kab60

I don't have a strong view on oil prices, but most stuff today is 20-30-40% more expensive than it was back in 2019. Despite technological advances, costs to bring on supply are up (some of the cost benefits from improved tech gets offset by increased labor and material as well as probably lower quality rock). If you look at the Dallas Fed survey, breakeven prices in the Permian has increased to around ~65 USD. Considering the short-cycle nature of shale, it makes sense to me that oil prices might flucturate in a smaller band with less up and downside compared to in the past, where more growth came from longer-cycle supply like offshore. Today, high(er) prices will quickly bring on new supply, while lower prices will take supply out of the market. 65-85 USD oil isn't bad for most produces. As for offshore, just take a look at equities like Transocean, Tidewater etc. It doesn't seem like they're about to enjoy a bonanza of drilling activity. It makes sense to me than investors and companies are cautios, because these projects take a lot of time to come online + you have a threat of spare OPEC capacity.

I liked Fairfax' response yesterday, but they should just refute the report one point at a time in writing. However bad Muddy Waters' take is, they won't be able to address all the points in the call, and why most of the points are bollocks, it's not like it takes long to address them in writing.

Love your takes, @StubbleJumper. You're the only one I've seen point out how Prem was playing with fire leading up to covid, and even though he avoided a catastrophe, it's probably one to keep in the back of your mind. I'm not sure what the right price is for Fairfax, but what's different this time around is you've got a ton of earnings power locked-in over the coming years, and it seems as if there's generally little sign of softening in insurance markets. I imagine large bond losses at peers might result in this market staying hard for longer, but I'm really no expert. There's no doubt that the gravy train will eventually settle down, but when it does, book value/share should be much higher than today just from the locked-in interest, and thus investors might do reasonably well here even without multiple expansion. If we get that on top, that's gravy. I agree with others that the MW report is pretty awful. But I also wouldn't mind if Fairfax simplified a little. Those total return swaps were obviously a nice bet, but I'd prefer if he cashed in over the coming year(s) and locked in his return and switched to buybacks. He should have the money now.

Ebay spun off Paypal, so the above doesn't make much sense unless you think there were special synergies at work here. EBAY shareholders got to participate in Paypal following the spin-off, which if anything unlocked value as they were valued differently and could optimize incentives and capital allocation (and cater to different shareholders). I also don't think Ebay has been particularly good at doing buybacks. They did most of their buybacks in the post-covid period where shares briefly touched $80. So while they've spent a lot of money on buybacks, they don't exactly seem to have timed them well. I'll throw Arrow Electronics in the pot. It's mostly a semiconductor distribution business. Does like 1B of net income on 3B in tangible equity. It's cyclical but as a distributor has counter-cyclical cashflows, so it's one tough cockroach to kill. It's a simple business, one Buffett likes (owns TTI and Mouser), and the industry is well-consolidated so basically just bolt-on deals+buybacks left for Arrow to do.

If AIG is 'fixed'? I'm no insurance expert, far from it, and it's always difficult to know anyway considering how much damage can be done with a pen and how big some of these things are, but I think the below suggests things have improved since new management took over about five years ago (not as CEO initially): I never invest in financials unless I'm very comfortable with the jockey, so I spend most time reading up on management and obviously like what I see.

You're welcome @Gregmal. I started following when Dan Loeb wrote about it in Q4 and thought it was an obvious opportunity as well. Then it got killed along with most other financials during March and May even though there's no deposit flight risk, and I sorta wondered if I was missing anything, but I don't think I did, so I bought... (they have some office exposure+HTM losses in their investment portfolios, but they don't have a ton of duration and investment yields are ticking up nicely...) I talked with some folks at some big funds about it, but they'd rather buy Chubb and WR Berkley with decades of good returns behind them and pointed to the meager ROE of AIG. Rearview mirror versus looking ahead, I think. I'm not saying those are bad picks either, they're great businesses and all, but they're also trading at 2-3xTBV versus <1x here, and this one is engaged in humongous capital returns AND unlocking of value through spinning off and selling down Corebridge+various subs... Next big levers is taking out a ton of costs, as the CEO wants AIG to become a pure-play insurer with a lean structure versus this bloated conglomerate with tons of costs and inefficiencies... This guy did some good write-ups on the opportunity: https://seekingalpha.com/article/4600871-aigs-underwiting-performance-is-deserving-of-a-higher-valuation (I think perhaps he was even on a podcast recently talking about the opportunity in Fairfax and AIG.).

