years when we are all bloody well expecting that cost to plunge over the remaining 2/3 of the warrants' life???? That's what gets me :) And that's where I see the opportunity to do way better than the warrant by my strategy. And I'm taking less risk along the way.

No, the warrants do not adjust for the buybacks today. Neither do the LEAPS. Both benefit from more intrinsic value per underlying common share, but that's as far as it goes. I invested my approximate 60 cent "default dividend" in the stock at $12 though :D The 3% I'm saving in interest costs over two years with the LEAPS is where I come up with my "dividend". One might say the warrant holder speculated on greater than 60 cents of dividends cumulatively for this year and next -- they purchased them upfront hoping to get more? Backfired so far.

The common would win out over the LEAPS if BAC flatlined for the next $2 years. But if I spend $4 on LEAPS today, am sitting on $8 of cash for the next two years, then if stock is back at $8 again I will now own: 1 share of common (or 2 shares if the stock goes down to $4) 2 LEAPS It's not straightforward that the BAC common would be the best route if the stock is still at $12 in two years. Depends what happens between now and then. We don't think it's likely that the stock will go below $8, but it might. Anyways, you are right that the common shareholder will live to fight another day if he just sits tight through all that comes. The warrants will have a better chance of living if they didn't face such a hurdle rate. Although, if you are going to leverage at a $13.30 strike with 13% cost of leverage paid for with all 6 years upfront, then you are already extremely confident that failure is nearly impossible. So based on the theory of invincibility that the warrant holders already ascribe to, I embark on my LEAPS strategy to reduce the risk while also increasing the upside.

The warrants cost me 13% a year for the leverage, but the LEAPS cost me just 10% a year for the leverage. So what sort of dividend protection are we talking about here? The guys with the warrants are buying their dividend upfront, then getting it handed back to them. The only way they win is if the dividend is larger than the options market expects -- but today, I'm the big winner as the warrants got no dividend even though they paid for one! And Sanjeev, I get to invest my dividend today at $12 but the warrant holder is at the mercy of what we both expect to be higher stock prices next year. A 60 cent dividend reinvested today at $12 (my dividend for two years combined) is worth 90 cents if reinvested at $18 later on. So I totally win -- kicked butt on that one relative to the warrants. Later, when the stock is trading at $20 in two years: either A) I'll take delivery for my shares, pay likely a 30 cent cost for a $12 put to hedge my margin loan for another two years (much cheaper than it costs today), and kick back getting the full cash dividend. The fact that the puts get cheaper and cheaper as the stock rises is really the secret sauce to my strategy. or B) not use a margin loan. Just sell the 2015 calls and replace with $20 at-the-money 2017 LEAPS. They'll also be priced for roughly 3% dividend protection. They'll likely be priced similar to the way the WFC at-the-money LEAPS today are priced -- only about 5% annualized. 5% annualized cost of leverage embedded in the put vs the 13% people are paying upfront for the leverage in the warrants. That's a spread of 8%. What I ask again??? Is BAC going to be paying an 8% dividend when it trades at $20 in two years? Hell no it won't! The craziest thing I've discovered about these warrants is that people are buying their dividends upfront, then calling it "dividend protection" if they get part of that dividend back. By not paying 13% for this year's leverage (I'm paying on 10%), I effectively get a 3% dividend. Warrant holders per today's announcement get nothing! Not my 3%, they get nothing! ;)

