omagh
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Posts posted by omagh
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H & H are interesting reading, but have very little impact on portfolio decisions. Portfolio decisions are all about finding undervalued securities with margins of safety, sell when estimated value is reached, and periodically remove the deadwood. Undervaluations are few at the moment, so I'd rather sit in cash and wait as new cash comes in or is raised from securities sales.
In Canada, about 50% of our local stock market is tied to commodities which have had a cyclical surge based on sentiment and currency shifts with a dollop of leverage from speculators. In the local stock market, it's prudent to have dry powder for the potential mispricings when commodities inevitably revert to the mean as people rush to raise capital in falling markets. Meanwhile, securities bought at good discounts continue to grow, so that I participate in the upside with high-quality businesses, but position well for other events.
This paragraph from H & H gave me some pause thinking that the banks have found a new way to increase leverage using the Fed's balance sheet:
According to the outstanding monetary researcher, Rod McKnew, Ph.D. of Newedge, the Fed facilitated inflation through a more direct channel than expectations. He points out that reserve balances, which are not money, increased much more than money. In the past two years, M2 rose 6% while total reserves jumped 85%. But this does not mean that unused reserve balances had no influence on prices, and in particular on commodity prices. To quote McKnew, “In a world of advanced derivatives, high cash balances are not required to take speculative positions. All that is required is that margin requirements be satisfied.” With reserve balances at unprecedented levels, margin risk is minimized for those market participants who wish to take positions consistent with the Fed’s goal of higher inflation and have either direct or indirect access to the Fed’s mammoth reserve balances, which can satisfy margin requirements."
There are always unintended consequences of Fed actions, but is this a productive use of capital? It's a siphoning of wealth from others, not wealth creation. Long-term wealth creation in commodities businesses is substandard, but obviously a necessary part of a functioning economy.
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omagh - thanks for the Hoisington link. He is always interesting to read. He either has been early or wrong. Based on the quality of people who read / listen I would guess early. What you wrote seems interesting and counter intuitive. I plan on reading it tonight.
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It looks like the initial offer, subsequent offer and the personal pressure on Fremont's CEO (i.e. you'll be fired if BH buys you) were tactics to extract value in the alternate scenario. These efforts were enough to put FMMH into play. So, Plan A didn't work out, but Plan B did. Cold and calculating efforts by Biglari.
-O
Sardar Biglari, Chairman and CEO of Biglari Holdings Inc., holder of approximately 9.7% of the stock of Fremont, voiced support for the transaction, saying "I have enjoyed working with Fremont's Chairman of the Special Committee in our effort to realize the full value of Fremont's shares.
The merger with ACIA represents a victory for all Fremont stockholders. We applaud the Committee's efforts."
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Farnam,
It was a stock dividend not a cash dividend. Keep good notes, make the appropriate calculations based on your knowledge of the events and pay the appropriate taxes. If you're working with a software tax package, this may be a good year to use an accountant instead. For heaven's sakes, don't overpay the taxes because it will be much harder to recover with all your personal time going to waste.
http://www.cra-arc.gc.ca/E/pub/tp/it88r2/it88r2-e.txt
-O
Prior to Western Sizzlin being taken over by Steak n Shake, Western Distributed the shares of Steak N Shake to its holders. I noticed on my T5 that CIBC classified this distribution as a "dividend" which is (painfully) very taxable.
Is this the correct tax treatment? (I hope not, my tax bill is insane!).
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Hunt and Van Hoisington argue the opposite. They contend that QE2 has been a failure and that ending QE is paramount for recovery. Further rounds of QE will put US into recession. When corporate margins are being squeezed, FCF and other profitability measures are reduced which indicates why many of us are struggling to find adequate pricing for stocks. Personally, I've been raising cash for several months as profitability has weakened. My opinions on commodities have been stated a few times.
http://www.hoisingtonmgt.com/pdf/HIM2011Q1NP.pdf
-O
People say don't fight the Fed. I say don't fight the election cycle. Mr. Obama wants to get re-elected at all costs. Nothing else matters: not the deficit; not inflation; not the devaluation of the $; not the fact that seniors get nothing on their savings because interest rates are kept artificially low.......
