ERICOPOLY

I think that buy low and sell high is the best method to apply. Value investing works because it includes the appraisal process... without which you have not a clue where "low" and "high" fall. I heard of buy low and sell high long before anyone told me about "value investing". Later I realized they were the same.

I wish the government did not pursue this any further. They forced companies like Wells Fargo to take the TARP money for cosmetic reasons, and it's clear that they did not want to take it. Every single quarter they have made progress towards rebuilding their capital levels through profits. Now, they are punishing Wells Fargo and behaving like it was a "bailout". Why do they have low capital levels? Because their took the writedowns on Wachovia before buying it... a lot of the other firms only look better capitalized because they are dribbling out the writedowns instead of doing it in one big bang. I also take exception to the idea that the remaining banks need to recapitalize the FDIC with special assessments. The mistake was made several years ago by not requiring all banks to pay a higher insurance premium to the FDIC to ensure that it was capitalized enough to withstand the storm we are going through right now. Instead, the politicians wait until the crisis hits, they wait until the bad banks go under, and then raise the premium and impose special assessments. In other words, if you are a good bank Wells Fargo, you need to pay for the sins of the bad banks. That's just insane in my opinion. All the banks, good and the bad, should be paying equally, but instead we have it rigged so that we wait for the bad to fail, and then concentrate the costs on the good banks. Why punish the good banks who did nothing wrong? The FDIC exists to save the depositors, I think the tax payers should ultimately bear the cost of the special assessments, it was their duty to put the right people in office in the first place and they failed at that... their elected representatives did not get the FDIC adequately capitalized in the first place. The tax payers (in my opinion) need to feel some pain when they elect the wrong people... When the politicians failed to regulate the CDS that AIG wrote, did they re-elect those same people? Did they push out the people who deregulated or failed to regulate, or did they elect them for an additional term? How many letters did they write to their congressmen demanding that AIG's CDS get regulated, and that the FDIC was undercapitalized? I think it's disingenuous to just blame Wall Street for "greed" when really the problem here (IMO) is taxpayers voting in the wrong representatives. We talk about how hard it is to remove a director when it comes to CEO compensation, but how about getting your elected officials in government to do the right thing? If the elected officials would only manage risk appropriately in terms of things like CDS regulation, discourage (through regulation) the kind of lending practices that got us into this mess in the first plac, and ensuring the FDIC is big enough to handle failures at large banks... Nah... couldn't the taxpayers that voting these people in that allowed the crisis to happen... the tax payers and their elected representatives have framed the debate such that they are not responsible.... Wall Street is. I don't buy it frankly... the taxpayers (through their elected officials) had the power to stop this crisis dead in it's tracks long ago. They failed to act and now they just blame somebody else... Wall Street greed "fat cats".

17F in Gainesville. Low 30s in Miami. 42F in Key West. Brrrr! FYI Publix is hands down the best run supermarket chain in US. It's privately owned and likely the most profitable too. There are @ 300-500K Canadian snowbirds in Fla this time of year. You can run, but you can' t hide from Ol' Man Winter. :) Your snowbirds are just going to the wrong place. It is stinking hot here in Sydney today.

Median household income seems more reliable in terms of housing affordability. In Seattle, dual income households are the norm. I would expect the price/income ratio to be higher in dual-income situations simply because... after buying food and clothing you have more money left for housing... and this tends to either drive prices higher in cities where it is trendy to live, or in suburbs you wind up with larger houses that are more expensive to build. That's how I think about it. There must be some way that housing can be priced at 5x or 6x incomes... it can't be fully explained by low interest rates, although certainly that plays a large role. Low interest rates lead to higher principle payments on amortizing loans -- so having 1/2 the interest payment does not dictate 1/2 the mortgage payment.