That summarizes my position nicely. I want the stock to go up fast, or I wouldn't have bought Leaps. I like to see a company succeed but I have bought all the stock I will ever buy and now I want that share price up. Raising the dividend to 0.50 instead of the buybacks would have pushed the stock above $15.00 quickly, possibly even up to $20.00. Now we wait another year which means another cycle of leaps, and the frictional costs involved. That's the risk with LEAPs...there is always a time arbitrage involved and hell of a lot shorter than the warrants. Do you still hold any common or warrants? Or did you switch it all to LEAPs? Cheers! Sanjeev, Do you concur with Eric's assessment that tarp warrants in longer run (yr 3 to 6) are losers game? And, what are your view on bac warrants going forward ? Thanks. No, I don't think they are a loser's game. Also, I don't think that's what Eric meant. I think he's saying that the normal degradation of the warrants when you get to years 4 and on, mean that they won't provide any sort of advantage over LEAPs. At the moment, I think LEAPs are the loser's game, since you are relying on a 2-year time arbitrage. Why do you think Al and Eric wanted dividends! ;D We bought the April 5th $12 Calls on March 4th for 17.5 cents each. They will be anywhere from 75-90 cents tomorrow! You aren't going to get that type of return with the warrants, but the warrants at present are proxies for equity...at least the A warrants. I think the B warrants may be tough to make alot of money on. Cheers! The warrants and LEAPS are both loser's games if the stock doesn't appreciate. The warrants decay and so do the LEAPS. But I grabbed the $12 LEAPS on the theory that the bank is (and this will sound fancy so brace yourself!) now "earning the cost of capital" embedded in the LEAPS. So I can keep on buying $12 LEAPS every two years even if the stock is still at $12. The shares might not appreciate, but at least their value is growing at the speed at which I'm throwing money into the LEAPS. Eventually the accumulated value will start to show in the stock price as ROTE shines through to earnings (and cover the cost of the LEAPS) -- that's when I get the moment I've been waiting for, which is the speculative rise in stock price up to 1.3x or 1.5x tangible book.. $12 invested in the warrants give the upside of 2 shares. Two shares of upside invested in the $12 strike LEAPS would cost $4 (2x$2). So $4 invested in the 2015s, then $4 more invested in the $2017s, then $4 more invested in the 2019s. Same 2x upside as with the warrants. Only, I don't blow the whole wad all at once. I spend a third, and wait. Then perhaps in two years spend another third and wait. Then perhaps in 4 years I spend the final third. Hopefully now I'm understood. At all times I have far less money on the table (except in year 5 and 6), and less money on the table means less risk guys! Yes, same upside!

That's the risk with LEAPs...there is always a time arbitrage involved and hell of a lot shorter than the warrants. Do you still hold any common or warrants? Or did you switch it all to LEAPs? Cheers! Sanjeev, Do you concur with Eric's assessment that tarp warrants in longer run (yr 3 to 6) are losers game? And, what are your view on bac warrants going forward ? Thanks. I know the question wasn't ask to me, but I am very comfortable with the warrants. Eric is a smart guy but options are not for the faint of heart. I believe many on this board may be following him out of greed and do not understand the risks involved. IMO, the TARP warrants offer excellent returns if held to maturity and the economy resembles any sense of normalcy. Six years is an eternity for some investors. Judging by the low expectations on the other thread regarding the share price in 2019, the ultimate return on the BAC warrants may surprise many on this board. Kevin, You are correct that the warrants will likely significantly outperform the common by expiry, because I too am expecting a common stock price above $25. Hey, maybe it's $40 as Berkowitz suggests. Whatever it may be, I'd rather do it with lower cost of leverage! Were the warrants to have lower cost of leverage, they'd be even better! So that's the direction I'm heading.

Not so fast my good sir. The bet was $7 bil returned to the COMMON. I was very clear about it and asked that you confirm. I can't find it right now but go back to where we bet. I am still winning here. I will happily pay when it's $7 bil to the common. There is still 9.5 months to go. I went back and checked...you sneaky bugger! Yes, you stipulated in brackets "(common only), no other security". I'm going to have to get Txlaw to read any agreement between you and me on a bet going forward! ;D Remind me to give you your "100 Grand Bar" in Toronto. Now I've got to cross the border to get one. Can any of you Americans coming to Toronto, pick one up! Cheers! Perhaps you can have Kraven buy it for you on credit and he can hold the collateral until you pay up.

I also don't think buybacks support the stock in a pullback. It just means an extra 5 billion of shares will be dumped by mutual funds who are trying to sell whatever is liquid. So it might help support the overall market, but not the stock. It just makes it a bigger target for the sellers looking for liquidity.

Layups are nice too.

March 2009 taught me that the time to dump all FFH is during the market bottom. FFH is only 0.5x long the stock market at such a time, and has names like JNJ which simply aren't going to move that much. Get ye' out of yer FFH matey and into WFC at $8. Much more bang for the invested buck.

We're staying at Furnace Creek Resort in Death Valley N.P. later this week. Back when we booked it, the weather was looking like it would be in the high 70s - mid 80s. Now it's going to be 90s! Plenty hot, don't need the nukes. This is still winter.

