txlaw

Sharper, are you saying that you think there will be a crash because the Fed, the federal government, and other governments will wait until a crash happens before there is another round of QE and fiscal stimulus? I hope that is not the case.

If we are talking about entities of a modest size, then I would go with choice 1 all the time, assuming you could buy great businesses. Because if you can buy a great business that earns high returns on capital, that has room for growth, and where you can allocate excess cash that flows into your coffers as you see fit to other business or investments, that seems to be the best of all worlds. In other words, if BRK were the same size as FFH or smaller, I'd go with Berkshire every time, knowing full well that many of the businesses WEB would buy would be float-oriented businesses.

I thought this was an interesting read. Found it off of Simoleon Sense.

With SHLD, it's probably wise to assume a continual decline in cash flow from the domestic operations. But even assuming such a continual decline, I still come up with a runoff value that is higher or equal to the current price. And that's assuming that cash will just sit there on the balance sheet and not be deployed in any way. Granted, though, how you value the real estate will have a big effect on what that runoff value is. The upside comes from Lampert possibly deploying the cash from runoff into great investments/businesses. Or from buying back shares that trade at a price substantially below runoff value. So long as it does not affect SHLD's ability to get financing, I'd love to see the price tank so that Lampert could scoop up more shares.

I'm with you, Premfan. At worst, SHLD is a cigar butt where runoff value is materially higher than the price at which SHLD is currently trading. I believe this because I think Lampert is a great capital allocator who will maximize the use of cash that comes into the coffers and who will not destroy the value of the good assets held by SHLD. If Lampert sees that Mr. Market is quoting him a price for SHLD that is substantially lower than runoff value, he will buy it hand over fist. Now, in a deflationary environment the cash inflow could noticeably deteriorate at Sears, reducing the runoff value of SHLD. But such a situation also could lead to a market price that falls much more than runoff value is reduced, giving Lampert a chance to buy back even more stock at rock bottom prices. It's our job to handicap the likelihood of such an outcome, and it seems like at the current price of SHLD (sub $65), we will do fine.

I would take Berkowitz at his word on whether keeping the fund open is advantageous to existing shareholders. But regardless of whether you trust him or not, I think he points out some good examples of how keeping the funds open have helped out existing shareholders. Could he have done the ACF ABS deal if he didn't keep the fund open, and would the outcome of the ACF investment (both common and bonds) have been as good if he didn't have the deep pockets to help them out during the depths of the financial crisis? Could FAIRX have participated in the GGP bankruptcy in a material way had he not kept his fund open? What else is coming down the pipeline in terms of recapitalization transactions? Berkowitz's argument is that size matters in this environment. There are so many macro discussions going on right now talking about how we're still in a deflationary environment and how balance sheets need to be repaired. That means opportunity for those who have large amounts of cash to deploy in a distressed environment!

Wow, great thread. Some things that haven't yet been mentioned: -Right now, I believe the IP-backed notes are carried at $900 M, but one has to wonder how much they would be worth if the brands are distributed in other channels in the US. It will be interesting to see how the ACE Hardware deal changes the royalty stream going forward. Does anyone know if Craftsman and the other Sears brands are sold outside the US, Canada, and Mexico? -Apparently, Sears has one of the most conservative ways of valuing inventory in the retail industry. I got this from a Bruce Berkowitz interview where he mentioned that he talked to a well-respected industry inventory consultant. -Bruce Berkowitz also mentioned in an interview that the tax value of the real estate was $80 to $90 per share prior to the bust. That was at 122 M shares outstanding. So that gives you an interesting number to adjust downward as you see fit.

Haha, yes those comments were interesting. I believe he said the same thing about his mom firing him in another interview too. The $1 a share earnings lines up with Ackman's comments about Citi's earnings power.

Thanks for posting, guys. Really interesting to actually see Berkowitz tout MBIA as his one investment.

Ackman's latest letter describes the Stuyvesant town deal in a bit more detail: http://www.scribd.com/doc/36474286/Pershing-Square-Q2-10-Investor-Letter

Thread T-bone is referring to: http://cornerofberkshireandfairfax.ca/forum/index.php?topic=2677.0

I was at 20% a month ago and am now down to 9%. Hopefully, I will be able to contribute a bit more to my account in preparation for even lower markets.