We will have QE-3, the debt cieling will be raised, the stock market will be propped up. The public will be made to "feel" good. Isn't it great to live in a centrally planned economy.
I don't believe there is anything to worry about until after November 2012.
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No, but this might re-rate MSFT.
http://www.asymco.com/2011/04/14/first-quarter-pc-forecast-windows-down-2-macipad-up-250/
http://www.asymco.com/wp-content/uploads/2011/04/Screen-shot-2011-04-14-at-4-14-9.22.26-PM.png
Will this finally re-rate MSFT?
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Full report is now out: http://www.hoisingtonmgt.com/pdf/HIM2011Q1NP.pdf
interesting commentary, thanks! one of the few that apparrently dovetails with hamblin watsa's macro views as far as the inflation/disinflation front. wonder how their record is?
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Cash is priceless when others have none.
-O
http://pragcap.com/wp-content/uploads/2011/04/gs1.png
Not buying much today. Though its the day to buy.
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Inflation affects cost inputs (raw materials, inventory, labor, financing, etc). The cost of the inputs can only be passed along to customers at suboptimal rates, meaning that companies must absorb the input costs in their value chain. Companies with pricing power have the ability to pass along most if not all costs to their customers. Over time, most costs will be passed along, but margins of weaker companies will be destroyed in the process.
Quality of business is a critical stock selection factor (high margin, high ROE, demand stability across business cycles, etc).
-O
But by definition, wouldn't you expect the price of stocks rise to keep pace with inflation? And with the same thought, cash becomes devalued.
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Full report is now out:
http://www.hoisingtonmgt.com/pdf/HIM2011Q1NP.pdf
“The historical record on massive Federal Reserve intervention is minimal but indicates that as QE2 terminates at its scheduled end on June 30th, the inflation/risk trade will also fade. Accordingly investors should gradually move into Treasury securities and other high-grade risk adverse investments. This will release funds for the mortgage market and credit worthy state and local governments. Upward pressure on commodity prices will abate. This will begin to mitigate the downward pressure on real wage income and consumer confidence. The lower commodity prices will also serve to unwind the corporate margin squeeze that resulted from the higher commodity costs.
While the economy will slow initially, the drop in inflation over time should lift real income and serve to stabilize the economy. The dollar should firm, encouraging foreign investors to place additional funds in U.S. markets. Taken together, these factors should give the economy the opportunity to stand on its own, rather than rely on massive governmental interventions whose potentially negative and unintended consequences are unknown.
The evidence of the past three years seems clear in that monetary and fiscal policy have been unable to improve the average American’s standard of living. Time will be required to reestablish balance sheets to more normal levels, and in the interim disinflationary/deflationary tendencies will be ascendant. This environment is favorable for holders of long dated Treasuries. Positioning for an inflation boom will prove to be disappointing.”
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- 13 public businesses spread across 7 accounts; 5 major positions
- 2 private operating businesses, 3rd being planned
- cash reserve, no leverage
-O
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Hoodlum...2 points:
1) Bayes Theorem doesn't apply here. Valuations in China are not a pre-condition for valuations in Florida.
2) Absolute valuation matters and relative valuation doesn't. Values of Florida real estate assets are best examined in the context of replacement value -- a measure of absolute value.
-O
“If you don’t own a home buy one,” Paulson recommended; ” if you own one home, buy another one, and if you own two homes buy a third and lend your relatives the money to buy a home.”
Isn't that what got us into this mess? Looks like China is going in this direction as well.
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...or Japan to stop buying US debt.
http://www.gurufocus.com/news.php?id=70344
-O
Will this event cause the Japan's debt bubble burst sooner ?
