FCharlie

As a means to hedge against potential inflation that results from excessive QE and an exponentially growing U.S. national debt, are there any of us here building physical silver positions? My logic here would be that the monies paid for Social Security, Medicaid, Medicare, and any other entitlements currently exceed all tax receipts, the U.S. national debt is currently $16+ Trillion, and if budget projections end up as expected (They usually end up worse than expected), the United States is facing a decade of $1 Trillion deficits. Not sure of the exact statistic, but I think 10,000 baby boomers each day sign up for Social Security. Wow! At some point, the owners of U.S. Treasury securities will not want negative return investments. At some point, we will probably face a currency crisis. When? No idea. This could go on for many more years or we could face a crisis in 2013. Other reasons to own silver: Commodities tend to run in 20 year super cycles. We are only a decade into this one. Industrial demand for silver for solar, cell phones, computers, etc should continue to consume supply. A large amount of silver is consumed and disposed of as opposed to gold, which is mostly used for jewelery and coins and gold is rarely tossed into landfills. Precious metals, even with their decade long bull run, are still mostly unloved. Most people don't own gold or silver, and if masses decided to go in, there's simply not enough size or liquidity for people to own silver. If 200 million people woke up tomorrow decided to buy eight ounces of silver bullion each as a small $250 investment, those 200 million people would overwhelm global production two times over. That's 1.6 billion ounces of demand against 800 million of annual production, but actually against it's more like 8 times the actual amount of silver available for investment since again, most silver is consumed by industry. Seems like there are a lot of reasons silver can keep rising and not so many reasons that it could fall. The reasons that exist that would hurt silver prices would really boil down to the U.S. government getting it's finances in order, drastically cutting the deficit which would support a strong dollar. Likely? I think no. Thoughts?

So, first off, I've done very little research on this one and I'm sorry if I'm missing something obvious, but has anyone out there spent any significant time studying the JP Morgan situation where they supposedly are short 3.3 billion ounces of silver? My gut feel is that there has to be something to this story that the conspiracy guys aren't acknowledging. Any thoughts?

This brings up a never ending discussion. Should a business be valued based on it's assets or liquidation value, or should it be based on some multiple of it's income stream. I always seem to get stuck in the lonely camp of thinking liquidation value should be a minimum value, even if earnings are not great. These examples come to mind: Bank of America.. At one point, very recently, BAC was $5 with a $20 book value. Aig.. At one point, AIG was a $20 stock with a $60 book value Weyerhaeuser.. This was a $15 stock during the housing bust even though their timberland holdings were worth closer to $20 per share and they owned over fifty factories, they had a very profitable pulp business, and they are a top 20 home builder. Sears Holdings.. This has been a $30 stock more than once, even though they have inventory, net of accounts payable, of over $50 per share. What is the value of their real estate? Not sure exactly but when they sell fourteen stores for $440 million cash I think it's safe to say their real estate is worth more than it's book value. Book value of real estate for SHLD is $75 per share. Berkowitz thought $90 was conservative and that was with 125 million shares. And while they do have debt that I'm not counting, I'm also not counting any value for Land's End, Craftsman, Kenmore, or Die Hard. These companies obviously have had earnings problems. Bank of America because of Countrywide. Weyerhaeuser because of a depression in housing. Sears because it's a mess... but all of these still manage to produce cash. So, should Loews be valued on it's earnings or it's liquidation value? Is Bank of America worth 7 times earnings or it is worth liquidation value? What if their liquidation value is double or triple the current stock price? Why does it cost less to buy Sears than it would cost to buy everything they have for sale?

I'm wondering if anyone here views BAC as a forever holding?? I think anyone who was able to buy BAC at $4,$5, $6, $7 is sitting on something very similar to Philip Morris Companies, Inc back in 1999/2000. This would be the old Philip Morris that included Kraft, Nabisco, Miller Brewing, PM International, and PM Capital. This was a $20 stock with a 9% dividend. No one wanted it and it was in the $20's for years. Today those pieces are worth $150 and your dividend yield would be approaching 35% The sentiment shift on this will not be something that happens overnight. BAC could compound 20%+ for decades. Why would anyone sell that? Just curious. Did Buffett ever sell any AXP shares? I'd view BAC in the same category as American Express and Philip Morris. By the time BAC is $20, book value may be $30. By the time BAC's $30, book value could be $40. This can go on forever. The dividend could rise annually for the rest of our lives beginning in 2013. Sorry if I'm sounding overly hopeful here, I'm only 35 years old. I wish I had more Philip Morris back in 2000... And I say that even though I had over 25% of my portfolio in it.

