link01
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Posts posted by link01
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volatlility at the end of the world by artemis capital is a very thought provoking article, & i seen it before.
but is a otm call option on spx really a cheap bet on hyperinflation? how was the performance of the braod indices like spx during the 70's, a period of high tho not exactly hyper infaltion?
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On another note, hyperinflation protection is also very cheap to buy. I wonder why the Fairfax team haven't built barbell protection.
what hyperinflation instruments are you referring to? other broad based asset indicators associated with inflation have been recently getting cheaper but dont yet look cheap from a multi year historical perspective
and if fairfax were to buy some hyperinflation protection now as you suggest he'd really be buying a straddle rather than some form of barbell protection
i think he's probably still firmly in the deflation camp at the moment, tho he trimmed his long term us treasury holdings, likely because the prices had discounnted all but the most draconian deflation outcomes
http://www.zerohedge.com/news/china-and-end-commodity-super-cycle
http://www.zerohedge.com/news/chinese-buyers-defaulting-commodity-shipments-prices-plunge
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the emails provide some pretty clear evidence of intentional naked shorting no matter how merrill & goldman & their hedge fund co-conspirators spin it.
great find!
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many thx. a small co like this really heppls investors cut thru the relative haze with an interview like this, considering the lack of 10Q's & the like
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i'll always have a soft spot for luk so thanks for posting.
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thx, norm. i always look forward to reading the ffh meeting notes. its the next best thing to being there.
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i sold when during the compensation fiasco. my stomach is still in knots thinking about it. but i wish you luck, ragu!
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ian cumming will be missed. what an incredible record he & js have put together over the years. along with web & munger they've set me in good stead early on when i knew even less than i know now! i can only wish him heath & happiness in his autumn years, along with a good glass of one & another his favorite crimson wines shared with friends & family. cheers, ian!!
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for you option geeks out there, this could have been written by bill gross if his gig were options instead of bonds. there's some interesting philosophical points raised:
<<Volatility at World's End symbolizes a new paradigm for pricing risk that emerged after the 2008 financial crash and is related to our collective fear of deflation. The metaphor encapsulates the unyielding sense of dread that the global economy will plunge into the dark abyss and is the source of major changes in volatility markets. Today the existential fear of world's end deflation is so powerful investors are willing to pay the highest prices for portfolio insurance in nearly two decades. The market for forward volatility has become unhinged as the SPX variance and VIX futures curves sustain historically high premiums over low spot vol. My argument is not that this extreme fear is misplaced but that it is mispriced. Like Odysseus in the epic poem the global economy is trapped between the monsters of Scylla and Charybdis. We risk one to avoid the other. From one world's end to the next sometimes I wonder if decades from now we will look back with the hindsight that we were all hedging the wrong tail....
Today traders are irrationally exuberant for fear.
The VIX futures curve (a rough proxy for SPX forward volatility markets) has become unhinged breaking new boundaries in the price of fear. The cynicism of retail investors burned by a decade of phony bull-markets is driving the popularity of VIX exchange traded notes and introducing retail demand for vega on the front of the term structure. The largely retail buyer base of VIX ETNs seems to follow a one-dimensional playbook for purchasing vol based on anchoring biases with little regard for the intricacies of the asset class (e.g. "buy VXX when the VIX is low"). Farther out on the curve institutional investors are driving up the price of forward volatility by purchasing tail risk insurance even as investment banks have pulled back the supply of short vega due to reduced demand for structured products. Below is visual breakdown of different regimes in VIX futures and options from 2004 to 2012. The steepening of the VIX futures curve and higher volatility-of-volatility ("VOV") skew for VIX options demonstrates the rise of investor fear in the post-crash environment. VIX skew measures the volatility-of-volatility (VOV on y-axis) investors are willing to pay per given level of spot-VIX (on x-axis). The steeper the VIX skew the more premium it costs to hedge against a crash using VIX options. The chart that looks like it was drawn by a first grader (bottom left) shows raw VIX skew data and is hard to interpret. The chart to the bottom right uses a smoothing technique to show the rise in fear and sharply steeper VIX skews whether volatility is at 14 or 40...
There is no historical precedent to understand how modern derivatives market would perform in the hell of destructive inflation. Weimar Republic Germany did not have a market for options, CDS, or variance swaps for us to study. For me it is valuable to theorize how that reality may unfold in volatility markets and to do so we need to think creatively.
