txlaw

Many thanks, dcollon!

txlaw, there is an ABH thread. You might want to bring it there Good point.

Very interesting. It appears that HWIC considers ABH shares to be substantially undervalued on a risk adjusted basis to the point where the exchange ratio is fair. I think I need to do a deep dive into ABH. I suspect the ABH pension liabilities may be the reason why there is such a divergence of opinion on the value of ABH versus FBK. Does anyone have any good ideas of how to go about assessing how the pension funding for ABH will work? Is everything in the public filings, or is there some background material that I should read to get up to speed?

I just went to pen and paper to calculate this out (can't do these things in my head). I see what you're saying. Honestly, it never even occurred to me to look at the difference between the put and the call premiums. Guess I should have.

Because options strategies hurt my head! ;D Also, call me old fashioned, but I just like to own companies or buy options to purchase stakes in companies.

I bought some SHLD today after seeing that it and RIMM were the only two companies in my watch list that were down. I have owned SHLD before, but haven't had it in my portfolio for a while. As much as I have been criticizing Lampert for not just spelling out what he's going to do with the real estate (my hope is that there will be a big deal with the better retailers out there to take over a number of cash bleeding Sears locations), I believe that the runoff value is easily above the current market price. Hopefully, it goes down even lower.

Touche.

comparing lampert to biglari is way too harsh. essentially, he's following the same script with shld that he has with an & azo. year in & year out he's shrinking the share base with a portion of free cash flow, a form of financial engineering that's his peculiar trademark. he's had stellar results those other 2 co's. and the ceo's there dont seem to be in a hurry to get out of dodge due to some problem dealing with lampert's personality. he's obviously still trying to figure out how to stabilize shld & position it for the future operationally. the real estate values are only a safety net, tho a diminishing one that he probably didnt imagine the severity of 5 years ago. same thing with the weak market position at the combined shld. he missed that too. i still think that he'll eventually get it right. but in this debt laden deflationary economy i'm not a nibbler yet. You're right, I'm being too harsh on Lampert. It just drives me nuts that he's keeping things so close to the vest. It allows Mr. Market to be stupid and for him to cash out unsophisticated selling shareholders who don't know any better. I also think it hurts SHLD because it keeps them from drawing in great people who are not financial engineers, so to speak. I'm talking about people like Ron Johnson -- people with visions for the new retail world. Of course, perhaps people who have done more due diligence on SHLD's hires could disagree. I'd love to hear from those folks. As for Biglari, even he's not as bad as people make him out to be. I mean, he's going to do well for his shareholders -- there's no question in mind about that. I just vehemently disagree with his whole notion of comp and what he's worth to the shareholders. I also don't like the low hurdle rates he's picked. I guarantee you a lot of people on the board are afraid to speak up and say that they agree with Biglari's views of comp, though I'm not one of those people. I'm not gonna fault Biglari for liking Aston Martin's -- those are pretty sweet cars.

It is interesting that one method of deleveraging the consumer, charge-offs, falls on the backs of bank shareholders, while the other method, low interest rates, falls on the backs of savers in general. On the other hand, if interest rates are supposed to match up with the inflation rate, and there is no inflation, then low interest rates aren't really producing that much of a subpar return for savers. So the question is whether there is inflation or not, which is what a lot of the macro posts related to gold and QE are about. Core inflation was last measured at 2%. But core inflation excludes food and energy prices, I believe. We all know that those things have gone up in price. Question is: how much of the inflation in food and energy prices -- and commodities, in general -- is related to QE (which some characterize as printing money but which others don't), versus capital flow into commodities stirred by expectations of currency devaluation, versus anomalous events such as drought and other extreme weather, versus changes in the supply/demand fundamentals in the short term (e.g., supply disruptions in the Middle East)? Very tough thing to figure out.

See the graph page 10 of JPMorgan's presentation: Consumer deleveraging largely driven by charge-offs http://files.shareholder.com/downloads/ONE/1550254602x0x515337/85746b44-384f-4eab-8c22-498b7d509acf/BAAB%20Conference%20Presentation%20Final_11.4.11.pdf Interesting presentation. On page 9, the presentation says that about half of the reduction in the consumer debt service ratio is a result of lower interest rates and refinancing, with the rest being driven by "charge-offs and deleveraging." I take it that deleveraging in that part of the presentation means paying off debt; otherwise, that doesn't make sense in the context of the next slide. I suspect firm deleveraging has been driven mostly by productivity gains (both in technology and labor), paying down debt, and conversion of capital markets debt to equity either by default and reorg or by voluntary conversion. But I don't have any data for that theory, so it's just a guess.

