mattee2264

Anyone still following this? A lot of political posturing over the last few months but I think the odds are probably on some kind of skinny free-trade deal that buys time over the next few years to negotiate.

Really it is a power trip for politicians to lock cities down. So if given half an excuse they can't resist. Especially as lockdowns make it easier to get money from the government. Politicians have job security and big houses so their lockdown experience isn't that bad. And once one major city is in lockdown it is easier for other major cities to follow. Tough to figure out how markets will react. I think there has been some of the same complacency as during the first wave and markets will react like they didn't see this coming. So perhaps another shock crash but a lot milder because a) the stuff affected by Covid such as financials, real estate, energy etc. didn't really participate in the recovery b) Big Tech are seen as covid beneficiaries so a flight to Big Tech (in spite of rich valuations) is more likely than a flight to cash c) there will be the expectation of a lot of money printing and generous fiscal stimulus to offset lockdown measures d) the economy has already shown it can rebound pretty strongly when lockdowns lift e) we have a vaccine so this winter should be the last lockdown

I think Buffett has always tried to earn the best in class banks rather than the turnarounds. Even with BAC he initially bought the warrants and only exercised them when their turnaround was well underway and they were in great shape. So Buffett selling WFC just indicates they have a lot of problems. You can probably make a lot of money if they fix their problems. But it doesn't have the certainty Buffett craves. I can't really guess his revised thinking on JPM especially as a year or two he was saying he was dumb not to buy it sooner and set out his thesis quite persuasively: "A business that earns 15% or 16% or 17% on net tangible equity, that’s incredible in a world of 3% bonds. I mean, just imagine that you had a deposit account with JPMorgan that they made a mistake and they gave you 15% on it. And they couldn’t redeem it. What would you sell that account for? You wouldn’t sell it for 100 cents on the dollar. You wouldn’t sell it for 200 cents on the dollar. You wouldn’t even sell it for 300 cents on the dollar. You have an FDIC-guaranteed instrument that would now be at 300 cents on the dollar. If it was 15% on equity, you’d be earning 5% on it, which is way better than Treasuries. Now, if on top of that, your deposit allows you to let your interest compound to some extent, now, that instrument becomes even worth way more. Because if you have an instrument that could compound at 15% for 10 years and use the added capital, that’s worth way more than three times tangible equity at current interest rates, way more.” So do not know really what changed for him.

Surely a quick fix around the corner makes lockdowns more palatable? Lockdowns function as a circuit breaker and stop cases getting out of control and overwhelming the health care system. Social restrictions have limited effectiveness because people break the rules or bend the rules. For example in the UK when we imposed 10pm curfews people started drinking earlier and then after 10pm crowded onto the streets. And lack of political will for national lockdowns increases the chances cases will get out of control. The European approach was pre-emptive lockdowns and while that wasn't popular it has already flattened the curve at quite low case numbers. Delayed action may increase the chances of avoiding lockdown but it also increases the risk of cases getting out of control and longer lockdowns being needed. As we saw already during the first wave complacency is the virus's friend and I think that is Ackman's point here and why he is hedging against a remote but very serious worst case scenario.

Yeah I had the same thought: that a vaccine makes further lockdowns more likely as governments can justify buying time. I don't really get US politics. But my understanding was that lockdown decisions were up to the mayors rather than the President or the President Elect. So does what Biden's coronavirus advisor thinks really carry much weight? Using another lockdown as an excuse to get the massive stimulus they wanted is a bit sneaky though.

https://www.ft.com/content/9697c211-c631-49b6-a91e-ae290fb02c3a Bill Ackman hedging his equity exposure via corporate debt again. Not on the same scale as earlier this year but interesting to read that he is able to get similar terms indicating there is some complacency now that a viable vaccine has been developed. Interesting positioning considering that everyone is piling into equity rotation plays such as financials, energy, travel etc. I agree with his assessment there will be a robust recovery but the next few months will be challenging and perhaps like the summer re-opening fever there will be a pullback as hopes and dreams collide with economic reality. But the difference this time is that there is light at the end of the tunnel which might allow the market to see past a few tough winter months and waiting for a pullback will likely therefore mean paying much higher prices for recovery plays. Thoughts?

https://www.bloomberg.com/news/articles/2020-11-10/-frenzy-for-airline-stocks-spurs-dislocations-in-2-billion-etf I found this interesting regarding the JETS ETF. Record trading volumes. Record call option buying. Short interest now close to 0%. Briefly trading at a premium to NAV. Imagine similar things going on with a lot of other recovery plays people are piling into. I've noticed serious service interruptions on my retail brokerage website and apparentely this is the case for many other retail brokerages as well. I think a rotation into cyclicals is long overdue but wondering if this is a set up similar to the summer when on re-opening fever stock prices of sectors such as energy, airlines, real estate got way ahead of themselves and corrected significantly once the realization set in that the virus wasn't over and there was a long road to a full recovery. I'm not really interested in airlines but energy and tobacco and financials are also getting a lot of inflows and making big moves and it is much more comfortable to be investing when the crowd have lost interest and moved on to the next big trade. So I am trying to decide whether to wait for a pullback given the market has jumped 10% over the last week and over the last few days energy and financials are up around 20% and travel related names a lot more or whether to invest now before good values disappear altogether as momentum and FOMO kick in.

muscleman what is your pullback thesis? I remember from earlier in the thread that you think good news re the virus is bad news for the stock market.

