ERICOPOLY

Eric, either you are going to continue to really enjoy retirement, or you may be coming out of retirement! ;D I'm betting on the former. Cheers! Yes well I spoke to my brother-in-law yesterday who has a financial planning/advisory business on the side. He said he had a client call up last week and sell everything -- including the mutual funds in his kids college funds, with early redemption penalties. His plan was to put it all into gold this morning at the open. I was at a picnic Saturday night at my "old money" mother-in-law's "country club" just quietly gasping at the 40-50 year old heirs of old fortunes nervously chattering about the debt downgrade and the markets etc... This morning I just figure these people are all getting out and the mutual funds just have to sell to meet redemptions. The fund managers want to buy, not sell, but what can they do? Cash levels in funds are at record lows. So once the last marginal retail investor has panicked, guess whas' gunna' happin?

at what price? Looks like they're currently around $1.15. That's about the average price I paid.

You mentioned several ways to play this one... do you mind me asking which option(s) you ultimately went with? I went with AIG & BAC warrants. I also got BAC 2013 $10 strike calls.

I think AIG has bottomed (everybody gets to guess for fun every now and then). Can't believe how many warrants I have now.

Yes but they only have $40b in reserve and can only produce about $130b over the next few years in PTPP. How will they ever survive another $2b hit from Fannie/Freddie?

This is why Citigroup was liquidated after it's stock dropped below $1 in 2009. Don't you remember?

Yes but note that the lawsuit is from AIG, which is down 8%. So if people assume BAC is going to take a huge loss from this lawsuit then this is particularly odd.

He bought NetJets when it was losing money. I think he'd be happy to buy the rest of USG if it fails.

The quotes for C, BAC, AIG seem to be down about 5% -- they seem to be trading on foreign markets and Interactive Brokers is giving those quotes. I never get up this early (being in Seattle) but today I'm particularly eager in a greedy way.

I don't mind buybacks at any price given my capital gains rate is normally lower than my dividend rate, but I can see how Buffett would hate to take a capital gain instead of a dividend when his dividend tax rate at Berkshire is far lower (sometimes only 5%!!!) than his capital gains tax rate which is 35% at Berkshire. Hmm... 5% vs 35%? No brainer. However, for me as an individual, if stock is trading at any level I can just sell some shares to launder my dividend tax rate into a capital gains tax rate. I don't think Buffett is unaware of this.

Recession or not... In two more years you'll have had 4.5 years of bad loans running off replaced by 4.5 years of very high quality loans. The people employed today are largely the ones who remained employed during the past recession, as not that many jobs came back. These employed people are the most "employable" ones, the firms like to cut the fat first. These are the very same people who will have got the last 4.5 years of loans.

That's right. In all the doom and gloom people forget that a dollar deployed in buying back stock at 5x earnings is a 20% risk-free return. So you can have a stagnant economy and still grow EPS at 20% clip.

How does Rochdale get paid? Are his clients big holders of the stock, or rather big holders of short term options?

He is a total crackpot though: Bove stated in a report published Tuesday that Citigroup will be worth $24.75 per share in 2015, more than 6.5 times Monday's closing price of $3.78 and twice the book value he is projecting for the bank in that year. Assuming Citigroup can attain the $12.37 book value Bove is projecting, that $24.75 price would not be far-fetched by historical standards. Citigroup has traded at a price-to-book ratio as low as 0.19 and as high as 4.59, according to Bove's research. The bank currently trades at 0.72 times book. Assuming the same price-to-book ratio for Bank of America in 2015, Bove believes the bank's shares will be worth $99.37 in 2015, well over six times Monday's closing price of $15.40. Bank of America currently trades at 0.73 times book value. http://www.thestreet.com/story/10766588/citigroup-bofa-to-sextuple-by-2015.html

I get a tax deduction for funding scholarships in Nicaragua. Buffett and Gates have reduced their taxable estate by giving it to the rest of the world. Somebody still has to pay for things here in the US.

Bank of America Corp., the biggest U.S. bank, said yesterday it had a $16.7 billion exposure to the five countries at the end of June, including loans and leases. This includes $15.2 billion of “non-sovereign” exposure, according to a quarterly report. The Charlotte, North Carolina-based lender purchased credit-default protection of $1.77 billion as a hedge against potential losses, according to the filing. http://www.businessweek.com/news/2011-08-05/citigroup-has-31-7-billion-gross-exposure-in-five-nations.html

Pay $8.17 for stock and sell warrant for $3.63. Net cash outlay of $4.54. $13.30 = 2.92 x $4.54. So maximum 200% return over 7.5 years. This is the same return as if the stock goes to $23.85 -- but the stock only needs to go to $13.30, so much more certainty. However, it's too conservative for me. You should be doing much better than tripling your money over 7.5 years at these prices. I'm considering the $10 strike call for $1.30. I mean, if it expires worthless you lose max of $1.30 -- but there will be decay on those warrants too -- perhaps as much at $1.30, perhaps less, perhaps more.