What do you mean? Don't charge offs decrease the health of balance sheets by reducing assets relative to liabilities? Maybe you meant defaults and debt to equity conversion? I'm thinking about how BAC and their peers are collectively paying down the debts of consumers courtesy of positive yet weakened bank earnings. Yet the health of the bank balance sheets are improving at the same time. The banks are like consumer debt paper shredders. Just look at the credit card charge-off rates over the past 3 years. You have had chargeoff rates go at high as 10%, but the historical norm is more like 5%. So that's rapid deleveraging, courtesy of would-be bank earnings. Yet the banks can absolutely afford to do it. Capital ratios have been building at the same time. Okay, I see what you're saying, but I would characterize that as defaults and forced haircuts on consumer debt, as opposed to willing deb reductions, and only partially the reason for our accelerated private sector deleveraging. Not sure what is mostly driving the deleveraging. Bank charge offs (i.e., consumer and corporate defaults, haircuts, and reductions) play a large role, but so does corporate sector pay off of debt, capital markets debt to equity conversions, and increased savings by US consumers despite essentially zero return on their money when put into bank deposits. Point being that both increased savings and debt reduction is occurring in the private sector. Not true in the public sector, of course.

[amazonsearch]Balance Sheet Recession[/amazonsearch] Explains Koo's concept of a balance sheet recession and how he believes that Japan's lost decade essentially represented the avoidance of a monumental depression in Japan, especially given the peak to trough decline in Japanese real estate asset prices of about 85%. Parts of the book that are fascinating: -His discussion about how his view is different from Irving Fisher and Keynes. With respect to Keynes, for example, he disagrees against using fiscal policy as way to "stimulate" the economy except when there is a balance sheet recession, which is a rare occurrence. In normal times, Koo believes that there is a crowding out effect, which means that fiscal policy shouldn't generally be used. He also talks about why he thinks monetary policy doesn't work during balance sheet recession times, though he may have changed that view with respect to recapitalizing the banking sector after our most recent financial crisis. -His detailing of the steps that the Fed and other US policymakers took during the Latin American debt crisis, which never blew up into a crisis of the same magnitude as this financial crisis, partly because of the heroic policy directives of Paul Volcker. Extend and pretend today is explained by this. -His take on the Asian currency crisis that resulted from unchecked capital flows from Western investors who hadn't done due diligence prior to piling into the Asian tiger economies. The resulting balance sheet recessions were devastating on those economies, but they recovered because of the collapse in their currencies. He quotes Lee Kuan Yew in a couple of circumstances, who admonished the West for failing to warn Asian countries about the problems with relaxing capital flows prior to making structural reforms, while scolding those same countries after shit hit the fan. Explains why Brazil, China, and India are wary today about completely opening up the borders to foreign capital right now because they don't want dumb money flowing in. Also explains why the Chinese are very hesitant to cede control of the yuan-dollar peg. -Koo also talks about how he believed the bursting of the Internet bubble put the US into a balance sheet recession. Interestingly, his take on that bubble was similar to Jeremy Grantham, in that Koo seemed to believe that the bursting of the Internet bubble would start the deleveraging process (which it did not). Koo also talks about how Chairman Greenspan was really worried about cataclysm occurring and so supported the Bush tax cuts, advocated for stimulus, and kept interest rates very, very low. Greenspan was aware that real estate was the only asset class that was not tanking after the bubble burst and that was the most interest rate sensitive asset class, so Greenspan specifically kept interest rates low to offset the destruction in capital markets wealth with real property wealth. Koo actually warns that this potentially was creating a bubble in real estate. Just like he warned recently that QE has possibly created an asset bubble in commodities and emerging market stocks. [Edit: added another part in Koo's book that I remembered after reading a post in another thread about Greenspan.] All in all, an excellent book. The type that people who are interest in macro should have on their shelves.

Thanks for posting, jjsto. I recently read Balance Sheet Recession by obtaining a copy from a university library. Excellent book.

What do you mean? Don't charge offs decrease the health of balance sheets by reducing assets relative to liabilities? Maybe you meant defaults and debt to equity conversion?

http://www.exxonmobil.com/Corporate/energy_outlook.aspx XOM believes that natural gas will replace coal as the leading fuel for generating electricity in the U.S. by 2025. Would be curious to hear from you folks with experience in O&G regarding how closely followed this energy outlook by XOM is.

Which Japanese corporations have a majority of revenue from international sales? 1) R&D/production costs massively devalue (Yen is destroyed) 2) International revenue keeps pouring in Translation: better profit margin after Yen falls Hahaha--and how does the production cost drop when they need to buy commodities to produce products? Will miners accept monopoly money for their goods? The labor costs are where the savings are, not the commodities. "ha ha ha". Plus, many commodities are in a bubble. I wonder what will happen to core inflation when the bubble bursts and once we shift to to a global natural gas market. I'm very skeptical of Kyle Bass' take on Japan. Yeah, there will almost certainly be devaluation of the yen, but does that mean default, or the Keynesian endpoint as Bass likes to say? I wouldn't bet on it. I've been considering buying EWJ to get exposure to Japan.

Well, I do respect Seth Klarman a lot. You too -- I've always enjoyed reading your posts, particularly those on the old board. But we disagree on this one. I'm with WEB that US equities were cheap as whole in 2008/2009. I don't know if US equities are cheap as a whole right now, but I do know that certain sectors are ridiculously cheap, and at least 30 pretty well known individual US stocks I follow are also pretty damn cheap.

Mungerville, did you believe US equities were ever cheap in 2008/2009?

Wow. I sold out of FBK this summer to harvest the capital loss and redeploy, but I've been watching, hoping to put money back into it at a later date. I've always liked SD's idea of selling off the conventional facilities and holding onto the RBK facilities for the long term. The price offered is a bit disconcerting. Obviously, if you take all ABH shares, you're getting ABH at a big discount to IV, but the ratio still doesn't seem adequate to me. Granted, I have not done a deep analysis of ABH. What do people who own both FBK and ABH think of the stock for stock exchange? Also, does anyone know FFH's cost basis on their FBK investment?

The key is that 85% of the respondents think BAC is cheap. Talk about selection bias. It seems to me that some of the board members who post quite often are going a bit stir crazy as a result of this highly volatile, range-bound market. Lots of bile being spewed out there at other members as well -- it seems like almost everyone is a target these days. We should probably all chill out (including me). Otherwise, this board just might jump the shark.

Could be. All I know is that I have been selling my JEF bonds at a profit to add to my 2014 WFC LEAPS.

This is sort of a red-button argument: "if your investment in BAC blows up, you won't have needed the money you invested anyway because you will be hoarding shot gun shells and bottled water as you fight zombies." Life will likely very well go on after the equity holders are whipped out and the government steps in to "nationalize" BAC. Essentially what they did with Citi. Citi died, shareholders got whipped out, life went on. Well, in the face of the European hurricane causing a relapse into recession, BAC may have to take measures that other financials don't have to, including dilution. But if BAC common actually goes down totally, which is very unlikely, it's likely that most of the other guys are going down too because the financial system will have collapsed again. So I think you're really making a call on all financials rather than on some idea that BAC is more of a black box than any other financial.

libor.plus1, when you say you think that anyone who thinks BAC is a good buy is kidding themselves, is there something about BAC in particular that you have in mind? Or do you pretty much have the view that all the financials are black boxes and shouldn't be invested in, as per the bottom answer on the survey? I very much think BAC is a black box. It's one of a many dominoes that's connected to every other domino. If one of them falls (europe, china), you can bet BAC will be ruined. Investing in BAC is essentially stating that you are of the conviction that the massive, massive, MASSIVE, structural problems in Europe will sort themselves out without bloodshed. I don't know anyone who can reasonably argue this. We live in a very interconnected world, and moreso banks than any other sector I can think of. People on this board are talking about BAC "being well capitalized". Maybe as it relates to the CW acquisition and liabilities. But if anyone thinks BAC is well capitalized for the shitstorm that's going to go down when France loses that AAA rating... well, I guess we will see. Fair enough. I suppose that's what the Fed's stress test is for, then. To make it clear where the big banks need to be at to make sure that they're prepared for a European shitstorm.

I really like Reed Hastings, but he clearly doesn't have a good sense of finance. I can't believe he was buying back stock at such nosebleed prices. Also, the Qwikster debacle was unbelievable. I never thought Hastings would make such a mistake. But I'm rooting for him in terms of transforming the company into a viable long term competitor with all the other content aggregators out there.

libor.plus1, when you say you think that anyone who thinks BAC is a good buy is kidding themselves, is there something about BAC in particular that you have in mind? Or do you pretty much have the view that all the financials are black boxes and shouldn't be invested in, as per the bottom answer on the survey?