I'm sure someone will respond by saying Bank of America's real problem was Countrywide, and that's very true, but consider this: Bank of America, from 2009 through today, has recorded net charge offs of almost $100 Billion Meanwhile, over this same time period, Bank of America has recorded a GAAP profit of over $8 billion. The business, Bank of America, has absorbed enormous losses but at the end of the day, it has remained profitable. This $8 billion of profits include huge goodwill write downs. The real pain to common shareholders comes from the massive dilution of their equity in the business. As it appears the dilution is essentially over, and BAC approaches a point of achieving Basel III well ahead of schedule, the logical next step is a decade of share repurchases. There is no need for any acquisitions, no need for balance sheet growth, and there is a limit on dividends. My hope is that ten years from today, BAC's share count is back to the old, pre-crisis share count, and we are sitting here with a $60-70 book value. Is this what most on here envision? When things finally begin to improve I'm going to have to constantly remind myself not to sell too early. I made an unfortunate mistake coming out of the 2009 crisis and sold too many companies purchased at dream prices after they had doubled, not holding on for the 300%-400% gains that would have followed. (Domino's Pizza at $6, Cheesecake Factory at $6, International Paper at $7, AutoNation at $7, Domtar at $20)

A couple of things that I notice from the small amount of time I've looked at this: In the 10Q they say During the first quarter 2012 we repurchased 6.1 million shares for an aggregate cost of $50 million, including fees.Through May 1, 2012, we repurchased an additional 2.6 million shares at an aggregate cost of $20.9 million, including fees, for a cumulative total of 290.8 million shares at a cost of $3.7 billion, including fees. It looks like the buybacks were mostly done at much higher prices, and the company was mostly out of the buyback market while the stock was at the lows. Also, depreciation is much, much higher than capex. What is behind that? Finally, a question.... What services does Xerox provide that a newbie to the stock might not realize? Thanks for the idea, and by the way... In my opinion, while massive dividend increases may force the stock higher, I think the most responsible thing to do if your stock is truly undervalued is to consistently buy it in the market, day in, day out, year after year, while increasing the dividend every year... Philip Morris Intl. may be the best example of this I know of. Earlier someone mentioned Safeway. Safeway, based on it's free cash flow, could pay out a 15% dividend yield and still have cash flow to repurchase 6% of it's shares annually at these prices. Of course with a 15% dividend the stock price would probably double, but I would rather see them do what they are doing, which is pay a 3.5% dividend and repurchase 10-20% of their shares annually. If the market doesn't give them credit, keep buying. Eventually the market will give them credit. There are examples in history of stable companies that are out of favor that repurchase stock at rates that would essentially take the company private in less than ten years. It doesn't last as long as the underlying business is okay. Eventually the stock will move up. Even AutoZone's stock didn't budge for years when they first began buying. It took years and 40% fewer shares to really make it move. Safeway is now approaching 50% of shares retired in 4 1/2 years. The price hasn't budged. It will.

I thought the topic "What business would you buy if price didn't matter" was a great idea. I have an idea along the same lines. What business would you buy, (Price does matter here) if you were looking for a starting point for a Berkshire Hathaway, Leucadia, Loews, Sears Holdings style company? You will be the controlling shareholder. You control capital allocation. You can buy anything you want with the excess capital or free cash flow that your business produces. Everyone loves what Warren Buffett has done with his textile mills, what the Tisch brothers did with movie theaters, and perhaps while people may not love what Eddie Lampert has done with Kmart, most do respect how he came to control the 4th largest retailer with only $700 million of bonds of then bankrupt Kmart.... So what do you think? If you were to take a large equity position in a public company and use it as a platform to make external investments.... What would you buy?