In hyperinflation everything we think we know about volatility will be backwards... literally it will be like watching options markets through the mirror. The traditional rule is that volatility will spike when the market crashes and vice versa. This is a rule of markets but not a law. In reality volatility is only a statistic indifferent to the direction of price movement. Volatility increases when an asset declines only because prices fall faster than they rise (the old adage that markets take the stairs up and the elevator down). To illustrate this concept the graphic below shows the 1-month realized volatility of the S&P 500 index deconstructed according to the percentage of variance derived from increases or decreases in the index price. On average 54% of SPX 1-month volatility comes from increases in stock prices but during crashes downside movements may comprise up to 99% of variance (thus far in 2012 increases in the SPX contributed between 80-90% of variance). The market for implied volatility anticipates the fat downside tails associated with market crashes. Since 1987 out-of-the-money put options have traded at a higher volatility level than out-of-the-money call options, a phenomenon otherwise known as negative volatility skew. The VIX index moves up and down the SPX volatility skew on the assumption that higher local volatility will result from a decline in the underlying index (see charts). The negative skew for SPX options became even more pronounced after the 2008 crash as tail risk hedging became fashionable. The problem is that this volatility paradigm, entirely valid in today's deflation fearing market, is completely wrong in a world where prices rise faster than they fall... like in hyperinflation...
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Why doesn't Resolute just buy FFH, Pabrai and Oakmont's FBK shares for $1.00 and become a large shareholder of FBK.
If FFH wants to give away their shares for $1.00, let them.
it may also be simply that each of ffh, pabrai, & oakmont see a much brighter future for abh, particularly after a buyout of fbk at $1 (price matters, & $1 may be their estimate of value with an appropriate margin of safety), while they are less optimistic about fbk & its mngt as a stand alone going forward.
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Here is the first quarter report by the AAR. Terrific analysis over the last three-five years. Definite recovery, but mixed rebound.
http://www.aar.org/~/media/aar/railtimeindicators/2012-04-rti.ashx
Personally, I think things could go either way...corporations are in great shape, but you've got significant deleveraging still occurring and governments are now out of bullets. If they find any more ammunition, it will come with a ton of delay and political back & forth. Many new controversial policy initiatives aren't likely to pass. Expect more volatility, and I would really be approaching things with caution.
Buy only when you get something very cheap, and keep some dry powder! Cheers!
as we approach the 2013 "fiscal cliff" of increased taxes kicking in & govt spending cuts right on the heels of a fast n' furious 6 month 20% market sprint higher that just might be sound advice :)
while informative, these rail load metrics look like somewhat lagging or co-incident indicators to me. more forward looking might this:
http://www.contraryinvestor.com/mo.htm
and i also thought this snippet i just ran across to be especially provocative from a (gasp) macro standpoint:
"No, all of these are secondary items. Here is what is of absolutely critical importance in the just released Goldman letter, nested deep in Hatzius' final paragraph, where it would otherwise be missed by most:
...we have found some evidence that at the very long end of the yield curve, where Operation Twist is concentrated, it may be not just the stock of securities held by the Fed but also the ongoing flow of purchases that matters for yields...
For those who are aware of the Fed's sentiment vis-a-vis the debate of stock vs flow of money effect, this will be a stunning revelation. Especially since it vindicates what we have been saying since day one, namely that when it comes to securities price formation in a centrally-planned regime, it is flow not stock that matters. And as those who follow the Fed's thinking know too well, the Fed is convinced it is stock, not flow that serves as a consistent catalyst for subjective risk valuation. The above quote is just the first crack in the Fed's thinking, because if Goldman now believes this, so will Bill Dudley, following his next meeting with Jan Hatzius at the Pound and Pence, and shortly thereafter, it will become canon at the Fed.
One way of visualizing what this means is to think of a shark which has to be constantly in motion in order to survive. Well, the allegory of Jaws can be applied to liquidity addicted capital markets. Translated simply, it means that it is irrelevant if the Fed's balance sheet is $1 million, $1 trillion or $1,000 quadrillion. A primacy of flow over stock means that UNLESS THE FED IS ACTIVELY ENGAGING IN MONETIZATION AT EVERY GIVEN MOMENT, THE IMPACT FROM EASING DIMINISHES PROGRESSIVELY, ULTIMATELY APPROACHING ZERO AND SUBSEQUENTLY BECOMING NEGATIVE!"
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Today, with Berkshire even more a bargain than in 2000 and Warren once again willing to repurchase Berkshire's stock near the current price, the risk of using margin is very low, but not zero. :)
the risk of using margin is never very low in a deleveraging world & a shiller PE of 23x sp500 earnings :(
but if you're gonna use margin then brk is one of your better bets.
how's your monetary base charts looking these days, btw?
