omagh
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Posts posted by omagh
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I would imagine that Buffett read the recent Moody's study from this article. Does anyone have a pointer to the Moody study or an abstract?
-O
No more tax arguments from me. As the resident tax expert on the board, I have stated my case.
Funny how Buffett does everything in his power to avoid estate and capital gains tax.
Nevertheless, we either need to raise more revenue or spend less, or both. I would start on the Kennedy tax policies and also change social security, disaster that it is.
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http://finance.fortune.cnn.com/2010/10/05/buffett-hints-at-bond-bubble/?source=yahoo_quote
Investors buying bonds at the prevailing high prices are 'making a mistake,' billionaire investor Warren Buffett said.
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http://finance.fortune.cnn.com/2010/10/05/buffett-says-cut-taxes-for-the-poor/
Warren Buffett said it's time to raise taxes on the 'very rich' -- and perhaps cut them for the rest of the population.
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Some interim confirmation of Berkley's thesis. Underwriting is deteriorating yet the industry is declaring increased profits.
JERSEY CITY, N.J. – Private U.S. property/casualty insurers’ net income after taxes rose to $16.5 billion in first-half 2010 from $6 billion in first-half 2009, with insurers’ overall profitability as measured by their annualized rate of return on average policyholders’ surplus increasing to 6.3 percent from 2.6 percent.
Reflecting insurers’ $16.5 billion in net income and other developments in first-half 2010, policyholders’ surplus — insurers’ net worth measured according to Statutory Accounting Principles — rose $19.1 billion, or 3.7 percent, to $530.5 billion at June 30, 2010, from $511.4 billion at year-end 2009.
Insurers’ net investment gains — the sum of net investment income and realized capital gains (or losses) on investments — grew $13.3 billion to $25.8 billion in first-half 2010 from $12.5 billion in first-half 2009, powering the increases in the insurance industry’s net income, overall rate of return, and policyholders’ surplus.
Partially offsetting the improvement in investment results, insurers’ net losses on underwriting grew to $5.1 billion for six-months 2010 from $2.1 billion for six-months 2009. The combined ratio — a key measure of losses and other underwriting expenses per dollar of premium — deteriorated to 101.7 percent for six-months 2010 from 100.8 percent for six-months 2009, according to ISO and the Property Casualty Insurers Association of America (PCI).
The profits will likely be short-lived.
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Just finished listening to the presentation and Q&A. For those interested in learning more about insurance, the future and WRB I highly recommend you listen to this.
My key takeaways: Industry current year underwriting continues to be poor. As bond yields fall, interest and dividend income will continue to shrink. It looks to me that all that is saving the industry are reserve releases (likely being fueled by lower than expected inflation). Clearly not a sustainable situation. Perhaps all that is needed to drive in a hard market is a couple of large catastrophes. Regardless, once reserve releases are burnt through the day of reconing will arrive and select companies (WRB, BRK, FFH) will do very well.
In the presentation Bill reviewed their minimal exposure to catastrophes so I will spend some time thinking about when I want to re-establish a position in the stock...
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It just boggles the mind that people still sell "at the market" in these days of automated trading that causes super-waves of demand that can digest all available "at the market" shares.
Caveat emptor...
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http://finance.fortune.cnn.com/2010/09/14/nucors-single-stock-flash-crash/
Is anyone aware of single stock flash crashes taking place on the Toronto Stock Exchange?
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That was a fat pitch followed by much fatter pitches. Many of us on this board made fantastic returns on purchases during this period. We didn't commit all of our reserves in one day, but by March 2009, most of mine were committed and I was wishing that I had more in my business and personal accounts.
I pay a fair amount of attention to the few public comments that Buffett makes. His rational comments are like a value investor's beacon while things like ECRI indicators are noise. Sorry Zorro, but I don't think that I've ever heard Buffett or Klarman talk about the ECRI indicator.
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Recall that Buffett wrote his famous NYT op-ed titled, "Buy American, I Am" back in October 2008. And we all know what happened next...One of the greatest market free falls all the way through March 09. The market fell through the floor, all the way to the infamous 666 on the S&P. Now to be fair, the market is currently higher than when he made his previous call, yet it fell precipitously shortly after he wrote the op-ed.
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“I’ve seen sentiment turn sour in the last three months or so, generally in the media,” Buffett said. “I don’t see that in our businesses. I see we’re employing more people than a month ago, two months ago.”