I think Canadian producers look quiet interesting still. My largest holding is $IPCO, which is down around 30-35% this year, but realized prizes oil prices aren't all that different from Q4 '22. While oil prices have dropped, so has the differential between WCS and WTI, and the Transmountain Expansion opens in Q1 '24 which all else equal should be positive for the differential as well. I'm licking my wounds from Harbour Energy PLC, where I definitely got the European gas situation wrong (at least in the short term).

Yes. It seems like a great little business, I just don't think it looks particularly interesting from a valuation perspective considering the cyclicality. I like Kitwave, Macfarlane, S&U and Sabre Insurance around these levels. Also think Pendragon is interesting as a special situation of sorts. But the UK is where capital returns go to die, so I'd probably not go balls long any of those names. Mortgage Advice Bureau and Belvoir Lettings are also interesting plays on housing (and inflation).

Not saying this is an Autozone either, but those guys run with negative equity and negative working capital - basically having suppliers finance their operation. And I wouldn't call them levered either at 2xnet debt/ebitda. I'm not saying the cash at Wickes is 'free' per se, of course they want some at hand, but if they were aggressive they'd probably finance that through a revolver or term loan instead of equity. Like most retailers Wickes has a ton of operating leverage, and long term leases are obviously dangerous if things turn south. But I think that's just the life of being a retailer. Sure some own their real estate, which they can selloff piece-meal if things turn to shit, but in reality that rarely works out either, as we all know (cutting off limps to try and stop the bleeding...). I've been looking at Wickes on-off over the last couple of years and think it looks pretty cheap, I just don't think it's better than a lot of alternatives.

Highly levered? Do you count their leases as debt? Ignoring leases, they have 100m net cash per last Q. The accounting for UK companies with leases is confusing and makes the cash flow statement a mess. But I agree Wickes is definitely no HD.

Yes, that's correct. My bad. As an AIG shareholder I was/am entirely focused on how much capital we're getting back through the transaction (>4,5B), as I saw 3B quoted around.

Don't wanna make this about AIG, which I hold, but I think Renaissance RE are paying >2.2x BV for Validus RE. Look at the press release from AIG: AIG to Receive all Capital in Excess of $2.1 Billion of Shareholders’ Equity of Validus Re and Achieve Future Capital Synergies of Approximately $400 Million from the Recapture of Reserves as a Result of Transferring the Validus Re Balance Sheet to RenaissanceRe , which together, as of December 31, 2022 , was over $1.5 Billion ; Total Transaction Value to AIG is Expected to Exceed $4.5 Billion https://aig.gcs-web.com/news-releases/news-release-details/aig-sell-validus-re-renaissancere

If you ever get bored, Viking, maybe you could add AIG to the bunch. That's one ugly duckling trading even worse than $FFH despite putting up great improvements in CR since current management took over and overhauled the operation. I prefer Fairfax' credit exposure, but AIG has been putting up 90% CR's in recent years and trades at like 2/3 of 'adjusted' TBV (adjusted for HTM losses) while gobbling up shares. I understand why investors stay away from AIG due to the number of headfakes since the GFC, but it does look a little different this time (or perhaps they're just benefitting from the hard market...). It really does seem like AIG turned the corner on underwriting (famous last words?), and they'll be taking cost out over the coming years as they simplify the business to focus entirely on general insurance. They already IPO'd part of their life insurance-business, which they're looking to fully divest over time, and as that gets off the book they'll run a much simpler and leaner operation.

Results look pretty good. Analysts will love that they locked in some duration, and the timing looks favorable. Now they just need a big recession and/or stock market crash and flight to safety, so their treasuries get bid up, and they can swap to corporate bonds.

Yes, actually ticked up a bit for small banks.

I think $tslx is interesting. It's a very well-run BDC with 1,15xdebt/equity, funded by well-staggered, unsecured debt and it has a ton of liquidity. It has paid up for that liquidity over the years to be able to strike if there was ever any stress. Almost every loan they hold is first lien and floating, so they're benefiting from higher rates. It's not gonna be a home-run, but it has beaten the S&P500 since inception, and I'm sure they'll find interesting things to do in the current malaise. I'm also drawn to SLM Corp., but that's a longer pitch, and there's a trifecta of risks; funding, political as well as credit. I do think odds look pretty attractive though. Generally, a basket approach probably makes sense. Would suck to hold the one regional bank caught in a meme-instigated bank run!