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I am trying to what's the point, 45% is not majority. For fairfax and friends, is it really better off for them??
well, maybe abh & co are willing to buy at 1 & happy to sell more shares at 1+?
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3 I have also had the opportunity to listen to Alice speak and she intimated that a great deal of Warrens investment prowress was a result of inside information and that she would reveal all in her next book the great wizard would be revealed to be just a mortal.[/qoute]
alice's penchant for pseudo-psychoanalysis should never be mistaken for having any talent at it. web misjudged her, unfortunately. he should have tried getting to know her better before choosing her to write his biography. i think he gave too much weight to abilities solely as a knowledgable analyst who distinguished herself from the others by having an approach to her work that focused on intrinsic value as opposed to the short term earnings momentum vs expectations model that many others seem to use
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i was confused at first by the antagonisms she attracts, but i've learned to explain it as the reflexive tendency to hate or belittle people who criticize a person you admire
buffett has had his feelings hurt by schroeder, but i think he and munger still regard her highly character wise and for her intelligence
no, criticism is one thing, lack of insight is another. her psychology is monumentally ill-suited for someone like buffett & munger. might as well have asked cramer or some other fast money trader to have done his biography. therein lies whatever disappointment WEB or his admirers might have for Alice.
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Sanjeev, I don't get you. I can see tuning out Alice Schroeder, Mary Buffett, Doug Kass, etc. But Snookie too? You've gone too far, my friend.
yea, but i bet you're as tickled as i am to see those names daisy chained together with that inimitable cultural icon, snookie
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The returns are just not that great. The businesses are too capital intensive.
lets give credit where credit is due. buffett knows this all too well. he's talked about it often. but given berkshire's mammoth size these days he realizes he needs some large utility type businesses to absorb the ever increasing amounts of cash thrown off each yr by the high return biz's. mid american & burlington fit the bill nicely. and they still earn a more than respectable return on capital employed. certainly beats the short term cash & equivalents WEB would otherwise be forced to park excess cash while waiting for those increasingly elusive world class businesses & compelling large cap stock opportunities to presnt themselves. this is a dilemna the younger buffett never felt the need to contemplate in the earlier days. i think he's playing his late game hand like the maestro that compounded at the 25-30+ returns built the berkshire of today. iuts not the sprinter it used to be but its still winning the marathon.
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thx for that. rodriguez is always uncommonly common sensical.
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This is probably something very basic, but could someone explain what exactly "Net $3.2B of CDS" means? My understanding is all derivatives are zero-sum games, so if one side wrote $60-70B notional exposure of CDS, another side must have bought $60-70B of it. Why is there a non-zero net amount?
this explains it in a nutshell about as good as any:
http://ftalphaville.ft.com/blog/2011/10/27/713826/how-gross-and-net-cds-notionals-really-work/
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i am puzzled by the stark contrast between dalio and buffett on one side and klarman, watsa and rodriguez on the other side
i'm continually amazed at this as well. and yet the great ones succeed both because of & in spite of their macro opinions somehow
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according to this paul volker said of dalio & bridgewater "mind blowing":
<<The document begins: “The economy is like a machine.” This machine may look complex but is, he insists, relatively simple even if it is “not well understood”. Mr Dalio models the macroeconomy from the bottom up, by focusing on the individual transactions that are the machine’s moving parts. Conventional economics does not pay enough attention to the individual components of supply and, above all, demand, he says. To understand demand properly, you must know whether it is funded by the buyers’ own money or by credit from others.
Using these principles, Dalio was able to predict the Euro crisis. Bridgewater figured out how much debt would need to be refinanced and when, who would want it and who could buy it. Paul Volker has called Dalio's methods and calculations "mind blowing," and said “he has a bigger staff, and produces more relevant statistics and analyses, than the Federal Reserve
...This week's issue of The Economist has a wide ranging issue with Dalio, who calls America's recovery "the most beautiful deleveraging yet seen" (Europe's is "ugly").