Vitaliy Katsenelson - Japan: Land of the Rising Debt
http://contrarianedge.com/2010/07/30/japan-land-of-the-rising-debt/
Vitaliy had a prediction about rising interest rate in Japan with CNBC back in Sep 2009
http://contrarianedge.com/2009/09/28/on-cnbc-will-japan-drive-our-interest-rates-higher/
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Al...to value insurance companies at this point in the cycle, is P/B the right measure to look at for valuation? That metric seems to percolate throughout most of the commentary here and it's a good one for looking at many points in the underwriting cycle. A case could be made for price/underwriting capacity. The estimate of intrinsic value could have an alternate scenario looking at the embedded optionality of the underwriting platform's capacity under firmer pricing conditions.
A working thesis that I have is that a subset of insurance companies are greatly undervalued -- 50 cent dollars. The subset consists of experienced companies that are managing the cycle well -- excess capacity, experienced teams in waiting, few reserve releases, writing at decent pricing. It takes a pricing catalyst, which I'm prepared to wait for, to unlock the embedded value.
-O
You may recall during the last hard market stories of people who had 20 years of driving accident free making a single claim and subsequently facing massive premium increases and threats of insurance cancellation. The same thing was happening in the home insurance arena around 2003. There had been a cumulative effect of the asbestos litigation in the US, then the dual effect of the market crash in late 2000 followed by 9/11. By the time the hurricanes arrived the hard market was full on.
The problem for FFH at the time was their capital structure was so weak from the asbestos claims in the late 90s that they couldn't really take that much advantage of the cycle. This time around they will be primed and ready when this time arrives. Insurance is just like any cycle in that it appears to turn quickly but is years in transition. So, if companies have been releasing reserves, and undercapitalizing for 5 years the crisis will appear to start in one or two quarters. The cumulative effect of low bond yields, declining insurance revenues, inflated earnings, and a couple of mid cats should tip a few companies over the edge at some point. Then the whole house of cards starts to come tumbling down. FFH and no doubt Berky pay alot of attention to counterparties... others dont so much. I would defer to what William Berkeley says in his quarterly reports as to what the final catalyst will be.
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Because the market is efficient? :)
Why are they going lower? Cheers!
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I looked at this a few weeks ago when it came up on a search. The margin of safety is not high enough as the company reverts, from a one-time sales boost due to the flu scare, back to its core operating capability. The compensation to key executives is also an issue. Pass.
-O
Has anyone looked into this? Positive earnings every year last 10 years, averaged about 16% ROE last 10 yrs, no debt, and insiders own about 12% according to morningstar. Market cap is about 33M and net current assets are about 29M. TTM PE is only 7, but they had a temporary earnings spike due to sales of masks during the swine flu scare so income might be headed down.
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Watsa has a decent record of calling out specific bubbles -- TMT - 2000, US real estate - 2006. Now, there is a new target: Chinese economy and its effect on commodities. 2011 and 2012 will be interesting times for those with cash and hedges.
Meanwhile we have concerns over potential bubbles in emerging markets. Consider, for instance, what we learned on a recent trip to
China: many house (apartment) prices in Beijing and Shanghai had gone up almost four times – in the past four to
five years!; many individuals own multiple apartments as investments with the certain belief that real estate prices
can only go up; and maids are taking holidays so that they can buy apartments also. “Buy two and sell one after it
doubles to get one for free” goes the refrain! In his essay in Vanity Fair, “When Irish Eyes Are Crying”, Michael Lewis
says, “Real estate bubbles never end with soft landings. A bubble is inflated by nothing firmer than expectations. The
moment people cease to believe that house prices will rise forever, they will notice what a terrible long term
investment real estate has become and flee the market, and the market will crash.” We agree!!
Infrastructure and construction spending in China accounts for more than 40% of GDP – a number rarely seen in the
past in any economy. In fact, this demand has resulted in commodity prices going up in a parabolic curve. Combine
the increase in commodity prices, substantially from Chinese demand, with hedge funds and others again trying to
allocate money to these very illiquid markets, and you can understand why some of these commodities have
exploded in price, as shown in the table below.
2000 2008 2010
Oil – $/barrel 27 45 91
Copper – $/lb. 0.83 1.39 4.35
Nickel – $/lb. 3.09 5.31 11.23
Wheat – $/bushel 2.80 6.11 7.94
Corn – $/bushel 2.25 4.07 6.29
Cotton – $/lb. 0.62 0.49 1.45
Gold – $/oz. 274 870 1,405
Even onions and chilis went up 64% and 38% respectively in 2010!! We shy away from parabolic curves, so we
continue to maintain our equity hedges!