Happily enjoying the sunshine in Santa Barbara today despite the California taxes -- as you say, "even climate" matters :D

TIPS are probably the best of the options the govt is issuing, but I haven't looked at how they are priced today. I totally don't get the logic between taxing us on the CPI adjustment -- isn't the purpose to return us the real value of our principle (suspend your disbelief in the CPI as measure of real value for a minute just for this exercise)?

Precisely Eric. If anything the risk-free rates should be significant higher due to the fact that every nation runs a fiat based currency. And the date is not 100 years ago but rather 1971. That is the most important date to look at. Post 1971 and Pre 1971 when trying to understand these things. The crux of the matter is that since 1971, as influenced by the majority of the electorate, the politicians have been increasingly relying on the fiat money system to subsidize their lack of fiscal discipline (blaming both dems and R's here) each time PUNISHING the saver for the debtor. It has done nothing but created a long cycle in hard asset appreciation and significantly increased the real value of commodities - the essential ingredients that allow an industrial society to flourish. Did technology help soften these effects along the way? Of course it did, the most important of which was the ubiquity of the internet imho. But we have now reached the end of this experiment with all nations employing a fiat standard, all nations employing ZIRP, and all nations employing a significant transfer payment program as a percentage of global GDP. It doesn't feel like socialism yet because there was in fact a major deflationary event that is still in its final innings (since 2008 lehman). One of you posted a wealth video the other day. The primary reason for the asymmetric distribution is that savers have been marginalized leaving only those with large bases of capital (as a percentage of nominal GDP) to flourish and creating a situation where even respectable savers, prudent savers, find their way back to the lower quartiles when taking into account taxes, inflation, and distribution to heirs over time (splitting of the nest-egg). A risk-free rate of return has been one of the cornerstones of trust in the economy since the late 1600's. It has allowed for terms such as retirement and leisure to be introduced into what our view of capitalism should be.Unfortunately for savers today unless you have 8 figures you will be hard pressed to generate a risk-free rate of return which could cover your outlays. We talked about this before. I know many investors with $2-5mm that are reaching into their principal for the first time in their lives. This is a de-facto wealth redistribution. I am not sure how it will end but I have always chosen the contrarian route when making long-term investments. Right now the most contrarian route of all is to pile up unencumbered cash. Keyword: "Unencumbered". A lot of people have liquidity (cash) today but it is not absolute liqudity. They have taken on more debt in their business or have bought a more expensive house with a mortgage reflecting artificially depressed i-rates. Same goes for corporations, even Buffett's cash situation isn't what it used to be when viewing it through the prism of future encumbrances. I will use 2013 as the year to pile up unencumbered cash which I will use to purchase short duration fixed income assets (less than 90 days). They could start by throwing out property taxes once you reach the age of 65 or something (or better, entirely on your primary residence). It's like you can't even buy a house as security that you'll always have somewhere to live. Maybe somebody has a fantasy that once they own a home, they will be secure. Well, that's only until you refuse/can't pay your perpetual "lease" (oh, I mean property tax) and they come with their guns and take you from your home. It's nice that in California tax payments on property can't rise more than 2% a year, but in other parts of the country how do you save up risk-free money to pay a property tax that could rise at 7% annually where you might live to 110 unexpectedly?

Regarding interest rates... I've asked this before but nobody really knows/knew the answer, so maybe some newer board members know: How can we compare interest rates of today versus 120 years ago when back then the dollar was backed by gold? Shouldn't a 2% government rate be considered a higher yield back then, when backed by gold, versus today when the underlying dollars devalue at a faster pace? I totally don't get these arguments about rates today versus history that goes way back. What seems unprecedented to me about low rates today, versus say 1890s, is that back then your low yield actually beat inflation. And your yield wasn't even taxable back in 1890 -- they brought the income tax in somewhere around 1913 or so. How do you make any money at all with a 2% 10 yr yield and you only keep maybe 1.3% yield after taxes? Surely there is higher risk involved here with making a real return, whereas if it were backed by gold it might be more of a fighting chance. So I can't figure out how comparing rates today versus far back in history is any kind of fair comparison whatsoever. A 2% rate today is vastly inferior to a 2% rate in 1890 -- that's my theory and I'm sticking to it.