txlaw

I think Foreclosuregate is only half of what caused the sell off in bank stocks last week. On Thursday, the following report was released by some hedge fund manager: http://www.businessinsider.com/bank-of-america-mortgage-report-2010-10#-1 That same day, the banks were down several percentage points and the monolines were up even more percentage points. Basically, foreclosuregate in conjunction with more repurchase requests is causing people to believe that there is more dilution coming for the big banks -- especially for Bank of America, which now trades below tangible book value. This focus on repurchase requests was probably caused by a letter sent by the Association of Financial Guarantors to BAC last month. Good legal posturing on the part of the financial guarantors. I still own C and the Series A TARP warrants for BAC though (thanks Omagh and Francis Chou). It will be interesting to see how C, WFC, and BAC respond this week.

That interview on TheStreet.com was great. Check out this interview excerpt with Morningstar that Berkowitz did on JOE. http://www.gurufocus.com/news.php?id=109470 It seems like he's really taking a decades long view on JOE and that the end game is to have JOE sold to a real estate family who will develop the area over the next half century. When you take a long term view, it's really not so crazy to think that JOE could be worth quite a bit more than what it trades at. I'm particularly intrigued by the fact that the deepwater port there is closer to the Panama Canal than Miami. Obviously, the "as is" value of the property at this time of the real estate development cycle will be quite low. Einhorn has capitalized on the fact that JOE was already one of the most heavily shorted companies on the market as a percentage of float, given that 30% of the shares were off the market. Yup, very smart exploitation of market dynamics given that: -We're at the bottom of the real estate development cycle, automatically leading to low investor sentiment and therefore lower Mr. Market valuation -The BP fallout is still on investors' minds -Nothing has happened with JOE over the last few decades -People immediately short whatever Einhorn presents as a short idea Now whether this play by Einhorn was admirable is another question. I personally do no think this is such a great way to make money. I think his Lehman call was very intelligent, but it was like yelling to everyone that the house is on fire while simultaneously throwing gasoline on it. But this presentation is forgivable because it doesn't really matter what the market price of JOE is since they have no financing issues.

Totally agree, jjsto. If there's one job in the world I could have, it would probably be Charlie Rose's. He gets to think about interesting topics and talk to interesting people, all without having to bow into the ratings pressure put on most other TV journalists. It's funny though -- I didn't even know about Charlie Rose until they started putting videos up online. Now, I check the website every week to see if there are any conversations that he's had that I'm interested in.

I listen to Planet Money from NPR and Marketplace on the way to work.

Interesting. So does this mean that he has changed his filing status to active investor so that he can push the company to let him buy more? What are the limits on the percentage a mutual fund can own of a company? I'm a huge Berkowitz fan, but I've always been wary about the JOE investment. It does seem like it really could take decades to work out, if at all. For what it's worth, I have a friend who's from Alabama and who has been to the Redneck Riviera, and he does indeed believe it to have some of the best beaches in the nation (other than Hawaii, of course). But you also have hurricanes, swamps, and bugs to deal with too -- not to mention the rednecks.

Haha, didn't mean to start a debate over what is a "tech company", but interesting points that you guys make. I mean, if you really think about it, Iscar is a "tech company" specializing in materials science as applied to the manufacturing of cutting tools. Anyways, some interesting ideas have come up. I will have to look into Micron, WDC, and AVX. It will be interesting to see if some sort of transaction is proposed to YHOO. I would agree with Jason that YHOO probably trades at less than the sum of the parts, especially after seeing the Ali Baba/MSFT story in the WSJ the other day. I really like the downside protection of the investment given the price I paid.

Awesome article. Thanks for posting, Sanjeev.

I find the JOE position puzzling as well. It's too hard to figure out real estate unless you really know what you're doing and have the ability to do some real due diligence. It will be interesting to see what Berkowitz does now that he has "gone active."

Well, the point is that MSFT is taking the appropriate steps to make Bing a somewhat viable competitor with GOOG globally. Partnering with Facebook, Yahoo, and Alibaba are all good steps in that direction. Not to say that they will succeed, but someone on another thread (I believe it was twacowfca) pointed out that Google's position is not unassailable, though there is clearly a wide moat around the biz.

