jay21

Gio, while I am sure that Packer and twacowfca are extremely intelligent, I don't believe that is why they are successful investors. They were my heroes on the board before they posted their results because of the great level of due diligence they perform and their well articulated thought process for each idea. Glad to see this is a case where good results stem from a good process.

Okay I;ll take a crack at the first one .... From what you propose this float seems like a zero coupon perpetual liability. Because of this it essentially means its worth nothing to the bond holder. So if I invert this proposition ... this effectively means this is a source of equity to me. Assuming I have a 10 year ten horizon and I think I could compound this equity at 15% in a 10% risk free environment ... using 12% discount rate (10% real + 2% inflation) ... i would be willing to bid 1.3 times equity ... ie roughly $1.3billon. The answer to second question would probably elongate the time horizon to 100 years ... and the critical assumption would be how much you can compound your capital by ... if you think 12.5% over 100 years .. @12% discount rate the equity is probably worth 13,500 x. From this you subtract the initial payment of $1b of libility so its likely worth 13,499 x. So 13,499 * $1billion. is $13.49 trillion. Given world's total wealth is about $300 trilion ... i effectively need to come up with 10% of world's wealth!!! The answer to second question is largely irrelvant .... is purely a match exercise. I would still probably bid $1.3b to $1.5b. Option 1 is probably a little easier to think about. You will get $1b that you don't pay back. So in other words you get $1b dollars. Why would you pay anything more than $1b to get $1b? You wouldn't. Your first thought is one the right track. If it's worth nothing to the holder, its worth face to you.

Okay I;ll take a crack at the first one .... From what you propose this float seems like a zero coupon perpetual liability. Because of this it essentially means its worth nothing to the bond holder. So if I invert this proposition ... this effectively means this is a source of equity to me. Assuming I have a 10 year ten horizon and I think I could compound this equity at 15% in a 10% risk free environment ... using 12% discount rate (10% real + 2% inflation) ... i would be willing to bid 1.3 times equity ... ie roughly $1.3billon. The answer to second question would probably elongate the time horizon to 100 years ... and the critical assumption would be how much you can compound your capital by ... if you think 12.5% over 100 years .. @12% discount rate the equity is probably worth 13,500 x. From this you subtract the initial payment of $1b of libility so its likely worth 13,499 x. So 13,499 * $1billion. is $13.49 trillion. Given world's total wealth is about $300 trilion ... i effectively need to come up with 10% of world's wealth!!! Do a reasonableness check. Do you really think that a scenario were you pay back the $1b is worth more than a scenario were you don't pay it back? Do you really think option 2 is worth $13 trillion? Sorry I amended my comment later on to say that it was largely a match exercise and that the bid essentially remains the same ... Ok, so instead of $1b, let's play this game scaled down to $1,000s for as many $1,000s as you want up to $100,000. And I will offer either option 1 or 2 against your scaled bid, sound like a plan?

Okay I;ll take a crack at the first one .... From what you propose this float seems like a zero coupon perpetual liability. Because of this it essentially means its worth nothing to the bond holder. So if I invert this proposition ... this effectively means this is a source of equity to me. Assuming I have a 10 year ten horizon and I think I could compound this equity at 15% in a 10% risk free environment ... using 12% discount rate (10% real + 2% inflation) ... i would be willing to bid 1.3 times equity ... ie roughly $1.3billon. The answer to second question would probably elongate the time horizon to 100 years ... and the critical assumption would be how much you can compound your capital by ... if you think 12.5% over 100 years .. @12% discount rate the equity is probably worth 13,500 x. From this you subtract the initial payment of $1b of libility so its likely worth 13,499 x. So 13,499 * $1billion. is $13.49 trillion. Given world's total wealth is about $300 trilion ... i effectively need to come up with 10% of world's wealth!!! Do a reasonableness check. Do you really think that a scenario were you pay back the $1b is worth more than a scenario were you don't pay it back? Do you really think option 2 is worth $13 trillion?

1. 999,999,999.99 - arbitrage 2. 999,925,000 ish - proceeds minus PV of $1b liability plus profit (theoretically should be 1 cent profit for arbitrage).

Thanks for lengthy response. I agree with your post. I don't think the guarantees versus non-guarantees are doing much for you as an equity holder other than lowering your debt costs.

