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Kaegi2011

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Everything posted by Kaegi2011

  1. As someone suggested above, why not go for a collar (long put and short call). If you're buying close to ITM the costs generally offset. You'll have downside protection in exchange for further upside. Effectively selling without the taxes (for the duration of the options) - just know that if you do get called or need to buy back the option at higher price you need to put in more money, either to the IRS or to the counterparty, so make sure your expiry dates are appropriate.
  2. One very high level way to rationalize it (not sure if it's the correct way...) is to think about the leverage in the system. If the economy is more levered than before, than smaller % nominal changes can lead to same if not higher equity changes. If one were to argue for this strategy, I think that would be a rather intuitive and compelling argument (for me at least).
  3. SD - with due respect -- and I do mean it, as I've found your comments elsewhere to be generally insightful -- while I agree with you on the concept, the real world companies that I've worked for do not work this way. SC financing are **generally** not done out of a cohesive logic regarding shareholder returns or value maximization in the long run, but rather incentives at the micro level. A couple of examples that I've witnessed: 1) The CEO/COO are told they need to lower working capital by the Board b/c McKinsey did some work and shows your Shitco is 4th quartile on W/C. Reducing inventory is really hard work without taking on operational risk, and it's much easier to negotiate with suppliers for better terms. That work is further reduced when the customer asking is offering an easy out - e.g., supplier financing that's relatively cheap. For the supplier many get to receive cash faster with some financing cost, and many do take it. The treasury group does not get a say in this - they are the intermediary that facilitates the interactions with the banks, assuming they're asked to do so at all (they are on the sidelines occasionally too). 2) The company has made some promises to the street to do a stock buyback on a leverage neutral / friendly basis. TO fulfill that promise it's going to pull an easy lever - financial engineering. SC fulfills that promise, and does not show up anywhere. It's not a required disclosure (vs. something like AR securitization). Little by little W/C comes down, and analysts cheer the operational improvements that the mgmt team is achieving. 3) The company promised the rating agencies of a certain operational plan, and are told that if they continue the progress they'd be very close to an upgrade (worth 20-50bps across the entire stack when refinanced). However, the easy fruits are gone, and SC financing looks very appealing... For a treasurer whose career track would be dramatically helped with a ratings upgrade, it's a pretty good carrot. Point is - across various constituencies within a public co the SC financing option is just the easy button, and nobody needs to know about it, which is why it's so damn attractive. A few other comments: 1) Not all suppliers offer early pay discounts (currently working for a company that doesn't offer it at all - like never. We'll negotiate on the days, but no discount for paying early). The % that do this is higher than I thought. 2) This game is being played by both customers and suppliers, so unless a company is in a business that sells to consumers it's just as likely to be on the receiving end of it. 3) I'm not sure I quite get your calcs on the increase in cost of debt, but if it's 10-25bps in as total incremental cost of funding, then that's a really significant amount. It's really not trivial when companies are looking for bps in terms of funding cost improvements...
  4. Agreed. If it's a slow drip without vol going up it's not going to hedge much of anything. I think this works b/c 1) due to the infrequency of events the market underprices the risk, and 2) the explosion of vol assumptions in the underlying instruments - both of which contribute to the convexity of the payoffs.
  5. This is the answer. In effect it's taking off the A/R off of the balance sheet of the supplier and creates better optics for both supplier and customer. Banks/funding institutions are willing to take the risk b/c it's just another short term credit market (e.g., commercial paper) and counterparties are very credit worthy. So in effect the cost isn't really cost of funds for the supplier, it's the just a small discount to the supplier, especially in these days when rates are zero... The cost is the (discount x 365)/(term - discount period) - and it is expensive financing. The cost of (1/15, n90) is (1x365)/(90-15) - or 4.87%; the more traditional terms are (2/10, n90) is (2x365)/(90-10) - or 9.12%. The treasurer of an Apple, Amazon, etc. just borrows cheap on their credit line, pays the invoice early, and keeps the spread. SD Not exactly. The decision on paying early or not to get a discount is obviously based on the level of discount, so if the discount is hugely attractive then it may always be worth it. However, for public companies at least, the optics of higher debt balance and lower AP / WC balance is worth something (sometimes a lot more than "something"), so supply chain financing can often step in when the early pay discounts are not significant enough to outweigh that.