Employment is a lagging indicator and has been persistently slower to recover in the last 2 recessions which have seen significant losses for investor and household balance sheets during the tech meltdown (2001) and the credit crisis (2008). Previous recessions going back to the 1950's have seen a much faster snapback in the employment rate after peak unemployment in a recession. It's good to see larger companies starting to hire and putting dollars into household balance sheets. We are reaching a turning point that will become more visible to the wider economy.
My cash levels have been dropping in the last few weeks as opportunities presented themselves, moving from 30% down to 10%.
-O
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There was a Fairfax board on stockhouse.ca which pre-dated the MSN board where a few of us sharpened our value investing craft. Bits of it are still out there on the interwebs. I recall Sanjeev appeared on there about 1998 or 1999.
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Indeed. For the "old timers" here, do you remember the time when we were at MSN and lotsofcoke was talking about Marvel (he once said something like "it was ringing like a cash register"), mungerville and his very wisdom words about a lot of stuff including the naked shorters (he once said something like "my CFA analysis tell me that they are toast"), some Mohnish Pabrai posts (no, not a nickname ;-)), when Shai managed the board and met Buffett at his school, etc.? I'm glad that we have some of them still posting here like uccmal, the "they will get the cup in 2010" crip, sleeplesstwindaddy, etc.
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Bill Berkley presented at the KBW conference -- one of his better presentations.
Lots of commentary on the hard P&C market, causes of the market turn, some evidence of a market turn in 4Q2010, calls BS on industry peers use of models. Some interesting poker analogies and thoughts on management of capital. Q&A session is outstanding, including commentary on how excess capital isn't a limiting factor in a hard market.
http://ir.wrberkley.com/events.cfm
-O
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Also, there is a small cash boost from the balance sheet which effectively reduces its invested capital. OSTK is starting to generate cash from its payables as it matures into an established commerce platform. As revenues ramp up, this will become a larger factor in how OSTK is capitalized. Expect CFROIC to increase, hopefully, into 100+% range, along with a swift debt paydown.
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3 lean years for OSTK? The stock has gone no where for 8 years according to the chart and its not like theres a dividend either.
Don't look at the stock price - that's not going to tell you anything! Fairfax's stock price went nowhere from late 1998 to 2010! That didn't mean there weren't times in that period when you could have made a killing in the stock based on improving financials.
Focus on the numbers...the cash flows...the improving margins...the balance sheet...the escalation in revenues in both the direct and affiliate businesses...customer service rankings and website profile. Cheers!
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Valuation of Overstock is ultimately about determining the return on invested capital and finding a reasonable method for valuing the cash flows on that invested capital. Byrne has focused on building free cash flow in the last 3 years and is now self-financing. Further, he has built a commerce platform that can scale up significantly. This paper is a bit dated but has the core valuation model necessary to understand where Overstock will go. It also provides a mental model for understanding the key performance metrics in the cashflow statement and balance sheet. There are enough pieces in the paper to reproduce your own spreadsheet model -- it's worth the effort and it might even make you some cash for your efforts at current market prices.
http://www.capatcolumbia.com/Articles/FoFinance/Fof9.pdf
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but imo byrne has so far not yet demonstrated the ability to methodically build a value-creating business, one sustainable incremental brick & click at a time. their efforts have always been sabotaged by some festering problem or other that suddenly rises to the surface & causes them to have to back pedal & regroup.
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http://www.choufunds.com/pdf/SA10%20pdf.pdf
NON-INVESTMENT GRADE AND INVESTMENT GRADE BONDS ARE NOW FULLY PRICED:
Non-investment grade bonds have rallied tremendously from their lows in March 2009, and at
current prices we believe they are close to fully priced. For example, three and a half years ago
the spread between U.S. corporate high yield debt and U.S. treasuries was 311 basis points.
Currently, it is about 696 basis points, down from its peak of over 1,900 basis points in December
2008. (Source: JP Morgan).
Similarly, we believe that investment grade bonds are now close to fully priced.
However, when compared to corporate bonds, U.S. treasuries are in bubble territory. In our
opinion, this is the worst time to hold cash and short-term treasuries unless you believe we are
headed into a 1930s style depression. And if you believe that you should redeem all your Fund
units.
In equities, we believe the financial, retail and pharmaceutical sectors are undervalued.