Thanks Kraven. That was a good response. But I have a few questions on the above. Particularly on this: "There isn't a situation where just the guarantor entities go under....So if a leg got cut off, it's tough to see how Holdings doesn't default on its debt. " Maybe I am misunderstanding, but I thought that the guarantors could go under and this wouldn't cause a default on the parent. This seemed to be what Parsad's friend was discussing. Also, if we look at the CF statement, all the CFO is coming from the non-guarantees. So it does look like to me that ESL is setting a situation where he can selectively default if need be and leave the parent whole.

I believe Buffett buys bonds too, and manages Berkshire's duration risk according to his view on where interest rates are likely to go. Duration management is an important tool in fixed income investing. I think the better value on the yield curve is at the 10yr plus maturity He does, but he is also not capitalized with 100% equity like most of us. I'd rather wait for a better spot then try to get some short term MTM gains on the 10 year. But that's just me. GL. You are probably right. Wait for a better opportunity if it comes. I'm only talking about "beginning" to extend duration(approx 5% of portfolio) not making it your core position within you fixed income allocations. Not necessarily directed at you but: I think of equities as long duration (at least 10 year and probably closer to thirty year). Why is the solution to the extending duration problem not to buy equities? Is PG, MDLZ, or DEO a better relative value then the 10 year? At least you should be somewhat inflation protected, right?

I believe Buffett buys bonds too, and manages Berkshire's duration risk according to his view on where interest rates are likely to go. Duration management is an important tool in fixed income investing. I think the better value on the yield curve is at the 10yr plus maturity He does, but he is also not capitalized with 100% equity like most of us. I'd rather wait for a better spot then try to get some short term MTM gains on the 10 year. But that's just me. GL.

I expect to see the 10 year well below 3 percent at some point in the next 6 months, despite the taper and taper talk I was just going to make a post on long dated treasuries (10 and 30 year). IMO, they are pure speculation. The thesis is that the price should move. However, people would not be happy holding these to maturity and collecting the yield to maturity. That to me is speculation. It doesn't seem like a value play. It's a macro call/speculation.

Loans aren't MTM. This should only affect securities and it appears that most banks are trying to keep short duration. I am only worried about the impacts of very high rate vol. I think banks should do fine in a steady increasing rate environment.

The one thing I don't understand about Buffett is why he doesn't buy things he obviously thinks are cheap when he has so much cash. He mentioned that he thought JPM was cheap and he could probably buy more railroads. I don't think this pick will be either of those, but we'll see what it is.

I like the idea. Do you have an idea to figure our which ideas have been "trending" in the last three months?. My original idea was to only list stocks that had been mentioned in the last three months but the board is so active that the list comes to 210 names! There has to be a cutoff somewhere. Do we do the last 60 names mentioned? last 100? 60 names gets us back about 4 days... 100 gets us back about 2 weeks... Maybe a google spreadsheet where each participant types in five tickers. Then use some type of count function? That way there might not have be too much work on the organizers end. One question: How do we vote to sell? Do we update our picks every month, day, whenever? And then the portfolio is rebalanced?

Bill Gross' comments: Insurance companies, pension funds – all institutions with liability structures that require matched asset hedging require fixed income assets on the other side of their balance sheet. The recent several months’ experience of higher yields was, in fact, a blessing for them, as their future liabilities went down faster than the price of their bond assets did! http://www.pimco.com/EN/Insights/Pages/Bond-Wars.aspx I think this is too categorical. Wouldn't this be entirely dependent on their duration matching?

There's been some shadow debt popping up again over the last year or two because banks are tight and some other lenders/fixed income investors are a little looser because of low yields. There might be some other avenues you can tap, but it will probably be more expensive.

Kind of like how the Nikkei PE has expanded downward with interest rates over the past 20 years? I meant to caveat my earlier statements with the "all things being equal" qualifier. Probably makes the linkage a little clearer as well.

