watsa_is_a_randian_hero

Answer the following statements with either (a) strongly agree, (b) somewhat agree, © somewhat disagree, (d) strongly disagree or (e) are not sure. Answer (E) if you feel the question is bias or possibly the subject of debate. You may find it interesting to read the article pasted below AFTER answering the statements. 1) Mandatory licensing of professional services increases the prices of those services. 2) Overall, the standard of living is higher today than it was 30 years ago. 3) Rent control leads to housing shortages. 4) A company with the largest market share is a monopoly. 5) Third World workers working for American companies overseas are being exploited. 6) Free trade leads to unemployment. 7) Minimum wage laws raise unemployment. 8 ) Restrictions on housing development make housing less affordable. http://online.wsj.com/article/SB10001424052748703561604575282190930932412.html?KEYWORDS=smarter+than+fifth Are You Smarter Than a Fifth Grader? Self-identified liberals and Democrats do badly on questions of basic economics. Daniel Klein, professor of economics at George Mason University Who is better informed about the policy choices facing the country—liberals, conservatives or libertarians? According to a Zogby International survey that I write about in the May issue of Econ Journal Watch, the answer is unequivocal: The left flunks Econ 101. Zogby researcher Zeljka Buturovic and I considered the 4,835 respondents' (all American adults) answers to eight survey questions about basic economics. We also asked the respondents about their political leanings: progressive/very liberal; liberal; moderate; conservative; very conservative; and libertarian. Rather than focusing on whether respondents answered a question correctly, we instead looked at whether they answered incorrectly. A response was counted as incorrect only if it was flatly unenlightened. Consider one of the economic propositions in the December 2008 poll: "Restrictions on housing development make housing less affordable." People were asked if they: 1) strongly agree; 2) somewhat agree; 3) somewhat disagree; 4) strongly disagree; 5) are not sure. Basic economics acknowledges that whatever redeeming features a restriction may have, it increases the cost of production and exchange, making goods and services less affordable. There may be exceptions to the general case, but they would be atypical. Therefore, we counted as incorrect responses of "somewhat disagree" and "strongly disagree." This treatment gives leeway for those who think the question is ambiguous or half right and half wrong. They would likely answer "not sure," which we do not count as incorrect. In this case, percentage of conservatives answering incorrectly was 22.3%, very conservatives 17.6% and libertarians 15.7%. But the percentage of progressive/very liberals answering incorrectly was 67.6% and liberals 60.1%. The pattern was not an anomaly. The other questions were: 1) Mandatory licensing of professional services increases the prices of those services (unenlightened answer: disagree). 2) Overall, the standard of living is higher today than it was 30 years ago (unenlightened answer: disagree). 3) Rent control leads to housing shortages (unenlightened answer: disagree). 4) A company with the largest market share is a monopoly (unenlightened answer: agree). 5) Third World workers working for American companies overseas are being exploited (unenlightened answer: agree). 6) Free trade leads to unemployment (unenlightened answer: agree). 7) Minimum wage laws raise unemployment (unenlightened answer: disagree). How did the six ideological groups do overall? Here they are, best to worst, with an average number of incorrect responses from 0 to 8: Very conservative, 1.30; Libertarian, 1.38; Conservative, 1.67; Moderate, 3.67; Liberal, 4.69; Progressive/very liberal, 5.26. Americans in the first three categories do reasonably well. But the left has trouble squaring economic thinking with their political psychology, morals and aesthetics. To be sure, none of the eight questions specifically challenge the political sensibilities of conservatives and libertarians. Still, not all of the eight questions are tied directly to left-wing concerns about inequality and redistribution. In particular, the questions about mandatory licensing, the standard of living, the definition of monopoly, and free trade do not specifically challenge leftist sensibilities. Yet on every question the left did much worse. On the monopoly question, the portion of progressive/very liberals answering incorrectly (31%) was more than twice that of conservatives (13%) and more than four times that of libertarians (7%). On the question about living standards, the portion of progressive/very liberals answering incorrectly (61%) was more than four times that of conservatives (13%) and almost three times that of libertarians (21%). The survey also asked about party affiliation. Those responding Democratic averaged 4.59 incorrect answers. Republicans averaged 1.61 incorrect, and Libertarians 1.26 incorrect. Adam Smith described political economy as "a branch of the science of a statesman or legislator." Governmental power joined with wrongheadedness is something terrible, but all too common. Realizing that many of our leaders and their constituents are economically unenlightened sheds light on the troubles that surround us. Mr. Klein is a professor of economics at George Mason University. This op-ed is based on an article published in the May 2010 issue of the journal he edits, Econ Journal Watch, a project sponsored by the American Institute for Economic Research. The article is at: http://econjwatch.org/articles/economic-enlightenment-in-relation-to-college-going-ideology-and-other-variables-a-zogby-survey-of-americans

1 ADR = 15 shares http://www.adrbnymellon.com/dr_profile.jsp?cusip=00709P108

Coincidence or Pattern of Negligence? 2005: Texas City Refinery Explosion 2006: Prudhoe Bay Oil Spill 2006: A Texas City worker was crushed between a pipe stack and mechanical lift 2007: A Texas City worker is Electrocuted to death 2007: Four BP Energy Traders found to be manipulating Propane market; BP settles for $303 million, largest commodity market settlement ever in the US 2008: A Texas City worker was killed by a 500-pound piece of metal 2008: Russian Federation finds BP/TNK joint venture guilty of manipulating crude oil prices 2009: A BP helicopter ferrying employees to platform in North Sea of Scotland crashes in good weather killing all 16 passengers 2010: Deepwater horizon explosion No other energy company has a track record even approaching this bad...and this is within a five year span. Exxon and Chevron have had incidents, but there is no pattern of major incidents within such a short time span. As for BP's stock, it is trading at about 4.5x pre-explosion 2011 projected income. 10x is probably a "normal" multiple. The difference between the 4.5 and 10x multiples is about $140 Billion in value. Are the clean-up costs going to be more than $140 billion? Probably not more than $50 billion, so it could prove to be a good long term buy. However, the risk is whether this is an isolated event, or whether there is a good chance of additional "incidents" in the near term based on the track record above. Bottom line...I'm not buying at this level...

I think buffett is right, it is tough for end users to pay, the only end users with $ to pay are probably institutions who have resources to do their own due diligence anyways. There is a good created by allowing small issuers access to capital and small investors access to research. Have you guys read Ackman's opinion on situation? I think Ackman is awesome, usually has straightforward, logical ideas. His idea is basically a rule that allows raters to be paid by issuer, but make it so the payment is somehow contingent on long-term accuracy of rating. Also, must wait 60 days prior to issuing rating on new issues, so there is no pressure from underwriters for rating. So essentially somehow measure the long-term accuracy of the rating, and make it so the fee is earned not all up front at issuance, but over the life of the bond. See here http://cache.dealbreaker.com/uploads/2010/06/Wait-to-Rate.pdf Not sure how this is done in practice, because outcomes of bonds are binary (default or no default); whereas ratings are analog in a sense. He says set aside $ into pool that is distributed to all raters based on relative accuracy to each other. Also, another good idea he has is to make it mandatory that the SEC revokes the NRSRO status of any rater than is consistently wrong. This is good incentive not to fuck up. Another good idea he has is to rethink Reg FD. Right now raters get inside info and are exempt under reg fd. This is unfair, because the raters are not even doing their jobs. That info would be better if in hands of investors. He argues the prospectus requirements require any info that investors would reasonably require must be disclosed. How can you say that there is exists info raters need to do their job, on the one hand, that on the other hand isn't reasonably necessary to investors?

I agree for the most part - especially with the interest rate comment. I was discussing this on another thread with another member, due to interest rate levels, I think stocks offer much better value today relative to bonds. I think when you look at the rfr rate in the market (4%) and the implicit spread between the cap rate for stocks over rfr, it is much higher than than in the past. Essentially, the stock market is priced as if growth is not possible and deflation will most likely occur, and so is the bond market. Gold is the only asset right now that is priced as if inflation is a reality.

So does that mean every time charter has a corresponding contract with the manager that fixes the costs over the life of the contract?

SSW looks cheap - interesting. How do SSW's contracts work - I invested in a few oil tankers in 2003-2006 and am somewhat familiar with their time charters - they had a guaranteed fixed amount and a portion that floated. Do SSW's have any upside or is it all fixed? If it is all fixed, could increases in costs (i.e. oil & labor) due to inflation eat away at their margins? Do you know what currency the fixed payments are denominated in?

That is my feeling exactly...recognizing these macro factors are extremely difficult to predict. Have you watched the debate between Rosenburg and Grant? Jim Grant argues inflation, Rosenburg argues deflation. I follow both (get breakfast w/ dave emails, and have subscription to grants at work). VERY interesting, though I was still confused afterwards. Generally I agree with you: there are more factors that point towards deflation, but I find it hard to believe policy makers will not respond with too strong a response to avoid deflation therefore stemming significant inflation. That being said, if that is the case, bonds right now are very overvalued relative to stocks, as inflation will destroy bonds (to my earlier point). Equities in firms with lots of real assets and lots of debt will outperform (assets go up w/ inflation, debt is fixed). Think stocks like oil tankers, deep water drillers, certain real estate operators. There are even companies that own and lease construction equipment such as cranes, and operate similar to a REIT (just own assets, no real operations). I have to believe these are better bets for inflation than gold!