Ericopoly, Actually, the lower qualified dividend rate (in the U.S.) expires at the end of 2010--so next year your dividends will be taxed at your ordinary income tax rate unless the tax code changes. GaliPart Then I will be back in the "no dividends please" camp. That is really BS -- getting taxed 35% after already having paid tax on the corporate income? I am in Sydney right now for a month, just enjoying the beach, seeing the extended family, and being away from the wet Seattle climate. I love their tax code here. Australia has a dividend franking system. Australian residents aren't taxed on their dividends so long as it's an Australian company paying the dividend and the company has already paid tax on that money. Additionally, their corporate tax rate is 30%. Then they have no gift taxes, no inheritance taxes, and much less in the way of property taxes (they have a land tax in some areas but it's only applicable to the land assessed value). It seems the only people who really pay the high taxes are the wage earners (not only are income taxes high, but there are high regressive "GST" sales taxes). For somebody living off of dividends though, this is a much better situation than the US. Plus, I'm a dual citizen... the only thing holding me back is my wife's family (in Seattle).

A little while back (2003?) Bush dropped our dividend tax rate to 15%. So even if I make $1b in dividends, my tax is only $150m. But I think the shares need to be held at least 1 yr before that lower tax rate applies -- so next year my dividends will be at 15% unless the tax code changes.

Agree completely with you on the compensation bit. As for "raising the dividend to the moon", there is no reason why ROE should rise on what's retained except to the extent that leverage has increased because of the higher payout. The same ROE effect could be achieved much more efficiently through share buybacks at discount to book. Moreover, as a US tax resident, you should not be happy about the unfavourable tax treatment of Cdn dividends. Also, I wonder whether you have considered, as a LEAP holder, that you are adversely affected by a high dividend (although this should clearly not factor into mgmt considerations). You are right, buybacks are just as good from an ROE standpoint. And yes, it only boosts ROE because it leverages up the company... after the big gains in the past two years coupled with shrinking underwriting, it seems like a decent way of increasing a flagging float:equity ratio. I don't hold the LEAPS anymore... I exercised them to get the dividend. A year early on some of them, but they were low strikes so the dividend represented a quite high percentage return on the cash I deployed in the exercise. CDN dividends don't impact me any more than US dividends (as I understand it) -- I get a foreign tax credit to reimburse me. My dividend preference is simply because I want more cash flow -- I felt a little bit hostage to Mr. Market last March. This year going forward I can at least live on the dividends and not worry about selling anything to fund my lifestyle. I'm in equities only but my dividend is now more than I earned when I had a job -- and once Wells Fargo restores their dividend things are really going to be awesome.

That's right, obvious as it would otherwise seem. (it would be obvious to most Martians at least).

Dividends are not compensation. Stock grants are compensation, salary is compensation, bonuses are compensation. But dividends, that's not compensation... it's just their rightful slice of what they already own. Let's compensate them... pay them more. These guys are underpaid and if cash flow is what they need, then let's pay them appropriately. As for the dividend, I like the dividend and I hope they raise it to the moon -- it will increase the ROE of what gets left behind.

The rate of inflation after 1965 is far higher than that of the period from 1913-1965. In other words, it would make far more sense to only count inflation post 1965. In doing so, it will alter your outcome quite a bit I think.

Sprott's July letter points out that we're in a depression right now (according to Sprott) and that S&P500 at 189 level is possible in a depression. http://www.sprott.com/Docs/MarketsataGlance/July_2009.pdf These are his three fearful scenarios. 1. Earnings stay constant; P/E ratios hit cycle lows: We assume a scenario where investors are nervous, people need to sell stocks to pay for lost wages, or for retirement, but the companies continue to perform as of June 2009. Assuming a P/E of 6, which is close to the all time low, and using an earnings value of $63.04 for the S&P 500 Index, we derive an S&P 500 Index value of 378.16 2. Earnings get halved; P/E stays constant: Earnings have been half of their current value three times over the last 30 years – so it is entirely within the realm of possibility that they could be halved once again. In the late 1970’s, early 1980’s and early 1990’s the S&P 500 Index generated half the earnings per share that it did this year in 2009 dollars. Using today’s P/E multiple of 16.08 results in an S&P 500 value of 506. 3. Earnings get halved; P/E ratios hit cycle lows: double trouble. If we combine these cases where earnings are cut in half from today and the P/E ratio drops to a cycle low, it implies an S&P 500 Index value of 189 (depression territory).

