txlaw

Wow, this is a very sad day. Rest in peace, Mr. Jobs.

But, Ben, aren't you making the same mistake you described with CAT with US financials? Let's say you are correct that the market is valuing many of these companies incorrectly based on a current earnings multiple that incorporates peak earnings rather than mid-cycle earnings. The same is certainly not true of the US banks. If anything, the markets are valuing US financials as though they will forever have EPS at trough earnings. Forget BAC because clearly you are worried about a big hole in the balance sheet there due to legal problems. But what about a WFC, BK, or a GS? Don't you think the market is valuing them as though their earnings will collapse for the next decade? Unless you believe there are humongous write downs to occur in the future, isn't now the time to buy US financials in aggregate in terms of pricing? (Note that I'm just talking about US financials, not financials in Europe or anywhere else.)

The question is whether the country as a whole benefited from the house building party that made everyone feel good while it lasted. This is the problem when you have a govt that reflexively feels it must keep people happy all the time. It is not so different from feeding us Big Macs and McFlurries all the day long and worrying about the heart bypasses later on. Your characterization of the motivation behind the bridge building project is incorrect. The point is not to make people feel good or to instill confidence. The government is actually trying to spend money in a way that will counteract the leakages in the system that result from the balance sheet recession effect. This is why broad based tax cuts won't work. With such tax cuts, a large percentage of that money goes back to people who likely will just put that cash back into the banks. On the other hand, when a government project is directly linked to employing people who have been out of work, it is far more probable that the money will be recirculated via spending by those newly employed persons. No doubt there will be leakages along the way, but the multiplier is probably better by building the bridge than by doling out the money willy nilly through undirected tax cuts. So the proper analogy for government action now is not feeding the people Big Macs in denial of the heart attack to soon come. Instead, it is like pumping the patient who has just suffered a heart attack -- due to all the Big Macs he ate -- with meds that save his life and that keep him going until his body recovers and that gives him time to change his diet in a way that unclogs his arteries. In my view, the best way to stimulate is through tax expenditure programs and public-private partnerships that are directed towards reducing unemployment but that keep the actual spending decision in the private sector rather than with the government. The bonus depreciation tax relief put in place by President Bush, for example, was a good idea, IMO. There is a potential for graft and incompetence, however, with the public-private partnerships that must be closely monitored (see Solyndra).

No one is doubts that austerity causes more pain and higher debt ratios in the short term. The question I posed was whether full blown austerity is a better solution than what Koo recommends. Japan tried the "muddling through" approach that Europe and the US are trying now. The fact that govt debt to GDP ratio in Japan ballooned shows that they did employ massive countercyclical spending and it didn't work. Koo explains this by saying things would have been worse without this spending. This is the counterfactual that we don't know. I gave the examples of such counterfactuals, i.e. the emerging countries that did pursue full-blown austerity under IMF supervision. They did not suffer lost decades and were back to healthy growth rates in relatively short order. If Koo had taken the trouble to examine these cases and offer an explanation of why austerity worked in contradiction to his theory, I would be more convinced. Otherwise, his work is prone to confirmation bias. As I understand it, and I may be wrong about this since I have not read Koo's book, the Asian and Latin American financial crises would not be considered balance sheet recessions under Koo's definition, as they were not situations where the entire private sector was minimizing debt despite having zero-cost money. Instead, there were massive defaults, and the costs to borrow skyrocketed (more similar to Greece than the US). But to be frank, that discussion is beyond my ken, as I am not too familiar with the details of those crises. Nevertheless, your point is well taken. The problem for anyone who advocates Koo's viewpoint is that the most similar counterfactual situation is the Great Depression. And it is very difficult, if not impossible, to prove that a second Great Depression would have occurred without the "stimulus" that has been ongoing. It's the curse that goes along with preventing disaster by taking drastic action. For example, Tim Geithner and Hank Paulson will forever be vilified by large segments of the population because those people cannot imagine or do not believe counterfactually that a second Great Depression would have occurred had TARP not been put into place. The fact that government debt to GDP ratio in Japan ballooned shows only that there was massive countercyclical spending by the govt, not that it didn't work. If Japan had subscribed to liquidationist theory (a less sugarcoated term for full blown austerity), is it clear that they would have gotten a purging and then bounce back of the economy? Andrew Mellon said the following while he was Treasury Secretary under Hoover: "[L]iquidate labor, liquidate stocks, liquidate farmers, liquidate real estate… it will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up from less competent people." A lot of people believe that Mellon was right. I (and most Keynesians) believe he was wrong. In my view, we would get a massive and prolonged worldwide unemployment in the vein of the Great Depression that would cause huge social unrest and that would have resulted in lost generations of people. The productive capacity of the global economy would actually shrink and be less than it could otherwise be because of this shock to the system. The geopolitical ramifications of having high unemployment and increased poverty across the entire world (the assumption being that if US unemployment went to 25%, the world economy would collapse as well, as decoupling is an illusion) are unknowable, but I doubt they would be good. (Do we want real class warfare? Do we want people coming into power that would institute new "cultural revolutions"?) Ultimately, it comes down not to whether government is an efficient spender of capital -- it isn't. But the question is whether there is a role for government to play in counteracting the reverse mutiplier when you have worldwide, Minsky/Fisher debt-deflation, and where the government can borrow at zero cost, which only seems to occur when the government can print money without causing a collapse of the economy.