I'm not necessarily advocating damodaran or BG as right or wrong, I just think it can be interesting to think about different tools and framework people have to estimate FV. Either way, my gut tells me that the "model answer" that damodaran's model gives us is right (the bond market implies stocks are undervalued and the stock market implies bonds are overvalued). This is my gut based on the fact that both the real risk free rate, expected inflation, and corporate bond spreads are very low. However, you have stock indices trading at a 7.19% earnings yield at the trough (using year end 09 earnings). Other inconsistencies exist in the market too right now too...look at gold. If someone really wanted to "hedge" inflation, why would they not just enter a 30-year, fixed for float swap, trading at 3.8% the other day? For 30 years, pay fixed 3.8% and receive a floating LIBOR payment. Seems to me like that is a much better direct hedge against inflation than buying gold at 1200. Point is, the bond market has extremely low rates right now, indicating a very low expected inflation rate. However, gold keeps going up because of inflation fears (or geopolitical fears translated into inflation fears).

Awesome- based on this, dow FV is 12,000. BG's original method of inflation-adjusted 10 year average earnings divided by 2x corporate bonds gets to a dow FV of about 8,000 now. However, he says in here that the numbers upon which he based his original formula on were from 1871-1954, and markets had matured since then, and safety nets were added to reduce systematic risk (i.e. unemployment insurance reduces corp earnings vol), so he said an arbitrary increase of 50% of the original model was warranted. Based on this 50% increase to 8,000, this would imply dow 12,000 is the current FV. Also, another way to estimate stock FV me and my coworkers were discussing: Damadoran, valuation expert from NYU, professes stocks are 1.5x more volatile then bonds, and therefore should have an equity risk premium of 1.5x bonds. BBB bonds trade at a credit spread of 165 right now, which with a rfr of 3.21% implies stocks have a required rate of return of 5.68%. With 3% assumed growth, this would imply a 37x PE multiple for FV! Invert the formula, and our current PE of 13.9 implies bonds should have a credit spread of 429 bps (or about 2.5x current levels).... So...according to Damadoran's studies, stocks/bonds are not trading in sync, and people should long stocks and short bonds.

Awesome- based on this, dow FV is 12,000. BG's original method of inflation-adjusted 10 year average earnings divided by 2x corporate bonds gets to a dow FV of about 8,000 now. However, he says in here that the numbers upon which he based his original formula on were from 1871-1954, and markets had matured since then, and safety nets were added to reduce systematic risk (i.e. unemployment insurance reduces corp earnings vol), so he said an arbitrary increase of 50% of the original model was warranted. Based on this 50% increase to 8,000, this would imply dow 12,000 is the current FV.

Nice catch, on today's price it's about 5.8% it's quite a nice yield for a floating. On the common I would buy GS if I could understand it... I think I just can't. This is goes into the too hard pile. On the preferred tough... I can certainly understand that GS is good for the money. BeerBaron Best part is...when you buy a floater below par you get optionality...for instance, if you buy at 70% of face, and libor goes up 1% because inflation goes up 1%, then your coupon will also increase 1% on face. HOWEVER, an increase of 1% on face equates to an increase of roughly 1.4% on your purchase price. So, if you see a spike in inflation and libor jumps, your coupon (as a % of purchase price) will increase FASTER than inflation. All of that, AND a LIBOR floor of 4% (so if LIBOR is below 4%, then 4% LIBOR is used to calculate the coupon). Hows that for an investment!!! It's not a bad investment at all. However, Libor would have to go up quite a bit to break the floor. Could be at 4%, based on face, for some time. That being said, hat tip for the idea. I may park some cash there. (so if LIBOR is below 4%, then 4% LIBOR is used to calculate the coupon) I'm sure u are already aware, but for the sake of other lurkers out there, it is .67% above libor. So a 3.5% libor would give you a little greater than 4% on the face. Yeah, its not a huge premium on LIBOR, and it does have a bit to go before the floor is taken out. However, considering this was trading at 23 pre-greece, pre-GS SEC investigation, I think it is a good buy below 20. Chances are it trades above 20 again within next 12 months, which puts the 1 year return expectation at 20%+ including coupons.

Nice catch, on today's price it's about 5.8% it's quite a nice yield for a floating. On the common I would buy GS if I could understand it... I think I just can't. This is goes into the too hard pile. On the preferred tough... I can certainly understand that GS is good for the money. BeerBaron Best part is...when you buy a floater below par you get optionality...for instance, if you buy at 70% of face, and libor goes up 1% because inflation goes up 1%, then your coupon will also increase 1% on face. HOWEVER, an increase of 1% on face equates to an increase of roughly 1.4% on your purchase price. So, if you see a spike in inflation and libor jumps, your coupon (as a % of purchase price) will increase FASTER than inflation. All of that, AND a LIBOR floor of 4% (so if LIBOR is below 4%, then 4% LIBOR is used to calculate the coupon). Hows that for an investment!!!