Viking as someone who is also sitting on quite a bit of cash would be great to hear your updated thinking. Vaccine news is very promising but as might not be available for mass distribution for some time doesn't take off the table the possibility of rolling lockdowns until the spring and also might reduce the appetite for a large stimulus bill. And perhaps with a vaccine on the way politicians will be more inclined to play it safe and impose restrictions with the knowledge it will be the last lockdown

Did a bit more reading and yeah only 50M doses estimated to be available by the year end enough for 25M people and that has to be divided between the US, the UK, Canada, Japan and the EU. So it probably doesn't spare us from the possibility of rolling lockdowns through to the spring and you are right it could take some time to build out supply chains to handle the challenges of mass distribution. So the original timeline of mass distribution by summer 2021 might still be the most realistic outcome.

Initial reaction has been a pop of around 10% in energy, 10% in financials and 20-30% in travel related names and real estate. Obviously quite big moves but then again these sectors are still well below pre-COVID levels and had already sold off significantly from the summer when the initial re-opening/V shaped recovery fervour was taking steam and the market is so driven by momentum that there might be a much longer rally before the good news is fully priced in. Of course still some uncertainties re approvals/timing of the roll out. But perhaps there is an opportunity here.

Obviously great news for humanity. What do we think are going to be the market implications? Initial market reaction has been euphoric. Obviously a very effective vaccine that can be rolled out pretty quickly wasn't priced in and should accelerate a return to normal and amazing news for travel related stocks and energy stocks and financials. But on the other hand markets are trading well above where they were a year ago before anyone had even heard of COVID-19. And perhaps markets can no longer count on much fiscal and monetary support now.

samwise I am trying to figure out the same thing. I think there will be a much higher tolerance this time. Hospitals are better equipped and much better at treating it. We've adapted to a new normal of more remote working, more online shopping, more takeaway food, and so on. Also the data in Europe suggests that cases have already peaked and are starting to decline and they've only just started ramping up lockdown measures. And I think if there is a market reaction it will be more discriminating. Cyclicals will sell off. Tech will go a lot higher. There might be a modest sell off but nothing resembling the panic of earlier this year.

I guess what is more certain than the election outcome is that the Senate is going to the Republicans and there isn't going to be a Blue Wave. That dispels the fear of higher taxes and more regulation which would have ruined the party for Big Tech. Interestingly a lot of healthcare stocks have bounced and they are also sensitive to taxes and regulation and not reliant on big stimulus measures for their growth.

I think it depends what the S&P 500 is going to do. S&P 500 has a feast or famine dynamic that you don't have to the same extent with Berkshire. I think the days of Berkshire compounding at a double digit rate are long gone. But it is a nice capital preservation vehicle. You can probably count on 7-10% returns which could well be a lot better than the market over the next decade and certainly a lot more attractive than the 1% you get on long term Treasuries.

Agree with you Simba. Just as e-commerce meant that there was far too much retail space, I think more flexible working patterns could mean too much office space going forward. Tough to figure how much of it has been priced in.

I see Berkshire as a pretty safe bet. Its stock price performance will mostly be driven by business results and you'd expect it to do around 7-10% ROE and shareholder returns should quite closely match that. That could end up being a lot better than the S&P 500. Brookfield I do not really understand. It seems like you are paying quite a large premium to book value and the underlying assets have already enjoyed a nice tailwind from low interest rates and economic expansion. Also with any real estate company leverage can be a double-edged sword. Also the stock price isn't much lower than a year ago before Covid-19 even though the long term fundamentals for CRE have probably changed for the worse. Fairfax seems like the highest risk-reward. It is difficult to see much downside when you are paying 0.6x book and if it gets its act together you'd expect a peer multiple of around 1.2x book which is an easy double. And that is even before considering book value increases. But that is a big "if".