I agree. I bought more JPM this morning as well. Jamie also said that with this disclosure the company could be in the market repurchasing stock as soon as today. Remember in the annual letter he boldly said the closer they got to tangible book value the more aggressive they'd be with the buyback. One would have to assume they'd be perfectly willing to repurchase 7.5% of the company right here. I want to buy alongside them, so I did.

A better economy = higher S&P 500 and higher interest rates. I asked the C.F.O. at the annual meeting about the pension. He said a 1% change in interest rates would impact pension liability by "about $500 million" SHLD has put hundreds of millions into the pension over the years, and the liability has grown. Why? They keep lowering the discount rate and the S&P 500 is lower today than five years ago. It's perfectly reasonable to expect the inverse as things continue to improve. That pension liability is over $20 per share. 1/3 of the stock price.

Are you taking account a decline in sales/profitability? Or are you assuming that the stores will continue to sell at their current level? Do you think their brands will keep their current market share with a smaller store footprint? I'm taking into account an increase in profitability because almost 200 stores are closing. Hard to imagine SHLD is closing profitable stores. I think their brands will increase market share because they are being sold in multiple places, Costco, Ace Hardware, etc.

$1.1 billion of that debt is seasonal. Only $2 billion of LT debt Pension liability is material, but it's based on projections and discount rates. A 1% change in interest rates would lower that pension deficit by $500 million. The stock market also should continue to improve as the economy continues to improve. Show me 4% Fed Funds and a decent housing market/economy, and SHLD's pension liability will vanish. In the meantime, what's happening today, is that SHLD needs to fund it's pension with $310 million this year. My point is simple. If closing almost 200 stores will bring the core business back to profitability, enough to fund the pension, then why would the business not be undervalued with up to 70% of it's market cap in cash and huge assets still on the books?

It will be interesting to see if SHLD continues to repurchase stock now that they have a huge pile of cash, and if so, at what prices will they repurchase stock. If you look at the remaining business, you're still talking about 700+ owned stores, billions of owned inventory, Craftsman, Die Hard, Kenmore, and one would assume a profitable business. If the business can simply generate enough cash to fund the pension (which implies GAAP profits of zero given the level of depreciation vs. cap ex)... If the business can fund the pension from operations, then at some point, having 70% of your market cap in cash, huge remaining assets, and some level of free cash flow is going to explode this stock higher.

$270 as a percentage of today's market cap is 4.5% Sears Canada is selling 3 store leases for $170 million $170 as a percentage of today's market cap is 2.9% Sears is offering Land's End for $2 billion $2 billion as a percentage of today's market cap is 33.8% Sears is offering it's Dealer Stores in a rights offering, and expects $450 million in proceeds $450 million as a percentage of today's market cap is 7.6% Sears is planning inventory reductions of $500 million from the closure of hundreds of stores $500 million as a percentage of market cap is 8.4% Sears has $750 million in cash as of the end of 2011 $750 million as a percentage of today's market cap is 12.7% Total cash and expected cash $4.14 billion ($270m, $170m, $2,000m, $450m, $500m, $750m) $4.14 billion as a percentage of today's market cap is 70.1% Sears needs to put $310million into it's pension this year. Sears and Kmart are closing 173 stores during the first half of 2012. If one logically assumes the 173 stores that close are unprofitable, one would logically assume the remaining business will be profitable again. If we assume that the remaining business generates enough cash to fund the pension, it would seem SHLD is very interesting here, at $55

IR won't share the presentation, however Seeking Alpha has a transcript of it, and Edgar Online has a select group of slides in an 8K filing earlier this month. http://seekingalpha.com/article/415981-safeway-inc-2012-guidance-update-call-mar-06-2012 http://www.sec.gov/Archives/edgar/data/86144/000008614412000009/ex9928-kinvestorconference.htm I don't have an opinion about WalMart and California. I think the property development idea is brilliant, they discuss it in great detail in the investor conference. The beauty here, is the free cash flow. It's a 16% free cash flow yield today. It should be more like 20-24% next year based on the level of share repurchases at today's prices. That's the draw here. This company is so cheap that you really don't need to worry about specific details such as what Blackhawk is worth, or why ID sales are flat. In my world, cash is the only thing that matters. Safeway is flooding shareholders with cash and Wall Street is asleep at the switch. It doesn't get better than this

