onyx1

From a screen run last week for large insider ownership: MANT, TTEC, NWLI, NPK, BTH, SYX, BBGI, ARDNA, UHAL

True that. The nature of structures can cause violent price movements. During the corporate fraud/telecom meltdown in 2003, I took over a CDO mezz position at 4 cents on the dollar. I asked another trader if he cared to buy it and he told me his bid was ZERO. Enter market recovery, and 18 months later it matured at PAR, a 25-bagger. I remind my friend of his bid as often as I can, hahaha!

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? Spread widening and resultant changes in market value have no effect on OC levels in CLO structures. Same for CDOs, CMOs etc. There is no forced selling of assets due to a drop in market value. One caveat - there is forced selling in market value deals (as opposed to the much more popular arbitrage deals), but those were much more limited and that's not what the poster was referring to anyway. Yes. And the potential of forced selling is exactly why they are so extremely rare.

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? Spread widening and resultant changes in market value have no effect on OC levels in CLO structures. Same for CDOs, CMOs etc. There is no forced selling of assets due to a drop in market value.

Illiquidity keeps me away from less than $50mm market caps. This mostly applies to the $50-75mm market caps as well, but exceptions are made for special situations where the company is in runoff or liquidation mode.

If your ITM LEAPS are performing like mine, they are up considerably more than the underlying, plus more than half of the financing premium has been paid down. Thanks Twa, this trade has made me happier than Eddie Money running a travel agency! :)

If rumors are true, he was a loser on the deal. http://realestalker.blogspot.com/2013/01/update-howard-marks-in-malibu.html "One canary told us the buyers were an extraordinarily rich Russian couple with "suitcases full of cash" who toured the property multiple times and wanted the property really bad. Another told us she heard the Marks' property had been shown very quietly with an asking price of $125,000,000, that the house was sold furnished and—most interestingly—that Mister Marks has told at least one friend or financial industry associate that after purchase price, renovations, decorating expenses, carrying costs and real estate fees he was gonna take a pocketbook punishing $20 million bath on the property. Imagine, children, having the pecuniary wherewithal to absorb a $20 million loss on a single property transaction and still be sick rich."

Ouch, $40/share! Didn't know that story. Good lesson on patience.

Awesome Twa, great decision! I'm in the 70 strike Jan 14 LEAPS and happy too. They are up 16% and plus they have already "paid for" almost half of the initial time value cost through decay. How do you interpret BV as it applies to company repurchases? Is it BV as published at the end of the most recent reporting period, or is it BV as estimated internally by WEB on the day of a repurchase? I'm very glad for you that the trade has worked well. In 2011, immediately after Warren made his first repurchase announcement, it was clear that the limit for repurchase was based on the last reported quarterly BV. Every time the stock went below that level there was increased volume, and the stock quickly popped back up above that limit. Then, within a short time, BRK actually reported repurchases when they published the next quarter's results. During the following several months, BRK's price rarely got down to the repurchase threshold, and never significantly below it as calculated by the latest public quarterly filing. There were, however one or two times when BRK got below what I estimated the quarterly repurchase value was at the end of the calendar quarter, but before they actually reported. In summary, I have seen no evidence that BRK has made any repurchases based on what an instantaneous estimate would be before that value was officially reported. However, there did seem to be a possible adjustment in how close to the previous quarter's limit they will go when the market was weak as it was after Christmas until the EOY bounce began. Formerly, BRK repurchased aggressively when the stock got no more than half a percent below the limit established by the previous quarter's reported results. However, at the end of December when the market was weak on the verge of the feared fiscal cliff, the buying activity at first kicked in as usual at less than half a percent below the limit, and the stock quickly popped back up above the limit as it had in the past. A few days later, as the market was even weaker, the buying activity kicked in strongly after the stock dropped to a range between one and two percent below the previous quarter's limit. BRK may have bought back more shares this time than in the past by making most of their repurchases a little below the limit instead of almost exactly at the limit. That is assuming that a lot of the buying just below the repurchase limit was by BRK as I suspect. We should know if this was the case when BRK reports EOY results. :) Thanks Twa you are very generous to share your observations. Your short term options have worked out temendously. With admiration, I looked back on the details at the time of execution. For example on Dec 31: Underlying BRK B share price .............. 88.25 120% of last reported BV, "floor".......... 89.35 Strike of Feb 15 '13 call option ............ 90.00 Price of Feb 15 '13 call option ............... 1.25 With the next reported BV date after the option expiration date, the "floor" price was sure to remain under the strike price. Were you expecting to hold these option to maturity, or were you expecting a higher price on the option from a quick move of the underlying up to the floor of 89.35?

Awesome Twa, great decision! I'm in the 70 strike Jan 14 LEAPS and happy too. They are up 16% and plus they have already "paid for" almost half of the initial time value cost through decay. How do you interpret BV as it applies to company repurchases? Is it BV as published at the end of the most recent reporting period, or is it BV as estimated internally by WEB on the day of a repurchase?

By far the most amazing (and expensive) chocolate I have ever had the pleasure of tasting! The champaign truffles are out of this world.

