KJP

- The largest US natural gas transmission/gathering systems: 7.75-8% yields (Williams; Kinder Morgan) -- DCF yields likely into the double digits - The blue chip NGL/refined products MLPs: 10-11% distribution yields (Enterprise Products Partners; Magellan Midstream) - Oil & gas mineral (royalty) owners: ~9% to double digits (but variable) (e.g., Black Stone Minerals, Dorchester Minerals) - Small NYC-area commercial real estate company consisting of the highest quality building on a long-term lease to a very high quality tenant and conservative balance sheet - 6.75% (Alexander's) I own most of these. At a high level, all four have the same issue -- not only a potential absence of growth, but a potential perpetual decline into zero terminal value (oil and gas are going away; NYC will never be the same). But I think you're being fairly compensated to wait and see and I balance things out by trying to find growthier investments for other parts of the portfolio.

What does it mean to "lockdown" everyone who is obese, has diabetes, etc.? Do you mean pay them to stay home and not to work? Do you think that would fly politically? In any event, wouldn't your lockdown include 50% or more of the US population? [see, e.g., the 42% obesity rate asserted by the CDC: https://www.cdc.gov/obesity/data/adult.html ]

Huntington Ingalls Hill International

I don't think that's unique to NYC. One of the main reasons for me to go into my downtown Philadelphia office is to network/see friends for lunch, coffee, drinks, etc. Most of that is not currently available, so I've been to my office twice in the last six months and don't plan on going more frequently until more dining and drinking options are available and I'm comfortable going to them. I personally don't plan to go to any indoor restaurants/bars anytime soon, so it's still the virus that's keeping me away, but I assume there are others who would return but for the drinking/dining restrictions.

It's going to be difficult because the case is 20+ years old. 1) It's a state court, so it's not on PACER. If LA County had electronic filing back then (I suspect not) and that portion of the transcript is publicly filed somewhere on the docket (maybe yes, maybe no), then you could access it by getting a log-in to the electronic filing system. 2) If you find the case number, you can start exploring the contacts available here: http://www.lacourt.org/generalinfo/courtreporter/GI_RE001.aspx I suspect you won't get very far because the case is too old. 3) An alternative is to hire a litigation support/docket search company that regularly obtains court records in Los Angeles. They would at least know where to start looking. 4) Forget all of the above and try to contact the author or publisher of the book and ask them to provide you a copy.

If by "death rate" you mean [confirmed cases]/deaths, you certainly seem to be right based on the data we have already. Cases also appear to be inflecting down in FL, AZ and TX. So, I'm very curious what exactly you mean by "herd immunity" and why you think we'll have it by the end of the August. Do you think the NYC already has it? I already explained in prior posts. NYC already had 24% people antibody positive in early April, so probably 40% now. Also research shows likelihood of 40-60% of entire global population who have never been exposed to COVID but their T cell can already fight COVID. So we are easily at 80% immunity in NYC. The proof is the 10k daily cases in March but no second spike in July. Now Texas and FL, with similar population size, have experienced what NY experienced in March, so in four weeks, the new daily cases should be sharply lower. I don't want to keep explaining things over and over. People who believe it will find evidence that confirms their view, and people who disbelieve it will also find evidence that confirms their view. My high conviction prediction is that by the end of August, the COVID situation is dramatically better. Then the Democrats will face tremendous pressure to reopen. Then Trump wins again in November. And to Dalal holdings, my prediction of the crash depends on many things and 6 month time line is just a tentative one. I have to revisit it later. I have high conviction that we are in the early stage of an asset bubble and I have high conviction that this bubble will burst. I have low conviction for the 6 month timeline. But as it approaches, I'll see it more clearly at that time. It is simply not a good idea to put your words into my month and say, yeah you agree with me and that the market will crash in 30 days and COVID will be gone in 30 days. I never said that. This is the info we needed from you—I believe you are inferring from the nature article on T cell reaction in unexposed patients? While certainly possible, I would not attach a high level of certainty to those results, certainly not extrapolating to the population level as you seem to do (N = 37) You have high certainty, but it’s a big leap... https://www.nature.com/articles/s41586-020-2550-z There may be a few more studies on pre-existing T-cell reactivity to SARS-COV-2. See papers discussed here: https://www.nature.com/articles/s41577-020-0389-z?s=09

If by "death rate" you mean [confirmed cases]/deaths, you certainly seem to be right based on the data we have already. Cases also appear to be inflecting down in FL, AZ and TX. So, I'm very curious what exactly you mean by "herd immunity" and why you think we'll have it by the end of the August. Do you think the NYC already has it?