Ive been a buyer of the preferred D shares. Traded for 70% of face recently. They are floaters, and therefore protect against inflation. Great buy, for the risk level.

The MBS that are listed in ORH NAIC filings are essentially cigar butts. Most will likely go to 0...however clipping the last few coupons can be very profitable. Here is why: on a tranched security like that, very small differences in default rates/prepayments rates can make the difference between your tranche receiving 5 additional coupons before defaulting or 10 additional coupons. Because of the huge volatility in potential results, a huge IRR is demanded from those that would like to sell. So, the buyer pays pennies on the dollar for the last few puffs on the cigar butt, and the implied yield to stated maturity is a huge % (as you stated above), but that is because everybody knows the mbs is not going to mature, but rather default.

This is something I never have come to understand (likely because I don't have an MBA nor did I ever study the topic). What do you mean by "cost of capital"? Are you talking about the cost of their float? The cost at which they borrow money? Their float does not cost 8-9%, and they borrow money at less than 8-9%. Even if it did cost them 8-9%, those numbers are pre-tax and their ROE is after-tax. So what exactly is costing them 8-9% in your estimation? I should have clarified, I meant cost of equity. Investors in their stock on average are likely buying at the current price anticipating a return greater than 8-9% on an annual basis (probably somewhere between 10-15%). If ROE is only 8-9%, and investors require somewhere between a 10-15% return, then the cost of equity is higher than ROE and the fair value would be below book value. I was saying I think the 8-9% is low, and I think it is more likely that potential normalized earnings would be between 40-50 (even high if you add a premium for the "prem" factor). Their goal of 15% ROE would equate to eps of almost $55.

$30? That would be like 8-9% ROE. I am guessing that their cost of capital is higher than 8-9%. If that is true, than their fair value would be below book value. I would hope normalized earnings potential would be more like $40-$50 per share at this point.

I still have 100 shares, just to keep on radar. A lot of optionality here.

Yes, I think what they are saying "As a practical matter, hedge funds rarely make elections under Tax Code section 754" sums up the point you are make. The point I was making is, however administratively difficult, that it is still there as an option for a basis adjustment. What they talk about on page 356 (they refer to as "fill-up" or "stuffing" provisions) is what I was talking about with special elections. The special allocations are a more preferable way to do it. The PPM & partnership agreement we used allows for both.

yeah - not my area of expertise. However, I am still pretty sure what I said is correct. just some quick googling - refer to page 355 & 356 of US Regulation of Hedge Funds http://books.google.com/books?id=_Mz09XY9B0AC&pg=PA356&lpg=PA356&dq=Section+754+irs+hedge+fund&source=bl&ots=xWaD7JUnTl&sig=Bqc0mPxfjyQiGkvfBNB9lvCeA8U&hl=en&ei=EA-pS4mEFI2MNu7siK4B&sa=X&oi=book_result&ct=result&resnum=1&ved=0CAYQ6AEwAA#v=onepage&q=Section%20754%20irs%20hedge%20fund&f=false

I am not a CPA, but the one who advised me said it (section 754) can be used for a basis difference related to stocks as well. I just looked up actual internal revenue code, it reads "basis of partnership property shall be adjusted..." and refers to "partnership property." I'm assuming marketable securities are included.

I just went through the process of setting one up over the last 6 months. The documents we used for the limited partnership allow the general partner to make "special allocations" of realized gains/losses in situations where there is a large basis difference. In addition, the partnership may make a Section 754 election for a basis adjustment. Basically, with all of the tax implications, corporate law implications, and security (the partnership interests are considered securities, and you are considered to be selling them) and investment adviser law implications, its near impossible to do this without seeking professional advice.

Q3, 2009 - Shares issued for $347, net of commissions. Q4, 2009 - repurchased about 12% of the Q3 issuance for a HIGHER price, $356. Q1, 2010 - issue shares at ____? Probably lower than the $356, given that is where it was trading today. We are no longer in a position where we NEED capital. Especially in a market environment like this, where it is unfavorable. Why I don't understand these guys... why issue shares just to repurchase? Issue shares for odyssey...repurchase 1 quarter later...then 1 quarter later issue shares for zenith? Why not just raise a little debt if you are going to do that? Why go through the underwriting costs of issuing shares and diluting? This is not smart in my opinion.

I don't understand these guys... why issue shares just to repurchase? Issue shares for odyssey...repurchase 1 quarter later...then 1 quarter later issue shares for zenith? Why not just raise a little debt if you are going to do that? Why go through the underwriting costs of issuing shares and diluting?

Is it possible to stop a tax deferral on the dividend from hitting FFH held in the states in an IRA?