Harbour is doing everything they can to affect politicians in the UK (so far without success), so they'll keep whining as much as they can. While net profit was negligible due to accounting issues, they did 2,1B in FCF in 2022 and should do around 1B this year and probably the same in 2023 depending on how commodity prices behave. They have some costly hedges that their bank partners forced upon them, which gradually expire and look much better from 2024 onwards. I think the real risks here are M&A and gas prices, and then they also have very large longer term decommission liabilities, though that number was taken down meaningfully in 2022. Around 50% of production is NG, so they're clearly very affected by swings in NG prices, and after skyrocketing NG prices have plummeted. I think the company is cheap, but I wouldn't be long if I didn't like the CEO and their capital allocation. She owns like 40m of stock IIRC, is American and sits on the board of Bank of NY Mellon. I feel much more comfortable in her company than I would in say Serica or Vermillion, and I also wouldn't have the guts to be 100% long NG. I talked with the Company earlier this year, and I know they looked at a number of deals, which they eventually pulled out of. I can't say I love the idea of them doing M&A as I can diversify myself, but I'm pretty comfortable that they won't be doing anything stupid. And while we wait they're retiring shares hand over fists while returning 200m annually in dividends, which combined with share repurchases increases the dividend on a per share basis. EDIT: If they do 1B in FCF this year, they'll probably spend another 400m on buybacks and 200m on dividend with 400m to pay down debt. That should take net debt down to 500m, financed by a bond, and give them ample opportunities to do M&A if they so like. While their reserves are a little short on duration, they're nowhere near alarmingly short, debt is becoming neglible and buybacks look attractive at these levels, so they should be forced to rush into any deal. Management seems competent and disciplined. There's still some overhang from former PE owner selling.

You might be right. But I don't think the risk-reward is as attractive anymore, and there is a chance you're wrong. I was quiet long BATS and Altria going into 2022 and did very well (relatively), but I since sold it all. My thesis was always that they'd be able to increase prices more than volumes would decline, which combined with increased margins would lead to MSD earnings growth on top of a 10% FCF yield. Not too bad for a resilient business in a cozy duopoly. The huge drop in volumes this year has been worried though. It might just be an anomaly, and things might go back to the normal trend of 4-6% volume declines, but I'm not sure, and I'm not sticking around to find out this time. I think there's a very real social effect at work here, and as more people switch to alternatives, I think declines could accelerate. Anecdotally, at first, one of my friends started using nicotine pouches. Now everybody has quit their cigarettes and started using pouches instead. I guess it's the same dynamic with vaping. I just think that pouches are a much better product than vapes and cigarettes for a lot of folks (and it doesn't kill you it seems), as it's discrete and can be used socially (you can have one during dinner and not have to leave the party). Now pouches just might increase the TAM and overall nicotine consumption, but I do think there's a chance this time is a little different. Sweden, which is the furthest ahead on nicotine pouches and snus, have very few smokers left. Pouches are still a small part of the overall market in the US, so it might take long, and if one was comfortable with capital allocation, I don't think you could lose a lot of money here around 10xFCF, but I think it's incrementally less attractive. Even though Altria owns on!, and Swedish Match is a great business (PM), it's not clear the economics will eventually shape out to be as attractive as with cigarettes (though growth might make up for that). And the valuation is basically where it has been for a long time - right around 10xFCF.

Asbury Automotive is still my highest conviction idea LT, but no idea if things get ugly as margins eventually come down so timing is tough. It's a hugely succesful biz with a great LT track record. My edge here? Probably just structural in that I try to take a 3-5 year view. On the less cyclical side, I think Ardagh Metal Packaging looks great. Secular growth (bev can growing 4-6% PA), temporary headwinds (capacity, input costs (aluminum, gas), attractive valuation (not least on 24-25 FCF). Plus a ton of debt, but it's fixed and rather LT, so I like the levered upside. My edge here? Again, mostly structural (2022 was shit (or as shit as it goes in a great industry like bev cans). Not a lot of FCF before 2024-2025). But I'm also comforted by small nuggets of information; rational industry with great compensation schemes (focus on ROIC, not market share). I also like Charter Communications. I stayed away until their recent investor day, as I thought they were being to complacent on competition. But they increased capex plans. Market hated it, it was exactly what I was hoping for. A quick path to gigbit symmetrical speeds and future-proofed for fiber (and opening for fiber on demand). We can debate whether people need 1gigbit symmetrical (most don't), but the marketing claims are valuable and eventually people probably will. Investing in their network so they can eventually roll out fiber everywhere - when it makes sense - seems to futureproof the business. Which you really want considering the levered equity model. I also think their mobile opportunity is underrated the more I think about the whole industry and structure. In tech I think Meta and Pubmatic are interesting. I think they're way too cheap (2-3xTBV, 6-7x EBITDA).

Returns have been easy to calculate in prior years, as I had only one active account. This time around, stocks were spread across 5 different accounts, some of which were partially liquidated throughout the year and moved around due to tax considerations and new job requirements. Main account (like 65% of NAV) was up around 15% before it was liquidated midyear. Pension account was up 47%. A couple of tax deferred accounts was 100% long British American Tobacco going into the year (winner) and swapped for 100% Twitter at $37 (big winner). Those were up like 65-75%, I think. Also opened a new regular account and stuffed it with International Petroleum in February, a couple of days before Putins' invasion of Ukraine. While another account was mostly in Swedish Match, which got taken out. Better lucky than good. Not sure what the final tally is and can't really be bothered to do the work. But definitely a good deal north of 15%. A large part of the gain was attributed to a strong Dollar, as I live in Europe and invest quiet heavily in the US. I also had some decent relative winners in Berkshire (sold at 330), tobacco (Altria/BATS), Swedish Match, Twitter and International Petroleum. Personal losers were Discovery (down >50%), Motorpoint PLC (same) as well as Facebook (bought around 200). Smaller positions and cut losses pretty quickly though, so missed the latest drawdowns and losses were manageable. But mostly I avoided carnage, as my biggest position, Asbury Automotive, held up pretty well throughout the year. At least as importantly I figured the risk/reward of a lot of my holdings had worsened coming into 2022 after a strong couple of years with less attractive valuations, increasing inflation and clear messaging from the FED. I've read all there is to Howard Marks and studied Druckenmiller as good as I could, and all I took away as somewhat actionable was 'having an idea where we are in the cycle' and 'don't fight the FED'. It seemed like both were setting investors up for losses, so I went mostly on the defensive in late '21 and favored cheap and good companies that could cope or even thrive if inflation came to pass. I had some more speculative positions going into '22 (TIGO, AMRS), but quickly got rid of them as I felt uncomfortable holding anything without strong current cashflows and low valuations. Not that anyone cares, but it'll be the last time I update my personal performance (as all my mental bandwidth as well as AUM will be focused in a fund). I started as a complete novice in 2015 and have been rather lucky throughout the years. But I've also learned a ton from helpful folks on this board as well as elsewhere, so hopefully a bit of skill has been involved as well. 2015 13 2016 45 2017 19 2018 -7 2019 23 2020 45 2021 65 2022 (north of 15%)

Position sizing and stop listening to uber bulls twisting every fact to support their narrative. I have around 15% exposure so I get to fight another day, even if I'm wrong. I hate commodity investing, but I think the setup looks pretty good. It's like all the companies got the same memo on capital allocation, while all the policians are making the same mistakes.

What's interesting is how well oil equities are holding up. IIRC energy is up like 60% this year, while oil prices are generally flat. I think it goes a way to show how undervalued and hated the sector was at the beginning of 2022. I have just as little idea as anyone as to where oil goes short term, but I do think Currie from GS has a credible case as to why the medium to LT looks good (for oil stocks). Structural lack of supply, and with the massive oil price volatility we've seen I don't think that's about to change despite a murky demand outlook (China, recession, SPR releases). Sector has been massively de-levered during the last two years and most companies are now very close to their (very low) leverage targets and returning massive amounts of cash to shareholders. I've come across a lot of (sensible) capital returns targets from O&G companies this time around (they're all mostly buying back stock), not those dumb volume targets a lot of them chased up to 2014. When you layer in a lack of investments for close to 10 years, a lack of training in skilled engineers/flight of labor in the downturn and raising interest rates (all increasing costs/inflationary), select oil equities are still the best risk-rewards I come across at the moment. And that's without even layering ESG on top. Lots of O&G companies are pursuing CCS projects, which seems like BS to me, but it looks quiet certain they'll get a lot of subsidies, and I wonder if you'll see all these dumb ESG folks piling in five years out when they get online. That'll probably be a good time to leave for greener pastures elsewhere, but so far the sector isn't getting much love despite how well equities have held up. I've been buying some Harbour Energy PLC in London lately (lots of legacy North Sea assets), which should do 2,1B FCF this year on a 2,6B market cap. Net debt was 1,1B end of September, but they could pay that off in a couple of months, if they so wanted (they've returned 500m in cash so far this year). Now as all investments it comes with some specific risks, and I don't want to make this about one particular equity, but despite the selloff in growth and tech this year, I still don't think a lot of that stuff looks reasonably priced yet (perhaps except for some big tech).

I don't think you're getting paid much to take duration up, so I expect duration will increase but still be quiet low. The 'risk' is we hit a hard recession and rates fall, in which case it would've been better to lock in more duration at higher yields. Others are much more knowledgeable, but even though rates have moved violently higher it was off a very low level, so I don't see Fairfax reaching for duration. In other words I expect Fairfax to still be quiet sensitive to ST rates as we go forward.

I think the setup a couple of weeks ago was better than 2020. Thanks everyone and especially Viking for keeping us up to date. Sure it was cheap in 2020, but most stuff was dirt cheap back then. You could buy Berkshire at $175 for a long time - even after the market had rallied - which then went on to more than double in < 2 years (and 'enterprising investors' could've bought LEAPs on BRK...). Fairfax was clearly cheap, but it had been cheap for a long time, and it wasn't clear it would be 'working'. Since then developments have been very positive, and they're looking even better in the years to come. I've followed for years but finally 'like the stock'. There's a lot of stuff right now that seems cheap, but I think Fairfax has some pretty unique attributes. While I like the absolute risk/reward, I also like it from a portfolio perspective. While insurance is cyclical (soft/hard markets), it's not affected by the typical business cycle and could stay strong going into a recession. And then you have a ton of rate sensitivity, but unlike the banks you don't have to worry about a loan book, which typically means bank stocks 'doesn't work' in a downturn as investors start to fret about losses despite NIM climbing up (and it's nice to have some stock moving up while the market moves down). I'm looking for other rates plays, but Fairfax is the one I found with least downside. Not least as I prefer not losing my shirt even if rates fall.

Lancashire seems pretty upbeat FWIW, stock market likes it: Lancashire Holdings Limited (“Lancashire” or “the Group”) today announces its trading statement for the nine months ended 30 September 2022. Trading statement key points Gross premiums written increased by 34.3% year-on-year to $1.3 billion. Group Renewal Price Index (RPI) of 107%. Net loss estimates from hurricane Ian in the range of $160-$190 million. Total net investment return of negative 5.0%, primarily driven by unrealised losses. Strong balance sheet and robust capital position. Alex Maloney, Group Chief Executive Officer, commented: “During the quarter we witnessed a number of catastrophe events and we extend our sympathies to the many people impacted. Insurers play a vital role in offering protection to vulnerable communities and we are reminded of both the potential destructive power of nature and the value of the risk solutions we offer. Our current estimate of the net impact of hurricane Ian, excluding inwards and outwards reinstatement premiums and Lancashire Capital Management, is within the range of $160 million to $190 million. This is within our expectations for an event of this type. During 2022, Lancashire has continued to grow and diversify its underwriting portfolio and deliver on its underwriting strategy. This has been fuelled by solid rate increases and strong market conditions which has given us additional resilience. Gross premiums written increased by 34.3% year-on-year to $1.3 billion. We expect the broader positive conditions to continue into 2023 and our strategy is to take advantage of attractive market opportunities. We believe we could see significant increases in rates and improving terms and conditions due to recent events and the fact that capacity had already been tightened in the wider market. Clearly the macro-economic outlook is increasingly uncertain with significant increases in interest rates, higher inflation, and broader dislocation in global markets and we expect this volatility to continue. Lancashire reported a total net investment return of negative 5%, primarily driven by unrealised losses. Future earnings in our portfolio should be bolstered by the higher interest rate environment, which we should benefit from relatively quickly given the short duration of our portfolio. We believe we are well-placed to manage inflationary pressures and have competence in dealing with previous inflationary and deflationary changes within a number of our product lines. Inflation will also present further opportunities for us as clients seek to purchase additional cover. Even allowing for the impact of hurricane Ian, and unrealised investment losses, our capital position remains strong and we will drive forward with our growth strategy and capitalise on the strong rate environment through our diversified product portfolio. As always, my thanks go to all our colleagues for their hard work and to our brokers, clients and shareholders for their support.”