Very interesting. You guys who own MSFT will be happy about this. http://blog.facebook.com/blog.php?post=437112312130

I read an article yesterday noting that Lee Ainslie of Maverick Capital believes that many tech companies trade at very attractive valuations right now. I tend to agree and own the following well-known tech cos: GOOG YHOO INTC DELL Other people on this board own MSFT, NOK, and AAPL. Some may own HPQ. EBIX is popular here too. Any other ideas? Or do most people stay away from tech?

I just read the post on the big bank foreclosure halt and the possible moratorium on foreclosures (if you listen to Geithner's interview, the full moratorium seems like a remote possibility). There was an interesting article that was posted there from Yahoo Finance. I have been thinking a bit about Berkadia, and I wonder what sort of market share grounds they can make by entering into the residential mortgage servicing business. As I understand it, Berkadia only services commercial mortgages and multifamily residence mortgages. These guys are so sophisticated, I have to wonder whether they saw this coming, just as they saw the benefits of being the best non-prime auto finance company in the biz (ACF).

Geithner on Charlie Rose. Check it out. http://www.charlierose.com/

See attached presentation for the Cliff's Notes version of the benefit of the FMG note. Of course, it's hard to tell how accurate this will be if FMG gets their way on the dilutive actions they are trying to take.

I've been quite busy with work, moving, and getting other things in order. Hopefully, I'll be able to participate more in after a month or so.

I think some psychologists or "behavioral economists" need to debunk this notion that increasing marginal tax rates will cause all high income earners to work less. That doesn't fly with reality. Most people don't have a choice to work less if their tax rates go up. That's just not how jobs are structured. Furthermore, people are motivated by more than just money. And why do people assume that taking money on income above a certain level will necessarily be allocated to unproductive uses? Imagine a CEO who makes $40 million dollars a year and that the highest tax bracket changes so that you pay 95% on any annual income over $20 million to the federal government instead of 40%. First, does the CEO quit his job because of the tax increase? Second, why wouldn't the corporation say that, hey, this $20 million a year that is effectively $1 million in the pockets of the CEO, can be used to employ more people (200 employees at $100K) or to buy more equipment? Those resources could possibly be put to more effective use because of the tax increase. The Laffer curve is as crooked as Dick Cheney's smile, and Arthur Laffer is a quack, in my opinion. He seems to be one of those economists that is really pushing a political agenda rather than well thought out social science. That op-ed in the WSJ is a perfect example of his quackery, as he comes up with this crazy connection between state income tax rates and state GDP. Here's a quote from Munger on Laffer: When I talk about this false precision, this great hope for reliable, precise formulas, I am reminded of Arthur Laffer, who’s in my political party, and who is one of the all-time horses’ asses when it comes to doing economics. His trouble is his craving for false precision, which is not an adult way of dealing with his subject matter. And please see this video of Laffer arguing with Peter Schiff: http://www.youtube.com/watch?v=IU6PamCQ6zw I'm no fan of Peter Schiff (I think he's sort of crazy), but he totally called out Arthur Laffer and all the other Pollyannish economists who were spouting drivel before the bubble burst. I also have to take issue with this notion that people who are most productive make the most money. Labor markets are complex beasts, and just because someone makes a low wage or income does not mean that they are less productive than high income earners. Some of the most vital jobs to society are low income jobs.

I still can't believe how many awesome companies there are out there that have dividend yields that are higher than the 10-year. I mean, FFH has a higher yield than the 10-year. That's idiotic.

This is exciting! I finally did the work on LUK, and it appears to be pretty damn cheap. Can't wait to see how they deploy. Real estate, perhaps? More mortgage servicing businesses? Who know what they'll come up with.

