KJP
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In the US, interest payments are tax deductible, though the tax overhaul imposed limits on the amount of deductible interest. Miller & Modigliani hypothesized that because of the tax shield created by interest deductibility, it should be possible to increase the enterprise value of the firm simply by doing a levered recap. [in theory, New enterprise value = Old enterprise value + Value of tax shields - Increased likelihood of costs associated with insolvency.] There's been alot of academic work trying to see if the theory is true in practice. See, e.g., https://www0.gsb.columbia.edu/mygsb/faculty/research/pubfiles/319/valuation_of_debt_tax_shield.pdf
[EDIT: See also Schwab's comment on the whether the "dividend" is a taxable event.]
There is also a principal-agent issue. The levered recap significant increases the potential returns on equity if things go well, and the likelihood of a complete wipeout of the equity. A PE firm gets alot of the upside when things turn out well via carried interest [the "20" in "2 and 20"], but it is the LPs that bear most of the losses when things go poorly. Those return profiles can incentivize high leverage at the portfolio-company level, even if it is not in the best interest of LPs.
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Any further thoughts given the recent declines?
I'll reiterate my suggestion of Parkit. See its thread for recent developments. A sale of the Canopy lot would be a significant catalyst, assuming the bottom has fallen out of its performance or cap rates for parking lots.
For a larger cap, I nominate NVR, but that contains an embedded macro call that new single-family house sales in the US won't decline in 2019. I don't see any hard catalyst that would prevent NVR from staying cheap in 2019 even if the US housing market holds up, but there is the soft catalyst of large share repurchases.
EDIT: I'll add another: Command Center (CCNI). See the thread for reasons why. I believe 2019 will see continued significant buybacks and perhaps more, given the make up of the board.
I'll also confess that when judged against the criteria of (i) underlying business quality, (ii) current valuation, and (iii) potential catalysts, these are all B-level ideas at best. I don't have what I believe to be an A-level idea.
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Midstream Is Kind of Like A PIMP
You get a fixed fee whether the girls make money or not "Is Wayne Brady Gunna have to choke a bitch?" (Take or pay contracts)
You stay in the warmth while the girls stay out in the cold (Cashflow much more stable than E&P)
You offer a service that is highly desirable, protection from Ted Bundy (Moves the O&G out of the basin into the market)
The relationship feels like it should not be sustainable, but it is sustainable, because sex work is the oldest profession and there will always be demand for the product (I just realized this while I type this out)
In theory, the gals should not enter this profession and enter into an agreement with you. You have almost complete control over the gals. But there are lots of broken homes and gals who don't have other skillsets. Hence, new gals keep entering this terrible business.
Mineral interest owners like Black Stone Minerals are similar. They get their royalties regardless of whether the E&Ps make money or not, and directly benefit from higher volumes. But their profits are more exposed to hydrocarbon prices than the typical midstream company.
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Reason for this post: I’ve held a basket of Canadian banks in the late 90’s, did quite well (eg a quite rapid double with CIBC) but eventually put that result in the failure file (file #2 of 4: good result and bad process) because it was basically luck. I want to invest in Canadian Banks again but need to understand better what will happen to Canadian real estate.
Viking has elegantly suggested the possibility that we may somehow muddle through and that’s a reasonable alternative.
This post was triggered by a phone call and a one-page note.
I understand that a significant fraction of Canadians are hurt by rising rates and profiles obviously vary. A member of the extended family circle recently called me to ask advice about a topic unrelated to money or investment. Going to general talk (during which she offered unsolicited financial advice), it became quite clear that she had become financially stretched in the context of a recent purchase of a new (and quite expensive) car and as a recent owner of a nice condo. At the conclusion of the conversation, I made a mental note to prepare an answer that would not appear condescending in order to politely deflect an eventual invitation to participate in an Occupy-Wall-Street type of event in the future.
The one-page note (see below) shows how 1-the % of mortgage debt servicing to disposable income has remained quite stable although there are small peaks that help to define the concept of margin of safety and how 2-the composition of the mortgage payment has changed over time (principal and interest strip). However what the author considers to be a source of “strength” and financial flexibility may correspond, at least to me, to a terrible misconception if the value of the underlying asset bought and financed is overvalued. In some scenarios, the price obtained upon selling may be a relevant input and a source of significant hardship as the value of liabilities is much stickier than the value of assets. At least, that’s one of the lessons learned from the American Experience in 2007-9.
