bmichaud

http://finance.yahoo.com/blogs/breakout/dow-16-000-explosion-bubble-speak-bullish-stocks-180149807.html

Quite a set of accomplishments to be "nothing to write home about." I would say that he has something going on if he can attract $600MM in assets, attracting significant amounts of capital isn't easy. If he's kept it then I'd presume his clients are satisfied with his performance as well which is something to speak of as well. I should have been more specific. From a public recommendation standpoint, from what I've observed he has not been phenomenal - i.e. he is not particularly actionable.

Well that's a given 8)

Wall of worry. Difficult… Wall of worry usually is about the economy… That would make sense to me… Not prices! If everyone thinks prices are extremely high, who is buying?! Would you buy, because you worry that prices are high?! I don’t understand… Gio If everyone thinks prices are high and is thus underinvested, by definition that creates buying power. Conversely.... If everyone thinks "this time is different" and is thus fully invested, by definition all of the buying power is used up.

Wall of worry.

According to the Financial Times lexicon: http://lexicon.ft.com/Term?term=asset-bubble

It would be the first one to be seen in advance by the "crowd". The crowd was not calling for a market bubble during the tech bubble or the housing bubble. His general point is that when everyone is saying the same thing, it's likely already discounted in the price level.

He is nothing to write home about. He writes a newsletter and manages around $600MM. I only posted it b/c he happened to touch on something I've been observing quite a bit over the past month - i.e. everyone is talking about the equity markets being in a bubble. This is entirely antithetical to my inherently bearish nature, but given the psychological effect monetary policy has on equity market participants, I can't help but view the following as support for a true equity bubble reaching 30 to 35 times normal earnings: 1. Given the market is still talking about "tapering", I believe the market is potentially underestimating just how "easy" Janet Yellen is 2. The BOJ is going to do "whatever it takes" to arrest Japanese deflation, and is thus likely to keep the pedal to the medal for an extremely long time 3. The Eurozone is near if not at deflationary levels, and the only logical response is all-out quanitative easing since rates are now nearing 0% If normal earnings are $80 to $90 per share, a bubble-like level would be anywhere between 2,400 and 3,150. I agree with Lance - once things reach these levels, then investors will begin talking about a "new normal".

Good note here by Lance Roberts on how there is too much bubble talk in the markets right now. Further support, IMO, for NDR's call that we are in a secular bull.... http://stawealth.com/daily-x-change/1881-too-much-bubble-talk.html

I think MCD is not a top holding, because eating habits change more than drinking habits and MCD owns a lot of real estate. That's probably right regarding habits, but to the degree that would imply that is why WEB avoids it, I'm not so sure about. MCD has grown 6% a year for a very long time while returning over 80% of earnings to shareholders, thus implying extremely durable moat. Perhaps KO is at 7% and 90%?? Not sure. But the difference is negligible, especially from a valuation perspective when MCD was under operational pressure in the early 2000s. Are you saying the RE is a negative for MCD from WEB's perspective?

There is always some type of leading indicator. For example....SHLD went from $37 to $60 long before the LE spin was announced, thus once the spin was imminent, the market already had it sniffed out. Of course 3 months ago the market didn't have it sniffed out - which I'm assuming is what ur talking about - but 3 months ago it wasn't "imminent". Gold rallied long before the true reasons for its multi year rally became known - financial crisis, low growth, deleveraging and money printing - thus by the time those events began to materialize, it was already in the price of gold. So perhaps Cardboard is right, but is far ahead of the market, and all of the assets that would rally in that scenario have yet to begin sniffing it out. At least that's how I look at it.

Very interesting. I don't pay near enough attention to the Iran situation. With market sentiment at extremely optimistic levels right now, I think there is pretty significant vulnerability to an event like this. Though I would think various geopolitical safe haven markets would have this sniffed out by now if there is such a high prob in the relatively near term. It is amazing how difficult it is to think of a risk that might upset the market right now. In early 2012, the market would have been beside itself at the lack of progress on an EU bank union, low EU inflation and lack of certainty surrounding the legality of the OMT program. But those things no longer matter - Ms. Yellen will come to the rescue no matter what happens.

