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As BAC stock continues to fall, interesting perspective


Munger

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"But I guess Munger will say that the whole banking system is bankrupt."

 

Ahem -- the banking system did implode...remember 2008?

 

And the reason BAC has gotten destroyed is becuase unertainty about whether the assets are properly marked and legal liabs.

 

No bulls have provided any evidence to support the oft quoted tangible book value.

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Take it easy on Munger.  He relies on viewing the world with the same blackness that David Rosenberg does. 

 

Let's take a look at this Zerohedge presentation from a couple of years ago.  Then view what they say with what transpired.  Some things they got right, some things they got wrong.  But things never became as bleak as they expected. 

 

And that's all I'm saying.  Folks like Blodget, or Smith, or Munger will have you consider that the worst case scenario is the likely scenario without actually attributing odds to that event occurring.  Every investor should make their bets accordingly.  Cheers!

 

http://www.zerohedge.com/sites/default/files/The%20End%20Of%20The%20End%20Of%20The%20Recession.pdf

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And further, most of the bulls on BAC stock have already gotten slaughtered in their position -- so something was clearly wrong in the original analysis....

 

When a stock temporarily falls in price in the first twelve months after purchase, it's "clearly" due to a change in the long term prospects of the company? 

 

Or if a stock doesn't fall in price in the first twelve months, it's confirmation that the analysis of long term prospects is correct?

 

 

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why wouldn't the company be highly conservative or even just realistic in their assumptions in this case.

 

They have been setting reserves aside (one reason their earnings do not show their cash flow from operations) they just do not disclose them. And I think the reason is pretty obvious

 

Bank spokesman Jerry Dubrowski said Bank of America and other companies don’t disclose their total litigation reserves because it would signal to plaintiffs how much they’re willing to spend to resolve legal cases.

 

Ahem -- the banking system did implode...remember 2008?

 

I thought we were talking about 2011 and the future. Did not know that discounting future cash flows included the past.

 

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txlaw -- I think you letting emotions get the best of you because I assume you can read. 

 

You write

You're willing to quote Blodget, ZH, and Yves Smith as credible evidence that BAC will be overwhelmed by its liabilities and must go to $0.

Actually, I think I've exaggerated your position.  You think BAC will have to issue highly dilutive equity capital at the price it's trading at.

 

 

Yet I have consistently written that I have no idea of BAC is a buy or a sell.

 

I am questioning how anyone could be pounding the table on BAC as a BUY without any supporting analysis -- simply trusting management.  Further -- the buy thesis has dramatically devolved over the past month, without any reconciliation by the bulls.

 

Still waiting for any bull and/or management to address FHLB.

 

Not at all.  I would say that you are allowing your emotions to get the best of you. 

 

Remember the fundamentals of value investing.  If a company is a good buy and the price drops, it is an even better buy unless the price drop itself affects the economic fundamentals of the business.  (How's that for a platitude!)

 

I think you are letting the dramatic price drop translate into the notion that the thesis has dramatically devolved for BAC over the past month.  In general, that is the sentiment that has been affecting the entire financial sector. 

 

Is it the economic outlook that has caused you to believe that the thesis has devolved?  Or the new legal developments, primarily?  Or both?

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Munger you cannot compare Lehman to BAC, it is a comparison of apples to oranges.

 

Also, I just went through about 10 pages of your post history on this board, and noticed that you have not made one stock recommendation, other than a time where you hedged yourself by saying you didn't own the stock.

 

Are you an equity investor? or just someone that gets a thrill out of showing up right around the time volatility and uncertainty hit the markets to poke fun at the real investors on this board.

 

You poke fun at the fact that the shares have declined since our original buys making the assumption that in a 30 day period Mr. Market is Mr. Efficient. Have you forgoten the lessons of Benjamin Graham? "The Market is a Voting Machine over the short-run and a weighing machine in the long-run".

 

My first buy on BAC was $10.77, my last buy today was $6.15, my cost average is roughly $7.70~. In my experience as a contrarian investor the only time to buy are during times like these. Has the position become a bigger portfion of my portfolio? Sure! would I have loved to have started buying now? Of course! but this is the real world and in the real world, I am damn happy with my position and avg. cost.

 

Check back in 6 months well see if I am up :)

 

 

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I am questioning how anyone could be pounding the table on BAC as a BUY without any supporting analysis -- simply trusting management.  Further -- the buy thesis has dramatically devolved over the past month, without any reconciliation by the bulls.

 

Still waiting for any bull and/or management to address FHLB.

I don't believe the buy thesis has "dramatically devolved" recently.

