txlaw

I agree. Moynihan has said that they will be able to generate the required capital through ops. If they sell the CCB stake, that will also help them out with their capital requirements, as the CCB asset is penalized. The 2nd quarter charge, which included a huge amount of reps and warranties reserves addition, was actually great. It reminded me of Wells taking a huge quarterly loss a couple years back to get it over with.

I like both. I've pretty much shifted all my C position into BAC and WFC. BAC is cheaper, but WFC is by no means at fair value. If you're risk averse and can't stomach the fact that BAC is a turnaround, go with WFC. Also, there is a material difference between the two in that BAC has both a premier global investment bank and a premier US commercial bank, whereas Wells is really only a premier commercial bank (although maybe its investment bank will do better going forward). That's not necessarily a bad thing. Also, take a look at PNC. Looks to be quite undervalued to me, although I do not own a position. In addition to generating more NIM when interest rates go up, expenses will be going down quite a bit at all the big banks going forward. Expenses are really elevated right now because of all the crazy sh!# that went down during the financial crisis and because there are redundancies that haven't yet been wrung out of their systems. We'll also see to what extent there has been over reserving.

Well, if we're talking about the move from $14 to sub-$10, it's really the reps and warranties issue that has been on the market's mind. Mr. Market appears to be convinced that BAC will have to raise capital through a dilutive equity issuance, although even many of the analysts who believed that have changed their positions since the last quarter and CC.

Now, let's see. Which party was in complete control of congress in December, 2010 when the Bush tax cuts were extended and lots of other goodies handed to high income types? Was it the same party that has the Lion's share of ultra high income financial supporters? Hmm. Could it be that the Bush tax cuts were extended because the Republicans threatened to block permanent tax cuts for the middle class unless Congress also made the tax cut for ultra high income Americans permanent? Could it be that the President brokered a compromise that was deeply offensive to the progressive wing of the Democratic party for the good of the nation? :o The Democrat Party had a huge majority in the US House of Representatives and a rarely seen filibuster proof supermajority in the US Senate when the income tax cuts and the huge Roth rollover provision were extended. Oh, let's not forget the $10,000,000.00 exemption from the estate tax. Correct me if I'm wrong, but the Dems did not have a 60-vote supermajority in the Senate or a majority of House in late 2010, did they? I recall the Progressives in the Democratic Party being pretty pissed off at Obama for compromising on the estate tax and Bush era tax cuts in late 2010. Also, the specter of a Democratic filibuster-proof supermajority was something cooked up by GOP strategists and the WSJ editorial page at the time of the Presidential election. The fact of the matter is that there is enough variability in the two parties to where a 60-seat block in the Senate doesn't result in the party agenda being rammed through the Senate come hell or highwater. There are a lot of moderate Senators who wouldn't sign onto legislation that is too left or right of center. (I believe in the GOP, those moderate Senators are disparaged as RINOs.). Heck, even Fox News felt the 60-vote supermajority was a mirage. See http://www.foxnews.com/politics/2009/07/01/democrats-senate-supermajority-strong-advertised/

Now, let's see. Which party was in complete control of congress in December, 2010 when the Bush tax cuts were extended and lots of other goodies handed to high income types? Was it the same party that has the Lion's share of ultra high income financial supporters? Hmm. Could it be that the Bush tax cuts were extended because the Republicans threatened to block permanent tax cuts for the middle class unless Congress also made the tax cut for ultra high income Americans permanent? Could it be that the President brokered a compromise that was deeply offensive to the progressive wing of the Democratic party for the good of the nation? :o