Thanks for the detailed response. I believe some of the constraints are statutory, rather than merely regulatory (not sure exactly what you meant by "rules"), but, of course, even statutes can be changed. But if we assume the current regime remains, can the Treasury's account go negative? If not, how is that Treasury account "funded"? Stepping into hypotheticals, if the Treasury account can go negative, is that any different than the Fed buying Treasury debt directly? After all, a "negative" balance is simply a loan, even if a forced one. And if the Fed can buy Treasury debt directly, does that cross the Rubicon into pure money-printing? Put another way, a constraint under the existing rules seems to be the someone needs to first buy Treasury debt issuance. If the Treasury's Fed account can go negative, that constraint is eliminated and the Treasury may spend an infinite amount of dollars without any revenue. [i have not yet read Prof. Kelton's book, but is her thesis that this is how the monetary system actually works now, and any focus on "pre-funding" the Fed's Treasury account is a misunderstanding?]

Great post! A few questions: How do assets (i.e., the account that's debited at Step 1 of your MetaBank example) get into the U.S. Treasury's Fed account to begin with? If I understand your point later in the post, the issuance of debt by the Treasury reverses the flow and ends up crediting that Treasury account. So why isn't that debt issuance "funding" Treasury spending? Unless forced to do so by increases in reserve requirements, why would banks choose to sell any Treasury to the Fed that has a higher yield than the interest on its Fed reserves? So is "yield control" simply the Fed paying a high enough price to drive all Treasury rates down to the rates it pays on reserves? If that happens, what forces private market buyers to purchase Treasuries yielding essentially nothing? In other words, why don't Treasury auctions fail?

What is your view on heat and humidity, during what time of year would you want to use the property, and what regional amenities (mountain vs ocean vs restaurant/museum/gallery) are most important to you?

I also own GD and likely will buy one or more of LHX/NOC/LMT/RTX as well if the prices are right. I don't want all of my eggs in the Navy basket.

I think you're right that growth (or lack thereof) is an issue. My understanding is the overall size of the fleet has stabilized over the last 15 years and there is an ongoing push to increase the size of the fleet over the next few decades from ~290 ships to ~355 ships. See, e.g., https://www.secnav.navy.mil/fmc/fmb/Documents/20pres/PB20%2030-year%20Shipbuilding%20Plan%20Final.pdf (page 16 has a chart so the historical decline in fleet size that you mentioned and the recent stabilization I'm referring to). Of course, I would not put too much stock in multi-decade "plans," particularly those that are ultimately subject to political control. But there is a possibility of growth in fleet size or at least not a continued decline in fleet size. In addition, HII has cyclical high and lows in capex as it periodically does major upgrades of its shipyards. It's just finishing a relatively high portion of its capex cycle, and thus capex should come down substantially beginning next year. (See slide 66: https://huntingtoningalls.gcs-web.com/static-files/cdc0dcb8-e072-4672-911a-09a854c4c851). Meanwhile, the company generated about $2 billion in FCF over the preceding four years (all returned via dividends or buybacks) despite being in relatively high portion of its cyclical capex phase. (See slide 65) Over the next five years, they project low to mid-single digit revenue growth, with most of it already booked (but again, I believe some of this is subject to appropriation) (See slides 69-70), leading to mid-single digit annual operating income growth over the next 4-5 years (slide 71), leading to roughly $3 billion in FCF over the five-year period 2020-24 (slide 72). Now, of course, these are management projections, not gospel. But $2.5 - $3 billion in FCF returned to shareholders via dividends and buybacks over the next five years seems a reasonable outcome. And at the end of that period, I think you'll still have a company that's dominant in its industry, though the industry has uncertain growth prospects. You get that profile for a market cap of just over $7 billion and a trailing p/e of ~13 - 15 (depending how you view CAS/FAS adjustment). I also think the company will be able to pass on cost inflation to the US government to the extent it arises. So, at the end of the day, I think you're trading the high potential upside of a higher growth company for the stability of a dominant, highly free-cash flow generative business trading at a below market multiple. Those are the reasons I own HII as part of the ballast portion of my portfolio, with other portions of the portfolio devoted to high growth/higher upside investments. If I were 15 years younger and more concerned about using all of my savings to build wealth, rather than devoting a portion of it to simply preserving purchasing power, then I probably wouldn't be interested in HII.