This debunks nothing. If you were told that the 10 year would be 1.5% forever, wouldn't you be willing to pay a higher multiple for stocks? Markets are based upon expectations. Investors are worried that rates will increase causing a contraction in multiples. If they knew that rates would decrease, multiples would expand. I did agree with this: "But should it work in theory? The common rationale for the Fed model relates to the “discounted cashflow” approach to valuing equities. Lowering the discount rate you apply to future cashflows increases present value (the share price), other things being equal. The trouble is, other things aren’t equal." There are too many variables when trying to think about equity market valuations. That is way I don't (try not to?) think about market valuations.

I would like someone like Berkowitz to say: We're are going to launch an insurer where underwriting will come first. We will, for the most part, match our float with bonds. We will invest in equities directly (i.e. not through a hedge fund giving me easy fees). That would be much more like BRK than some of the other (re)insurers with value investors heading the companies.

They were worried about it going much much lower than 800. No they were completely unhedged at 800. I forget where, but it was somewhere in the 800 range that they dropped ALL of their equity hedges. And yes, they made all those "1in100 year storm" comments, and "very few survived the great depression" comments a long time beforehand. Then the market rallies 25% and they go completely hedged again? It's not like 20% is a terrifying amount of market swing. That kind of decline can happen in any market. And then if it happens, it's only a 7% loss to them due to their 50% exposure and the tax thing. I mean, come on, I eat 7% losses for breakfast! (happens at least a couple of times a year). As Lakeside pointed out, unlike us, insurers need to worry about MTM losses unfortunately.

I was just thinking about the economics of John Carter and Lone Ranger. While I admit that I am definitely out of my depth when discussing the movie business, I think that these aren't as a huge of a mistake as people think because of the huge amount of upward optionality in these movies. The companies are not trying to launch just one movie, but a franchise. So if they were successful, we could easily see two or three sequels, which should be very profitable as well if history serves as a guide. I could not give an educated guess of the probability between bomb and successful franchise for these movies so maybe even so they were a terrible decision. If anyone has a good grasp of the movie making industry, I'd love to hear your thoughts.

Just have to listen to Munger's lessons on cognitive biases. In this case, incentive bias. Clooney doesn't star in the "safe" movies (ex: the mediocre action movies guaranteed to draw an audience) easy money makers. Loeb wants Sony to make more of those movies and take less risk, which would reduce opportunities for Clooney. Not very surprising that Clooney is against it, even though he is typically a lot smarter than that. The same applies to Loeb. He doesn't care about any artistic or cultural values, he just wants the most profitable ventures put forth. What's wrong with that? Isn't the purpose of a business to put forth its most profitable ventures?

Potentially. Based upon the wording, the call schedule will have a stepdown. So they could still be around.

From the 10-Q: "The preferred stock possesses no voting rights except as required by law or for certain matters specified in the Heinz Holding charter. The preferred stock is entitled to dividends at 9% per annum whether or not declared, is senior in priority to the common stock and is callable after June 7, 2016 at the liquidation value plus an applicable premium and any accrued and unpaid dividends. Under the Heinz Holding charter and a shareholders’ agreement entered into as of the acquisition date (the “shareholders’ agreement”), after June 7, 2021, Berkshire can cause Heinz Holding to sell shares of common stock through public offerings or other issuances (“redemption offerings”), the proceeds of which would be required to be used to redeem any outstanding shares of preferred stock. The warrants are exercisable into approximately 46 million shares of common stock (subject to certain anti-dilution adjustments) for one cent per share and expire on June 7, 2018. " Another margin of safety! If the company blows up, 3G will have to sell and start paying back the preferred.

I am not close to munis but this could be a case of sound macro =/= good investments. Munis could be in worse health but not showing it yet. We should also try to dissect the returns here. The 10 year was above 3% in the beginning of 2011 and ended below 2%. She should be evaluated on the credit spread and number of defaults and the interest component should be bifurcated. This reminds me of Blurry in a way where he thought housing was in bad shape, but he did a ton of micro work too by analyzing a ton of RMBS. He specifically looked at state concentration to identify which were exposed to the worst bubbles, he looked for esoteric products like Alt-A ARMs with specific payment change catalysts, etc. He had a macro thought and then through due diligence narrowed it down to individual actionable ideas. Does anyone know if Meredith called out specific municipalities or was this a macro call?

For MKL, I calculated a 1.24 P/B based on 3.31 BV and their annual report puts their 5 CAGR BV at 9%. The others don't seem off to me at first glance so thanks for posting.