jay21

I'm describing legacy CLO's done at the top of the market in '06-'07, with the tightest collateral, but also tightest liability spreads, AAA locked at L + 25, equity at time of issuance was projected to have IRR in the low teens, but are now yielding 30% (after incentive fee to the manager). New issue CLO's today would come out at low teens (loss adjusted), right on top of new issue whole loan RMBS deals, validating Warrent Buffet's statement in that famous fortune article: the cost of equity across time, across industry, has basically been 15% pretax. Couple of things about CLO very different from an RMBS securitization: CLO's have a 5 year +/- reinvestment period, which provides optionality that doesn't exist with RMBS deals. A properly managed CLO tend to hold defaulted assets until ultimate recovery, which in many cases could be above 100% of original par value. Such dynamics doesn't exist in RMBS, when servicer just kick the foreclosed property to say Ocwen, who goes on to rehabilitates the property, and get the upside on the other side. RMBS buyers just took the loss. If you listen to Michael Milken, he'd tell you corporate credit is better than consumer credit, which in turn, is better than sovereigns. The first statement makes some intuitive sense to me. If a company fires 10% of its workforce, consumer credit at large of the economy would be affected, but the company would still most likely pay back its debt, or at least try very hard to do so. Bank loans, in turn, is arguably the best structured corporate credit. All of this help explain the performance of CLO equities in the last cycle, but none more so than the principal of getting funded with non-recourse debt with no mark to market leverage. Maybe I should learn CLOs a little better but a thought a big problem with them was that spreads got extremely wide and caused OC to collapse. So then triggers were hit and they had to starting paying down principal. Basically selling when things were cheapest. I know the A tranches didn't get touched, but I thought that the mezz and equity got hurt pretty badly. Did this not happen? If spreads stayed very wide for a year or two more, would this have happened?

Don't know if there's a place to point you to, but the gist of it is that CLO's are backed by leveraged loans (think Realogy, First Data, TXU, Delphi) and were funded with securitized debt, the key being those were term funded, actually overfunded term wise because of a "Reinvestment Option", without mark to market trigger. In the crisis, 1) bank loans didn't crash out, instead, were repriced to very high spreads. 2) CLO's weren't forced to sell credits that all the credit hedge funds were forced to sell because of margin calls. On the margin they actually bought into the abyss. At 12x leverage, when assets all of a sudden yield 300 bps more than you originally planned, but liabilities didn't change in spread, equity is now yielding in excess of 30%. Guys are now trying to do it again, and it's one of the few securitization market that still functions today, and is benefitting from QE3. There's literally no risk free bonds to buy, so you buy this. Do you really see equity yielding 30% now? I thought a lot of people moved their hurdles back down to 15%. I'm closer to the RMBS world than CLO world and I am seeing much more reasonable yields there.

A lot of these new deals are supposed to be less levered. Still I think these are horrible investments. They are almost structured to fail imo.

Good write up on autos, specifically GM in Grant's interest rate observer: http://moneyinstereo.blogspot.com/2012/12/grants-interest-rate-observer-winter.html

Your way of analyzing the entire capital structure of companies is very interesting. Curious if you posted at all about the pricing of the capital structure of banks and financials in 2008-2010. I am sure there were some discrepancies there and it seems like your investing style may have picked up on a few.

Also, keep in mind Klarman usually has 20 to 40% in cash. So a 6% position is more meaningful to his total invested assets. I said this in another thread, but I think that Buffet is the greatest business analyst of all time and Klarman is the best securities analyst of all time.

I have no idea what my returns were for the year. 2012 was my first year with a job and investing. My assets grew by ~2x just by saving money. This made some positions I initiated earlier in the year very small by year end. Most of my trades I was happy with and I don't believe I took an impairment of capital over the year.

Interesting point. I know MKL has a short duration FI portfolio which limits their interest rate risk, which may be something else to consider. Also, MKL will deploy funds into private businesses through Ventures. I don't know much about Y. What kind of equity investments do they like and how concentrated are they? Also, do they invest in distressed FI products, which you might want to consider adding to the equity investments per share?