The "miscreants" (as described by Byrne) don't borrow shares: they naked short them. Your suggestion for cash accounts as a means of cracking down on legal shorting prevents honest participants like Watsa from shorting... and he is not a "miscreant". Cutting back on shares available for lending might increase the demand for naked shorting... as naked shorting is a means of avoiding the high cost of borrowing shares.

A little while back LVLT took a hit to their NOLs due to a 5% ownership change. I didn't realize the rule was at 5% until it was mentioned in a LVLT annual report that I read. I suppose I could have a better memory and actually cite at least the year of the annual report, but it was certainly within the latest 2 or 3 years back if one is really interested.

This is from Q4 2008 -- it sounds like Wells Fargo communicates with delinquent borrowers at a higher rate than this anecdote from your builder friend suggests. Through our active communication programs, Wells Fargo Home Mortgage has reached 94 percent of its customers who are two or more payments past due. For every 10 of these customers, we have worked with seven on a solution, two declined help and one could not be reached. Of those who received a loan modification, one year later, approximately 7 of every 10 were either current or less than 90 days past due. https://www.wellsfargo.com/pdf/press/4Q08_Recorded_Comments.pdf

There is so much to talk about. I assume you've already read the Q2 & Q3 transcripts? There is a lot in there that addresses the question of how they are going to grow while the consumer is deleveraging -- one can start simply by observing how much the business is growing this year, in spite of the increase in the savings rate and contraction of credit: https://www.wellsfargo.com/pdf/press/1Q09_Recorded_Comments.pdf https://www.wellsfargo.com/pdf/press/2Q09_Recorded_Comments.pdf https://www.wellsfargo.com/pdf/press/3Q09_Recorded_Comments.pdf In a nutshell (from the Q1 transcript): The consistency of our revenue growth is also due to the fact that we did not participate in most of the problematic businesses and activities that have reduced the level and stability of revenue at many of our peers. As our peers are busy dealing with the problems from these activities, and with replacing the lost revenue, we have been successfully gaining customers and market share that will add to revenue and earnings well into the future. https://www.wellsfargo.com/pdf/press/4Q08_Recorded_Comments.pdf While many other banks – and almost every other large bank – retrenched from lending since the start of the credit crisis, Wells Fargo has remained open for business, providing over half a trillion in mortgage originations and new loan commitments to our consumer and commercial customers. And, on a net basis, increasing on our balance sheet over $119 billion in loans and securities by year end 2008. The opposite was the case during the irrational exuberance of 2006 to 2007, when asset spreads were at all time lows and were not priced for risk. At that time our asset levels were relatively flat - in fact declining in 2006 - while other financial institutions were leveraging their companies – in some cases growing by double digit rates - at low or no economic return. We were building our capital in that period waiting for the dam to break and it sure did. We were also prepared to lose market share and in fact we lost mortgage market share because we maintained our disciplined lending standards throughout that period. Earning Asset Growth vs. Peers – slide 5 In the last 1 ½ years, as others needed to retrench, Wells Fargo accelerated it’s growth taking market share in our chosen markets, increasing the number of households and businesses we serve and actively working at building relationships that will last forever. Wells Fargo’s growth in average earning assets, adjusted for acquisitions, from the beginning of the credit crisis through year end 2008 - 25 percent - was the highest among our large bank peers and also the highest among the top 9 peers in the U.S. In terms of just loans, Wells Fargo’s acquisition-adjusted 22 percent growth was the highest among our peers. Keep in mind that while Wells Fargo has been fully extending new credit, we were simultaneously reducing high-risk loans, including exiting indirect channels, tightening credit standards and pricing for risk. Our solid pre-tax pre-provision profit growth is largely fueled by strong revenue growth. In addition, we have grown revenues at a faster rate than expenses – creating positive operating leverage. In 2008, Wells Fargo grew revenues by 6.1 percent organically, while reducing our expenses by 2 percent. None of our large bank competitors had positive operating leverage last year, adjusting for significant acquisitions. Relative to our peers, we have had the highest and most consistent growth in top line revenue net of expense growth over either 1 year or 5 year time periods. Adjusted for acquisitions, none of the large peers had positive pre-tax pre-provision profit growth last year. Our relative performance is due to our faster loan and deposit growth, as well as the fact that we have not had the revenue losses that all of our peers have had in connection with problems from “covenant-lite” leverage lending, structured investments, proprietary trading, or market making in sub-prime or exotic securities because we have never had material exposure to those activities.