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Exactly...so, why not start a business or three? Bumming around bores me to tears, so I have 2 businesses with a 3rd in the offing.
-O
I think Eric knows this and is f'ing with us.
In Canada, we have a tax free account (TFSA). Put in money (annual cap limit), invest as you wish, pay no taxes at withdrawal (except implicit annual corporate taxation on earned profits). The little guy can take advantage from age 18.
-O
Why is there no vehicle for small people to do the same. These arguments that it's difficult to tease out reinvestment compared to consumption are utter bullshit -- it's simple as pie to create a new investment account exactly as I described. It's so familiar to us already (because of IRA accounts), that it's very easy to see.
No, I don't want the corporate taxes to be changed in regards to dividends withing holding companies. Instead, I want us all to have that sweet dividend tax rate -- nothing. Most people don't have the means to take advantage of it -- or if they do (like buying Berkshire shares) it's not quite the same thing at all because they have no control over things like the allocation of profits or timing of dividends out of the holdco if they happen at all.
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Eric...you're comparing apples and oranges. The HoldCo (BRK) owns 100% of the OpCo's (BNSF, See's, etc). They are legally separated for divestment purposes, but effectively, HoldCo and OpCo's are 1 legal entity for taxation. Transfers of dividends between HoldCo and OpCo are essentially internal transfers of funds post-taxation. If BSNF had been rolled into the BRK entity, you wouldn't even see the funds transfer as dividends, just an internal reshuffling of accounts.
In the case where BRK holds a minority position (e.g. WFC, KO, PG, etc), there is a double taxation just as for individuals -- we're now apples to apples. Buffett made a strategic change several years ago to have more wholly owned subsidiaries to remove the double taxation. In so doing, it permits capital to flow to the highest returns internally at BRK.
Why don't you start a business or three in some underserved markets? There must be some better societal benefits to your wealth than passive investments that are doubly taxed.
-O
I believe the way Berkshire gets taxed is the earnings of the wholly owned subs are consolidated and he then pays tax. Okay, yes in that respect the incremental subsidiary he acquires gets taxed at 35% rate because of the already extreme level of earnings within Berkshire.
However, when he takes the post-tax earnings out of Burlington Northern to deploy in a new purchase -- he pays absolutely ZERO on that extraction of profits. That extraction of profits is a dividend. But when an ordinary individual takes earnings out of an investment via a dividend, he wants us to get hit at regular income tax rates! Fine then... let's be fair -- he needs to pay ordinary corporate tax rates when he takes money out of Burlington Northern. That would put him on an even platform with the rest of us.
Look, my soon-to-be 35% tax rate on dividends is a double-tax on the post-tax dividends being paid to me. That's on top of whatever the company already paid! Yet Berkshire's maximum tax rate is 35%, and there's no prior round of tax on it.
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oec...your question is good, but it reflects a certain framing. FFH is an insurance company with a substantial bond portfolio and a much smaller equity portfolio. If you look back over inflationary periods, insurance companies with short durations in their bond portfolios have the ability to roll their bonds over into higher yielding securities. It's a type of asset conversion that Marty Whitman has written about. In the event of inflation, insurance companies typically revalue towards a "going concern" model.
If you get the chance to go to the Fairfax shareholders dinner, talk to the quiet guy named Brian who runs the bond portfolio -- guaranteed to be worth your time. FFH has made far more money off bonds than equities in its lifetime, but people mostly like to talk about equities here.
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Would you mind clarifying how you see the portfolio positioned for inflation if the equity positions are substantially hedged?
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3.5% loss on a $22.7B portfolio in a quarter where bonds rose is expected. The portfolio is positioned for both inflation and deflation while meeting obligations, so it doesn't much matter in the long run.
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I think the mark to market losses aren't really ugly, but just the reality of what happened in the last year.
