Sleepwell

Thought it would be worth sharing the below article, written by Michael Lewis for the Times after Katrina. A little long, but some very interesting insights. Mainly talks about the creation of catastrophe bonds and how the pricing works (on a very high level of course). http://www.nytimes.com/2007/08/26/magazine/26neworleans-t.html?pagewanted=print Hope you enjoy!

An interesting fact in the super-exciting world of T-bills: The 3 mo T-bill now yields more than the 6 month, I think to the tune of 10 basis points last time I checked. This is a pretty big anomaly as the yield curve is usually upward sloping. Apparently this week there were some pretty large accounts selling 3mo T-bills amid low volumes which probably exaggerated the move. There is some investor concern around the debt ceiling which is set to have a deadline somewhere around mid October - three months away. If the U.S. Government were to enter into a technical (yet temporary) default, these securities would not get their principal+interest back in time. Of course this is a very unlikely scenario given the widespread consequences it would have for the US and globally, but looking at the last debt ceiling episodes, congress has a terrible track record and they usually resolve this at the eleventh hour. This is the main reason S&P downgraded the US credit rating a couple of years ago. Anyway, if you think it's a 0% chance of this happening you can also go long the 3 month and short the 6 month (curve steepener), lever it up and make some money. :P

To me, a good deed. I think that financial still have some upside. However, one thing that keeps bothering me is that I don't know how these big banks will do with a) online/mobile payments and b) cyber currency. Does that mostly eliminate the need to go to a branch, which is a big moat for the big banks? How will that impair their earnings? You should look at Ally, the largest online bank and growing deposits at 20% per year, most of it from millenials. Overhead is lower since they don't have any branches (lower efficiency ratio too vs. money centers) and they pass a lot of these savings to customers by offering higher rates. Trading a 9X earnings and 0.7X B/V buying back a lot of shares.. market is concerned with Auto loan exposure but after looking at their loan book which is mostly prime (and they're diversifying through mortgages, credit cards and online brokerage) I'm fine owning it

The official announcement was made on Wednesday, the process will probably start in October. I ran some numbers and it looks like balance sheet will be reduced by 1.5 trillion from now until end of 2021 (1tn of treasuries and 500bn of MBS). Not a lot to say right now other than wait for the market to see how it actually reacts to this and how the supply can be absorbed. Not a lot being priced in right now really. Yes bond yields will be higher, stock market will be higher to predict though it depends how much higher yields go. A move from 2.20 in the 10 year treasury to 2.75-3% is not really a deal breaker for the stock market. Above 4% then a lot of things start to change in terms of the valuations of some sectors than have been called bond proxies (utilities, telecoms, even consumer staples). But I don't think the balance sheet unwind alone is going to cause the 10 year to move by that much. 75 bps at most in my opinion in four years. Remember the reduction is much less aggressive than the accumulation (QE) so the effects will be different. At the end of the day the 10 year treasury yield is a barometer for market expectations of growth + inflation.

That Bernanke piece is really good and touches on a lot of interesting points. I've done some research on this for work and happy to share some of the findings. Disclaimer: this is completely uncharted territory and involves a lot of guestimation, hence take my comments on the effects with a grain of salt. The Fed's b/s ballooned from 800bn to 4.5tn due to quantitative easing, and is now composed of 2.4tn of Treasuries (with varying maturities) and 1.6tn of Agency Mortgage Backed Securities (the rest is in other assets like gold and repurchase agreements). In other words, the Fed owns 15% of the Tsy market and ONE THIRD of the MBS market. They are indeed a big player in both. We've already seen specific comments from the Fed in terms of how they plan to start unwinding this and when from the latest minutes. Their intentions are for this process to be "gradual, passive and predictable" meaning 1) it will take a number of years to prevent market turbulence 2) they will not sell any assets but rather let the monthly maturities runoff by implementing monthly caps on the amounts that will not be reinvested and increase the cap every quarter 3) they want the market to understand this process well and have no surprises. The process is expected to start this year, my guess is in Q4. The biggest question is what does a normal balance sheet look like? We know it's not going to go back to pre-crisis levels because the Fed's main liabilities have changed drastically, these are mainly currency in circulation (actual cash dollars lying around all over the world) and deposits held at the Fed by member banks. The latter should be the main one that will reduced given that currency in circulation has grown 7% every year post-crisis and this demand should be satisfied. The new normal size of the balance sheet is expected to be anywhere from $2.5-3tn according to some estimates, but it still implies a major reduction. The reduction is in itself a form of monetary tightening, although the Fed does not want this to be interpreted as a monetary tool, but we'll have to see what the market makes of this. On first order effects, the impact on the treasury market should not be too big, I would think it adds a couple of 10s of basis points to the 10yr rate each year or so but nothing game changing. The MBS market is another story given their size and all the supply that will have to be absorbed by the market. And the Fed is not supposed to hold mortgages so they will have to get rid of this entirely (and if prepayments slow down due to higher rates and less people refinancing, they may even sell these). Bottom line expect higher mortgage rates as a near certainty. Second order effects, much harder to predict, but there may be some implications on the high yield market and other fixed income products that trade on a spread over Treasury, but a lot of this will be driven by the flow of money leaving assets to go to other assets (so good luck trying to predict that...) Also, tomorrow the Fed has a press conference after their interest rate decision (which market predicts 100% chance they will raise) and they should give more details about this.

Revisited this talk yesterday, always worth a read. Thought I might share for those of you that haven't seen it and if you've read it maybe a refresh won't hurt! http://www.grahamanddoddsville.net/wordpress/Files/Gurus/Charlie%20Munger/Charlie%20Munger%20_%20Art%20of%20Stock%20Picking.pdf Cheers

Has anyone looked into potentially profiting from the current spread between the bitcoin ETF (GBTC) and bitcoin? The ETF is trading at a 100% premium to NAV, seems to me like a no brainer trade to put on (long Bitcoin/Short ETF), but not sure which brokerages let you short the ETF since it's OTC. Looking at the historical spread it seems to get out of whack every now and then and then come back to earth. Any thoughts appreciated. Credits to Barron's article over the weekend which mentioned this. http://www.barrons.com/articles/bitcoin-and-tech-stocks-a-21st-century-tulipmania-1495858829

Ran into this old post when searching merger arb stuff in the site. Has anyone been active in the space lately? I currently have a position in TWX which still has some upside (bought at 87). Also looking at MON, SYG and LSCC. My main questions are: What else are people finding attractive in this space now? What books do you recommend? So far I've read Risk Arb by Guy Wiser and Deals, Deals and more Deals by one of Gabelli's PM Where do you find merger arb ideas? Newspapers? Sites? One of the main reasons I'm interested in this strategy is its market neutral nature, especially in this current market environment where I'm not finding a lot of cheap stuff and I think we will get a correction at some point. Thanks

does anyone have the link to the American Airlines presentation that CEO Doug Parker gave that apparently convinced Tedd Weschler to invest?

Service corp international (SCI) is the largest US funeral operator and they offer a prearranged funeral service where people prepay for their graves and they're able to invest this in whatever they please sometimes for decades. Sounds like a pretty nice float. On another note, a wonderful recession resistant business. Looking to look more into it and possibly add on a nice pullback.

Interested to learn more about the subject, so far I've only read Joel Greenblatt's. Does anyone have any other good recommendations? Thanks

This is a good post, the Mexican stock market has been overvalued for some time now but definitely there will be better entry points in the future, especially with the current backdrop. Country has good market system, ok political system and very attractive demographics (large and growing middle class, young population, low credit penetration etc.) I would add: -Arca Continental (second largest bottler) -Unifin Financiera (leasing company) -ALFA (large industrial conglomerate) -Alpek (chemicals) -Bimbo (consumer staples, largest bread company) -Televisa (largest hispanic media company) Haven't done a lot of research on any of these, but having worked a couple of years with Mexican clients I can say these are good names to keep an eye on.

Permanents: ~45% UHAL ALLY BRK Generals/Undervalued: ~35% ICON AC GM FOGO JASO MSG Special Situations: ~20% TWX DVMT LVNTA

Thanks for all the comments guys, very interesting topic. I also thought I'd share a post from John Huber's Base Hit Investing site which talks about capital light businesses and negative working capital as an advantage: http://basehitinvesting.com/reinvestment-moat-follow-up-capital-light-compounders/

Hey guys, I've started noticing a couple of great companies that have negative equity (and some negative working capital) from an accounting perspective but achieve great return on assets and don't actually carry a lot of leverage (from a interest coverage and debt-EBITDA standpoint), some which come to mind are Marriott, AutoZone and TransDigm Group. All of these have achieved excellent returns on their stock prices. My idea for the discussion topic is the following: 1) How do you approach the valuation of these companies? 2) What other great companies other than the ones I've listed have you found? 3) What are the advantages of having negative equity? What about negative working capital? 4) What are the main risks? 5) An explanation of the mechanics behind this from a financial/economics standpoint (for example I've heard Walmart as an example of a company that benefited from negative working capital, how did they get to that point?) 6) Any other relevant thoughts that come to mind on the subject Thanks