Safeway's interest coverage was at 8.9X this most recent quarter. The second highest of any point in the past twenty years. Safeway's historical debt at year end: 2002: $8.45 billion 2003: $7.82 billion 2004: $6.76 billion 2005: $6.35 billion 2006: $5.86 billion 2007: $5.65 billion 2008: $5.49 billion 2009: $4.90 billion 2010: $4.83 billion 2011: $ 5.41 billion So during the past four years, Safeway has actually decreased their total debt levels while simultaneously repurchasing 40% of their shares outstanding. Prior the the past four years, Safeway spent almost all of their cash flow remodeling stores and repaying debt.

Hi, Here's are a few comments. 1) How am I determining Free Cash Flow yield? I am taking average free cash flow from the past three years, and projected average free cash flow for the next five years, and dividing it per share and then into the stock price. The average for the past three years and the forward projections for the next five average out to about $1.1 billion annually. The beauty here is that Safeway doesn't really need to achieve anything more than status quo to make this investment work. Safeway indeed did "overinvest" in store remodels in the 2004-2007 time frame. This Lifestyle remodeling is nearly all complete. There are only a small percentage of stores that aren't remodeled and many of the remaining ones aren't going to be remodeled as they are close to the end of their leases. Safeway claims to have some of the most updated stores in the industry. I can't actually confirm this, I don't live anywhere near a Safeway store. 2) Gross margins are actually very stable if you strip out the impact from fuel sales and LIFO, which is a non-cash charge. I would either ignore the fuel/LIFO impact, or pay attention to total gross margin dollars, which are very stable and increased last year even as margin rate declined (again due mostly do to fuel shifting the numbers around) Fuel is a good business, It's something that didn't exist not too long ago. It's a multi billion dollar business and it drives huge traffic into the stores. 3) Not sure. The margin rate isn't my concern... It's the margin rate excluding fuel and non-cash LIFO charges. As we've seen in 2011, gross margin rates can decline with a simultaneous increase in gross margin dollars. 4)Dividends are discretionary, Interest payments are not. Interest expense has declined every year since 2003. Even in 2011, a year when Safeway actually increased total debt. 2003 interest expense was $442 million. 2011 was $272 million... Interest rates are so low that the expense is declining as Safeway refinances, even as they have borrowed somewhat to repurchase stock. Last conference call Safeway stated that they are borrowing six month commercial paper for less than 1%, and using the cash to repurchase stock, which has a dividend yield of 2.6%.... a trade off that actually decreases cash out the door because the dividend yield is so much higher than the after tax cost of commercial paper. 5) Don't know about the pension. Pensions are a nightmare for many companies right now. (Sears Holdings) This isn't something I'm terribly concerned with though. Pension accounting is subject to assumptions about the future. Interest rates are at 0% and the future projected obligation could change materially with changes in rates or equity prices. 6) Don't know how to value Blackhawk. I know it's not worth zero though, and with a nearly 20% free cash flow yield, I think there is a negative value being applied to the core business, let alone Blackhawk. Thanks for your comments.. I welcome more. What do you think?

