KJP
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AMC Networks
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Starbucks was in ~350 Teavana leases and got out at a cost of $30M. That was a fraction of the total leases. You can't get out of $200M of mortgage debt by passing the lender $30M. Seems like a big difference but I am an accounting noob.
You can get out of the mortgage debt on those terms if you can sell the encumbered property for $170 million. That is why Starbucks was able to get out of the leases on the terms you mention -- the landlord could release the assets. In other words, the asset embodied in the lease -- the right to use the real property for a certain period of time -- was not worthless. Indeed, some leases are worth more than the book value of the liability, because they are below market and can be sold for gains. For example, Sears has been selling certain leases for a profit.
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It may be that the answer is to capitalise operating leases for some purposes but not others.
I believe this is correct. You'd have the same answer to the question of whether to include purchase accounting intangibles in the denominator of your ROIC calculation.
Taking your operating lease question, if you wanted to know who is the best at actually operating an airline (as opposed to how that operation is financed), you'd likely want to capitalize all leases so you're looking at an apples-to-apples comparison. On the other hand, if you're trying to figure out how fast a company can grow without issuing additional debt/equity, then you need to take into account how they finance their growth.
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Charter Communications
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I’m not familiar with NVR. Just looked it up, it does have a low PE ratio. Do you feel confident that it will be around and earnings and revenue will continue to increase for the next 30 years? (Assuming home starts average average what it has in the last 60 years.
3. With that said, personally I wouldn’t invest in home builders. Just the fact that there are so many - they have no competitive advantage. They don’t have great balance sheets and to me don’t seem to be great 10 year or more holdings.
Simpson looks like a strong company, and I agree with you about most home builders, which are too weighted towards levered land speculation. NVR, however, has historically been an exception. It's long-term returns are even better than Simpson's. The earnings of both companies are driven by new home sales (NVR even more so than Simpson).
Simpson is trading at 25x 2019 earnings, while NVR is trading at ~15x 2019 earnings. What is the scenario in which Simpson outperforms NVR?
I can't vouch for any business for the next 30 years, so I can't help you there. You seem to have extensive knowledge of Simpson, so it makes sense that you have great confidence in it. You also seem to believe it enjoys a very profitable niche in the industry, particularly versus homebuilders. You can look at a long-term stock chart of most homebuilders and see that, most of the time, you're absolutely right.
But NVR has long been a special case, rather than just a transient "low p/e" opportunity:
January 1, 1995/Today/CAGR
Simpson: ~$2.70/$73.23/14% -- Very good! This certainly supports your belief that Simpson is a very good business
NVR: ~$5.50/$3090/28% -- Incredible!
I don't know what the future entails, and things could change. But the last 30 years at least suggest that it is possible that NVR at 15x is a better bet than Simpson at 25x.
Full disclosure: I currently own neither because I foolishly cling to the belief that I can time the market on NVR.
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3. With that said, personally I wouldn’t invest in home builders. Just the fact that there are so many - they have no competitive advantage. They don’t have great balance sheets and to me don’t seem to be great 10 year or more holdings.
Simpson looks like a strong company, and I agree with you about most home builders, which are too weighted towards levered land speculation. NVR, however, has historically been an exception. It's long-term returns are even better than Simpson's. The earnings of both companies are driven by new home sales (NVR even more so than Simpson).
Simpson is trading at 25x 2019 earnings, while NVR is trading at ~15x 2019 earnings. What is the scenario in which Simpson outperforms NVR?
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In the US, Airbnb ownership is a very smart thing to do.
Put bluntly, it is an asymmetric bet against the US banking system, with very little downside
US HELOCS/mortgages are for the most part non-recourse.
Both the ALM mismatch risk, and cash flow mismatch risk, are borne by the bank - not the unit owner.
And the more units the owner has - the more effective the risk transfer is.
Why do you believe that most HELOCS/mortgages (given the context is AirBnb, I assume we're talking about residential mortgages) in the US are non-recourse? That is not my understanding. See, for example, the 50-state survey of foreclosure law available here, which says that 36 out of the 50 states permit deficiency judgments: https://www.nclc.org/images/pdf/foreclosure_mortgage/state_laws/pr-foreclosing-dream.pdf
I believe those figures generally apply to owner-occupied dwellings. In general, there is less protection in the US for investment property loans. So, again, what is your basis for saying that most AirBnb's hosts in the US can buy a property with non-recourse debt?