The market is telling us that previous prices were unrealistic because the liquidity was the result of unsustainable levels of cheap money. That's part of it. Another part of it is the 17% or so unemployed (counting underemployed). What will the "normalized" unemployment be going forward? Never a job market recovery? Then there is also the falling knife in some real estate markets that drove lenders to beef up down payment requirements above the nationwide average -- when those markets stabilize the down payment requirements ought to relax a little bit, to more normal levels (reflecting the nationwide average). There was an article about this very thing beginning to occur in some markets as lenders gain confidence that markets are finding a bottom (they are making that assumption).

Additionally, I believe only 52% of PTPP is tied to the size of loans. They have other businesses (wealth management to name one).

I don't believe there will be any $100b writedown happening in a single day. But let's say for argument's sake that it will happen over the next 2 years... and that $50b per annum is PTPP (it looks to be that way). Is today's stock price adequate to discount for 2 years of zero earnings? I think so. You can take 2006 earnings for both Wells & Wachovia and add $5b to it. You get to about $20b after tax. P/E today is therefore less than 7x. Is that a good deal even though there will be no earnings for 2 years? Sure, I think so. And we should remember that there are also reserves in place to handle some of the losses. That's fine to point out that debt will shrink. So what if credit card debt shrinks? Wells has hardly any exposure to credit cars. And so what if mortgages shrink? They are gaining market share and terms are more favorable. Then Wachovia's cross-sell is far behind Wells', and there is room for growth there. Last, debt can shrink in real terms while growing in nominal terms (although for now it's shrinking in both).

Prechter thinks the dollar is going to go on a long massive rally... and Prechter seems to rely on technical analysis.

Quite a lot of FFH's investments look that way (USB, WFC). Yet people don't think FFH can earn.

This story claims that Wells Fargo is willing to cut your payment down to 2% interest if that's what it takes to keep you from walking away. I take it that solves the 'jingle mail' risk for now -- a 2% interest rate would result in payments lower than renting a home elsewhere. Meanwhile as long as interest rates are this low it is still a profitable loan for the bank even at 2%. There are even people getting 0% temporary interest rates from some lenders. That ought to completely eliminate the risk of somebody walking away from the loan! http://money.cnn.com/2009/12/16/real_estate/great_mortgage_modifications/index.htm For example, Californians Steve and Elena Servi received a 2% fixed-rate loan from Wells Fargo that replaced the 6.75% adjustable rate mortgage on their Rowland Heights house. In the case of the Servis, their house had lost perhaps 40% of its value since they purchased it five years ago. Repossessing the home would have cost Wells Fargo more than $100,000 in lost value alone, plus the legal expenses, commissions, taxes and other expenses the bank would have incurred.

I'm not sure if it's a new era, or just a repeat. I believe there was period during the early 1980s where large US banks had worthless South American loans. Rather than being forced to write them down, they were allowed to earn their way out of the hole before taking the writedown. They were allowed to hold the loans at original issue value until the day they could afford to write them down, even though everyone knew that was bogus. And somehow America survived!

The SEC had these rules about how many shares you could purchase per day, based on percentage of average trading volume. They don't have to worry about the SEC's rules any longer. What do the TSX rules look like?

I am very unhappy. This wound up being a full 10% dilution... Why did they suddenly do this after making "we will repay TARP in a shareholder friendly manner" statements lately?

Every time you put a dollar towards buying more investments vs paying down your mortgage you are implicitly saying that the cheap leverage is worth it. Those investments can go south but you are still under the mortgage debt load. Not too different from the risk involved in the proposal given here on this thread. Congratulation if you don't have a mortgage... if you do have one, don't think you're not using leverage to attain your goals.