I cover the stock for my firm - Buffett must've seen my recent report rating it a buy with a 16% projected 5y IRR :) XOM is the Berkshire of big oil - not a care in the world for quarterly results, focus on the extreme long term and high roc, minimal debt and laser-like capital allocation. I've long wondered why BRK hasn't owned this. Not sure why WEB wasn't buying in 2010 when it was below $60....not much has changed since then save the share count. Also have wondered why BRK doesn't have MCD has a top holding. Perhaps just a matter of time.

I can't find a good clip to attach, but was able to see a quick 3 minute clip. Berkowitz sounds like a f$cking moron talking to Faber - wouldn't answer a single question, doing nothing to make his case. I've never been able to stand listening to him anyway, particularly in that ridiculous interview with Moynihan in 2011, and now this....doesn't instill much confidence in what he's doing....

I'm just using AIG as an example. The huge discount to BV for AIG was created by the govt overhang. In the case of the F&F NewCo, the overhang would likely be created by the mere fact you'd be buying into a brand new entity. But main point was that the AIG overhang was assigned by the market DESPITE a highly profitable business already in place. With the F&F NewCo, not only are you investing in a brand new entity, but there is not really a business already in place (essentially the plan would give birth to a new industry over night), thus I would guess the overhang created by the market would be that much more punitive. But yes I would agree taking a stake now would likely be premature. Given rampant insider information finding its way into stocks, I imagine the recent run-up in the prefs was due in part to this plan. As with most event-driven situations, there is a lot of volatility, and any hint of a delay or dismissal of the plan would send the prefs back down.

So I guess it all goes back to the legal argument. If the govt never views the prefs as legitimate claims on the business, then it could go straight to the $52B rights offering and keep the money itself. Whereas if the prefs are viewed as legitimate claims, then the govt could so a $52B rights offering, pay off the prefs in full and keep the extra ~$17B for itself. Under the proposed plan, and assuming the prefs are viewed as a legal claim on the business, then the govt extinguishes the $35B of prefs for a simple exchange of assets but without the profit a rights offering would bring. I guess one could argue that if it did a rights offering, it might be difficult to raise $52B due to the uncertainty surrounding a new business (I mean look at the discount the market applied to AIG for the govt overhang with an highly profitable existing business in place!!), and thus this plan would be superior due to significant capital already in place ready to go. I still think there has got to be some margin I safety in all of this that we r not seeing (if it is not in fact this plan) because I just so not see how one exists outside of this plan. If the legal argument fails, there is no MOS. The prefs are zero. Yet BB says there is a MOS and has sized his position accordingly. Who knows....

I'm afraid that I'm starting to sound like a broken record, but it seems like the government has two choices at the moment: (1) Keep the run-off piece, and (2) Provide $34.6 billion in cash/assets in exchange for private preferred + raise $17.4 billion in private capital for the mortgage insurance NewCo OR (1) Keep the run-off piece, (2) Keep the $34.6 billion in cash/assets, and (3) Raise the full $52 billion in private capital for the mortgage insurance NewCo I don't know why they would choose the former and basically gift $34.6 billion to Fairholme et. al. There's practically no reason for it if, as I believe, the legal argument is looking weak. They can still put the new business in private hands by just raising the $52 billion outright. (Especially since I think bmichaud's analysis is roughly right in that the company will be worth significantly more than the $52 billion.) Great points. Could it be as simple as...with this proposal there is an automatic $52B already lined up ready to go, versus the govt somehow pitching to the private sector on its own why it should invest $52B on what would likely to be far worse terms than the current investor group would be getting by purchasing the prefs at a large discount to FV? As BB says in his proposal, there must be a margin of safety in everything. Not that I would expect somebody like Nancy Pelosi to grasp such a concept, but the investor group has a large embedded MOS with the current set up in order to guard against the risk of taking a long-term stake (with a 5y lock-up) in an entirely new business venture. Or perhaps you're right Merket, and the govt could simply raise the capital via a consortium of insurance companies??