 

Regarding reps and warranties, I think it's quite possible that BofA is under-reserved. But as PlanMaestro points out, if actual losses are higher by say $20 billion than what BofA is assuming currently, that can be covered in just six months out of pre-provision earnings. The other numbers that Blodget provides -- for second loans, commercial mortgages, exposure to Europe etc -- are all highly exaggerated, I believe. Looking at the most recent 10-Qs and 10-Ks for delinquency rates and charge-offs, there is no basis for these assumptions. BofA's reserves are likely sufficient or close to being enough. But let's assume that these losses turn out to be $50 billion more than currently anticipated. Even then, BofA won't need to come up with $50 billion overnight. They will be able to raise their provisions over time. If they do this over two years, BofA will generate $80 billion of pre-provision earnings in the meantime.

 

My calculation is that given the immense earning power of BofA's franchise and its decent capital position, the company will be able to overcome its significant short-term issues with putbacks and legacy mortgages. Even if the share count goes up by 50% as a result of a capital raise, the stock is a good investment at this price.

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moore_capital54 -- your last two post sound an awful lot like the arguments Dick Fuld made when resisting the push to raise capital.  Didn't work out so well for him or Lehman.

 

30:1 leverage is the same as 8:1 leverage

investments 1y into a recession are the same as loans 4y into a recession

ST repo funding is the same as LT deposit funding

investment banking is the same as commercial banking

 

war is peace, freedom is slavery, ignorance is strength

 

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The problem is you can't expect a capital raise to happen at these prices.  It's a chicken/egg thing and there is no easy way around it.  If they try to raise $25b they stock will plummet.  Further, people will wonder if another $25b is around the corner, not to mention they have said no capital is needed.

 

Point being, it's impossible to just double the share count and say it's still cheap.

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"And that's all I'm saying.  Folks like Blodget, or Smith, or Munger will have you consider that the worst case scenario is the likely scenario without actually attributing odds to that event occurring."

 

Again -- I am not assuming anything...simply pointing out that bullish opinions have been based on platitudes not any insightful analysis.  And your assumptions about my viewpoint and investment approach are ludicrous.

 

 

txlaw -- You have now provided three posts that have no relation to what I've actually written.  Go back and read again, which will also provide an answer to your question.

 

 

 

 

 

 

 

 

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I do love the emotions -- e.g., PlanMaestro's most recent response has no relation the post he cites.  Holy cow!

 

Dick Fuld always believed the Fed would never let him fail in the way that moor_capital argues there is little risk in BAC because of our fiat system.

 

Take deep breaths before posting.

 

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And further, most of the bulls on BAC stock have already gotten slaughtered in their position -- so something was clearly wrong in the original analysis....

 

When a stock temporarily falls in price in the first twelve months after purchase, it's "clearly" due to a change in the long term prospects of the company? 

 

Or if a stock doesn't fall in price in the first twelve months, it's confirmation that the analysis of long term prospects is correct?

 

Of course. This is why Buffett's purchase of Washington Post stock in 1973 was such a disaster. :-)

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Again -- I am not assuming anything...simply pointing out that bullish opinions have been based on platitudes not any insightful analysis.  And your assumptions about my viewpoint and investment approach are ludicrous.

 

Didn't say anything about your investment approach...just your views.  They tend to rest on the shoulders of catastrophic consequences. 

 

For example...If a cup of coffee spills while reading the newspaper!

 

Your reality:  The coffee will stain the table, which will have to be resurfaced, lacquered and then restained to match...if you can even save the table at all! 

 

Reality:  you simply wipe it up with a cloth, refill the cup and read the newspaper again.

 

And yes, you can send a rebuttal and say that my views are rose-colored and simplistic.  I just find that if you can simplify a problem by rationalizing it, then you find that the eventual outcome is closer to what actually occurs. 

 

Remember, our actual fund presentations from 2006 were very pessimistic about what was occuring.  We were nearly 40% cash earlier this year as well.  But we jumped in at the end of 2008 and beginning of 2009, and we jumped in again now.  So my glasses aren't always so rose-tinted!  ;D  Cheers!

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treasurehunt -- "Even if the share count goes up by 50% as a result of a capital raise, the stock is a good investment at this price."

 

That statement shows how the thesis has dramatically devolved...up until a few weeks, the potential for a capital raise was completely dismissed by all bulls.

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txlaw -- You have now provided three posts that have no relation to what I've actually written.  Go back and read again, which will also provide an answer to your question.

 

Just humor me, if you will. 

 

You have stated that the buy thesis for BAC has dramatically devolved over the past month.  It would be helpful to have a nice summary of why you believe this is the case.

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I do love the emotions -- e.g., PlanMaestro's most recent response has no relation the post he cites.  Holy cow!

 

Dick Fuld always believed the Fed would never let him fail in the way that moor_capital argues there is little risk in BAC because of our fiat system.

 

Take deep breaths before posting.

 

Emotions? Imagine if I had the stock. You are the one comparing LEH and BAC (that are in no way related, not even their leaders style and performance)

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treasurehunt -- "Even if the share count goes up by 50% as a result of a capital raise, the stock is a good investment at this price."