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I'll try answer your questions. All from a very quick read, errors are very possible.
1. this is not equal to borrowing at 9.5%, this is equal to borrowing at a higher percentage, because the instrument has significant option value to a recovery at Cheesecake Factory. CAKE would take this because this is a flexible piece of paper with the ability to pay in kind (which is valuable to a closed restaurant company). A real "lender" would require cash interest and shorter effective maturity. It is in CAKE's interest to sell some upside to Roark and effectively raise this financing instead of a higher cost, cash-pay paper which is what the debt market would require [landry's just raised 1st lien loans at like 15%...https://www.bloomberg.com/news/articles/2020-04-06/landry-s-brings-first-u-s-leveraged-loan-in-almost-a-month]
As you suggest, the real interest rate on this is higher than 9.5%. CAKE essentially sold a PIK bond and something like a six-year call option on 9 million shares with a $22.23 strike. If you assume $19.50 stock price at exercise, 1% risk-free rate, and 27% volatility (from 2019 10-K, but too low now), Black-Scholes would value the option at $4.55/share * 9 million shares = $41 million. That leaves $159 million in principal for the PIK bond. It's paying 9.5%*200 million = $19 million annually in interest, which is ~12% interest on $159 million in principal. For various reasons, the B/S value of the option is probably too low, so the true interest rate here is likely higher. In addition, the right to participate in common dividends pre-conversion has some value, which would also increase the implied interest rate. Bottom line: It looks to me like CAKE is borrowing in the low teens.
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Cigar, thanks for doing the leg work on their recent work. I am reading up on deflation and came across the Podcast linked below (recorded just a week ago) The kid asks good questions; best of all he just lets Lacy Hunt (from Hoisington) talk. Very educational whether you think deflation is coming or not. Skip the first 4 minutes if you are in a hurry :-) It is long (45 minutes) and full of economics stuff... so you have been warned :-)
I now understand why it is rational for someone to want to own a 30 year US treasury bond!
- how can they have a 30 year perspective (being invested primarily in 30 year treasuries)? Answer: their investment process has a 3 to 5 year time horizon.
- Vance Crowe Podcast: Lacy Hunt (April 18, 2020)
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PS: Cigar, can you update the the title to just Hoisington Management? For future...
I listened to the podcast. Quite grim. Is anyone aware of a macroeconomic history of the post-WWII era written by someone who shares Hunt's macroeconomic views?
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For sure. But does the currency risk matter in the 5-10 year time frame? I know it has been hit hard in the last couple of months, but doesn't that even out over time?
Here's a 25-year chart of the Mexican peso versus the USD: https://www.macrotrends.net/2559/us-dollar-mexican-peso-exchange-rate-historical-chart
I don't see it evening out over time.
More broadly, I've seen many pitches that try to compare growth rates, FCF yields and multiples of emerging market companies in their domestic currencies to companies in the same industry in the US trading at much higher multiples. On the surface, the EM company looks much more compelling, but if you eat USD (or yen or Euro) how much are you actually going to get at the end of the day if you have a long-term currency chart that looks like the peso?
I've haven't looked at the Mexican airports specifically, and I agree that airports (if they aren't overlevered right now) are usually good businesses. So, the comment above ultimately may not apply to them. But I do not think you can safely assume that currency moves will just even out in the end.
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Context: Upper middle class Northeast professionals (lawyers, accountants, consultants, etc.) with youngish children (2 years old - middle school) and almost all anti-Trump (Obama or Romney fans).
Two weeks ago, everyone was on very strict lockdown/precaustions (letting packages sit outside in the sun for week, etc.). Now, in conversations, text chains, etc., 1/3 are asking why we aren't loosening things up given that our hospitals have not been overwhelmed (I'm not it NY/NJ/CT), 1/3 react with horror to the suggestion and send around articles about 35 year olds dying, 1/3 remain silent. But even the first group says they aren't going to a stadium, eating in a crowded restaurant or taking a vacation that requires a plane flight until they are convinced that they and their families are not at essentially any risk (vaccine, highly effective treatment, protective antibodies from exposure).
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Have there been any studies on the virus's ability to spread via HVAC systems in office/multi-family buildings?
This is no time for definitive answers and there is potential airborne transmission over long distances. The critical variables are virus load, proximity and one's susceptibility. Unlike other infections (example: Legionella bacteria, Legionnaires' disease) which thrives in ventilation systems and transmits this way), CV does not appear to transmit through ventilation systems.