And he's seen a lot of deleveraging, if only because part of the way Dalio constructs his investment ideas is by reading old newspapers from past periods of economic distress, like the Great Depression. Unlike Soros, Dalio isn't big on reading academics, his strategy comes from his experience after years of trading.>>
jeff gundlach has also spoken admiringly of dalio & his research, tho he's never remotely intimated that he thinks America's recovery "the most beautiful deleveraging yet seen" that i'm aware of. pimco's gross & el-erian dont sound too starry-eyed about it either. Here's The Presentation Where Jeff Gundlach Dares To Compare The US To The Roman Empire
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Looks like they expect a big pullback in common stock prices in the next three years with potential for deflation and then a rebound with very good returns over ten years.
even interpreted this way it still seems like they are timing eventual stock market outcomes. maybe not with the 10 yr outlook, but certainly with the 3 yr where they seem to suggest stocks will discount the deflation risks during that timeframe, setting up the potential for attractive risk adjusted, mean reverting returns after.
this surprises me somewhat considering that the case-shiller model still pegs the broad market indices to be 35-45% overvalued based on long term real trend earnings. so, is this another way of saying watsa expects a 35% or more swoon in stocks prices within 3 yrs? or perhaps that he parts company with shiller's valuation model here? or, maybe, like buffett, he sees a major adrenalin shot to the economy & to animal spirits from a rebounding housing sector at long last!
here some interesting comments i saw recently concerning real trend earnings:
<<There are many, many different ways to go about this, but the central
estimate seems to be "fair value" of about 933 for the S&P for end Feb 2012,
actually measured in December 2011 dollars.
For "fair value" I simply use the observed historical average multiple of trend E,
since the multiple appears to be mean reverting to a typical central range.
So, 933 is the valuation level that would make the current multiple of
my estimate of today's on-trend sustainable earnings equal to the
average observed multiple of that trend line since 1940.
The historical average multiple isn't particularly in doubt, it's 13.58x.
The problem is trying to estimate today's level of trend sustainable earnings.
I come up with the figure of about $68.75-69.50 now.
(actually trailing year reported earnings are about $87, running above trend).
Flipped around, for today's market level of 1363 to be fair value, the on-trend
trend real earnings would have to be spot on $100 right now in Dec 2011 dollars.
That won't be the case for many, many years.
A very brief recap of the process:
Start with a history of all US earnings, trailing 12 months, using the
monthly data series from Mr Shiller's web site since 1871.
Convert all of those to constant dollars with a CPI adjustment.
Smooth the series by replacing each month's value with the average
for many years before and after that. That gives you the perfect
on-trend earnings figures for the past, though not for lately.
Calculate the historical average ratio of price to then-current on-trend earnings.
(actually I average the trend earnings yield which is more numerically
stable to get 7.363%, then invert it to get the P/E ratio of 13.58x).
Build a number of different models based on only the data known at the
time to try to estimate the current on-trend level.
Test all those models against the now known perfect values to see which
models worked the best on average in the past.
Build a consensus model with a mix of about 5 of the best models.
Run those models for today to see what they say trend earnings are likely to be.
I have done the whole process separately with a different data source,
and it comes to about the same conclusion.
The final result of fair value 933 depends on whether you look at
the historical average multiple or the historical median, and whether
you look at the entire data series since 1871 or some more recent subset.
These different approaches give figures ranging from 900 to 1050,
but 933 seems to be the most sensible estimate I have right now.
The S&P is not 47% overvalued.
You might be right, I might be wrong. I sure hope so, as I'm quite fully invested (though hedged too).
But lay out your evidence. Where's the logic hole in what I did?
If you come up with a better way, I'm all ears and will gladly switch!
For example, GDP-to-index-level is by comparison an extremely crude yardstick
for a half dozen reasons. It's cute and easy, but it's dead easy to do much better.
Does the fundamental value of a collection of stocks come from anything
other than their net after tax trend real earnings? In a word, no.
Should we expect the market to trade at a multiple of earnings that is
far from the historical norm? Why would that be?
It has been mean reverting for a very long time, though only very slowly.
The multiples might stay higher than average for 20 years, or might not,
but if one is estimating central expected long run returns from an
initial purchase time and price (the purpose of my work), then that won't help.
The most sane central expectation is that the average multiple in the
next 100 years will probably be a lot like the average multiple in the last 100.
Is the trend real earnings line a whole lot higher than I estimate it?
Sure, maybe, try it yourself and graph it. Figure out the likely trend line yourself.
But the central trend line of a squiggly data series won't go through a
new all time high such as we just saw no matter how you torture it.
So, current earnings are above trend, it's only a matter of how much.
Holes in the data source? Sure, CPI is a common example. But I'm
looking at ratios of inflation-adjusted earnings to inflation-adjusted
prices, so even if the CPI is off by a mile it mostly cancels out.
The best approach that I can think of for defending a higher valuation
is that the weak hand of global labour versus the strong hand of
global capital in this 20-30 year period is going to stay the way it
is for a long time, meaning the largest global companies are going
to get a disproportionate share of the GWP pie for a long time to come,
so we might see an above-trend earnings decade or two as happened after the war.