Hill International

HII has elsewhere been described as just a "metal bender," but I think you're correct. There is either no or one competitor for most of what they do. And I also think you're correct that the Defense Department knows HII and GD are irreplaceable and essential to national defense. So long as the US seeks to be a naval power and naval power involves large surface ships and manned submarines, HII and GD are too big and too important to fail. You can look at the US's current capacity (or lack thereof) to build nuclear reactors for energy production to see what happens when you let a specialized manufacturing and skill base erode. BWX Technologies is another naval monopoly -- naval nuclear reactors, but the stock is significantly more expensive. The main risk is that sometime in the next 5-10 years or so the US chooses not to continue to build traditional naval ships or to significantly shrink the Navy. Given the apparently emerging rivalry with China, the US giving up on being a naval power seems unlikely to me. But at the end of the day, that's a political question, rather than something that can be analyzed through traditional financial or economic analysis. A bigger risk, perhaps, is that large surface ships and manned submarines are rendered obsolete by unmanned drone-like ships that can fire torpedoes and missiles (think much more intelligent and capable mines). I view HII as similar to Williams (WMB) and, in some ways, Equity Residential (EQR). They each own infrastructure/large physical assets that appear to be irreplaceable at a reasonable cost. The main question for each appears to be whether the world has moved on from the needs that infrastructures serves (or, perhaps, whether the US/cites is/are in significant terminal decline).

I agree that there may be some short-term pain here, but what you wrote is why this is still compelling to me longer-term. No need to repeat what BG has written about the unique appeal of cities for the 21-35 crowd. The suburbs or their parents' basement cannot compete. Deals like this suggest the private market (for now at least) agrees: https://therealdeal.com/2020/07/23/record-setting-multifamily-deal-comes-together-in-brooklyn-for-1-25b/ Portfolio of Brooklyn apartments selling for ~$1 million/unit or $833/sq ft. And as you have mentioned, what cap rate would a life insurer or pension plan pay for a high quality residential building in the very best US cities when the 30-year Treasury is yielding 1.25%?

I've now sold essentially all of my Rosetta Stone. A press release saying that they're exploring alternatives has increased the enterprise value of the business by 60%. I think that says alot about both the value of the Lexia and perceptions about of current management.

Equity Residential

Another bite at the apple is now here as EQR approaches the 3/23 low. Have your thoughts changed at all?

Rosetta Stone

Curious what interests you about MRTN? TL trucking is a pretty rough and tumble industry. MRTN just posted outstanding results, and after following(like with a lot of names) for some time decided to use some cash to put it in the portfolio. They are incredibly well managed, have an impenetrable balance sheet, have refined the business to be primarily temperature controlled transport rather than competing for everything under the sun. As such they've been able to hold reasonable leverage on pricing and grow revenues much more consistently than the "peers". Theyre basically a trucking company that doesnt really have the problems most trucking companies have, and this has historically been the case. Someone recently blogged on ODFL and how despite being in what is typically a "commoditized" business have earned very good returns on capital. Marten doesn't seem to earn returns on capital or achieve operating ratios similar to ODFL. Do you think their business is improving so that returns on capital and operating ratio continue to improve? Marten and Old Dominion are not in the same segment of the industry, are they? Old Dominion is primarily a "less than truckload" (LTL) shipper. In that model, route density (i.e., local economies of scale) are key. If you routes are denser, and thus your trucks are more full, than your competitors, then you will win. I believe Marten, on the other hand, is much more of a specialized (temperature controlled) truckload shipper. Truckload shippers can't exploit the benefits of route density in the same way as LTL shippers, so their potential competitive advantages, even when well managed, do not appear to be as large as the potential competitive advantages of the LTL model.

Wabuffo: Can you link to the source for your annual Social Security tax numbers? I tried to find it in the 2019 Data Book linked to in the prior post (https://www.irs.gov/pub/irs-pdf/p55b.pdf) but only found total FICA taxes (e.g., Table 1), which don't appear to be the numbers you're using.

There have been plenty of press reports on current testing delays, but I have a personal anecdote on the issue. A non-immediate family member of a friend had some mild but suspicious symptoms, spoke with a doctor and then got tested. She was told it would take 5-7 days to get the results, and it's now day 6 with no results yet. The test occurred in the DC suburbs of Virginia. I don't know if demand for testing supplies in the currently hardest hit places (e.g., FL, AZ, TX) is lengthening testing times in other places, but it's hard to see how "test and trace" is going to be effective if it takes a week to get a test result.

