Found via the Corner of Berkshire & Fairfax.
Following up on a past letter, we continue to believe U.S. financial institutions are very cheap and TARP warrants associated with these companies are an attractive way to invest in them. Depending on the price, TARP warrants have several characteristics that make them appealing long-term investments. Specifically, they are long dated, with most expiring around 2018-2019. This time frame of six-plus years allows banks to grow their intrinsic value to a high enough level to have an appreciable impact on the strike price of the stock warrant. In addition, we believe the strike price will be adjusted downward for any quarterly dividend that exceeds a set price. This is rarely seen in a stock warrant. An example: for Bank of America, class 'A' warrants, the strike price is adjusted downward for any quarterly dividend paid exceeding one cent a share.
It’s been over three years since the European crisis began and we’re still unable to predict what will happen to the Euro and the 17 Eurozone countries that have adopted the Euro as their national currency. While most believe that to solve its problems the Eurozone must undergo deep structural reform, to date no one has devised a solution that all 17 disparate Eurozone nations can agree on. If the ramifications of Euro crisis on the world economy weren’t so serious, we could all get a good laugh at the comical way the Eurozone club was set up and how that has played out. Nigel Farage, leader of the UK Independent Party, captured the humor in a speech he gave in June 2012.
Based on ratios such as rent-to-house-price, disposable-income-to-house-price, Canadian house prices are out of line with historical standards. In addition, household debt as a percentage of disposable income is unprecedentedly high. This does not mean that real estate prices will decline soon, but it does indicate that valuations are stretched.