I think you are being too kind to Obama. Many would say Obama's quote in 2006 was purely politics. Who can tell? Shouldn't we judge based on actions and not words. He didn't show any concern about a debt problem as President until the last few months. His original budget plan surely didn't address the issue. I guess what person sees as being an Executive another person sees as thumb sucking. I also think we are too quick to label the House as unflexible, and the problem. There is a reason beyond politics. For example, the new Republicans do not want government spending to be 25% of GDP. They think it should be under 20%, therefore tax increases are off the table. It in their minds should be all about spending cuts and policies that will help economic growth. Many Democrats appear to be inflexible as well in that they refuse to support a plan that does not increase taxes. At least that fits with their political philosophy. http://www.bloomberg.com/news/2011-07-21/grand-bargain-returns-to-u-s-debt-talks-as-negotiators-open-paths-to-deal.html The problem is those who cannot match the revenue and the expenditure. Those who want increased spending and lower taxes. This sad tragedy started under Reagan when the Democratic Congress accepted the tax cuts but largely rejected the spending cuts he proposed, and Reagan accepted it. Since then we have had nearly thirty years of stupidity. One could make a case that what many call the irrational extremes (the House) are actually rational, in that their view of the size of government matches their view on the appropriate level of taxation, whereas some in the middle are wanting spending without paying for it (i.e, both parties in the Senate). It is case where we would be better off with one side or the other winning, but compromise is not working. Sadly, most Americans do not understand the issue, or cannot decide which course of action is best. Perhaps I am being too easy on Obama. I would agree that Obama hasn't really been hugely involved in the negotiations on fixing our long term debt problems until recently. He did nominate Simpson and Bowles to chair the fiscal policy commission, but he never really addressed their recommendations when they came out. That was a very unfortunate decision. Probably based on politics and pleasing some of the people in his party. The House is the problem, though, in my opinion. Limiting government spending to 20% of GDP is not a bad goal. But it is also not mutually exclusive with raising revenues either. The timing issue is a big deal as well. Do we immediately put in spending cuts that are the functional equivalent of austerity measures or do we phase in cuts over time?

Of course I do not believe that all the politicians are doing everything for the greater good . . . or that they are acting like animals. Or that this is good versus evil. Or that people who are fine with defaulting are luddites. Not sure how you are getting that from my previous posts. You are either intentionally twisting my words or are unintentionally misconstruing what I'm saying. As value investors, we all know that incentives matter, and that there are perverse incentives that affect how politicians behave. We should also be aware that the US two party system and the way that coalitions are built will affect the stances that politicians take, especially in the House, where it really matters how the "team" strategizes and plays "the game." But politics is the art of compromise. And right now, only the Senate and the White House are really willing to come to compromises on these big issues in a timely manner. Both sides of the House, and particularly the House Republicans, are playing chicken in a way that is very dangerous. It's like the first TARP vote all over again. See http://www.rollcall.com/issues/57_10/Debt-Ceiling-Vote-TARP-GOP-207467-1.html. I do not mean to suggest that Obama doesn't play politics. He certainly does. He is a very gifted politician. But being a gifted politician and trying to do what's right for the country are not mutually exclusive. I was no fan of George W, but I would never say that he wasn't trying to act in a manner that was beneficial to the country when he was President. Remember how George W was in favor of TARP, but it was the House GOP that killed it in the first vote? The reason that the House GOP did this was because it was "an election-defining vote," as the Republican political consultant states in that article from Roll Call. Your article quotes Obama in 2006, which was before the financial crisis: The fact that we are here today to debate raising America’s debt limit is a sign of leadership failure. It is a sign that the U.S. Government can’t pay its own bills. It is a sign that we now depend on ongoing financial assistance from foreign countries to finance our Government’s reckless fiscal policies. … Increasing America’s debt weakens us domestically and internationally. Leadership means that ‘the buck stops here. Instead, Washington is shifting the burden of bad choices today onto the backs of our children and grandchildren. America has a debt problem and a failure of leadership. Americans deserve better. Far from being a sign that Obama is a hypocrite, it shows that Obama believes that we have a major debt problem. It also shows how policy decisions change depending on the circumstances. Ever heard of countercyclical policies? Five years ago, I was also arguing that we should be clamping down on spending, addressing the entitlements issue, and acknowledging that we made a huge mistake getting into an unnecessary war that was sucking up crazy amounts of money. I still believe those things, but I do not think that now is the time to drastically cut spending. Nor do I think it would be a good idea to default on our obligations at this time, when the global economy is still in a precarious situation.

The Gang of Six framework is another attempt to get the two sides in the House to actually come to a compromise on spending cuts and revenue increases. The reality is that the GOP will never be able to pass the conservative plan in its pure form, without any revenue increases. And the Dems will not be able to avoid cutting spending in the way they wish. It would be horrible if both sides actually got what they want. Very irresponsible. There has to be a compromise. And it should not be tied to the debt ceiling issue. That is the key point. There's a reason why the plan put forward by Obama is light on specifics, and why almost all his plans are light on specifics. The reason is that the House is full of representatives on both sides who are hyper-partisan. By putting forward general frameworks, Obama signals to both sides the parameters in which the House should work to hammer out all this big legislation. Essentially, he is saying to Congress: "You are the legislators. I will tell you what I will and won't veto and what I think the legislation should generally look like, but I'm not going to be the head of the party and make it so that no legislation gets through." This angers both the GOP and the Dems. My take is that Obama is trying to be a responsible Executive. This might not be the right approach to legislation. But that's the approach he seems to be taking. Only time will tell if he is right in his leadership approach. I cannot tell you what are the specifics of the various plans and which are optimal. I'm getting too much conflicting information to figure out what the hell is actually going on. But it does seem like the Senate is acting pretty rationally (both the GOP and the Dems) compared to the House. And the House Republicans are the worst of the lot because they are posturing for the next election.

The point is not that default is literally "unthinkable." Of course, the US can default. I'm arguing that you should not characterize any such default as merely "the government" reneging on its obligations. In my view, our theory of government holds that government actors are agents of the people, and the people are sovereign. Or as Benjamin Franklin said, "In free governments, the rulers are the servants and the people their superiors and sovereigns." Therefore, ultimate authority resides in the people, and if the US government defaults on its obligations, the people have defaulted on our obligations. That is not a childish view, of course. It is a view on political philosophy. But let's leave the political philosophy aside and talk specifically about the effects of a US default (whether or not that is default by the government or default by us, which is a tangential point in this debate). What WEB is arguing is that if the US defaults, that could potentially have a huge negative effect on the US economy. Interest rates could shoot up, which would further reduce the prospects of climbing out of this predicament we find ourselves in. Confidence in the US government and confidence among economic actors could decrease to the point that it affects the recovery, as well. If the US slips back into recession, then the global economy will be affected. In other words, a default could have a huge impact on the lives of people in the US and across the world. So the point is that there is a possibility (but not a certainty) that catastrophe could result from the US defaulting. Therefore, if we believe in risk management, we should not be taking any chances with the US defaulting. Yes, life will go on after a default. But it could be much worse for people because of that default. Perhaps you do not agree that there is a possibility of catastrophe occurring if the US defaults. Then that is what you should be arguing.

It's nice to see this crystallization of what must be done to solve our problems. Now if only we could get some of the folks in government to say something like this.

I think Warren's (and Larry Summer's) viewpoint that these represent "your bills" is a bit of a false premise. They aren't my bills or your bills technically. They are the government's bills. Governments change and people change. Why should their decisions still be binding? Should Russians today still have to pay for Soviet decisions? Should Iranian citizens still pay for the Shah's decisions? You get my point. Not to be tangential here but, as a society, I think it's completely normal to have serious debates about whether we want to accept the sins (or debts) of our fathers and grandfathers. That's a perfectly healthy debate. In fact, Judaism and Christianity has always accepted the idea of Jubilee: that over long periods of time, a forgiveness or debt and sin is healthy. Now all of a sudden it's "unthinkable" (Summers) and like a "gun to the head." (Buffett) I feel sorry for the society that doesn't have this conversation. P.S. - I am not saying we SHOULD; I am just saying the conversation is perfectly healthy. Just to be clear. We are having this conversation. Both on this board and in the real world. Calling something "unthinkable" or like a "gun to the head" is in no way advocating that people shut up about these debt problems that we have. Your idea about not paying the bills because they are the government's bills and not yours is very much at odds with our system of government. The fundamental premise of the US system is that the government is not a sovereign separate from the people. The people are the government. "Government of the people, by the people, for the people." Now, you might ask, why should we bound by the dead hand of the past? The only answer is that because there is a social compact that entails that we be bound to some degree to the decisions of past generations. And because the people have the ability, in theory, to change the situation by putting a new government in power. I mean, why should we follow the US Constitution or any past federal laws? We didn't come up with the text or elect those legislators who came up with those laws. Taken to the logical extreme, your idea is pretty radical.

I agree that we are actually starting to grapple with this issue because the Democrats lost control of Congress. I actually think it was a good thing that the Dems lost control. But I wasn't literally saying that everyone in the government agrees that we must spend less. What I was implying was that both the Republicans and Democrats have put long-term spending reduction plans on the table. The Obama plan was put out in April. The Republicans didn't like it because it didn't go far enough on entitlement cuts (particularly, health care cuts) and because of the tax increases on high income Americans. Obviously, Obama's intention was to come to a compromise where both sides would give concessions. Up until now, though, the House Republicans have refused to make concessions on revenue (tax) increases, and they are being recalcitrant about this to the point where they're willing to put a gun to the head of the nation's economy. Now that Obama has backed the Gang of Six plan, can the GOP legitimately say that this is about saving the country from our debt versus scoring political points?

I don't get this. Because Congress is so "dysfunctional, irresponsible, and conflicted," Congress should take those attributes to the next level and play Russian roulette with the economy in order to have a debate over the proper level of spending . . . or, rather, the propriety of tax increases? Am I wrong in thinking that everyone in the government agrees that we must spend less, but that the primary hang up is whether there should be tax increases incorporated into any deal?

I'm not sure that Berkowitz really is suffering from style drift. He appears to always have been a focus investor. With respect to his heavy concentration in financials, he has made it abundantly clear that this is his sweet spot, and that he believes these large US financial companies are being severely undervalued by the market. I tend to agree with him on his bet. With regards to JOE, I can understand why people might be upset if they think he's sinking a ton of money into something that's worth $8 per share, but I don't get why people are worried that he is going to try to get heavily involved on the operations side. Park Brady, the former CEO of ResortQuest (a former Leucadia subsidiary that was sold to Wyndham last year), was recently appointed the COO. He will be the ops guy, and he has a pretty good track record. I think Berkowitz's role as Chairman and Interim CEO will be focused primarily on being the face of JOE in meetings with potential investors from abroad. Right now, there are a lot of dollars overseas, and the sophisticated holders of these dollars understand that the dollar is a bad thing to hold onto over the long run. So the idea is to get these guys to develop on the land that JOE owns. Build up the area so that the activity from industry, tourism, and government helps Florida out over the long run (that's why Charlie Crist is on the board). If the area gets developed in the manner that Berkowitz hopes, JOE will be worth quite a bit more than what it's trading at. If the area remains stagnant and no major development occurs, it is worth what it's trading at or less, perhaps even the $8 figures cited by those who disagree with the long bet.

Perhaps that's right. But a lot of video call/conferencing usage is going to occur through social networking service interactions and business/workplace interactions. If Google+ and Facebook emerge as the strongest social networking services out there, and both of these solutions have embedded video solutions from Google and MSFT, what sort of additional value does FaceTime bring to the table that makes us want to buy Mac OS devices? What about in the work context? If HTML 5 makes it easy to access video conferencing services through web apps, we can simply use Skype or Google Voice and Video to serve all our video call needs. I'm just wondering what Apple is planning to do to keep FaceTime a valuable asset, rather than a cutely named app that is undifferentiated from competing services. It might be that they make FaceTime the first solution that is actually allowed over the wireless networks. The whole Apple-carrier relationship thing. Or they may try to shut down Skype usage or Google Voice and Video chat usage on their devices. Don't think that would fly.

What I find fascinating about this is watching GOOG and MSFT (both of which I own) battling it out in over the top video calling/conferencing and "social." MS Skype is linked with Facebook, Comcast boxes, and MS business products such as Lync, and is available on all the major mobile device OS's. That covers a pretty good amount of potential usage. Google Voice and Video chat is linked with Google+ (see Hangouts, for example), Google TV boxes (eventually, I believe), the Google Apps suite, and will be available for access either by native app or web app on all the major mobile device OS's. I gotta wonder . . . where the heck is Apple with its Facetime solution? They need to get on the ball because GOOG and MSFT are running ahead of the pack in this space.

"Facebook Unveils Skype Video Calling and Group Chat" http://www.readwriteweb.com/archives/facebook_unveils_video_calling_with_skype_and_grou.php

Wow. That was his last meeting. F---!

I'd love to see detailed notes from someone who went. I was actually going to fly out to LA to watch Mr. Munger and spend the Fourth there, but had to cancel because something came up at work :-\

Here's the page for the emails referenced in the NYT story (appear to be distributing through CNBC, as well). Very interesting to read. http://www.nytimes.com/interactive/us/natural-gas-drilling-down-documents-4.html#document/p15/a22739

Reed Hastings added to the board of Facebook. http://techcrunch.com/2011/06/23/facebook-adds-netflix-founder-and-ceo-reed-hastings-to-board/ Hastings also sits on the board of MSFT. The ties between MSFT and Facebook are strengthening even further. That's a good thing for MSFT shareholders.

Thanks, Sanjeev. :) Only went into that detail because you asked. I really do think that DELL is one of the best risk/reward scenarios out there, despite being such a well known (but not well understood) company. It makes perfect sense to me why it is one of the largest equity positions in HWIC's portfolio.

Yeah, the guys I know who are part of the scrappy start-up crowd tend to be fans of Amazon and Google. And most of them use Amazon AWS.

My view is that it is too simplistic to talk about moats (or a lack thereof) when we're talking about a company that has been undergoing a transformation for a while now (successfully, I might add, IMO). It makes more sense to talk about competitive advantages, threats to existing businesses, and growth prospects. We have to think about the company holistically. The same is true of an analysis of MSFT, where the moats of the cash cow businesses are shrinking but where free cash is being deployed into other businesses or into transformation of the cash cows. The analogy to IBM is very appropriate -- Michael Dell has been gunning for IBM for a while now. Dell, which has always focused on its business customers despite having a great consumer business in the past, sells productivity to its enterprise customers. Like IBM, the goal is to help solve business problems using technology. I highly recommend reading the Economist article discussing the longevity of IBM over the last 100 years. Much of what is in that article is instructive with regards to DELL's prospects. By far, the greatest competitive advantage DELL has is its customer relationships and distribution network. DELL directly talks to business and government in order to understand their needs and it develops solutions, whether hardware-, software- or services-oriented, for these customers. This distribution channel (which provides info on a two-way basis) is extremely valuable. It allows DELL to buy companies like Compellent at what appear to be high prices, scale up the sourcing for these acquired product lines, and then dramatically increase units sold by selling through the distribution network. All of a sudden, the price paid doesn't look so high. It also allows DELL to sell both commodity hardware and high margin services to its customers. Case in point: "The Nuclear Regulatory Commission (NRC) has selected Dell’s wholly-owned subsidiary, Perot Systems Government Services (PSGS), a unit of Dell Services, to provide a full scope of Information Technology Outsourcing (ITO) support services as well as hardware, enterprise, and software products." See how the entire package was sold to the NRC? The strength of this network is also increasing on a worldwide basis. Dell is the number one PC-brand in India. How quickly we in NA forget that PC penetration is nowhere near complete in emerging markets! By dealing directly with Indian business, DELL strengthens its customer relationships and prepares for a future where they can sell other things to those Indian businesses (mobile devices, cloud hardware, consulting services). Same is true in Brazil and China. Scale is also an advantage to DELL. Being a big seller of commodity hardware means that it has created a supply chain with manufacturers all over the world that cannot be duplicated easily and that allows it to be a low-cost provider of hardware (though not necessarily the lowest-cost provider). The low-cost/direct buy supplier advantage is still fruitful today in the enterprise segment (much less so in the consumer segment) and in the cloud infrastructure segments, which provide the guts for the productivity shift that is going on today with the move to the cloud. The scale and supply chain has allowed DELL to deploy free cash into building a cloud hardware product line that a has a long runway ahead of it. Many of the cloud infrastructure providers we like to talk about a lot use Dell hardware. Many that we do not talk about also use Dell hardware. For example, I've noted on the board that Tata is partnering with Dell to bring out its own IaaS service in Singapore and India. Dell and HP are trying to further strengthen their market positions here by working with the OpenCompute project so that they can help build hardware and data centers that allow developers and platform providers to focus on just that, and not have to worry about hardware at all. Finally, there is also know-how and innovation. Dell hasn't been known to be innovative in the past, but is becoming more so, especially in the cloud hardware segment and in the services segment. DELL is also snapping up IP related to its cloud hardware businesses and has vowed to continue to focus on IP. I think it's useful to break DELL up into its varying businesses, all of which do actually work synergistically to strengthen its customer relationship network. Consumer PCs -- Declining competitive advantage here because the lowest-cost/direct buying edge that DELL used to have matters less and less . But note that less than 10% of earnings come from this segment Enterprise PCs and hardware -- Still has a competitive advantage due to customer relationship network and low-cost supply chain. Margins continue to decrease though. Cloud infrastructure hardware -- Scale matters and there is a very long runway for growth here. Buying up IP allows DELL to prepare for a high volume future where margins are pretty decent despite being in the hardware biz Services, software, and consulting -- High margin and low penetration at the moment. Will be much bigger profit center in the future. Finally, a huge additional benefit: the management team and Michael Dell. These guys have been doing a great job with the transformation, they are extremely shareholder friendly, and they work as a team. They understand that they need to focus on business and understand what business needs. ------ Some additional anecdotal evidence that might interest some of you. I happen to live in Austin, TX, so I will often run into people who work at DELL, which is based in Round Rock. Morale was very low there a couple years back, but recently, everyone I've talked to who works at DELL has said that morale has really improved, along with the work environment and the business prospects. That's a good thing to hear from those folks.

Down about 3%. Heavily invested in financials, and the drops there have more than offset the unrealized gains in tech holdings such as LVLT and DELL.