Putting the anecdotal and the statistical together
An amazing phenomenon that has occurred (in North America at least) is that consumers have responded to improved energy efficiency in cars and relatively cheap gasoline prices (despite environmental and high gas prices headlines) by buying heavier and more expensive cars. Can somebody explain that conundrum other than saying that “rational” people respond to prices? The same way, people have responded to ultra-low interest rates by buying larger and more expensive (and progressively overvalued IMHO) homes and this new era even prompted some (?5% of households) to buy a home when it would have been financially safer to rent one.
https://www.nbc.ca/content/dam/bnc/en/rates-and-analysis/economic-analysis/hot-charts-181214.pdf
What’s the point and why it may be relevant now?
People refer to the “hawkish tone” displayed by the Bank of Canada and describe the recent rise in rates as a “shock”. A link is provided below for historical perspective. If what has happened to the recent mortgage rate trajectory is found to be traumatic, the historical perspective helps to define the extent of the household leverage situation and the precarity of the residual margin of safety for many. The expression that comes to mind for the residual margin of safety is “peau de chagrin” which cannot be translated directly but which means that, at times, all you may be left with is sorrow.
https://www.ratehub.ca/5-year-fixed-mortgage-rate-history
This post is getting way too long but I looked also at the exposure to fixed and variable rates and the nature of Canadian debt, especially the mortgage debt that has a significant fixed component, which is felt to offer protection in a muddling through scenario but which may also happen to be a curse in disguise.
Disclosure: no long position in Canadian banks, yet.
That historical decomposition of mortgage payments is interesting. Nice example for those who believe the biggest factor in asset prices is the availability of credit. In my experience, most people looking at big purchases (houses and cars) accept the salesman's logic of "What monthly payment can you afford?" I don't think people understand the potential problems if they cannot hold the asset until maturity, just like they don't understand that there's an interest rate embedded in the lease they've been offered.
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Can anyone think of a strategy to take on a huge amount of non-recourse leverage with little down and invest in stocks?
The only thing I could think of was Leaps.
1. Start an asset management firm and charge incentive fees. Losses on LP capital are non-recourse to you, but you get a nice slice of the upside on any increase in value on that capital.
2. Invest in the equity of highly levered firms. Small changes in their enterprise value will lead to large changes in their equity prices, which would be similar to the effect on the value of your portfolio of levering your own balance sheet to buy unlevered firms, with the benefit that debt at the firm level is non-recourse to you.
KJP,
1. In theory true. In practice you have to be very very good at sales to pull it off. Judging from most people on this board, we're mostly doers rather than sales guys.
Agreed. You can't take advantage of the leverage unless you have the scale to cover the overhead costs, and, in general, you can't get scale unless you can sell.
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Can anyone think of a strategy to take on a huge amount of non-recourse leverage with little down and invest in stocks?
The only thing I could think of was Leaps.
1. Start an asset management firm and charge incentive fees. Losses on LP capital are non-recourse to you, but you get a nice slice of the upside on any increase in value on that capital.
2. Invest in the equity of highly levered firms. Small changes in their enterprise value will lead to large changes in their equity prices, which would be similar to the effect on the value of your portfolio of levering your own balance sheet to buy unlevered firms, with the benefit that debt at the firm level is non-recourse to you.
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I've been reading public pundits saying this a lot lately which gets me confused. Why would 2 year treasury yield ever be higher than 10 year? Who would be dumb enough to buy the 10 year notes then?
And how would this always be the precursor to recession?
There is another active thread on this issue that began a few days ago: http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/yield-curve-inverting/
An inverted yield curve does not cause a recession, as your topic title suggests. It is used as a leading indicator of potential future recession.
As for why anyone would buy the 10-year note, a 10-year note is the equivalent of rolling a two-year note several times with a significant difference: The 10-year note locks in a yield on cost for a 10-year period; the two-year note only locks in a yield on cost for 2 years, then you get the two-year yield that exists at the time you roll, not the two-year yield you got when you initially invested. Thus, an inverted yield curve implies that the market believes that, in the future, short-term rates will be lower than they are today. (If the market believed that short-term rates would stay the same, then people would sell their 10-years to buy 2-years until the yield curve steepened.) What typically causes a decline in short-term rates? The answer to that question is why the inverted yield curve is used as a leading indicator of recession.
