merkhet

I agree here -- Berkowitz likely sees value above $62, which is where the stock traded earlier this year, and I doubt that recent volatility for his fund as a whole would change his opinion. FWIW, I estimate that AIG is trading for about 1/3 its intrinsic value, but I don't want to hijack this thread into an AIG thread or anything...

AIG has about $30B of DTAs, but present value is probably only about 1/3 of that. AIG has a book value of about $100B, but that doesn't count any of the DTAs.

The real question is the following: Are they doing this because: (1) They don't see sufficient value in the markets right now (2) They believe their earnings engine is going to explode over the next few years (3) Both (1) and (2)

Haha, that sounds about right...

Exactly right -- I've been buying all day, actually. I've still got about 33% in cash. (Well, with a 10% position in Fairfax, which I view as being good as cash, it's about 43% cash & "cash equivalents.")

Exactly. :-) I know I posted this in the Berkowitz/WealthTrack thread, but I love the quote "In February I was a hero, now I’m a bum. So, we’ll see six months from now. Revenge should be sweet." Six months ago, people (sans people on this board, of course) thought Prem & Co. were bums for hedging their exposure to equity markets -- nice to see them vindicated.

I've looked at ARO in the past, and I think it's likely to provide a stellar investment over time. They've cloned the original The Limited playbook (have a fast manufacturing/distribution process and immediately clone the new styles) as it pertains to J. Crew, American Eagle, The Gap and Abercrombie.

This might be a little simplistic, but I'm looking at the warrants in the following way. According to ValueLine's 10 year table, Wells has been able to compound book value at roughly 10% per annum. So in 2018, their book value could be roughly 2x the current book of about $24. Since Wells has historically been one of the better banks, it has been able to historically earn an ROA of about 2% and a ROE of 20%. So, by 2018, Wells should be earning about $9.60 a share. Slap a 10x multiple on that, and you've got a $96 share price. With a strike of $34.01 (ignoring any dividends that might come down), you've got a warrant price of about $62, and you can buy a warrant for about $8 per warrant. @ 7.75 over 7 years, that's a 34% CAGR. Alternatively, breakeven is $34.01 + $8 per warrant = $42.01. In 2018, I figure it's unlikely that Wells Fargo trades below $42, so it's unlikely that you'd suffer a permanent loss of capital.

What the hell does the market price have to do with his being right or wrong? One of my favorite parts of the Consuelo Mack interview -- "In February, I was a hero. Now, I'm a bum. So we'll see six months from now." ~ Bruce Berkowitz

Ah, found it -- I love the Kindle. Also, for those that are interested, re-reading Greenblatt's "You Can Be A Stockmarket Genius" provided some insight on how Greenblatt valued LEAPS -- he goes into detail on Wells Fargo (a coattail on Berkowitz's 1992 OID interview, actually).

Uccmal, where did you get the info re $1 million to buy BC Power Bonds? I knew Charlie used margin, but I didn't know specifics. Greeenblatt definitely used LEAPs and warrants -- he mentions it in his first book.

How does the leverage "in the system" affect Bank of America specifically?

I can't recall if he's said this before, but in this interview, he indicated the following: $36 billion PTPP for Bank of America. Potentially $3 per share in earnings. Additionally, I believe he said he's thinking AIG could double its book value by 2021.

[amazonsearch]The Holy Grail of Macroeconomics[/amazonsearch] I know most of us spend very little time on reading the macro tea leaves, but this is a pretty good read nonetheless.

Someone correct me if I'm wrong, but I believe he means Berkshire in this instance. At some point, Mohnish viewed Berkshire as being "good as cash" in the event of a crash -- but in 2009, that wasn't true. So now, he just holds the cash.

I just small chunk things. It provides a small boost to happiness when you accomplish a small chunk item. And the dopamine/serotonin seeking behavior does the rest on auto-pilot.

None of the above. We're on the US chart, only you don't know what that chart looks like -- time will tell us. Well, it depends on the politicians now... http://static.businessinsider.com/image/4bc5bb587f8b9a9c28420700-590/slide-141.jpg Notice that the dips in JohnDoe's chart parallel with the dips in Richard Koo's slide concerning austerity measures "fiscal reform"... The perverse thing is that I think a lot of people think that the market is suffering because we're no longer triple-A (and Europe, etc.) and they also believe that solving the debt problem will "reverse" the slide that began with our triple-A woes. So, oddly enough, I think we'd get an upswing in the markets if we took steps to reduce the deficit drastically (say, if the Republicans win and begin appeasing Tea Partiers) -- and that would be the moment to put on hedges for the cardiac arrest that's forthcoming... (And that'll be the 2 minutes this year that I spend futilely prognosticating macro...)

Looks like no QE3

BRK does make $5B investments in common stock year-in and year-out. The question is how often does BRK make a $5B investment without moving the price significantly. Of course he's not going to go out and buy it all in a day or a week -- the two important things are (1) will your volume/purchases on a daily basis move up the stock price and (2) can you pick up all you need before you have to report that you're doing so? Again, not really what I was saying. There are few opportunities to pu $5B to work at 6%, but both Warren and Charlie have said that most people forget opportunity cost. If you're putting money to work at 6% you're forgoing the opportunity to put it to work 6 months, 1 year, etc. in the future for much greater than 6%. I'm sticking to my position that the investment was not about the 6% -- I mean, it's better than sitting around in treasuries right now, but his real goal is the warrants.

Prior to this announcement, the market cap of BAC fluctuated between $60 and $70 billion. If he tried to buy a slug of $5 billion of shares on the open market, what do you think would have happened to the price of the stock? It would have soared a lot higher than $7 a share by the time he was done. Instead, he lends $5 billion @ 6% and receives warrants for 700 million shares with a strike of ~$7 per warrant. In other words, he gets to invest $5 billion in Bank of America's common without moving the price. I don't claim to have any personal insight into Warren's thinking, but he's not making this investment because he's trying to earn 6% on his cash. He's buying into this for the warrants/common.

It's too bad that Warren made this "terrible" investment. He "used" to be such a good investor. I bet he couldn't articulate the bull thesis either. ;-)

You're right -- mis-labeling on my part. Total PIIGS exposure and total PIIGS sovereign exposure is what I should have written. Thanks for the French numbers.

Am I reading this incorrectly or is Blodget basically saying -- "Yea, I didn't dig into Bank of America's balance sheet before I pulled numbers out of my @$$"... I read Yves quite frequently, and she has a bit of a mea cupla up this morning. (For the record, I find her generally very good, but in this case, I think she's off.) http://www.nakedcapitalism.com/2011/08/more-on-the-opacity-of-bank-of-americas-financial-statementss.html You can see Thompson said they have $16.7 billion and then said they have $1.6 billion. The 10-Q clarifies matters Bank of America's total European exposure is $16.7 billion. Bank of America's total European sovereign exposure is $1.6 billion. I guess Yves (and by extension Blodget) got confused because neither read the actual 10-K/Q before posting. Oops.

Another data point: http://www.gurufocus.com/stock-market-valuations.php

I second this -- FFH and BRK are always April/May so it'd be nice to have a Oct/Nov event.