Odd lot tender offers should be something I should consider given my limited bankroll. Does anyone have any experience or useful information on them?

One thing I like about MKL is that their comp is based upon 5 year CAGR in BV (not tangible book). The current threshold is 11%.

The exposure draft if anyone is interested: http://www.fasb.org/cs/BlobServer?blobkey=id&blobwhere=1175825477164&blobheader=application%2Fpdf&blobcol=urldata&blobtable=MungoBlobs

and how is it a "sticky" point? could you not say the same thing about John Malone? yet his stock falls way below prices he paid to buy back stock. review history of LINTA. the market is going to do what it will do. there is no stickiness. if the market has a panic, do really think anyone is going to stop and think about not selling because Buffett bought .5% of the stock back? I am not predicting this trade won't work out. It may work. It probably will work. because I don't see the market going down much in the next few months. but I really think it's being sold as something it's not. I didn't say it was sticky point. You would need to analyze the situation and determine that for yourself. One thing I think the people who think it is a resistance level look at is the fact it was trading below 1.2 BV previous to the announcement and not really after the announcement.

I agree. You don't need to believe its a "put" for it to be exploitable. You just need to believe that it is a sticky point/resistance etc. that skews the probability that it will fall below that price.

I think this is Ajit's baby, not Buffet's.

Why pay more than book for a commodity business with absolutely no barrier to entry, especially when there are better businesses that might benefit from normalization of construction? Home builders that survived the late 80's and early 90's real estate recession barely scraped by for many years until prospects improved around Y2K. I have been thinking about home builders for awhile. I couldn't get comfort over the business model and normalizing profits. However, I thought I saw some of the better builders had distressed property arms that would try to scoop up bargains. Wouldn't allow them to trade over book? IDK, if I had a chance to play housing recovery, I would have picked up something like MAS or FBHS. MAS still seems pretty undervalued compared to normalized housing starts. Anyone have any other opportunities leveraged towards the housing recovery?

I am very young and would love to become an analyst at a fund that has an extremely long horizon and has a thoughtful and collaborative culture. However, I think that there is a small supply of these jobs and a high demand, which makes competition intense and the chances of me landing a job very small. I believe I would have to get an MBA, which is very expensive and does not add much intellectual value, and even then my chances would not be high either. Does anyone have any advice or thoughts on people trying to get an analyst job?

What stock is this?

I posted on another thread that a drop in the corporate tax rate to 25% could lower the value of BRK's deferred tax loss by as much as 10.6bln. With 169bln of equity, this would be an increase of 6% in BV. With the new multiplier at 120%, the "put floor" will go up by over 7%, or $6 per B share. Awesome. I think BRK can still compound at a high rate (maybe not 20%) despite everyone saying they are too big. Also, I wonder how Buffet thinks about buying above book when one measure of his performance is increases in book value.

Can you make a thread detailing your thesis? Thanks

The release said estate so I instantly thought it might be a charitable estate. This maneuver ould make more sense to me if that was the case.

On the other hand, the executives and board of directors (you know the people deciding to do these special dividends), should notice a difference.

Pretty cool. My basis is much higher unfortunately.

twacowfca, how do you think about debt in P&C insurance companies? At first thought I assumed this would be bad because you might be losing your funding advantage. But the debt could be cheaper than equity. Also I guess it depends on the uses of the proceeds. Do you have any thoughts on capitalization or could you provide some thoughts on how you analyze an insurers capital structure?

I thought the list wasn't about building another BRK, but compounding money at high rates over time. Klarman has been phenomenal at this and has done so with much less risk than anyone else. I think of him as the best security analyst ever and Buffet as the best business analyst ever.

MKL's culture seems to be nearly identical to BRK's. I don't think Gayner is in the same league as Buffet investing wise, but I think the company is set up to deliver more than satisfactory results.