Does anybody follow Capital Southwest Corporation (CSWC)? When I apply a 35% capital gains haircut to the shares held of publicly traded companies (including HLYS), apply a 10 multiple to RectorSeal, Whitmore, and Balco, add cash, mark down all other investments by 75%, and subtract liabilities, I get a NAV well above what CSWC is trading at. For those of you who have followed the company, is it likely that they will use the cash proceeds from their Lifemark Group divestiture to buyback shares? Does the company always trade at such a large discount to NAV? CSWC appears to be in the portfolios of LUK and Third Avenue, so that gives me comfort that this is not an Allied Capital-like situation.

It's important to note that today's web browsers require a pretty good chunk of horsepower; and as more functionality goes online, complexity will continue to increase in that area. While it has gotten more efficient, running javascript in the browser is still a lot more computationally expensive than running native code. I haven't run tests, but certainly it takes more computing power to run google docs than an older version of MS word. It has always been somewhat frustrating to me that MS Office 97 did everything I really needed and ran quickly on a simple pentium laptop...while today's software would not even start on a machine with only 64M of ram. [MSFT has made billions on locking people in to an upgrade cycle they don't actually need]. So while huge number crunching may move away from the desktop, those "lightweight" interfaces aren't necessarily that lightweight. Just *try* running Firefox or Safari on a machine only a few years old. The general point is that it seems that computing capacity has always increased to fill whatever you've got available, and I don't really see an inflection point yet. There are some possible ones, but nothing that is a done deal. Your point is well taken. I don't mean to suggest that the newest devices to be adopted will be a step down in computing power. The latest versions of the iPad or Android tablet/netbook will use much better hardware than previous computing devices. So perhaps calling these "dumb interfaces" was a mistake. But I do think that the computing power that we will need locally -- in front of our faces -- will be very, very low cost and much smaller in proportion to total computing power used because of the ability to shift computing power to remote areas.

Agreed. :)

Privacy and data security issues are absolutely huge concerns for businesses that they will have to get over before they begin to adopt cloud computing en masse. However, I believe that the efficiency advantages will be so great that given a certain level of security, businesses will begin to switch to cloud computing. Large scale, trusted cloud service providers will be the ones that businesses turn to to host their critical business data and applications. Remember that "cloud computing" is an incredibly broad term that encompasses a number of different types of businesses: SaaS, PaaS, IaaS. Businesses will mix and match as they see fit. There will also be differences in the way small businesses utilize the cloud versus large businesses. Even assuming that businesses don't host data and applications outside of their private networks, virtualization technology could make the use of PCs for business obsolete. Instead, employees will work on dumb screens/interfaces with the actual processing happening on servers managed in-house. Server processing becomes the new game in town. Intel can no longer count on selling high priced, high margin processors directly to end users, whether consumer or business. Even if they maintain their margins per unit, they won't be able to maintain price per unit. That's why Intel has to expand to all computing devices, not just what we think of as PCs. They need to be in smart phones, tablets, surface computing devices, TV/cable boxes, appliances, cars, etc.

Forget about it cloud computing will not get into the gaming world before another 10 years. The amount of bandwidth/latency needed is so high that I just don't see the network improving fast enough for those needs in the mean term. If you believe cloud computing is going into the gamer world then rush on those level 3 shares they are going to make a killing. Talk to your kids and ask them if they would mind their latency going from 10ms to 100ms. BeerBaron Well, there may be an opportunity for the last mile telcos/cable companies to get into the on demand gaming space in order to fill in the gaps of the network. Latency should go down as these guys -- TWC, CMCSA, T, VZ -- upgrade their networks and set up servers to host games locally. In any case, I think you may be missing the forest for the trees here.