 

That statement shows how the thesis has dramatically devolved...up until a few weeks, the potential for a capital raise was completely dismissed by all bulls.

Not at all. I don't think a capital raise is needed or likely. But as the stock price drops, more and more bad stuff gets discounted into the price; I was just pointing out that the stock price is now low enough that even 50% dilution won't affect the bullish case for BAC.

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treasurehunt -- "Even if the share count goes up by 50% as a result of a capital raise, the stock is a good investment at this price."

 

That statement shows how the thesis has dramatically devolved...up until a few weeks, the potential for a capital raise was completely dismissed by all bulls.

 

No, it just shows how a value investor thinks. First, downside protection. That scenario is not very probable and even if it happens it is not that bad? That is how you make money.

 

OK Munger, show us your best. Is not bad to have a skeptic in the house but you have to amp your game. At least throw some numbers.

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In June 2010, the United Sates Supreme Court declined to hear President Barack Obama's request to allow the government to seek over $300 billion dollars from tobacco companies. This legislation would have allowed the US government to collect $280 billion dollars of previous profits from tobacco manufacturers such as Philip Morris and R.J. Reynolds. In addition, $14 billion dollars would have been collected to fund campaigns and programs for quitting smoking. Since the Clinton administration, this lawsuit has been ongoing, citing that tobacco companies withheld information regarding the effects and risks of tobacco use. Tobacco manufacturers have already begun filing appeals due to the recent actions on the legislation

 

This can go on and on for a long time as cigarette manufacturer will fight and delay in court.

 

The putback case make me think of this situation. BAC is trying to settle fast and move on, but if the price is too big, they will fight and delay the case in court and collect ~80-100B$/year in cash flow from operation in the meantime.

 

And the people suing them will have to wait for their money, if they receive any.

 

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"No, it just shows how a value investor thinks. First, downside protection."

 

You are now down 50% -- so much for the protection.

 

And I have simply pointed out that your bullish position is based entirely on platitudes and speculation.  Whole lot of trust in what management is telling you but ZERO analysis.

 

"At least throw out some numbers"

 

Start by addressing the absurd assumptions highlighted by FHLB and then tell me why you have so much confidence the assumptions are absurd in only this case.

 

I have had enough fun for today.

 

I will repeat -- I HAVE NO IDEA IF THE STOCK IS A BUY OR A SELL.  What I do know for certain is that your bullish opinion is based on nothing more than platitudes and speculation, which inherently carries a lot of risk.  Your position in BAC is a roll of the dice -- and I honestly hope the best for you in this regard...I have no dog in the fight. 

 

 

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This can go on and on for a long time as cigarette manufacturer will fight and delay in court.

 

The putback case make me think of this situation. BAC is trying to settle fast and move on, but if the price is too big, they will fight and delay the case in court and collect ~80-100B$/year in cash flow from operation in the meantime.

 

And the people suing them will have to wait for their money, if they receive any.

 

Agree, but probably cash flow is half that.

 

I would like to ask our friends from the MBIA board (valuecfa, Rabbitisrich, ERICOPOLY?) what would be their reaction with a $8b settlement? And MBIA's price has also been under pressure as MS, GS, C,... 

 

This is not about BAC and its MBS, it is about Europe and the potential ramifications of a credit freeze. That is a more interesting subject to discuss.

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http://www.bloomberg.com/video/74310536/

 

Aug. 23 (Bloomberg) -- Richard Bove, an analyst at Rochdale Securities, talks about Bank of America Corp. Bank of America has fallen more than half in New York trading this year amid speculation that costs from mortgage disputes will drain capital. Bove, speaking on Bloomberg Television's "InBusiness With Margaret Brennan," also discusses corporate governance at Goldman Sachs Group. (Source: Bloomberg)

 

 

By the way, weren't you the guy who was claiming that that BAC's share price has an affect on BofA's capital position?

 

 

;D

 

“There is no impact whatsoever on Bank of America’s balance sheet, based upon the price of its stock in the open market. If the price of the stock goes to a penny a share, it has no impact on the balance sheet of Bank of America. Bank of America sells the stock to the public, it takes in the money, and that is the end of the transaction as far as Bank of America is concerned. If you’re going to break a bank, you’re going to have a run on its deposits. That’s not happening. Exactly the opposite is happening…Deposits are pouring into Bank of America…Or, as in the case of the fourth quarter of 2008, you’ve got to bust a bank by making it repay all of its short-term debt immediately. Bank of America has so much cash on its balance sheet that it can pay back all of its short- term debt, it could pay back a big chunk of its long-term debt and still have excess cash on the balance sheet. You can’t break the bank by driving the price of the stock lower, particularly if the bank is as cash-rich as this one is with deposits pouring in as fast as they are.”
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