But do you own work. References below. Don't hesitate to ask more questions even if answers cannot be provided. :)
https://www.nature.com/articles/d41586-020-00974-w
https://msystems.asm.org/content/msys/5/2/e00245-20.full.pdf
Personal note: spending time on this will invariably cause you to focus on your environment and to the realization that microbes are terribly ubiquitous.
Thanks for the links.
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Thanks for the link. I read the Quillette article and the journal article from which the diagram was pulled. I understand the theory about how the AC could have pushed droplets from Table A to Table B. But I don't understand how Table C was infected by Table A, given that Table C was upstream from Table A with respect to the airflow from the AC unit. The other diagram in the journal article shows an exhaust fan adjacent to Table B and a dashed line running in the opposite direction of the airflow from the air conditioner. Are they saying that the exhaust fan recirculated contaminated droplets back into the AC system, rather than ventilating them to the outside?
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Have there been any studies on the virus's ability to spread via HVAC systems in office/multi-family buildings?
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Trust has been lost.
The scientists got on their soap box, pointed to their models, and made their predictions of doom and gloom. Nowhere in the 1-2million death model stated “If we shelter in place” then we will see the outcome that we have seen (empty hospitals, death toll 10-20 times less than expected). They are definitely saying that now, but it feels like an after-the-fact revision.
My understanding is that the 2 million potential death toll came from this Imperial College study: https://www.imperial.ac.uk/media/imperial-college/medicine/sph/ide/gida-fellowships/Imperial-College-COVID19-NPI-modelling-16-03-2020.pdf
If you look on pages 6-7 of that study, you will see that the 2 million number is prefaced with the observation that is represents the unlikely scenario of no mitigation efforts at all. If you go to page 10, you will find a discuss of the effect increasingly severe social restrictions up to a "complete lockdown." Have you read this study? If so, is it consistent with your description of it?
The point is that the scientific community needs to update the models and provide more transparent predictions, region based, based on several courses of action, with confidence intervals.
The IHME does exactly that and has been updated several times. It's available here: https://covid19.healthdata.org/united-states-of-america
Have you looked at this model before? If so, how does it not do what you say needs to be done?
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https://www.nytimes.com/2020/04/20/opinion/coronavirus-testing-pneumonia.html
It's an op-ed, but it has a useful discussion of how at home pulse oximeters (easy to find) can help avoid bad outcomes from an unusual Covid-19 symptom. My apologies if it has already been posted.
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It looks like we are starting to see some second order effects play out from the economic devastation brought on by the virus.
Oil has seen an unprecedented massive demand shock that is ongoing. Producers have not cut back nearly enough. Excess storage is now full. So what is the solution? Lower prices.
The problem is cutting production results in lower employment and no national government wants this so everyone keeps producing. What we are seeing is what happens to an oligopoly when there is no cooperation.
Interesting commodity indexes are now trading at new historic lows. And the 10 year US Treasury is trading lower (near its all time low). Disinflation is a reality. And that train is just getting started. We are in unprecedented times...
i wonder what will be the next shoe to fall? Low commodity prices, a rising US$ and virus ravaged economies can’t be good for emerging markets (Brazil, Turkey, Iran, Iraq, Venezuela, India etc).
On the other hand, the natural gas forward curve has been rising, with the January 2021 contract up around 25% in the last 45 days. I assume part of the reason for that is the assumed decline in associated/byproduct gas going forward.
Also, for US producers, what percentage of oil production is hedged at much higher prices than the June or July contracts? More broadly, if you've already incurred the expense of drilling and completing a shale well, what is the actual cost to lift and transport it for sale? I assume that's quite low. So, wouldn't US production likely decline with the aging curve of recent shale wells, rather than simply fall off a cliff?
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Brent oil is only down 5%. Someone is playing with WTI futures. July oil $27.
If you can't take physical delivery, what are you going to do?
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If you had to take Miller vs an S&P 500 index fund over say, the next 10 years, which would you choose?
Gregmal can, of course, speak for himself, but I think he's suggesting that that's not the real world alternative for many people, who would actually be choosing between Miller and something like a CD. I don't know if he's right about how many people see their real world alternatives, but you seem to be talking past each other with your question.