Coming back to this after watching the video of Day Dalio in the other thread and I think I understand your position better this time around. Thanks for sharing your insights! I've been leaning towards the bolded part of your comment myself. Don't fight the Fed works until it doesn't and the fact that we had 50+% declines in 2000 and 2008 depsite Fed stimulus suggests sometime "it doesn't". To no one in particular - I'm trying hard to reconcile Ray's "no one will want to own bonds and stocks can trade @ 40x earnings" with Hoisington's "unproductive debt = deflation and lower rates" and I think the primary difference is probably timeframe. My main thesis has been it's the backstop of unemployment benefits @ $+600/week that has resulted in this rebound. Also, backdoor unemployment benefits via PPP loans which is subsidize employment so unemployment is underreported. All of this is the Treasury - not the Fed - and this money has the potential to circulate. Most likely, these programs are reduced/end soon so I think results are probably in Hoisington's favor in the short-to-medium term. There will be a huge income hole and some reconciliation to debts/liabilities must occur - and liabilities are still growing dramatically relative to incomes so the reconciliation grows more painful by the day. This is deflationary and a credit negative. Interest rates go lower, credit spreads go higher, equities probably go lower (but maybe won't get "cheap" as I previously hoped) and Fed/Treasury will step in once again to mitigate. All this intervention takes 18-24 months to really hit the economy. Starting sometime in mid-to-late 2022 we'll probably see the green shoots of inflation. You'll have an improving economy, improving demographics, stimulus sloshing around, and rates near 0%. This is probably the environment stocks can make the run to 40x earnings in as per Day Dalio. It's also when the USD is probably losing its relative advantage over other developed currencies with the Fed's repression in full swing. So stocks remain high until the combo of currency debasement and prior stimulus work inflation sustainably above 4ish%? Do any of you have thoughts on how this plays out differently? There are even more variables to consider. For example, the U.S. economy is not a closed system, and the effects of trade and transnational supply chains on domestic inflation is not fully understood. (See, e.g., https://www.bis.org/publ/work602.pdf ) To the extent the US has been importing deflation via accessing lower cost production from overseas, what happens if there are increasing tariff or non-tariff barriers to that trade? Also, what if policy changes are enacted in the US (e.g., strengthening unions) that increase the percentage of income that goes to labor (https://fred.stlouisfed.org/series/W270RE1A156NBEA )? I don't know how to assess the likelihood of any such changes happening or their effect on inflation if it did happen. In short, I have no idea whether we'll have a 1% (or lower) or 5% (or higher) inflation rate in 5 years. I have to invest with the knowledge that either outcome is possible.

I think you're letting "US politicians" off the hook. President Trump remains very popular among the Republican base. If he said it's very important to (i) wear masks, and (ii) avoid crowded indoor spaces, I believe that would make a major difference, not only in how people actually behave, but also in the cover it would give to Republican state- and local-level officials with respect to the pace and scope of reopening various venues. In many ways he has done the opposite by choosing not to wear a mask in public, urging rapid and broad reopening, and holding indoor rallies. I acknowledge, though, that, so far at least, this is a counterfactual that cannot be proven.

Public school districts in the US are starting to announce tentative school plans for fall 2020. Several large suburban districts are requiring parents to choose between part in-class, part online (2 or 3 days a week live) or all online (e.g., Fairfax in Virginia), while others are requiring parents to choose between 5-days a week live and full online (many districts in the Philly suburbs). Typically, parents must submit their choice by a July deadline and stick with it for at least a semester, though all in-school instruction is subject to actual conditions in the fall. I understand that the 2 or 3 day/week in-school schedule is intended to lower class sizes (only 50% of students attend each day) to aid with social distancing. But if children ultimately attend some type of group childcare on the days they're not in school, presumably with at least some children who are not in their class, the split schedule may be counterproductive. I understand that many parents were quite frustrated with the makeshift online instruction offered in March - June this year because it was both half-baked and required significant parental oversight, essentially requiring parents to simultaneously teach, keep the house in order, and work at their regular jobs. I don't think that's sustainable and quality in all three of those areas will inevitably suffer. The President's most recent immigration proclamation also appears to have effectively ended the ability to hire a new au pair from outside the country, making childcare even more difficult for some families, though I suspect this affects only a very small number.