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Like you, my longstanding Flybe holding has been a gold medal winning downhiller, but I don't have the bravery to add to it.
I'm sure 2019's biggest winner will be something like Flybe -- an existential risk that never materializes -- or something highly levered. For the same reasons, I suspect I won't own it.
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Can you have a large portion of your portfolio in Flybe given the Brexit risk (both risk to operations and effect of likely decline in pound on cost of USD-denominated debt and fuel)?
I was going to nominate Parkit for this thread, but decided not to because I don't have a significant portion of my personal wealth in it and can't recommend anyone else do so. But if you asked me what company in my portfolio is most likely to double next year, I'd say that one.
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I cannot find the link now, but there was a thoughtful analysis published several years ago suggesting that U.S. regulations regarding pilot training, hours, etc. give pilots tremendous bargaining power over the airlines. As a result, all (or nearly all) economic profits of a airline would be siphoned off to pilots over time via increased pay as their collective bargaining agreements come up for renewal. (This is similar to the theory that movie theaters will always be a tough business because their key suppliers, e.g., Disney, have too much bargaining power.)
If true, this would be something that would play out over many years, so wouldn't be immediately apparent during the early years of a change in the industry's competitive dynamics. The theory may be wrong, but I offer it as something to consider.
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A lot of carnage, but there definitely isn't much IMO for the "stocks are expensive" crowd to whine about anymore. Obviously this is predicated upon the tax cuts staying in place, but there is more high quality stuff for sale right now than I've seen in a LONG time. Valuations probably on par with 2010-2012, if not better in many areas.
I saw your post on NVR, which I'm looking at now after looking at the single-family building materials companies (BLDR and BMCH) and concluding that they are poor businesses (and in BLDR's case, over-levered). I've also seen you post about FRPH, which I've followed for some time. Any others that you believe are particularly attractive right now?
Will open up the book a bit because I've found you to be a high quality contributor to a few ideas I also follow. In no specific order or size;
NVR, FRPH (as you've seen) MSG, GM(glutton for punishment), CTO, NXPI, BX, GOOG, XPLT(not really down a lot but GARP IMO), IBKR, AAL(sub in an airline of your choice, I happen to like the shittiest one), CLF(holy f*cking future cash flow machine w/ DTA's)+MSB, and MX...
Can get into more detail later but didn't want to write a book write now...
Thanks for sharing. I've owned XPLT for years and agree it seems reasonably priced despite the run up over the last year. Given your interest in FRPH and CTO, have you looked at Howard Hughes? It's been written up enough that I'm sure you know the story. I own it for the underlying asset quality (Ward Village and the Seaport in particular, but also the Texas and Las Vegas MPCs, which I believe is a business model that improves over time as the development matures).
I don't know whether it's cheap right now, but Old Dominion Freight Lines (ODFL) has long interested me as a high quality, well run business, and it's also down significantly from its highs.
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A lot of carnage, but there definitely isn't much IMO for the "stocks are expensive" crowd to whine about anymore. Obviously this is predicated upon the tax cuts staying in place, but there is more high quality stuff for sale right now than I've seen in a LONG time. Valuations probably on par with 2010-2012, if not better in many areas.
I saw your post on NVR, which I'm looking at now after looking at the single-family building materials companies (BLDR and BMCH) and concluding that they are poor businesses (and in BLDR's case, over-levered). I've also seen you post about FRPH, which I've followed for some time. Any others that you believe are particularly attractive right now?
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I've tried VIC twice and have given up since then.
I am an independent operator now and don't want to be affected by any group thinking.
It is always dangerous to follow any herd, including the herd in VIC. :)
What really matters most for your performance is:
1. Independent research by yourself.
2. Assume full responsibility for failure.
3. Have supreme confidence in your own ability to make money.
With that said, I also would like to know the combined average performance of all VIC articles. If the combined performance is not significantly beating the market, then the chances are low for an individual to read through those pitches and pick ones that outperform the market. If he can, then he doesn't need VIC. If he can't, then he also doesn't need VIC.
Wouldn't this same logic apply to cobf? VIC can be used as a source for ideas just like anything else. I've found the comments, message boards, network to be immensely valuable.
I agree. CoBF, blogs, VIC, etc. are places to start, and sometimes good comments/discussions can correct errors in your thinking and point out risks you may have overlooked.