I think there is going to be another leg down. I do not think another lockdown has been priced in and it is only November so warmer weather isn't going to save the day. The US election is distracting the markets but once it is over there might be an even greater focus on the rising cases and the scary possibility of another lockdown and I think it is inevitable because we've already seen lockdowns seem to work whereas partial measures do not really seem to (because of lack of compliance etc). A vaccine was supposed to be ready in time for winter to avoid the need for Lockdown 2.0. But that doesn't seem to be happening. Of course positive news will buoy markets because it will allow them to see through the winter to a strong recovery in 2021. But further lockdowns will mean a more protracted recovery. I see energy as a good opportunity. To some extent winter lockdowns are priced in and the difference this time round is that lockdowns won't be global and China demand is strong and there is no price war. Also the focus is on weaker demand when the other part of the equation is tighter supply. I am less confident but banking also feels like a good opportunity. Difficult to handicap credit losses. But there has been a lot more income support than usual in recessions and banks have also been stress tested and are very well capitalized. And especially in Europe you are seeing GFC type valuation levels. With the airlines I think Easyjet and Ryanair are safer bets. US airlines have a history of going bankrupt and Easyjet and Ryanair have a massive cost advantage and will benefit longer term as a lot of the other low cost airlines have or will go under. Also they are not as reliant on business travel. Not so keen on the aircraft manufacturers as will be a while before there is sufficient confidence to expand fleets. Not keen on hotels. I think for present conditions there is overcapacity and that will put pressure on room rates. Also maybe there will be some secular changes such as preference for Airbnb, less business travel etc. And for companies that own their hotels leverage is very high and for franchisors like IHT and HLT where you don't have the same degree of balance sheet risk stock prices aren't really that much lower than pre-COVID levels. Booking.com if it got cheaper would be my preferred way to play an eventual recovery in the sector. I think another interesting angle is to scoop up some nice dividend yields. With companies cutting dividends left right and centre every dividend has come under suspicion. But once that passes and a recovery is underway there is no way you are going to find blue chip companies sporting mid to high single digit dividend yields. So you get the dividend plus a re-rating kicker! Also some of these companies are fairly defensive so even if cases get out of control you won't see massive quotational losses. Kinda stuff I have in mind are the Big Tobacco stocks, AT&T, Verizon etc. But would welcome any other ideas. What you could even do is have a mix of cyclical/recovery and defensive/income and rebalance.

https://www.pzena.com/third-quarter-2020-commentary/ Pzena draws an interesting parallel in his 3Q20 commentary. The gist is that value outperforms growth after a recession and after a long long wait we've finally got one.

The other thing that gets forgotten is that a coronavirus vaccine may need to be as much as 70-80% effective before we can stop social distancing. So preliminary versions of the vaccine may not reduce the risk to an acceptable level and in the meantime social and economic costs continue to mount. So I think to some degree we do need to build up some natural immunity and learn to live with the virus while shielding as much as possible those for whom the virus could be deadly.

I think a hybrid model makes a lot of sense. A way of getting the best of both worlds. Also caters for differences in job functions. For example at the momentcompanies tend to like sales teams onsite whereas back office e.g. IT and accounts are being allowed to continue WFH. Perhaps another implication will be that companies try to save money by moving their HQ to cheaper locations. There isn't the same need to have a central location that is easy for people to commute to if people are WFH most days. So you might get little business parks cropping up in the suburbs as opposed to the traditional city office blocks. Either way I think there will be a reset of office rents as leases roll off and a lot more vacant space which will be difficult to repurpose.

What is the story in Asia? Data probably isn't as reliable (especially China) but looks like they've got the virus firmly under control with no immediate worries about further lockdowns (although I guess it is still early days).

Problem is that with optimism about a vaccine available for next year there is little appetite for governments to explore a "learn to live with the virus" or "herd immunity" approach. Much easier to play it safe and wait for the cavalry justifying yet more social and economic costs with the argument that the end is near and rising debt can be paid off later down the line. And as soon as one country starts imposing lockdowns it is tough for others not to follow or else risk criticism for leaving things too late. It is very hard politically to sell a policy of "lets wait until the bodies start to pile up" before we take action. And even if the early action is entirely unnecessary so long as enough countries follow suit and death counts stay low governments can take credit as averting potential catastrophe.

I'm not convinced it is totally priced in. Rolling lockdowns through the winter even if they are designed to keep as much of the economy open as possible will have an impact on consumer and business confidence and delay the economic recovery another year or so. Further stimulus packages will offset some of the economic damage and of course further lockdowns will reinflate the tech bubble. But I think at least part of the rally was because of improving economic data and easing of the lockdowns and that looks like it will now partially reverse in the winter. And while vaccine development seems on track it is clear that any vaccine will not be available for mass distribution until middle of 2021 at the earliest so we will probably have to hunker down this winter and spring.

Agree. Playing it safe made a lot more sense in the spring when the potential health outcomes were a lot wider and we knew very little about the virus or how to treat it and also had a lot less data to work with due to limited testing capacity and also the limited number of cases. But now we know that while the virus spreads quickly it is mostly only dangerous for certain identifiable groups. By now the most vulnerable would have either succumbed to it during the first wave or developed some immunity. And in the general population there will be some degree of immunity by now. And yes the lockdown was meant to flatten the curve. But the problem was the benefits of the "circuit breaker" were quickly lost because of poor compliance and enforcement of social distancing rules. And health care spending seems to have gone towards ill though out and unworkable test and trace schemes rather than increasing capacity and equipment and staffing to allow us to accommodate a rise in cases in the winter. So the easy way out for governments is to go back to partial or total lockdowns knowing that even with only partial compliance they will have some success in reducing case numbers and transmission rates. And of course it will be justified as being prudent, playing it safe, not putting lives at risk and politicians will say it is the public's fault there is another lockdown because they didn't follow the rules. But really it would be a failure of governments who had pretty much unlimited resources and unlimited powers to fight the virus but failed to use them effectively.