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The end of an era. There aren't too many minority non-controlling interest positions left on the BRK balance sheet.
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From the just released 13D/A...
"On August 25, 2010, Berkshire’s management determined to propose to Wesco a cash-stock election transaction in which it would acquire the remaining 19.9% of the shares of Wesco that it does not presently own in exchange for Berkshire Class B shares and/or cash valued at the book value per share of Wesco as of a time reasonably contemporaneous with the closing of such a transaction."
After just 30+ years!!
mmiller
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Seems like this discussion has turned into a kind of slugfest where people are taking punches at anyone who's view is different from theirs.
...and all done tastefully and respectfully, which makes this community great! Come to the annual Fairfax shareholder's dinner and meeting and you can do it in person.
-O
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And this is a surprise? The US government distorted the supply/demand of the market by pulling sales forward earlier in the year. Same government action occurred in Canada. Now there is an excess of supply which means that pricing will decline further. Additionally, July is the typical highest month of housing inventory, so beware figures that are not seasonally adjusted.
At what point does it become cheaper to buy a house than build a house? Some light investigation should prove out that a significant decline from current pricing will put housing stock on sale below replacement value. As Buffett has pointed out, a combination of new household creation, destruction of housing stock, or pricing declines will soak up the excess. It ain't pretty and it will take time...but, it'll be a darned good time to buy a house at below replacement cost if you're forming a new household.
-O
Expecting National Association of Realtors report tommorrow to show a 12-13% decline in July sales of existing homes.
Those "cheap" co's will probably get a bit cheaper
The drop was much greater than expected.
http://online.wsj.com/article/BT-CO-20100824-708958.html
Existing home sales plunged to their lowest level in 15 years in July as inventories soared, painting a grim picture for the housing market absent government support in a stubbornly sluggish economy.
Home resales dropped a record 27.2%--nearly twice as much as analysts had expected--to an annual rate of 3.83 million in July, the National Association of Realtors said Tuesday. Meanwhile, inventories rose to 12.5 months from 8.9 months in June, pressuring already depressed home prices. Inventories are at their highest level in more than a decade.
"Historically July is the peak inventory month in any given year," NAR Chief Economist Lawrence Yun said.
Economists surveyed by Dow Jones Newswires had expected existing home sales to fall by 14.3% to an annual rate of 4.6 million.
Tuesday's data drove the Dow Jones Industrial Average down more than 100 points and pulled down yields on 10-year Treasury notes.
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In the Great Depression, I'm guessing that investors were buying bonds directly rather than through mutual funds. How will under-educated investors react when prices in longer bonds fluctuate? Bonds held directly were likely redeemed at the end of their term with little mental upset. In the current age, we're likely to have yet more panicking and redemptions when bond mutual fund quoted prices drop in response to short-term events. It will be a sad destruction of capital for the average citizen.
You may recall Fairfax sitting on unrealized losses well in excess of $1B several years ago, but Watsa indicated that the bonds would be held to maturity if necessary (since bonds are loosely linked to insurance liabilities).
-O
As in the Great Depression there has been a rush into bonds for good reason. Bond prices will rise as interest rates drop further.Just how much further can interest rates drop?
I haven't done much looking into bonds but it seems to me that aside from going with specific bonds and picking winners when people are going with bond funds that they have an upside in the 5% range with a whole lot of downside possibility. That doesn't set well with me and my thinking. Maybe I am wrong about the upside maybe there is more potential upside then I am seeing.
The way I am looking at it I would prefer a 1/2% yield in a MM that is safe from decline then a potential max of around 5% return with a significant downside possibility. For me to step out and take a risk there needs to be a more significant upside potential.
SmallCap
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I've been noticing the same doom-and-gloom everywhere, but transportation indices are creeping upward and hotel occupancy rates are increasing which are also signs that the world hasn't ended. This Caterpillar interview is a bit over the top, but indicative of optimism in heavy equipment sales.
http://finance.yahoo.com/news/Caterpillar-CEO-says-no-apf-2091456021.html?x=0&.v=6
Oberhelman said he doesn't agree with the negative outlook most people making predictions about the economy employ.
"There seems to be a doom and gloom out there in the punditry," Oberhelman said. "We're not seeing that."
Caterpillar said equipment sales in the Asia Pacific region surged 41 percent in July, and North American sales improved 38 percent over last year.
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thanks collon!