You pointed out earlier that a government can print money. So if nobody will renegotiate, everyone can still get repaid in full. They will never miss an interest payment involuntarily -- and that's where the credit rating downgrade comes from, the fact that people in government expressed the possibility of voluntarily defaulting as a lever used for political gain.

Yes, bankruptcy does exist for individuals if the lenders won't agree to renegotiate. Same for corps.

The government isn't bankrupt, it just is reluctant to cut it's spending. We can cut our defense budget down to Canada's size. We can make 72 the age of retirement with Social Security benefits. We can stop subsidizing interest costs on home purchases as a means of collecting more tax. At this point the spending hasn't been reduced yet. A person with $90k in debt and a $100,000 after-tax salary isn't bankrupt just because they spend $110,000 per year. They can live on $99k per year spending and reduce the debt by 1/2 over 40 years. To be bankrupt means that you go before a judge and after looking at your situation there is nothing to cut.

Their governments will print the money, so the future value of those dollars is "junk". Worse, as you point out there is an additional credit risk because they can't print money of their own. So if they get into a bind, they might only pay you 1/2 of the "junk" dollars owed to you. Best case, they repay 100% of the junk dollars owed to you, but that's no better than the govt bond, which is "junk". Thus, if all sovereign long bonds are "junk", then ALL long debt is "junk" as well. It would be odd if there were AAA corporate bonds denominated in US dollars but the US govt bonds were junk for the reason of long term debasement. You'd have banks only able to hold high amounts of corporate bonds and very little govt "junk" bonds. The world would be turned upside down! At least in the govt bond scenario, you are certain to get back 100% of the dollar units, however valuable they may be. In both cases, govt and corp, the dollar units have equal value.

Then all long term corporate debt should be junk as well. That doesn't provide a means for differentiating the ones that will only repay 50 cents on the dollar from the ones who will repay 100 cents on the dollar. What the dollar will actually buy you is another discussion altogether.

I know what you are saying, I'm just undecided if this is the right form of leverage compared to what else is out there. Those $5 2013 calls are only $4. That's 2x leverage, already in the money. So when you take delivery, you then buy more $5 strike puts to replace the old ones (they ought to be very, very cheap) or just move the strike up on the put to lock in gains as you go (the only way out of the warrant is going to be selling it and paying tax, unless you want to buy more puts in addition to the cost of the leverage you have already paid). Those calls only cost you 80 cents of premium ($9 break even point less the $8.20 stock price). Once you take delivery on the shares you can buy more puts with the dividend, moving the strike up. Compare that 80 cents to what the leverage in the warrants will really cost, which is actually about $9 if held to maturity ($8 stock price + $9 cost gets you to $3.70+$13.30). This is written from the point of view that it's nearly a certainty the stock is over $17 in 7.5 years -- opinions vary of course. Yes, the calls only last 1.5 years versus 7.5 years for the warrants, but can one argue that's worth paying 11.25x more for the leverage (9 = 11.25x.80)? If you believe the stock will be over $17 at settlement of the warrants (I do), then it really will cost you $9 per share for the price of having leverage. Yes, the leverage in the calls won't cost 80 cents for the entire 7.5 years, as they expire in 1.5 years. But for that remaining 6 years after taking delivery on the shares the cost of buying replacement puts will be very inexpensive. Imagine for example what a $5 strike LEAP put will cost you when the stock is $20? A hell of a lot less than the present 70 cent quotation is my bet -- probably only 10 cents or something, and you'll just use some dividend to buy it. So after 6 more years, I'd be amazed if the leverage of the calls cost a total amounting to as much as 20% of what you have to pay for the privilege of leverage in the warrants. Chances are just high that most of the gains in the stock will happen in the next 4 years, and I doubt the calls route will cost much more than a $1 in total for the leverage in that time frame. If the $5 put can be replaced today for 70 cents when the stock is at $8, what will it cost when the stock is at $20? Warrants will do better if stock is less than $8.75 in 18 months (actually, that number assumes the warrant is still worth $3.75 in 18 months despite decay). What does your gut tell you about the stock price in 18 months? If you are that terrified that it will be less than $8.75, then I guess that's why it seems okay to pay so much for the leverage in the warrant? Perhaps paying 8x as much for the leverage? Is less than $8.75 in 18 months really what is worrying us and is that why we hold the warrants and not the $5 strike call. There are other strikes of course, like the 2013 $10 call for $1.30. I'm just not going to spend the time to run this line of thinking on more than one strike. EDIT: Granted, I forget to mention the margin interest costs after taking delivery on the shares. Interest rates might be a lot higher, perhaps. You could be paying that for a while after 2013 settlement date.

When Canada lost its AAA rating in April 1993, for instance, the country's stocks gained more than 15% in the subsequent year. The Tokyo stock market climbed more than 25% in the 12 months after Moody's downgraded Japan in November 1998. http://money.cnn.com/2011/08/06/pf/sp_rating_money.moneymag/index.htm?iid=Lead

OMG! I didn't realize it was that bad! :D