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NoCalledStrikes, how's your experiment with TD AM going? I haven't had any problems with them for a few otc stocks that I own. (NJMC, ATGN, TSSI, QUES etc.)
Bumping this up to see how it's going with TD Ameritrade. My existing broker has now largely locked me out of grey market, otc, etc. TD Ameritrade's website claims it permits OTC trading and a TD rep I spoke to confirmed that. Can anyone currently use TD Ameritrade confirm that they're currently able to trade grey market, pink sheet and "no information" stocks? Thanks.
I transferred from IB to TD last year and so far have been happy. What specific symbol would you like me to try to buy and experiment? I can send in a low priced buy limit order to see if they reject it.
Thanks for the feedback. ADVC (Advant-E) and PKTEF (Parkit) are two I've had problems with.
I just tried in TD and there are no problems with ADVC or PKTEF. My order for GCCO was instantly rejected. I've seen that kind of case with OTEL and GSUM before, but I can call in to place the order.
Thanks for checking!
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NoCalledStrikes, how's your experiment with TD AM going? I haven't had any problems with them for a few otc stocks that I own. (NJMC, ATGN, TSSI, QUES etc.)
Bumping this up to see how it's going with TD Ameritrade. My existing broker has now largely locked me out of grey market, otc, etc. TD Ameritrade's website claims it permits OTC trading and a TD rep I spoke to confirmed that. Can anyone currently use TD Ameritrade confirm that they're currently able to trade grey market, pink sheet and "no information" stocks? Thanks.
I transferred from IB to TD last year and so far have been happy. What specific symbol would you like me to try to buy and experiment? I can send in a low priced buy limit order to see if they reject it.
Thanks for the feedback. ADVC (Advant-E) and PKTEF (Parkit) are two I've had problems with.
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NoCalledStrikes, how's your experiment with TD AM going? I haven't had any problems with them for a few otc stocks that I own. (NJMC, ATGN, TSSI, QUES etc.)
Bumping this up to see how it's going with TD Ameritrade. My existing broker has now largely locked me out of grey market, otc, etc. TD Ameritrade's website claims it permits OTC trading and a TD rep I spoke to confirmed that. Can anyone currently use TD Ameritrade confirm that they're currently able to trade grey market, pink sheet and "no information" stocks? Thanks.
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I think the best intro depends on the audience's background and (i) how they think/learn/are persuaded, and (ii) what subject matters interest them. For analytical minds that focus on data, I would start them on something that's based on data or mathematical logic. For people more interested/persuaded by narratives, I would start with something like Peter Lynch.
Alternatively, if there is something this person is interested in, such as cars, then a good intro might be exploring how CarMax actually makes money. That may spark an interest generally in learning about how companies make money (or lose money).
A third alternative is showing them a brief but very good writeup of an idea. Several years ago, I came across this writeup: http://quinzedix.blogspot.com/2012/07/hawaiian-holdings-air-transport.html
I probably learned more from, and was more inspired by, that writeup than any of the dozens of investing related books I've read.
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I won't vouch for the quality of all of these, but here are some blogs or newsletters that may interest you:
http://www.canadianvaluestocks.com/
http://www.mispricedmarkets.com/
https://onbeyondinvesting.com/blogs/blog
http://www.globalstockpicking.com/
http://adventuresincapitalism.com/
https://backoftheenvelopeinvesting.wordpress.com/
http://bovinebear.blogspot.com/
https://cigarrfimpar.wordpress.com/
http://quinzedix.blogspot.com/
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Some of you are way too harsh. Plenty of highly educated 50 year olds don't understand loans and debt—let alone a 17 year old who has been told since day 1 to go to the best school they can get into. To someone who has never really worked before, and has been financially supported their entire life, the difference between a $10k and $100k future payment is just some abstract # with no real weight behind it.
For example, I would consider myself pretty financially savvy. I've (responsibly) had a credit card since I was 15, bought my first stock at 13, have had a 401k and Roth IRA since I was 17, etc. But I also took out ~$100k of student loans to go to school, because I simply had no idea how much money that was. Sure didn't seem like a lot when every school tells you that 80%+ of their graduates make $100k. In retrospect, yes, I overpaid for my education. But I also don't see how 17 year old me could have known otherwise.