Packer, you're right that cloud computing has been around for a while. In fact, Larry Ellison has pointed out that it's really a buzz word that is way overused these days. However, one of the major hangups for "cloud computing" has been the quality of one's network connection. When we get to a world where everyone can get a hiqh quality network connection with lots of bandwidth and low latency, then computing power can be moved to remote locations. It's like the mainframe is returning now except that we are going to have really large scale mainframe providers. This means that the concept of needing a powerful PC to get work or play done will become obsolete for most consumers. For example, I used to use Microsoft Excel to track my investments and for my number crunching. Now I use Google Docs, which runs through the browser. I only need a very simple machine that can run my browser (Firefox) to get most of my investing work done. Or think about gaming. I'm not a gamer, but my understanding is that the latest games usually require the use of high end graphics cards in order to have the best gaming experience possible. But that could change if our network connections get good enough. There is a company called OnLive that has made major inroads into the delivery of computationally complex games over the network. What I think this means is that most consumers, including in the developed world, will no longer be willing to shell out money for a high end processor. They will buy iPads or Android laptops/tablets instead, both of which can run on less powerful processors than the ones Intel is famous for.

Zorro, I think your view of the economic outlook is sound. However, it's way too hard to figure out how that translates to what the market is going to do. Having said that, I will rather hypocritically make a prediction on the markets that has very little effect on the way I invest. Prior to the crash, there were signs that there would be an Irving Fisher-style vicious cycle downwards in the capital markets. There was so much distress selling because investment companies, banks (commercial and investment), and insurance companies were overleveraged and sold all at once when things started to spiral downwards. Derivatives were a ticking time bomb. The financial system, comprised of both the regular banking and shadow banking system, was on the verge of collapse. I'm not sure that the requirements for such an upheaval in the markets are prsent now, at least in the US. Therefore, I predict that we will not have a crash, though we probably will see markets lower than where they are today. I am of the view that we will see range bound markets in the US going foward. Don't know about foreign capital markets.

The competition comes from AMD, Nvidia, TXN, new ARM processor manufacturers, and hardware companies that decide to use their own processors (like Apple with its iPad). But the real story is that there is a paradigm shift happening right now -- over the next decade or two, cloud computing will become more and more important, and the quality of our Internet connection will become the paramount concern for most consumers, not the performance specs on our personal machines. What this means is that the "PC is a truck," as Steve Jobs would say. That is, the engine driving the hardware is way more powerful than most people actually need. Simpler hardware with much better interfaces connected to a world of applications through the Internet is the future. Intel creates best in class CPUs, but demand for such CPUs is going to be substantially less going forward. Therefore, they must radically change/expand their business in order to survive. Packer, you note that Intel should have just done a JV with McAfee. This is an interesting observation because that's exactly what they've been doing for the past year and a half. Apparently, what Intel saw from McAfee has impressed them enough to where they want all the value to accrue to Intel shareholders. You either trust them on the synergies or you do not. But given the ethos at Intel and their track record, I believe they know what they are doing far better than the finance guys on the Street, who wouldn't know business strategy if it kicked them in the ass.

Haha, Wolfram Alpha! Twacowfca, you must be a geek! :D (That's a compliment.) True, GOOG is not invincible. They are far ahead but not invincible. Actually, imagine how formidable a competitor a MSFT/Facebook combo would be against Google? That combo would gain ground very quickly. Nevertheless, even if Google loses market share, the market size is so enormous over the long run that the companies in this space -- which I think is a natural oligopoly market -- will do very well over time. Perhaps GOOG will be Coke, Bing or Facebook will be Pepsi, and Wolfram Alpha will be . . . Dr. Pepper?