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The evidence that he is a superior investor is no more apparent than simply looking at all the failures during even a fraction of that timeframe. Then look at the guys who got by, but trailed miserably. If you can put Miller up against peers and show me he is nothing special, I am open to changing my opinion of him. But the guy definitely has been in the upper echelon of investors. Fees are part of the game; everyones returns would be different without them. Most people, honestly, probably cant even buy an index fund. Things are always presented as "well ya coulda bought an index fund and done better". But thats hogwash because no one does that and sticks to it. You've got folks who want to time the markets, folks who are too scared of everything to put in a full allocation, folks who try to make buying an index into a complex strategy with hedging techniques, etc. Everyone makes that claim. Ive yet to meet many who strictly just "buy the index" without any of the above issues. Saying "oh but fees" IMO is silly. Thats how these guys run a business. My dining bill would be much more economic if not for tips...my insurance would be cheaper if not for agency markups...my home sale proceeds would be greater without realtor commissions...thats life. You need a service, you pay for it. If you can do better yourself, then do it. But the number of people who think they can do it better and the number that actually can are very different.
Miller also has shown a remarkable ability to go anywhere and analyze anything in any sector. Compare that to guys like Buffett who immediately write off half the investing universe because they dont get it, or guys like Icahn who are undoubtedly rich, but cant seem to get out of their own way and continuously make the same mistakes with shit like energy stocks.
I agree with your broader point (which I don't think is disputed) that beating an S&P 500 index fund over 30 years after fees while running a U.S. open-end mutual fund (with all of the '40 Act constraints that entails) is very difficult. See, for example, the long-term returns here:
https://www.tweedy.com/resources/vf/FactsTWEBX,%2020200331.pdf
https://southeasternasset.com/investment-offerings/longleaf-partners-fund/
https://www.sequoiafund.com/Performance
This list is cherry-picked from a group I've heard of (which suggests they're fairly well regarded) and that have lasted decades, so its got a big survivorship bias, which ought to bias the returns higher. Yet still the performance is underwhelming.
But if an individual investor is incapable of putting $1,000 on the 1st of every month into an S&P 500 index fund, come hell or high water, then that investor also isn't going to continually give that money to Bill Miller either for the same reasons. So, what is Bill Miller's active management doing for them?
Also, if Bill Miller has amazing analytic ability as you suggest, do his returns suggest to you that analysis actually isn't worth very much?
I mean, the names you quoted I hold in high regard as well. Definitely upper echelon. Ive read about a few dozen firms the past few months that went into business in the past year or two looking to exploit a market downturn, that are already out of business.
I think an individual should be capable of putting $1000 a month into an index fund, but how many actually do, consistently? The biggest reason for a manager, is to make decisions for you. There is an underlying psychological truth applicable to most human beings, especially coddled North American ones; they HATE taking responsibility or making commitments to anything. Look at Dalal in the coronavirus thread for the most blatant example of failing to commit. EVERYONE talks, IE "oh the index would have done better", but many refuse to back it up. There is no single greater commitment than putting ones money to work, and no more "real" and "personally challenging" way to do that than directly hitting the buy/sell button oneself. One of my favorite quotes of all time is from Tepper and its along the lines of "there is a certain rush when it comes to putting in your orders. When you hit the buy or the sell button, you are effectively betting that the guy on the other side of the trade is an idiot". Not many people are wired like that and that is why things like index funds and mutual funds exist in the first place. Look at how many people post here... now look at how many post in the buy/sell threads?
So in a round about way, is buying Miller's fund efficient? IDK probably not. That said would I pay what I charge people to manage their money? Probably not. But having someone else do the work for you is always expensive. Ever get your brakes done? $300 do it yourself but then be accountable for the performance of your work. $800 for a guy with barely a high school diploma and a drug habit to do it, but most walk away with peace of mind...
I see your point now. It's not efficient to invest with Miller, but you believe its psychologically necessary for many people who otherwise wouldn't invest in anything, even an index fund. So, for those people, paying Miller to produce 5-7% annual returns is better than the alternative of them putting their money in a CD paying 1-2%, and thus he provides a very valuable service. It's an explanation of active management that can justify it despite structurally lower returns than index funds, which I think is a more compelling argument than Murray Stahl's increasingly convoluted arguments about the purported perils of indexation.