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Klarman has an excellent chapter 13 in Margin of Safety on managing a portfolio. Here's a teaser...
Second, the periodic liquidation of parts of a portfolio has
a cathartic effect. For the many investors who prefer to remain
fully invested at all times, it is easy to become complacent, sink-
ing or swimming with current holdings. "Dead wood" can
accumulate and be neglected while losses build. By contrast,
when the securities in a portfolio frequently tum into cash, the
investor is constantly challenged to put that cash to work, seek-
ing out the best values available.
...
Selling: The Hardest Decision of All
Many investors are able to spot a bargain but have a harder
time knowing when to sell. One reason is the difficulty of
knowing precisely what an investment is worth. An investor
buys with a range of value in mind at a price that provides a
considerable margin of safety. As the market price appreciates,
however, that safety margin decreases; the potential return
diminishes and the downside risk increases. Not knowing the
exact value of the investment, it is understandable that an
investor cannot be as confident in the sell decision as he or she
was in the purchase decision.
This morning I sold the last half of a position I had in Timberland (TBL) at $36.44. I bought a year and a half ago at ~$13, thought it was worth about $20, sold half not long ago at $30. I'm ambivalent about it because I like the company and would have liked to hold it longer. But, It is near an all-time high and I've been planning on getting more defensive by raising cash, plus I wanted to add a little to some other positions that look reasonably cheap (cutting the flowers and watering the weeds perhaps).
Obvious alternatives to selling would probably be buying a put, maybe a couple bucks below the current price, or just putting in a stop-loss order.
How do you guys approach sell prices and taking profits?
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I've never understood nibbling. Why not just have a watch list and make the investment decision separately? Peter Lynch was the ultimate nibbler with ~1400 stocks in his portfolios.
-O
Anyone want to take a stab at why they hold so many insignificant stakes in so many companies?
They buy through their various subs, so some portfolios are signficantly smaller than others. That small position, may actually be fairly significant within the subs portfolio. Also, some positions are testing the waters and nibbling, but the price may never have gotten to a point where they loaded up. Cheers!
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I think that they should introduce an aggressor jeopardy rule. When a player is injured due to in-game violence, the aggressor is penalized an equivalent number of games as the injured player is out. If a guy loses his career, the aggressor is suspended indefinitely (e.g. Bertuzzi). Of course, there should be oversight/review to determine intentionality and to prevent injured players from sitting out indefinitely. The league should man up and take some responsibility for the athletes whose careers are at risk from the goons. The governance of the league is weak and caters to the lowest common denominator.
Lemieux's point is directionally correct, but suffers from glass houses syndrome.
-O
Yeah, he turned, but the player hit him in the head with his shoulder when he was vulnerable. I believe in big hockey hits, but not when the puck is nowhere near the player, and not when they are vulnerable.
You throw a big open ice hit when the guy is trying to skate through the other team...fine. You hit shoulder to shoulder on the boards...fine. But hits when the player is facing the glass, rushing to tag the icing, away from the play...nope! Look at the hit by Getzlaf on Hamhuis last week, and Hamhuis was completely knocked out. I don't think that was a bad hit...it was more of an accident as Hamhuis turned...and I'm a Vancouver fan. But cheapshots to the head, especially on the star players...it's bad for the game!
And yes, guys like Cooke have to go, or get rid of the instigator penalty so players can patrol and control the cheap shot artists. I think guys like Cooke, Pronger, etc...they should have to fight after a dirty hit. Cheers!
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I doubt that transition from military control will be an issue since it's unlikely to happen. In a country with no democratic tradition, it's not a given that democratic rule is the next step.
http://feeds.tvo.org/~r/tvo/TxZN/~3/PxxxVVmViB0/1903508_480x270_512k.mp4
-O
I'm both surprised and glad that this happened as peacefully as it did -- though I worry a little about how the transition from military control will go...
Watsa Recommends Wells Fargo, J&J, Kraft, US Bancorp Shares
in Fairfax Financial
Posted
Small impact to Fairfax's book value:
Small writedown of book in the short-term, bigger increase in book in the mid-term: