ERICOPOLY

Aren't you concerned you are paying too much for Vol at these levels? Volatility is always expensive when there is tension and underlying has fallen considerably in price (which is usually correlated with a good price:value). There is no way around it. Just don't buy 6 years' worth of it is my motto. My speculation is that when the stock goes to $20 (whenever that is) or so I'll probably be able to write the $22 strike call for at least $2. So I think I'll get all this premium back in the end. So mentally if I look at it like that it's not so bad.

I added some BAC 2017 $15 calls and some shorter term $15 BAC puts. Not touching my SPY short though -- might need it. Added some GM common.

I admit that I don't understand the issue -- but genuinely I am amazed that all that QE did pretty much nothing to the gold price. Perhaps it permanently propped up a gold price that was already in a bubble (but isn't anymore after the QE). Just don't know.

Gold is just something that ought to shoot up if there is QE, but it hasn't yet. GLD finished at 109 today, and it was 91 at the beginning of 2009, before all the QE. More than 6.5 years later, it's only up 19.7%. That's a bit less than 3% a year. That's after QE1, QE2, QE3! Why is QE4 going to produce better results for GLD?

You too had a hard time engaging the enemy after you lost Goose. There is something to be feared in fear itself, as the economy is in part a confidence thing. Large market collapses and currency crises can feed into the real economy. Will they? Well, we'll see. The odds are higher with a collapse rather than without one.

I personally think this one is a big one..at least 20% correction here if not more. Problems in China are not to be ignored. It is not contained just like Housing problem here wasn't contained to subprime. I don't think it is 2008 here but it is similar to the last Asian currency crisis 1997 i think. Comparing it to 1997 currency crisis makes sense -- that took our market down by 20% or so. I actually added to my SPY short today.

It's one of the relatively most insulated, with exports being a small percentage of GDP (at about 13%). The rest of the world feels relatively more pain when the US stops buying their goods, than vice-versa. Eric, are the S&P 500's overseas earnings part of "exports". My line of questioning relates to if they aren't, then with emerging and Asian economies slowing, this could impact Europe's economy (which may be more reliant on exports than the US). If this is the case, the rest of the world may be slowing dramatically reducing the S&P 500's overseas earnings (which I hear is half their earnings). Does this make sense? I thought the overseas earnings were what we derive from the exports. Happy to be proven wrong though so I can keep learning.

It's one of the relatively most insulated, with exports being a small percentage of GDP (at about 13%). The rest of the world feels relatively more pain when the US stops buying their goods, than vice-versa.

Somewhere in the annual letters to shareholders Buffett refers to all of his companies collectively as "the streams of income that form the mighty Amazon" (I'm paraphrasing). I think it's quite a bit of his strategy is to prefer an acquisition over his own shares -- his own shares would have to be awfully tempting to be a better idea. Or something like that.

I think Glass Steagall preempts that. For a commercial entity and a banking entity to be under the same roof potentially gives that commercial entity a very strong financing advantage, which, in a guaranteed deposit world, is arguably derived at the public's cost. With the right management, it's not a bad thing, but regulation is never intended for the well behaved. The closest banks got to own a legal "diverse income stream" is owning the credit card processors, Elavon in the case of US Bank, Vantiv in the case of Fifth Third, and they haven't been bad things to have during the tough times. But such is life with these heavily regulated entities. It figures that Glass Steagall is responsible for the financial crisis ;) Let's make sure these banks are heavily concentrated within banking -- good!

I keep thinking about that last banking crisis. What if each bank never paid dividends (nor bought back shares) and instead retained those earnings to purchase more diverse income streams (not more banks, but completely separate industries)? Would they have needed bailout money? I wonder how much money was poured into dividends and buybacks at BAC over the prior 20 years leading up to the crisis. Anyways, different topic from this thread. Berkshire has something great going on from the nearly indestructible nature of it -- those independent businesses reinforce the safety of each other. Businesses that return capital to shareholders can never reach their maximum potential level of safety -- by definition of having returned the excess capital. IMO.

I don't know, but I also question why they'd want to. Instead, they wind up with more assets on the balance sheet if you use the same amount of cash to add to existing equity positions. A buyback is a return of capital -- it's not as good as adding to their positions that earn a return. That is... if you want a fortress. If you like the idea of growing the many little rivers that feed the mighty Amazon. IMO. Buffett is all about increasing intrinsic value, not expanding empire. If he could buy a significant amount of his existing businesses at a price cheaper than buying a new business he would do it. I would guess he'd rather put $37 billion in to BRK share buybacks than PCP but it is unlikely he could repurchase that amount of shares. The future of the entire enterprise is more secure if you have more varied streams of income, and put together those streams of income are bigger than before. You can never attain the same ever-increasing level of safety by buying your own company stock. Just like paying dividends doesn't make your earnings capacity greater... Just like paying dividends doesn't make your balance sheet stronger... Buybacks fortify the business in the same way as a paid dividend -- exactly zero. There's a bigger issue here than "empire building". How about ever-more-secure empire? Build it stronger. Make it even harder to break. I'd rather have 2 separate income streams within Berkshire than just 1. I'd rather have 3 than 2, I'd rather have 51 than 50, I'd rather have 75 than 74. Etc... etc....

I don't know, but I also question why they'd want to. Instead, they wind up with more assets on the balance sheet if you use the same amount of cash to add to existing equity positions. A buyback is a return of capital -- it's not as good as adding to their positions that earn a return. That is... if you want a fortress. If you like the idea of growing the many little rivers that feed the mighty Amazon. IMO.

I'm fairly ambivalent. Might go higher or lower. I don't feel particularly gutsy at the moment. Pass.

I forget... in 2008 when they dropped their equity hedges, did the gains on the hedges exceed the market drop of their equity portfolio? Or was it mostly a wash? I'm remembering it as mostly a wash. Once again Original_Mungerville with his huge equity hedges! Congrats. I'm limping today, down about 2% at the moment versus the 3.9% that the S&P500 is down. I'm getting better at this luck thing though -- this is the first market drop in a while where my loss doesn't exceed the market. It's cold comfort. Too many out-of-the-money puts that don't help much in the beginning. EDIT: Okay, just a few minutes later the market is down 4.35% and now I'm registering a slight gain for the day (due to a volatility spike). This is a bizarre day.

No matter the industry, I don't see how intrinsic value could ever exceed the discounted value of all future distributable earnings in addition to the present liquidation value. You can only squeeze so much juice from a lemon.

It's up to you to pay whatever multiple you want... However my take on this is that intrinsic value is (I think) the present hypothetical liquidation value plus a discounted future stream of earnings. That seems to be all the money you can ever derive from the business unless I'm forgetting something. So the size of the investment portfolio contributes to the future income stream that you discount, but I don't think you can exaggerate it's value in the hypothetical liquidation component because of the offsetting insurance liabilities. But that's just my method.

I started drinking Miller 64.

I understand the interest rates punishing savers comment. The wealthy are earning low returns on their money and those low returns are a transfer of wealth to help out the people who are struggling to repay their debts. Meanwhile people just gripe the wealthy don't pay enough tax -- well I guess the Occupy Wall Street people don't want to hear that low mortgage interest rates translates to a siphoning of income from the banks' net interest margins. Oh well... sigh.

I'm probably just extrapolating my own views on debt. I felt like I wasn't making any headway on my mortgage back in 2001 when the rate was 8%. I'd make a huge monthly payment and it nearly all was for interest. It was very demoralizing. Today my mortgage payment has a huge savings component and that really cheers me up. I know that a much larger component of the payment is merely a form of savings (the principle). So little of it is interest that I just don't feel that bad about all this mortgage debt. So it bothers me far less -- it's very morale boosting to think that all these Americans now have this disciplined "savings plan". Better than a similar sized payment with a lower savings component, IMO.

Except getting hit with a hammer never felt this good. Record margins and solid employment. Perhaps it's like that ball busting fetish -- looks painful but people seem to like it.

It's definitely a good thing. It points that the demand picture is improving, and pretty much all the other indicators prove that the picture is slowly improving. On the other hand some improvement from a low level doesn't mean that demand is good. The economic indicators also show that the US economy is still suffering from demand deficiency. So basically demand is still bad, better then it was before, and slowly improving, but there's still a ways to go. If the demand base is still low (yet improving) then there is room to grow. That's ideally what you want because current CPI and profits and employment are tied to the piss poor existing demand, right? So that leaves a lot to look forward to. It would be worse if demand were peaking with no possible improvement potential -- at that point worldwide pressures could more easily drag us back. Better to have momentum that is strengthening.

So to the question of why they are paying down debt -- are they merely using their interest payment savings? Or what?

I think you need to go back to 1980 to find household debt service levels this low. It's not the total amount of debt that matters. It's how much money they have at their disposal after making the payment. Instead of focusing on how much principle needs to be paid, why not instead obsess upon how little interest needs to be paid? Most of the US household debt is fixed rate, not floating. Debt overhang or interest payment underhang? They cancel out and put no net undue stress on the households. Take your pick as to why, but knowing this helps me absorb the improving retail sales without raised eyebrows.

Well if there's no debt overhang than why are people using gas savings to pay down debt in a low interest rate environment? Also just because retail sales have been strengthening lately doesn't mean that the economy is not still demand constrained. If the economy is not demand constrained then why do you have low inflation in a zero interest rate environment? Why is anyone even mentioning deflation? Is demand falling or flat if sales are rising? Despite paying down debt, no less. They are buying more AND paying down debt. Must be terrible out there. Is that an economic model? It's a question. I'm asking if rising sales indicates poor demand.