Good quote on Sokol:
“He was capable of deploying a considerable amount of money for Berkshire with the rollout and expansion of MidAmerican,” said Thomas Russo, a partner at Gardner Russo & Gardner in Lancaster, Pennsylvania. “That’s one of the most prized skill sets at Berkshire: How do you put investments to work profitably. And I think he’s showed an enormous ability to get that job done.”
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twacowfca,
To reply to your other part, private market values don't appear to be rising significantly. What I have found is that markets are achieving stability with firming revenues and margins. In the case of Samuel ManuTech, the bottom fell out and writeoffs ensued. But once revenues firmed, margins returned and the private market valuation went back up. When the market didn't fully respond, it made it easier for the founding family to get access to capital to take it private. At the takeout price, it's still below a 10-year P/E multiple.
If my tiny sample of 5 takeouts is any guide, 4 occurred in 2009 and 1 in 2010, so the availability of opportunities is scarcer. Investing in small cap minority positions can be painful if the takeout price is below intrinsic value, where sometimes there is a captive board that benefits from the low takeout price and there's little recourse for the minority shareholders. Small caps are not for everyone since stocks can trade below intrinsic for years and not trade even a single share in a week, but you can make good returns if you're patient and stick to your valuation knitting.
As Sanjeev pointed out earlier this week, there are nuggets out there where good companies are trading below conservatively valued book (i.e. likely getting close to liquidation value - a whole art in itself) with good cashflows, little debt and low capital needs.
On tax increases -- agree, but hopefully minor. On inflation, disagree; best to be in common stocks which have some hope of gross contribution margin increases and perform better overall than other investment classes in inflationary markets.
-O
omagh, you just mentioned something simple, objective, yet profound! Private market values are higher than stock market values for many companies that have conservative valuations. That's a reality check on valuations. However, we should be mindful that market prices could change if US taxes do increase next year as expected. And inflation and associated tightening is a future risk when the economy eventually moves out of the doldrums.
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ucp/dd,
If that's the case, then common stocks are probably range-bound. Since this is a thread on cash weighting, it points to the essential need for cash as a portfolio component for opportunistic purchases of individual common stocks when valuations shift to the lower end.
What I see Watsa doing with hedges is protecting for directional shifts within the range, but using tools other than cash. Obviously with an insurance portfolio, there are payout concerns which can cause temporary upset to the Fairfax portfolio, but an individual can sustain the temporary upset provided there is no recourse leverage used and there is no permanent impairment of capital when market pricing reverts to intrinsic value.
BTW: good essay posted today by Montier on mean reversion. http://behaviouralinvesting.blogspot.com/2010/08/reports-of-death-of-mean-reversion-are.html
-O
I continue to believe that there is risk we are entering a similar period as the 40's where bond yields incurred negative real returns for almost a decade. I can imagine there was plenty of fear in the markets while the world went to war in the first half of that decade (perhaps escalating on and after Dec 7, 1941). In the second half of the decade one can well imagine the fear about how the bills would get paid. Incidentally the 2nd edition of Security Analysis was published at the beginning of that decade ..... what is taught in that book is just as viable now as it was then.
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Twacowfca,
Mostly small caps except ORH:
- Cossette - taken private by private capital group plus operating team
- Tundra Semiconductor - bought by Gennum
- Odyssey Re - bought by Fairfax
- Western Sizzlin - bought by Steak'n'Shake/Biglari
- Samuel ManuTech - taken private by owner family
Most of these were bought or added to significantly during the October 2008 - March 2009 period. I have 2 additional positions (won't disclose) that are closely held which may also get taken private. Why did I buy? Mostly these are well-run ops with low-capital needs and with significant owner operators that are able to generate good returns on equity or good returns on invested capital. When you start paying book or less than book for decent operators with a track record, the margin of safety is obvious and reversion to the mean is an expectation with uncertain timing. In baseball terms, these are singles and doubles that keep adding to the score.
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omagh, you just mentioned something simple, objective, yet profound! Private market values are higher than stock market values for many companies that have conservative valuations. That's a reality check on valuations. However, we should be mindful that market prices could change if US taxes do increase next year as expected. And inflation and associated tightening is a future risk when the economy eventually moves out of the doldrums.
I'm curious. Would you be so kind as to share the names of the companies you held that were takeouts in the last 18 months, and also share your reasons for buying them?