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The evidence that he is a superior investor is no more apparent than simply looking at all the failures during even a fraction of that timeframe. Then look at the guys who got by, but trailed miserably. If you can put Miller up against peers and show me he is nothing special, I am open to changing my opinion of him. But the guy definitely has been in the upper echelon of investors. Fees are part of the game; everyones returns would be different without them. Most people, honestly, probably cant even buy an index fund. Things are always presented as "well ya coulda bought an index fund and done better". But thats hogwash because no one does that and sticks to it. You've got folks who want to time the markets, folks who are too scared of everything to put in a full allocation, folks who try to make buying an index into a complex strategy with hedging techniques, etc. Everyone makes that claim. Ive yet to meet many who strictly just "buy the index" without any of the above issues. Saying "oh but fees" IMO is silly. Thats how these guys run a business. My dining bill would be much more economic if not for tips...my insurance would be cheaper if not for agency markups...my home sale proceeds would be greater without realtor commissions...thats life. You need a service, you pay for it. If you can do better yourself, then do it. But the number of people who think they can do it better and the number that actually can are very different.
Miller also has shown a remarkable ability to go anywhere and analyze anything in any sector. Compare that to guys like Buffett who immediately write off half the investing universe because they dont get it, or guys like Icahn who are undoubtedly rich, but cant seem to get out of their own way and continuously make the same mistakes with shit like energy stocks.
I agree with your broader point (which I don't think is disputed) that beating an S&P 500 index fund over 30 years after fees while running a U.S. open-end mutual fund (with all of the '40 Act constraints that entails) is very difficult. See, for example, the long-term returns here:
https://www.tweedy.com/resources/vf/FactsTWEBX,%2020200331.pdf
https://southeasternasset.com/investment-offerings/longleaf-partners-fund/
https://www.sequoiafund.com/Performance
This list is cherry-picked from a group I've heard of (which suggests they're fairly well regarded) and that have lasted decades, so its got a big survivorship bias, which ought to bias the returns higher. Yet still the performance is underwhelming.
But if an individual investor is incapable of putting $1,000 on the 1st of every month into an S&P 500 index fund, come hell or high water, then that investor also isn't going to continually give that money to Bill Miller either for the same reasons. So, what is Bill Miller's active management doing for them?
Also, if Bill Miller has amazing analytic ability as you suggest, do his returns suggest to you that analysis actually isn't worth very much?
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Moved a bit from Charter to Comcast for reasons explained here: https://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/cmcsa-comcast-nbcuniversal/msg409247/#msg409247
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Yeah, I agree with Viking. They should really get an army of contact tracers and testing facilities installed as quickly as possible. Any outbreak will just totally undermine the economy if we start up and get large scale outbreaks again. Outbreaks will happen, so it is important get people confident that can be squashed quickly. Sounds like each state will have to figure out on their own how to do it, unless Trump provides a credible framework.
Just uttering 10x in each WH briefing “ we have to open the economy “ is not going to do so. I actually agree we need to open it come May, but it is critical that it is done right.
The crazy thing is we have all these unemployed people. We want to pay them for doing nothing.
We also have this virus thing where we need a bunch of people to staff up a bunch of different things (like contact tracing)...
Too obvious a fit? I am buying into the suggestion that Trump simply does not want to get involved. Too much personal risk. Better to let States and Municipalities struggle their way through it. Then he can come in after the fact and ‘throw some paper towel rolls to the needy’. Much better to sit in the weeds, let others fight the good fight and then come in as the dust settles with money, lots of ‘i told you so’ and look like the saviour.
We lack the institutional capability to do it through existing institutions. The CDC isn't staffed to do nationwide contact tracing and neither are county departments of health.
One would hope the CDC would have already created a set of best practices on testing, contact tracing and isolation of the infected, including, where feasible, isolating infected individuals away from their co-habitants (there are plenty of empty hotel rooms to use!). The responsibility for implementing would then flow down to state, then to county, then to townships/cities, then to individual precincts/wards/neighborhoods/blocks. Based on the desire to help that I've seen among my neighbors, I believe there would be a surplus of volunteers willing to, for example, deliver food to the houses of those required to stay at home because of actual or suspected infection.
If the President/Governors were to announce that this level of organization needed to happen, and all of our modern communication tools, including Facebook, were harnessed, I believe many areas would be organized down to the block level within a week. But, to my knowledge, none of this has been asked of us, and nothing of the sort is being organized anywhere in the United States. I don't understand why we haven't been preparing for that, even if we hope never to have to use it.
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The proposed structure also creates a "personal holding company" issue, which imposes an additional corporate level tax on undistributed corporate income.
What are you buying today?
in General Discussion
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Comcast
General Dynamics
Alexander's