That is exactly what the Japanese did and see what that got them - 200% debt to GDP. Let's not go down the same bridge, Mr Obama. This is the quandary facing the politicians in the US (and Europe). All the sensible projects that will provide future returns to the economy have too long time horizons (like most good investments) and will not benefit their election goals. The proposed Greek bailout reeks of the same bad logic. Say, they advance Greece the short term funding they need to tide them over for a few months and at the sam time ask existing bondholders to exchange their holdings into much longer dated holdings. Greece's structural problem remains (the debt is too much for the economy to bear) so yields on their bonds stay elevated. The private bondholders (lots of banks presumably) will then suffer losses on the new long dated bonds when they are marked to market yields. So, they still need to be bailed out to shore up their capital base - effectively resulting in two bailouts instead of one (if they simply allow Greece to deafault/restructure and then shore up the banks that take a hit). With overleveraged domestic economies, the West has limited options to stimulate domestic growth through stimulus. Export growth would be the solution - but who do you export to when everyone is trying to deleverage? I don't think the idea is that the bridge pays for itself, but rather that employing labor to construct that bridge results in a multiplier effect that counteracts the destruction in demand and private-sector wide deleveraging that has a reverse multiplier effect. Therefore, output that would evaporate in its entirety only evaporates by 25% or something like that. Richard Koo would argue that if the government does not use its ability to borrow cheaply and build that bridge, GDP will collapse at a precipitous rate that actually causes deficits to increase even more rapidly, thereby getting you to a situation where both GDP has collapsed and government debt to GDP has increased markedly. Obviously, it's better to put money into projects that actually will be beneficial to the economy in the long run. According to the BOJ, total debt to GDP continued to go up until the late 90s, and then it finally started to go down despite government debt to GDP climbing all the way up to 200%. Of course, the global recession has probably caused total debt to GDP to go up again.

That was a phenomenal interview.

Very valuable info, dwy000. Thanks for posting.

So why the restrictions? He basically laid out instructions on (a) the actual price floor and (b) the cash that is required to remain at Berkshire at bare minimum. That is very unlike Warren. Those look more like instructions to a third party. Why wouldn't he just have the board approve of a boiler plate buyback and buy opportunistically? Maybe he wants to be transparent in order to treat all shareholders fairly? But this seems unusual to me. It's all speculative of course. I think you may have hit the nail on the head. WEB has been giving more and more information to shareholders in a very in front of your face way to let them determine the valuation of BRK. This year's annual letter is an example of this. It's possible that being included in the S&P 500 index also has impacted his decision on disclosure. Unlike, say, an Eddie Lampert, WEB wants to be totally upfront with shareholders regarding valuation before cashing selling shareholders out at prices well below intrinsic value.

Good timing! I was considering buying BRK.B a couple days ago as well, but decided to go with LUK instead.

The warrants are a separate deal, as I understand it -- the fact that he got 10 years on the warrants makes this deal look far better to me than the GE and GS deals. Those deals had 5 years on the warrants -- they expire, IIRC, around October of 2013. His strike on the GE warrants is $22.25 and on GS it is $115, IIRC. He said at the time that he wouldn't have done the preferred deals without the warrants -- this time around I think he's just facing the fact that he should have gotten more than 5 years. I don't think he was expecting to be 3 years in and not well above the strike prices by this time. All the above said, I think this deal means he is very bullish on the long term value of BAC equity and that he doesn't think BAC equity / balance sheet is a zero. As Ben Graham has said (to paraphrase), you don't buy a preferred for par if you have any question about the company as a going concern. Kiltacular, I believe you're right. Somehow, I got in my head that WEB could force redemption after 10 years. You definitely don't buy a preferred for par at a below market yield and for an indefinite period of time (no right to force redemption) if you have a question about the company as a going concern or if you don't get some sort of equity exposure out of the deal.

Both price to current value, which seems out of whack to me, and opportunities for Ashner to deploy the capital FUR raised into very attractive opportunities. It's nice to have owner managers who can actually deploy capital opportunistically when you have markets like these.

Bought some FUR today.

I was thinking the same thing.