Cardboard, I am always worried about a secular decline in a company's core business. We see a secular decline with Dell. We see it with MSFT. We see it with the telcos. I believe we will see it with cable companies like CMCSK in a few years. I do think that Intel will make less and less profits per CPU sold at an accelerated rate going forward, which will lead to decreased revenues -- or at least I am worried about that. However, I think that the acquisitions that Intel has completed over the last few years -- for example, Wind River and McAfee -- sets Intel up for a future where their chips (and bundled software/services) will continue to be wanted by device manufacturers due to their being best in class. More importantly -- and central to my thesis on Intel -- is that because of these acquisitions, Intel will be able to greatly expand into new markets that will results out of ubiquitous connectivity, low cost sensors, and low cost computing power, i.e., the Internet of Things. This expansion into new markets, I hope, will allow Intel to mitigate declining revenue in their core business. Andy Grove and the Intel guys are famous for their motto, "Only the paranoid survive." This is an acknowledgement by Grove of the ease with which a high technology company can be destroyed by new technologies and competitive dynamics in their industries. Intel has been a survivor in the tech world because they have been paranoid. Grove talks about "strategic inflection points" where the "old strategic picture dissolves and gives way to the new." We are at strategic inflection point in the high-tech world, and I believe that Intel is executing properly. When I handicap how Intel will fare going forward, I am willing to purchase Intel at current price levels. I like the risk/reward here. Perhaps I'm wrong, but only time will tell. I agree with you here. I define a "high quality" company as a well run businesses that has a business model that will continue to generate cash even if management is not stellar. Management merely has to be decent for a "high quality" company to thrive. JNJ, KO, and PG are good examples of such companies. With MSFT, CSCO, and INTC, you have to have management that is excellent in order for their business to survive, so they are not "high quality" companies. GOOG is a bit of an outlier because what people think of as the core business -- web-based search -- has a very large moat around it and has huge growth potential with very little capital investments. There is a virtuous cycle aspect to it too because the more business they get, they better and more far ahead they get. Furthermore, they are executing on their goal to be a search company, regardless of platform. That business will continue to throw off lots of cash and will be hard to attack in their existing markets (though Facebook is probably a big threat). The other revenue streams that will come online from their forays into content distribution, their attempt to be an Internet infrastructure/platform provider, and their best in class team of computer scientists, are gravy and present lots of optionality for the investor who is satisfied with paying a reasonable price for a great business. Furthermore, their nascent information acquisition-focused businesses are what make Google unique among the high tech companies (it also makes GOOG a bit scary if you care about privacy). So I might actually consider GOOG a high quality company.

I actually bought a little bit of INTC today because I don't think the Street is right about the acquisition. I'll lay out my rationale, and I'd like to see whether people think I'm smoking crack. But please be nice. Okay, so Intel clearly paid more than a fair price for McAfee when you consider McAfee as a standalone company. But while Intel is getting McAfee's revenue stream at a very high price, I believe that the strategic rationale for the acquisition is really to increase the durability of their business, which is to sell computer processing hardware. In other words, I think the acquisition must be viewed much the same way as one would view "maintenance capex" for a low tech business. Intel has dominated in the PC sphere for a while now, but they are facing attacks on many fronts. ARM chips threaten to cut into Intel's CPU market share. Nvidia is trying to have the GPU replace the CPU. Apple and other hardware manufacturers could cut Intel out of the mobile, Internet-connected device space. Cloud computing threatens to make ever increasing processing power for computing devices less necessary, which means that Intel could see dramatically less profit on an absolute basis for each processor sold over time. The only way that Intel can hope to keep its current owner earnings power stable is to try to defend its current market share and expand substantially into other places that will need chips that Intel could produce. If Intel wants to have its chips everywhere -- in appliances, TVs, mobile devices, ATMs, cars, smart grid devices, and in any other objects connected to (or part of) the "Internet of Things" -- it will need a way to keep its processors differentiated from the multitude of competitors that could emerge over the coming years. Buying a security software company that integrates security software and a security service into its chips and embedded software could be a way to do this. That is, if Intel can somehow attach a security service to every chip they sell that is connected to the telecommunications network in a way that makes the associated device vulnerable to threat, that could be a pretty good way of keeping their business from evaporating over the long run. Thoughts?

This is a serious issue for JNJ, but I think there is a high probability that they will make things right. You can bet that Buffett will have something to say about it behind the scenes if they don't take appropriate action. I don't own JNJ for my own account, but I'm planning on buying some for my parents' account.

QE 2 could very well be coming soon. It sure seems like that's gonna happen. Bill Gross just arguing for QE2 just a couple of days ago. Munis will default, structured finance bonds will continue to default, and MBIA will have to sell assets they hold to make good on their promises (paying out on defaults over time). From MBIA's perspective, they'd love to sell the assets they own at prices where yields are super low. Once the lawsuit is taken care of and they are able to write new business from their "good bank" subsidiary, they will have a hard market for municipal bond insurance and they will deploy whatever capital is left from the "bad bank" into their "good bank" subsidiary. For MBIA, there are lots of similarities to what's happening with Citi.