Dowling & Parntners upped their estimate of BRK Sandy losses to $1.4bln this morning and now believe 2012 YE BV will be $75.44/share, 120% of that BV is $90.53/share. With the B shares trading above the "floor" I don't see shares being purchased, which works just fine for me.

That's interesting. I wonder if he allowed anything for Sandy losses? Today's surge in the market should conservatively take instantaneous BV/SH to about $91.50, or perhaps higher by Ramsom's methodology. This is interesting as we bought a lot of short term BRK calls last week that are up double or triple what we paid for them. :) Their BRK guesstimate is 3.8% of $20bln in Sandy losses, or $750mm. But they expect late development to bring losses to a level higher than first estimates, and are assuing flooding caused a higher mix of commercial losses vs auto/home. BTW, I fat fingered his name, it's spelled Ransom.

Gary Ramsom of Dowling & Partners (one of the insurance experts WEB picked last year to ask questions at the ASM) estimated year end BV of $75.97. 120% is $91.16. Note that his estimate was on November 29 and we saw a meaningful improvement in general equity valuation in December, including a move in BAC from $9.8 to $11.6. December's BAC movement alone might be worth $0.33/share after tax.

Very impressive, congrats!

+37% before taxes, a monster year for me. Following a +2% year in 2011, I maintained 100% long throughout 2012 in eight positions plus a basket of uncorrelated special situations. Started year with no single position over 20% of portfolio. I am a full time investor. Some highlights (and lowlights): BAC and BAC A warrants (I added more three times during the year): +109%, +66%, +54%, +45% BBSI +93%: Bought this owner-operated California PEO in 2009. Owner died last year and the company bought back all his family's shares in one transaction equal to 30% of outstanding. This is now a 4-bagger vs. my average cost. RJET +65%: Good management and restructuring efforts have keep costs down and business competitive. Several catalysts in 2013. Expects to generate $1.20 cash in 2013 vs. a year end close of $5.68. WFC +27% BRK +17% WRB +13% Uncorrelated basket: +12% MSFT 0% PNCL -96%: a painful and humbling goose egg. My only good decision here was to avoid making this a big position. In future, I will stay away from businesses with one customer and be more sensitive to the potential for deceitful actors.

Happy New Year to All, and thanks, you all have made me a better investor.

You lost me here.

A warm Merry Christmas to everyone!

Good point. Practically, large repurchases should be rare. BRK's share turnover is very low. The big recent buyback was about half a percent of all shares outstanding. Typically other purchases have been more like rounding errors in calculation of BV/SH. :) You're probably right that risk is academic, and now that I own LEAPS I would have no problem if the market kept him from having an opportunity to buy any shares at all.

The irony of using the Jan 2014 LEAPS for this trade (2015 is not really liquid enough for me atm) is that if WEB were to buy back a large amount of shares this year the BV of BRK goes down. For example, if he were to spend $22bln to buy 10% of outstanding tomorrow at 120%, BV per share would immediately drop by a little more than 2%. From WEBs standpoint, this is no problem because EPS will increase by 8-10% due to the smaller sharecount and he will recover his $3.7bln BV premium "investment" in about 3 years (earning over 20% IRR). For an levered investor in 2014 LEAPs though, the 2% hit to BV is immediate and all else equal a negative since they won't be around long enough to receive the payback from EPS accretion. Cruel world! ::)

Simple & robust. Little downside and several catalysts on the upside, love it! Thanks Twacowcfa!

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.

http://professional.wsj.com/article/SB10001424127887323339704578173241968322374.html?mod=WSJPRO_hpp_LEFTTopStories Given that lower US corporate tax rates have been supported by both parties (Dems have suggested lowering rates to 28% from 35%, and Repubs have offered 25%) it is plausible that we will see some agreement on this topic. If it happens, corporations with large deferrals will be required to adjust the value of their deferrals and this will have a direct effect on BV. Those with large DTLs will show an increase in BV, and those with large NOLs/DTA will show a decrease in BV. Who will show significant changes? Two come to mind, AIG and BRK. I have made some simplifying assumptions to get an idea of the maximum exposure for each. For a drop to 25% from 35% rate: AIG will be a loser. AIG had a BV of $114.3bln and a net DTA of $16.6bln as of YE 2011. DTA could fall to a value as much as 25/35 * 16.6 = $11.85bln or drop of 4% of BV. BRK will be a winner. BRK had a BV of $169.0bln and a DTL of $37.1bln (lots of unrealized gains from securities) as of YE 2011. The DTL could fall in value as much as 25/35 * 37.1 = $26.5bln, or rise in BV of 6%. Keep in mind these are maximums and likely to by less as some the deferrals are linked to international operations (especially with AIG). With BRK though, the increase in BV could have a meaningful impact on the market price because of the Buffett put of 110%.

It's worth considering. For US taxable accounts, there is no wash-sale rule for gains so one can sell and immediately buy back the same shares. This will create a recognizable gain at today's rates and reset your basis for future gains. Of course it requires cash out of pocket today, but you do benefit if rates are higher in the future.