  6. This is the answer. In effect it's taking off the A/R off of the balance sheet of the supplier and creates better optics for both supplier and customer. Banks/funding institutions are willing to take the risk b/c it's just another short term credit market (e.g., commercial paper) and counterparties are very credit worthy. So in effect the cost isn't really cost of funds for the supplier, it's the just a small discount to the supplier, especially in these days when rates are zero...
  7. Vinod - appreciate the response. Gonna try to dig deeper to find someone who can explain how this all works b/c I feel like I'm really missing the forest here. :)
  8. Is the ultimate measure of success whether they made or lost money? Because if that's the yardstick, then propping up asset values is always going to look good in hindsight. They might as well go into CLO equity as the return will look even better. I don't mean this as a sarcastic comment at all. I think there was a major line that was crossed this time around with the Fed in terms of its programs and the markets it participates in. If the intent to "preserve" asset value what's the difference b/t equity and credit? Why not just go into SPY? It seems like a major slippery slope. One that I very much dislike on a principal basis as a citizen (but my accounts are better for it...).
  9. You're right, we would not. But if one had invested with the at the beginning, that portfolio is still likely to outperform the S&P, but then you're saying it's luck and not skill. Fair enough - not for you. Maybe we can get back to the topic of whether there are potential instruments to use for the future, or the relative merits of those. For HYG/LQD - they seem to be far less sensitive to equity movements outside of a crash scenario. Now that the Fed has effectively backstopped LQD it seems like significant near term price declines are unlikely, thus probably rendering puts on LQD as ineffective. Not sure about HYG as real distress has yet to work its way through the system, and the Fed is also soft backstopping that market as well (writing puts seem reasonably interesting tho...) So that does leave VIX as another candidate - will be looking into calls on the VIX, as well as ETN/ETPs on vol.
  10. I don't know their performance from Feb 2010 to Feb 2020. Implicit in that question is what happens when there are no major drawdowns - I would assume it's not very favorable. But that goes into the bucket #3 that I mentioned above - which is that you don't think significant drawdowns will occur in the future and therefore insurance is not worth buying as it'll never pay off. Of course if that's your view then there's no reason to buy insurance.
  11. So far you've simply stated your opinion, and if you want to believe that it's fine. I'm not trying to argue about your opinions. But that opinion does not hold water against actual performance in the documents shared above. So you have pretty much the following arguments: 1) You the think the numbers are inaccurate and does not reflect actual performance (again, they only take institutional money with minimum account sizes of greater than $150mm, so I don't think this is realistic, but it's possible - maybe it's another Madoff, and if you have suspicion I'd love to hear the logic...) 2) You don't think the market pricing for selling protection going forward will be as friendly going forward, and pricing of these products will go way up to reflect actual risk (certainly possible, maybe even expected, but I would have thought the same after GFC, so would be curious to hear why you think this) 3) You don't think markets will decline going forward 4) Some combination of 2/3 above Below are the relevant paragraphs where I'm wondering if you've read the letter... "A 3.33% portfolio allocation of capital to Universa’s tail hedge added 12.7% to the return of an SPX portfolio in March 2020, added 11.6% to the CAGR of an SPX portfolio since 2019, added 1.7% to the CAGR since 2015, and added 3.6% to the CAGR life-to-date (since its inception in March 2008). The Universa risk mitigated portfolio has thus outperformed the SPX across all of these timeframes, accompanied by—or, more accurately, because of—far less risk (as evidenced by the March 2020 and the 2008 columns)." And, to answer the persistent skeptics of our strategy out there, let me point out that we certainly didn’t need the Q1 2020 market drop to add risk mitigation value. At the end of 2019, for instance, Universa’s life-to-date risk mitigated portfolio CAGR exceeded the CAGRs of all of the other risk-mitigated portfolios (including, most notably, high-duration bonds), as well as of the SPX alone, by from 2.2% to 4.2%."
  12. Have you read their research? If so, and you disagree with their figures / outcome, can you explain why? Not sure what you mean by whether I disagree with their outcome or not. If you are basing the value of an "insurance policy" on the date right after the loss, of course it'll outperform. Over time, the amount you pay for insurance is not usually a profitable investment. But you're speaking in generalities. For you to invest in their strategy you have to believe that protection pricing is improperly priced. Based on events over the past twenty years (tech bubble, GFC, and now this), we've had more than a few 20 sigma events. B/c if you believe that their 34x return is correct, a 3% allocation means they can go 11 years without making any profit to break even, and they're providing you cash at the most opportune moment (E.g., a crash) to compound. So again, is there anything specific that you disagree with?