Hi all. I wanted to run an idea by you guys and see what everyone thinks. About a year ago I began buying Safeway, around $21.50. At the time they had 368 million shares outstanding, so we're talking a $7.9 billion market cap. Safeway produced $2.6 billion of cumulative free cash flow in 2009/2010, and at the time they projected $800 million of free cash flow for 2011. I averaged the 2009/2010 free cash flow with the projections for 2011 and realized that Safeway was sitting there with a 14+% free cash flow yield. Safeway also was very actively repurchasing their shares, which excited me as well. One year later, here we are. Safeway ended up on target with their free cash flow. They got even more aggressive with the share repurchase at the end of 2011, so for the year, Safeway repurchased 19.5% of their shares during 2011. Subsequent to the end of 2011, Safeway has further repurchased 9.4% of it's shares this year, only a couple of months in. Today, they authorized a new $1 billion buyback. The current Safeway share count is 268 million, the stock price has barely budged. The market cap is now only $5.8 billion, and Safeway has projected $900 million of free cash flow for 2012, and has projected cumulative free cash for the next five years of about $5.7 billion, almost equal to their current market cap. What does Safeway do with their cash? 1)They pay the dividend, which has been increased at 20% annual rates for many years 2) They repurchase stock in large quantities (Safeway has repurchased 40% of it's shares in the past four years) 3) They have been developing entire shopping centers (currently 32 shopping centers under construction as we speak). Safeway has created a subsidiary for the sole purpose of buying land, developing entire shopping centers, anchoring them with new Safeway stores, and renting the entire shopping center with themselves as the landlord. Safeway by the way currently has $31/share of owned real estate at cost (land + buildings) The attraction here is simple. Hard assets and free cash flow. What's not attractive about a company that sells for $21.70/share with $31.00/share of real estate, generating around $1 billion annually ($3.75/share free cash flow) Around a 17.5% free cash flow yield, repurchasing it's own shares at an astonishing rate, and a share price that is unchanged from 15 years ago?? I can happily discuss further, and will respond to questions/comments.. I'm looking for other opinions here. I think Safeway is one of the best deals out there. Cheap & safe. What do you think?

I think the most interesting part of this as it relates to Sears is the idea of having stores within stores... Something Sears has scratched the surface of with Whole Foods, Forever 21, Edwin Watts, etc... JC Penney wants to make their stores more relevant, Sears probably just wants to lease under productive real estate.

Please help me understand better if I am wrong here, but when people say 5% of inventory is $400-500 million dollars, isn't it also fair to say that 55-65% of SHLD's inventory is owned free and clear of any invoices at any given time? In other words, in the event that more suppliers lost financing, the shelves would not at all be empty at the stores. If at any given time over half of merchandise is owned, there is a $3 billion credit line to supply up to 30% of needed inventory, and history shows that Lampert is not afraid to buy SHLD commercial paper into the hundreds of millions of dollars, I don't know that there is a solvency issue the way that perhaps Linen's and Things had. Most retailers don't own as much inventory as SHLD. I also think if push comes to shove, Lampert could and would buy SHLD bonds and effectively refinance SHLD debt, either outright or by converting debt into common stock. I don't think Lampert bought 5 million shares personally for the purpose of inspiring confidence, I think he knows he controls the situation and he's probably got a backup plan at any given time for nearly any possible outcome. Other alternatives could be a credit line from Fairholme Fund, Commercial paper purchases from Fairholme Fund (which has happened in the past), more store closings, or outright liquidation. I don't think SHLD has a solvency issue at all. Someone please argue the other side if you think I am wrong.

I'm amazed at how many people think Kmart should simply liquidate. When 2011's books are closed, Kmart will have an operating profit. Sears won't. When I look back over time at the operating earnings of Kmart vs. Sears, Kmart is consistently a cash generator three quarters out of the year. Kmart has cumulative operating profits over $1.1 billion for the past five years. Remember, Lampert took control of Kmart with only $700 million. I think you could make the case that Kmart would be better off had it never bought Sears at all.

I never said they should borrow now. I said they can't. not such a great situation is it? amgen just borrowed $6b and used every penny to buy back stock. esl would probably love to do that. he can't. point? he has zero financial flexibility. Zero financial flexibility is going too far. SHLD will produce free cash flow this quarter. Next quarter they will close 100-120 stores which will produce $150 million of cash as net inventory is sold. If you go back to Q2 2011, in the earnings release, SHLD announced they were closing about 28 stores and they expected annual savings of $50 million as a result. How much will closing 120 stores help? It won't hurt. They aren't going to close profitable stores. If closing stores produces cash, and then they can later sell the building, or sublease the property, that helps too. It's very possible SHLD has been holding open stores that lose money where they pay $2/foot in rent and could sublease for $5/foot... Perhaps Lampert has been holding on in hopes that with a stronger economy, he could lock in leases for $7/foot. He's a businessman, there has to be a reason why he's kept open loser stores. At the meeting last year he made it pretty clear that there was lots of potential in subleasing stores. Yes. SHLD is doing terribly. Could SHLD fix their problems? I think so. If the problems can be fixed, we'll most likely see share repurchases in the near future. If the problems are too much, we won't. Either way, I think the pessimism on SHLD has hit an extreme here, the same way it usually does with any stock that moves in the same direction for 9 days in a row. At some point, it's priced in.