And again - Bruce is virtually gifting AIG with a massive new business opportunity here. He made a comment about AIG eventually stepping into FF's shoes awhile back, but I would have never guessed he would orchestrate the change himself. Very very cool stuff.

Let's say it is levered 10x with debt costing 4%. Total assets are $520B, say with an average yield of 7%. So NIM on these assets would be 3%, or $15.6B in $ terms. Say they guarantee $1T starting out at an annual premium of 50bps, exactly matching the estimated loss rate. So the guarantee fee and annual loss rate are a wash for income stmt purposes. If the expense ratio is 40% (not sure off the top of my head what this looks like for AIG, but I would assume it would be lower than a bank that has an expansive physical footprint) then Net income is $5.62B at a 40% tax rate. So ROE is just over 10%, a reasonable return for a utility-like business. However, the incremental ROI on retained earnings is likely far higher than book roe as there is no need for incremental man power to manage an expanding base of float. And given the growth opportunity of this business, the FV PE on NewCo would be at least 15x I would think. So NewCo FV at 15x 5.62 would be $84.3B. The prefs 66.5% share of this would be $56B versus the current market cap of around $13B. Hopefully our brilliant Congressmen provide some attractive entry points over the next several months :) Edit: I miscalculated NIM by calculating it as if debt funded 100% of the assets. Required debt would be 468, and would cost 18.72 versus a 7% yield on 520 of assets, or 36.4. So NIM is 17.68 versus my 15.6 calc. Thus the estimated FV would be even higher....

What are everyone's thoughts on the leverage that this company could handle to be AAA? Would 20x be too high? What kind of a loss rate would guaranteeing 1-4 family mortgages have? 50bps? If the big banks are guiding to 100 mid cycle, I don't see why this would have to be more than 50.

That's the brilliance of this plan - the govt keeps the cash cow while the future mortgage business is placed into private hands!! Another interesting piece is the run off value that would accrue to the common. I assume that would not actually happen, but why not throw it in there!?

This seems like an extremely serious proposal by Fairholme and not the "bluff" Dazel was referring too. Perhaps I'm misreading the situation....

Investor group pitch book: http://ftalphaville.ft.com/2013/11/13/1694232/private-capital-now-say-hedge-funds-with-frannie-preferreds/

I am curious how the prefs would convert into the new insurance cos. Say the $34.6B outstanding is trading at 36% of par, that's a market value of $12.5B. Under the investor group's plan, there would be a $17.3B rights offering. Would the prefs convert at market value for total common equity post-rights offering of $29.8B? Or would the prefs convert at par....? Assuming 20X leverage on $29.8B of starting capital, allowable assets would be $893B. Assuming a NIM of 3.5% and an expense ratio of 55%, PTPP would be $14.1B. If the investor group requires a 15% ROE, pre-tax income would have to $7.45B at a 40% tax rate, which implies an annual allowable loss rate of $6.65B. Also - I am not even including the guarantee fees.... What would a mid-cycle loss rate be for a guarantee business? 50bps? 100bps? At 100bps, this pro forma insurance co could support a $665B guarantee book, and at 50bps it would be $1.33T. 2012 FNMA/FMCC MBS issuance was $1.3T according to their 10Ks. I assume this is a decent proxy for the annual market NewCo would begin to guarantee. The existing F&F guarantee book run off provides what I assume would be a huge growth runway. So what should NewCo be valued at? 20X earnings? 25X? At 20X the required 15% ROE-derived net income of $4.47B, the NewCo fair value would be $89.4B. The current estimated market value of F&F prefs, or $12.5B, represents 42% of contributed capital....and 42% of the $89.4B fair value is $37.55B. All that to say - the margin of safety part of this story is finally starting to shine through. Without a restructuring as outlined above or a legal victory, there is no margin of safety against the gov't pilfering 100% of F&F profits.

How is this not the best of both worlds? 1. The status quo remains the same for the current business (i.e. current bond holders have the backing of the USG) while Treasury gets to keep its cash cow 2. Private capital comes in to take over future MBS guarantees The group is simply buying the future guarantee business with an instant 85% mkt share of all new mortgage issuance. Is it not?