  13. Have you read their research? If so, and you disagree with their figures / outcome, can you explain why? Everyone has their research and everyone makes bold claims. Motley Fool beats the shit out of the market too apparently. Financial Services firm research is mostly bs. Especially stuff done only for accredited investors. I'd even point out that unless they have additional disclosures, spamming Twitter like they were doing not long ago is a major no-no in the business as well. I think since they only market to exempt participants, they can get away with it, but its definitely sketchy. I'm sorry I'm missing specifically what it is about their strategy that you disagree with? Or are you suggesting that they're just straight up lying about their performance in that very specific account letter?
  14. Have you read their research? If so, and you disagree with their figures / outcome, can you explain why?
  15. Well isn’t this the point of insurance? You hope you don’t need it but it works well when shit hits the fan? A 30x return pays for a lot of years of complete donuts.
  16. Which high yield bond ETF went up 100x? I'm curious It was either HYG or JNK, maybe both. The caveats are: (a) you had to get the strike and expiration just right to get the max return (duh), and (b) trading was pretty thin pre-crash so I am not sure how much you could actually buy at those historical prices. Edit: Randomly pulling out one example ... a few HYG 5/15 70 puts traded < $0.05 in Feb and went > $5.00 in late Mar So you have access to historical options data? Could we PM and work together on some backtest? :) I don’t have any special data subscriptions, I just pulled the numbers above from my broker (IB). The option hasn’t expired yet so the numbers were easy to fetch. Thx for the offer though. :) Got it. So you can see historical pricing on existing options? Still think that’s helpful. I can’t even find that info on Merrill! Out of curiosity what’s the max pricing on 275/250 spy puts for June (noted above)?
  17. Which high yield bond ETF went up 100x? I'm curious It was either HYG or JNK, maybe both. The caveats are: (a) you had to get the strike and expiration just right to get the max return (duh), and (b) trading was pretty thin pre-crash so I am not sure how much you could actually buy at those historical prices. Edit: Randomly pulling out one example ... a few HYG 5/15 70 puts traded < $0.05 in Feb and went > $5.00 in late Mar So you have access to historical options data? Could we PM and work together on some backtest? :)
  18. Vinod - Thanks for the response. I have gone through some S1/10K/IR materials for some of them, but the one thing I struggle to really figure out is how much of their expenses are "growth" vs. "maintenance." This is further complicated by the fact that when you have negative churn, which many of these guys have at cohort level, it's close to impossible to figure out true LTV. This means whenever I try to put something in excel the outcomes are a mile wide as I don't have enough intuition or experience to put in numbers I believe in (or right now, when backing into a valuation, margins and growth rates that I don't know how to get comfortable with). It would be incredibly helpful given your experience if you can lay out an example of how you go figuring out the boundaries for a specific co. What I read from analyst research seems to just be growth + opex declining and viola - fantastic business in 5 years (and then I look at CRM and I don't see the same margin profiles for the out years!).
  19. I disagree that Oracle did not have competition. They did. So did Microsoft. Why were they still profitable? Perhaps because before the Internet bubble nobody financed profitless growth much or for long. 20+ years ago it would have been difficult to sell huge potential TAMs to investors. Some companies could but it was likely more difficult and rare than it is now. (I am not saying that selling huge TAMs and profitless growth is bubble or irrational on the investor side, I'm just saying that the attitude towards this has changed a lot.) I kinda agree with both here. A few decades ago the "new" tech back them is now the backbone of everything now, so the most pressing needs of the day were solved that way (e.g., database). But because the cost of starting up something is fairly enormous, only a few were able to make it to be a decent size, and dominated the markets. Now, startup costs are very low, so more competitors, and going after more niche spaces (or competing with giants with a totally diff product like Slack), with investors who are willing to fund burn rates further at the name of growth (the last one TBD - something I believe in, but don't have empirical evidence is happening). So... I'm still trying to find how to value these damn things. :)
  20. In case anyone is curious, Universa only manages institutional capital, with min account size of $150mm. I assume that's per year, so a cool $5bn AUM should do it.