This is an interesting way of looking at it, and it reminds me of early 2009 when SHLD had just finished closing a large amount of stores at the end of 2008. Q1 2009 SHLD made money, even as the economy was at it's worst... With the improved performance (even though it was still mediocre) the stock rallied up to $120 by the day of the 2010 annual shareholders meeting and Lampert made the comment that the average of all buybacks was lower than the current share price. I say this because it would seem to me that if you are a large retailer with unprofitable stores, then the most sensible thing you can do is close stores. The drain on income stops, the inventory is monetized, the real estate can be sold. The end result should be a more profitable business correct? Why is closing 5% of the stores is a bad thing? It's what SHLD should have done a year ago. Isn't it highly probable SHLD has better SSS and better gross margins next year because of this? Even a return to mediocre profitability for a company of this size and only 106 million shares can be a big deal.

I agree. I have absolutely no clue as to why people think SHLD is going sky high. There are probably some better vehicles to bet on a real estate bounce. The only other value driver here seems to be the cash flow from the stores. And what does he do with it? Buys more SHLD shares. No, he's not diversifying into better streams of cash flow, he's just effectively dividending it out. So what do you get left with if the cash flow keeps on dwindling? So basically the only play here seems to be KMart getting up and kicking everyone's butt in retailing. But it ain't gonna happen unless he invests heavily in the stores, instead of dividending it all out. So I don't understand where the upside is unless you reinvest in the stores instead of returning it all to shareholders. I think the upside and the "secret" value lies in the fact that the stores are operating, any cash that can be taken out of them is taken out and shares are repurchased, shrinking the share count to 106 million on inventory and real estate valued at cost of nearly $15 billion. The real estate on the books is also misleading. Kmart entered bankruptcy with $1.5 billion of land and buildings at cost, and exited bankruptcy with $1 million thanks to fresh start accounting. Kmart still owned 135 stores, 3 distribution centers, and HQ. So do the division... $1 million for 139 properties is $7,194.24 per property. Seven thousand bucks. Book value is misleading. Perhaps real estate values have declined, but shares outstanding have declined more. Real estate values can rise... most likely shares outstanding will continue to fall. I think the income statement would look a lot better with the money losing stores closed, but it may indeed be more strategic to operate them until rent rates rise and then turn them into leased stores. Lampert controls this company. If there were no hope, why repurchase stock? Why not redeploy the cash into external investments?

What's KMART's likely ROIC then? Something tells me it's less than what Lampert could compound at. I'm sure Lampert could compound at a better rate. Just because he's not doing it now doesn't mean he's not going to do it later. Here's a quote from this years letter to shareholders: "As we have done since we took control of Kmart in 2003, we will continue to evaluate alternative uses of the company’s cash flow and capital resources to generate long-term value for all shareholders. Each year brings with it different circumstances, and we expect to have a variety of opportunities to invest our cash in the years to come. "

Kmart's historical operating income: 2007: $401 million 2008: $172 million 2009: $190 million 2010: $353 million Not sure why you'd shut and liquidate something that produces operating cash flow year after year. It's not a beautiful place, and the shoppers aren't exactly the most beautiful people, but they have cash and they spend it. You could argue that Sears is the laggard here, but then I think Sears is being held back because of housing starts at 600K. Housing starts need to rise 150% just to return to "normal". The pension is the biggest problem here, but the pension is frozen to new employees and eventually will run off. Interest rates being held at 0% are an issue. Lampert thinks every 1% rise in rates = $500 million change in pension liabilities. I think a lot can change w/ Sears over time. Seems like it's priced for near total failure here.