I totally agree that Hillary would have been a much better president, but remember that WEB endorsed both until Obama won the primary. Contrary to what people are saying, Obama's approach has not been to tow the party line up until his recent hard line stance on taxes (taxing munis -- wtf?). He's been very much in the middle, but he hasn't been able to broker any deals. I seriously doubt it's his fault, though. The House Republicans are intent on recapturing the White House, and they're willing to throw the country under a bus to do so. For this situation, you could modify WEB's quote on what happens to the reputation of a management tackling a business with a reputation for poor fundamentals. The management's reputation tanks. Well, here, when you have the folks in Congress acting like a bunch of two-year olds, you're bound to get destroyed by the media for a failure to make those kids behave. For me, the main problem is this austerity push. If you had a guy like Romney running for president but that was not pushing for austerity, I would likely vote for him over Obama. In fact, if Romney gets elected, I won't be too unhappy because I bet he'll flip flop on the whole austerity thing. If Rick Perry gets elected, on the other hand, I'm moving to Australia.

This is exactly what I argued when Buffett made his investment. Clearly, the equity exposure was integral to the investment. Buffett's betting on the frickin government would step in and save the system if need be - that's what he did back in 2008 and that's what he's doing now. If you go back and look at his Gillette, US Air, Salmon preferreds in the Forbes Buffett interview compilation I posted within the last couple of weeks, he clearly made those investments b/c the actual equity was too risky. Even if the equity is an integral part, by definition, buying something higher up on the capital structure (unless restricted by policy) means an investor deems the lower position is too risky. Well, I do think that the government would step in and save the system if the US banking system were to collapse again, but I think Buffett's assessment is that the US financial system is in much better shape versus the European and Chinese financial systems. Europe, in particular, is a total mess. I really think that WEB wouldn't make an investment like this where he thought the stock was not worth his strike price in a negative/worst case scenario. Otherwise, he would have asked for a 10% yield and the strike price would have been at TBV or BV. He has just tied up $5 billion of capital for ten years, knowing full well that he could have deployed into "safer" investments with a much better than 6% return, including buying up whole companies where it doesn't matter one bit what the market does. So why preferred + warrants versus a common investment at all then? Because it's the best of both worlds. He gets equity exposure and an immediate cash stream that can be deployed in a market that could easily trade sideways for a long time. I'd do the same thing if I were WEB.

This is exactly what I argued when Buffett made his investment. Clearly, the equity exposure was integral to the investment.

So now Bloomberg TV is reporting that in addition to potentially ousting Apotheker, the Board is considering keeping the PSG unit. http://www.bloomberg.com/news/2011-09-21/hp-s-board-is-said-to-be-reconsidering-pc-spinoff-proposal-amid-ceo-debate.html Unbelievable.

I just watched a video segment on CNBC where Tilson was asked about his opinion on MSFT's dividend hike. He basically said the same thing that Sanjeev and Eric did earlier today. He also talked about Skype being a horribly expensive acquisition (though he provided no analysis). Tilson also noted that he is continuing to redeploy from MSFT into DELL (something that many people on this board probably have been doing). Finally, Tilson said that he has now put his first ever currency trade on, which is the Ackman HKD trade. Tilson explained the trade by saying the same thing that ValueGeek did in the thread on Ackman's secret trade ("The large payout is a function of how cheap the option is (eg, how low the volatility is)."). Tilson even used the term "vol", which was kind of funny to hear. I guess the reason people tend to dislike Tilson is because when he comes on TV, he basically repackages everything that is being (or has been) discussed in the value investor community in a media-friendly way, and he is able to grow his businesses as a result. It's a skill he has. So I can see why people hate on him. Gotta give him props for co-founding Teach for America, though.

Anyone ever heard of this guy, Mark Massey? The shareholder letter was quite good. http://www.marketfolly.com/2011/09/mark-masseys-hedge-fund-altarock-on.html

There is an article in Slate (owned by WPO, btw) that links directly to your website when describing Debbie Bosanek as having "short-cropped red hair." http://www.slate.com/id/2304225/ I see Tilson somehow ended up on that same page of your website as well. ;D

I suspect there are a lot of folks on this board who feel the same way about Berkshire and Fairfax. Good to hear that Pabrai can be drafted if need be.

It's really interesting. I was watching some of those CNBC Delivering Alpha videos earlier today, and one of the guys (I think a fellow from Blackstone) was talking about how mortgage servicing rights are being dumped by the banks at great prices because of the new capital requirements. It looks like Leucadia and Berkshire were some of the first folks in the market to realize that they could capitalize on this trend. It was also interesting to watch the real estate panel because this indicates there will be a lot institutional interest in the markets that Berkadia services. If activity markedly increases in these markets, then I wonder what sorts of volumes Berkadia could be handling in the future.

If you want to get more info on the LZ acquisition, it's worth going to the website and reading the 2010 Analyst Day presentation and transcript. http://investor.lubrizol.com/phoenix.zhtml?c=91008&p=irol-eventDetails&EventId=3242330 It's a good amount of reading, but you'll see why WEB liked Lubrizol after going through it.

The latest Third Avenue letter is quite good. http://www.thirdave.com/ta/documents/reports/3Q2011ShareholderLetters.pdf

I think you might be referring to Congressman Jim Cooper's presentation at Harvard entitled "Fixing Congress": http://cooper.house.gov/images/stories/here.pdf