  21. Great info, thank you. YOu're right that MSFT is probably an outlier, but I went back and looked at Oracle and ADBE, and they were profitable long before they reached the scale of CRM now. From this filing it seems that ADBE reached ~30%+ OI margins at $300mm of revenue in 1990. Granted, it grew from there from a topline perspective and bottom line did not improve. https://www.sec.gov/Archives/edgar/data/796343/0000912057-95-000843.txt Has there been material accounting changes to how software R&D is expensed? New to the space so I don't have a lot of background on the history. Regardless, your point on FCF vs. EBIT/OI is fair - it probably does cut out the accounting noise between businesses to make better comparisons. I'm still trying to get my head around the moatiness of these businesses. I think if you gave me 5bn dollars to replicate a Moody's or a Facebook or whatever, I don't think it can be done. But it seems that a lot of these businesses trading at 10-20bn can be recreated with 5bn (maybe substantially less?)? Am I way off as someone who's not dealt with software whatsoever in life?
  22. Thanks for the long post. I appreciate it. :) I guess maybe asking a related but different question - when I look at MSFT financials in 1992, it showed a company with 2.8bn in revenue and 1bn of EBIT/OI. Obviously it was still growing quickly, so it's not like they were sacrificing revenue for profitability. When I look at the a huge SaaS player like CRM now, I see 17bn of revenue and 450mm of EBIT/OI. Obviously a bit of apples and oranges since lots has happened in the past thirty years, but I'm trying to figure out why these scaled SaaS companies are not more profitable at this point. So is there a SaaS company that has shown what "normalized" P&L might look like? I'm really curious to the trade off between topline growth and bottom line profitability, and to your point, are they building a castle like Bezos or substituting growth to mask an unprofitable (or not very profitable) business model?
  23. Growing up my neighbor's kid (same age as me so we were friends) always complained about not getting cable and spotty telephone connection. He'd come over to watch batman after school. We never had an issue nor did I hear about it from others in the small complex. When his apt would have issues it seems that maintenance always takes forever to fix issues. Again, nothing to definitively prove that it's related to payments but it's strange when there was a guy on premise to do this type of stuff. His family was basically living paycheck to paycheck but we were not. When I was in NY I complained about my heater for a month to the landlord b/c it was working intermittently (and I was in banking working 18 hours a day, so it wasn't a huge deal). Then I wrote him a letter stating that I'm paying someone else to fix it and taking it out of next month's rent. Guy shows up in two days to fix the issue with a new radiator. Lastly, while it's not my personal experience, you can go and look at the netflix show on the kushners. That's some shady shit. Again, I don't expect you to acknowledge that these are tactics that you're using as it's a public board. However, if you're a small time landlord (and not EQR...) and you feel like you have no lever to collect rent then you're the exception, not the rule, based my experience.
  24. Yes, vol is currently elevated due to fear in the market. That's why the trade would have paid out 2x payout now if done at the beginning of the year when vol was lower (approximately). With regard to your point about inflation - that's covered by the 97% of the risk portfolio, not the insurance side. The insurance side is for drawdowns only. Your question on the short put option - I'm pairing it to lower the initial upfront cost so the payout is higher in between the two strikes, but lower in the extreme scenario (e.g., if you think market is going down 50% it's better to buy 45% OTM nakes puts than 20% OTM puts or a bear spread with 15% / 25% downside strikes). Since his description is that a drawdown is 15% I'm trying to construct a payout where insurance "pays off" past 15% but does not require 50% for a 10x. Hope I'm explaining my logic clearly. Obviously would love to hear other opinions on constructing this tail hedge.
  25. Does anyone have a good resource to read about the framework for how to think about these SaaS companies from an investor's perspective? I get that incremental margins are super high and customers are sticky, and ROIC can be extremely compelling, but most analyst models I see are based on some model where profitability and cash flows don't come in until 5 years from now and then shoot through the roof. While I certainly acknowledge that as a possibility, the key aspect that I don't understand is the stickiness of the customer base, or the moat around these businesses. Low capital intensity and high margins are great, but doesn't that mean that the next company doing something in the space will have similar advantages? I feel like i'm missing something in this puzzle that's critical to understanding at least how some portion of the investing public thinks about these opportunities...
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