Plus, since a lot of those firms are in the S&P 500 you'll see a
continuation of the trend of earnings growing faster than US GDP.
That still wouldn't make today's market level a typical market valuation
level, but it would mean that it's only slightly overvalued.
By the way, nothing about this has anything useful to say about the
likely direction of stock markets in the short term, say under 3 years.
It's not a sell signal on the S&P for a short term trader.
But it's an excellent guide for what to expect in the next 5-10+ years.
Based on the typical results in the past starting from levels of
price-to-trend-earnings similar to today's, the likely expectation
for the next 10 years is about 0-1%/year after dividends and inflation.
That's with 90th percentile outcome +5.6%/year, 10th percentile outcome -2.2%/year.
Since high valuations tend to last for a while, the short term looks a little better:
3 years out central expectation is about 3%/year after dividends and inflation,
but the range of outcomes is so wide that it's not very predictive:
90th percentile +21.1%/year and 10th percentile -8.1%/year.
Jim (aka, mungofitch at the TMFbrk fool board)>>
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The bought deal is disappointing. Both because I hoped if a raise was done it would be done with debt and because Fred specifically told me (~2 months back) that an additional equity raise wasn't contemplated and wasn't necessary.
i dont mind this bought deal at all, not at 2x book. if its accretive, as you excellently show in the table below, then its not dilutive. not in the most meaningful sense of that word, anyway.
i prefer a ceo thats financially conservative, eschews debt where prudent, & is willing to trade a little juice (debt issuance) for long term assurred viability. EGD operates in a very volatile industry, after all. and the whole world currently teeters on the knife edge between conflicting deflationary & inflationary forces.
i do think the ceo should follow a policy of keeping discreetly mum re any analyst & shareholder questions regarding shorter term financing or other tactical plans, tho
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ragnarisapirate,
No disrespect was intended in my original reply.
which is cash that can never get allocated for shareholders...
Here's a hint regarding the assumption that I believe will be shown to be incorrect: Never say never.
Best,
Ragu
lol, i dont ever remember you as being so cryptic, ragu.
the only way isee any possibility that at least some of sb's 25% take above that 6% hurdle will be given back to other shareholders is if (big if) sb uses that comp windfall to purch BH shares thru the lion fund & shareholders thus reap a share of the growing asset fees on a growing asset base.
"If you wrapped up all the $100 bills in circulation...
in General Discussion
Posted
with due deference to all those who believe in gold as a safe haven & a store of value, & can persuasively pontificate seven ways from sunday why it is especially compelling in todays turbulent climes, what about its valuation? mungofitch at TMF calls out its achilles heel well:
C'mon, man. The classic straw man was Buffett comparing gold to productive assets in his annual letter--get real.
Ummm, are you sure you know what a straw man is?
It's an alternative to the recommended course of action selected not
because it's viable, but specifically because it's not viable and would
be easy to dismiss, making the recommended course seem optimal if only by comparison.
In the context of an argument against gold, suggesting investment in
productive assets is not a straw man: it's a viable and sensible alternative.
Of course I suppose you could look it as the reverse: since the suggested
course of action is investment in productive assets, the mention of gold
is a straw man by comparison since it's so easy to demonstrate that it has no earning power.
So yes, you're right, Mr Buffett was using a trivial comparison to
demonstrate the obvious conclusion that productive assets are a better choice.
While on the general subject of buying shiny metals...
One argument against gold as an investment is rarely raised, and that's valuation.
A lot of folks say it's hard to value, but that doesn't mean it's not worth trying.
Traditionally the biggest selling point of gold is its ability to hold
its value more or less, on average through the centuries.
A corollary is that the price goes net nowhere: the average is pretty flat in purchasing power.
Thus, if you compare the price of gold in one or more currencies to the
historical average inflation-adjusted price in those same currencies,
you'll get an idea of its current valuation level.
It's not very accurate, but this might be one of those things where it's
better to be approximately right than precisely wrong. Gold was probably a good
deal a few years back (as good as it ever is, anyway) at under $400, but it's overpriced now.
The average ratio of the then-current price of gold to the then-current price of
a US dollar, inflation adjusted, has been $650 since 1969 in today's money.
To a first approximation, what you could buy for US$650 cash today is about
what you could buy in real terms with an ounce of gold in any typical year.
Though it's true that USD cash might lose half or more of its purchasing
power in the next few/several years, that seems like an outlier
outcome whereas it's the sensible central expectation for gold bought today.
Never mistake a cycle for a trend.
Jim
http://boards.fool.com/cmon-man-the-classic-straw-man-was-buffett-30069242.aspx