CX could potentially be a pretty darn good investment over the next 5 to 10 years, although I'm not sure how Longleaf will do, as I do not know what their cost basis is. Scale matters in the cement/aggregates/ready mix business, and it is a sort of oligopolistic market. Cemex operates all over the world, which I like, and is supposed to be one of the best buildings materials companies in terms of its operations. They're also quite good with disclosure, although I'm not sure how the Mexican GAAP thing should affect the way one digs into the financials. They made a huge mistake loading up on debt to buy Rinker, though. There is both operating leverage and financial leverage built into the investment. Cemex could have owner earnings well over $2.00 per ADS in five years, and if CX uses all free cash to pay down debt and gets to refinance at better terms when its debt comes due, we're talking about a damn good return. However, I don't own any CX yet -- it's on my watch list. I feel like we should wait to see what the economy does and what Cemex's sales and margins look like before jumping in. Lenders could be unwilling to refinance the debt that starts coming due in 2012 at decent terms if we don't get a nice recovery in construction and some large stimulus projects that require lots of building materials. In fact, there are targets that CX has to meet by the end of the year (see http://www.reuters.com/article/idUSTRE68M3Z220100923), and if they don't meet the targets, they will be forced to take actions that reduce the value of the company (asset sales at low prices, for example). Better to wait and see what happens. I'm also interested in TXI, which has some of the same dynamics as CX, except that it is unlikely that TXI will perform to potential in 5 years without some shareholder activism. To that end, it's interesting to see Longleaf and Nassef Sawiris, the Orascom guy, loading up on shares. TXI just put out an interesting presentation that details the potential operating income they could earn, but that's under a rosy return to normal scenario. Additionally, I have no confidence that current management would be able to achieve those aspirational goals. I feel like CX and TXI are ones to watch and jump into when we get more information, especially since there are companies out there that are even better values.

I think that when WEB said there would be no double dip, he was referring to the NBER definition of recession. But in his opinion, a better definition of "recession" would incorporate the employment status/financial health of the population rather than just focusing on GDP. By that definition, we're clearly still in a recession.

Nothing wrong with having a hard and fast rule like the one Baoxiaodao has if that prevents you from making mistakes or somehow makes you analyze things more thoroughly. You may miss out some opportunities, but over the long run, you could be better off, especially in situations where bankruptcy or fraud is a real possibility.

0% at the moment.

I purposefully omitted his insurance operations because I wasn't as clear on how the insurance operations might give him insight into the broader macroeconomic picture. Let's try not to turn this into a discussion about/criticism of Buffett over Level 3! I don't anything about the company other than that some people have lost a lot of money following Buffett/SAM/FFH into it.

Well, what if Buffett had said that he believes there is a very low probability there will be a "double dip" recession? You're opposed to the way he framed his beliefs about the economic outlook because it suggests certainty. But we all know Buffett would not be so foolish to believe that there is 0% probability there could be two successive quarters of negative growth. My interpretation of his statement is different. First, I take it to mean that he thinks there is a very low probability there will be a double dip recession. Second, I gather that he used emphatic language in order to convey his beliefs in a way that shows that he is not hedging his bets, and in order to bolster confidence, as he is seen as a credible figure among both businessmen and lay people. Those two objectives are not mutually exclusive. I'm heartened by Buffett's statement not because he is a great investor and because we all admire him on this board, but because he controls businesses that should give him great insight into what's actually happening on the ground. He owns an electricity company, which allows him to see what industrial activity is like, as usage can go up and down quite a bit when industrial activity changes materially. He owns one of the largest full-service residential real estate brokerage firms in the US, which gives him insight into what the housing market is going through. In fact, he owns a number of businesses with prospects that are directly tied to the housing market. He owns McClane, one of the largest grocer/foodservice distributors in the US, which gives him an outlook on whether people are cutting down or increasing their consumption of essential consumables. He owns one of the largest toolmaking companies in the world, which gives him some insight into whether factories are tooling up for new production. He owns a railroad, which gives him a pulse on the raw materials, inputs, and supplies that are being shipped around the country. The macroeconomic outlook is very much reflected in these railroad shipments. It's madness to ignore someone who has that much real economic data at his disposal but be more than willing to rely on a statistical indicator like the ECRI or on speculation by pundits, bloggers, and board posters! Finally, it is true that the market can affect the economy -- which I think is the same thing as saying that aggregated expressions of confidence (or lack thereof) can have an effect on how people behave -- and vice versa. But to connect market fluctuations directly and substantially to economic activity doesn't seem right to me. We shouldn't be using the market to predict what the economy is going to do but should be using direct economic data that is available to try to get a real sense of what's happening. Bottom line: maybe he's right, maybe he's wrong, but we shouldn't discount Buffett's opinion, as it has much more value than most commentary that is put out there.

Let's not forget that there is a difference between saying that the market is undervalued, saying that the economy will not go into a double-dip, and predicting where the market will be in the short term. Buffet was dead right when he said to buy in October 2008. He wasn't timing the market, though. He was saying that based on what he was seeing, the entire market was undervalued, a call he rarely makes. I hope he is right about the economy.