There's a broader underlying point here about the financial illiteracy of even apparently intelligent people in this country, whether teenagers or adults. As you note, this person made the initial decision to go to NYU and major in journalism when he was 17 or 18 years old. He appears to be an intelligent person. So, why did he (and many others like him) not make wiser decisions? I understand the point about personal responsibility, but most people absorb the lessons they see around them.
Interesting question.
Looked for answers.
So, this is an issue tied to individual responsibility.
But what if everybody around you (parents, friends, social circle, school, government and other institutions) say:
"Don't worry, just sign here."
Is it reasonable to expect that the average college applicant will behave responsibly?
Somehow, I would say that the "system" can be improved and not only through emphasis (and consequences) on personal responsibility.
This has a lot of parallels to the unfortunate mortgage episode that happened recently.
Doesn't history repeat itself sometimes?
Can we learn from mistakes?
I read the papers you linked to. Although the New America paper is based on only 59 focus group participants, I think it's more interesting and suggests many causes, including immaturity, financial illiteracy and low agency. For example, look at all the quotes suggesting that borrowers had no idea what their monthly payments would be or didn't know that they'd have to payback the loans if they didn't get a degree. Similarly, the apparent total befuddlement about IBR, even after it was explained, is both sad and frightening.
I have no evidence to support it, but I continue to believe that we could address some of the problem by having mandatory basic financial literacy education in high school. For example, with an internet connection, a graduating high school student about to take out significant loans to attend college should be able to figure out (i) the expected monthly payments on student loans at graduation; (ii) expected rent in the city they want to live in; (iii) a rough estimate of additional living expenses (car, food, etc.) and taxes; and (iv) whether all of those expenses are greater than or less than a reasonable estimate of the starting salary in their hoped for profession. I don't actually expect most 17 and 18 year olds to do that on their own. But if they were forced to do it as part of a graded financial literacy class, it would hopefully open their eyes up to what they're getting themselves into. Along the way, they'd learn many useful pieces of financial knowledge, e.g., the effects of compound interest, amortization tables, the actual impact of payroll and income taxes, the actual cost of renting an apartment, etc.
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Some of you are way too harsh. Plenty of highly educated 50 year olds don't understand loans and debt—let alone a 17 year old who has been told since day 1 to go to the best school they can get into. To someone who has never really worked before, and has been financially supported their entire life, the difference between a $10k and $100k future payment is just some abstract # with no real weight behind it.
For example, I would consider myself pretty financially savvy. I've (responsibly) had a credit card since I was 15, bought my first stock at 13, have had a 401k and Roth IRA since I was 17, etc. But I also took out ~$100k of student loans to go to school, because I simply had no idea how much money that was. Sure didn't seem like a lot when every school tells you that 80%+ of their graduates make $100k. In retrospect, yes, I overpaid for my education. But I also don't see how 17 year old me could have known otherwise.
There's a broader underlying point here about the financial illiteracy of even apparently intelligent people in this country, whether teenagers or adults. As you note, this person made the initial decision to go to NYU and major in journalism when he was 17 or 18 years old. He appears to be an intelligent person. So, why did he (and many others like him) not make wiser decisions? I understand the point about personal responsibility, but most people absorb the lessons they see around them.
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So which of the mentioned above the 420 parallel companies are midcap or smaller and have outsider type owner operators?
It wasn't listed above, but Dream Unlimited is a Canadian small cap in which the CEO owns about 30%. The company's capital allocation is discussed on the company-specific thread.
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If Canada has decided that no hormones are allowed, then make that a rule no problem. Instead of having huge tariffs and quotas, just don't allow milk with hormones across the border. If anyone wants to export here they can so hormone free just like the locals. Locals without hormone benefits will be at an export disadvantage, but may be able to get premium pricing for a premium product.
They won't because as amazing as it might sound it is against the law in the US to say that your milk doesn't contain hormone.
In US, you can advertise your milk as "synthetic hormone free," or the equivalent. I just confirmed that by checking the milk carton in my refrigerator.
To the extent you cannot say "hormone free," I believe that's because the statement is false due to milk containing natural hormones.
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Fidelity supports trading on AIM.
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I see. I wasn't counting any additional pop. Just the re-allocation alone would be quite useful.
Best Ideas For 2019
in General Discussion
Posted
In your view, is anything at a "fire sale" price right now? If so, which companies?