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Viking,
In the past 18 months, I have had shares in 5 companies taken off my hands out of the 12 that I held with the latest coming a few weeks ago as a going private transaction. What that tells me is that private market valuations are higher than stock market valuations for specific companies. As these transactions have provided me with cash now up to 30%, I'm letting it sit idle and continue to do my homework. I've added one new position this year in insurance which I view as an increasingly cheap proxy for long bonds with significant underwriting capacity as upside.
I'm liking these doldrums where there is no defined trend and the markets nervously twitching up and down. It's providing me with opportunities to do homework on my valuations. One area of interest is matching dividend yield rates in high quality companies to bond rates. It appears that the herd has moved into bonds while leaving some tasty morsels for those of us with patience. The challenge as an investor is putting capital to work at acceptable rates or waiting for the next pitch. October 2008-March 2009 was the last significant period where I put most of my available capital to work and now I'm much more selective.
The availability of capital was reinforced to me in the 2008 credit crisis as I read Klarman and Templeton and re-read Graham. However, the macro fears are cushioned by private market valuations and the availability of cash on many corporate balance sheets.
BTW: congrats on "almost got enough"
-O
myth465, your Buffett quote below rattles around in my head quite a bit. Lynch has some great ones as well about the foolishness of trying to time the markets (I like to re-read One Up On Wall Street about every second year because I like Lynch's stuff so much).
What gives me pause is the chance we are entering a 'US in the 30's' or 'Japan in the 90's' type slowdown (not necessarily another great depression; perhaps just a decade long absence of growth that rewards bonds and punishes equities as earnings shrink).
I do not want to end up like Ben Graham in the early 30's; I want to keep what I got (as I almost got enough)! If I was younger, with a small base and adding to my capital every year in a big way then I likely would be more fully invested. Today I am 13% equities and 87% cash (having recently sold a chunk of equities); about 25% of my portfolio is US$; 75% is CAN$.
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Munger, this community works best with positive contributions and that includes valid criticism. Criticism in socially unskilled ways is best left to other forums.
-O
I've got an easy way to resolve this. Do an advanced Google search for a few of the words you've entered in the sentences below and add "2010". How many hits do you get?
C'mon -- you're smarter than that my man.
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Good summary of US employment here:
http://www.calculatedriskblog.com/2010/08/employment-population-ratio-part-time.html
Most political messages re: stimulus are now pointing towards increasing employment. Introduction of renewed stimulus will be targeted at public works and stimulation of specific industries. In the graphs you can see that this has been a severe recession for employment. A significant influence compared to earlier recessions has been reduced labor mobility where workers have negative equity in homes that cannot be sold to move to other parts of the country where potential jobs exist. Labor mobility will be a limiting factor in employment stimulus. On the whole, employment seems to have bottomed out absent other shocks.
-O
(1) Absent the census impact & US employment has essentialy been flat for all of 2010 YTD. Head-count is constant, but retirements & firings are being replaced with part-timers. Most would suggest that is unlikely to change much over the next 6 months.
Buffett hints at bond bubble
in Berkshire Hathaway
Posted
Regulators are also adding to the confusion. There is a proposal for Sovency II (snippet & link below) which would pile even more funds into bonds as a regulatory requirement to meet payout needs. It just feels like throwing gasoline onto a raging fire. I share your general unease with the market. Growth is slow in wealth-creating companies, country balance sheets are over-leveraged and the lemmings are running after the latest fads (gold, commodities, currencies, etc). Klarman writes about deflationary markets as being the most difficult to guage since what might seem like a reasonable discount turns out to not much discount at all. Cash (in the right currency) will be quite valuable when the next big dislocation occurs.
-O
http://www.investorsinsight.com/blogs/john_mauldins_outside_the_box/archive/2010/10/04/insolvency-too.aspx?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+John_Mauldin_Outside_The_Box+%28John+Mauldin%27s+Outside+the+Box%29
Last week, Niels Jensen (head of Absolute Return Partners) and I were talking with a variety of pension funds. They started telling us about this thing called Solvency II. Outside the arcane world of European pension funds and insurance companies, it is not on the radar screen of most people. But it may be one of the more explosive problems in our future. Cutting to the chase, the new rules require insurance companies and pension funds to buy more bonds to match their liabilities. But as yields go down they are required to buy yet MORE bonds and then yields go down some more. And so on. The possibility of serious defaults by these same pension funds in the wake of these new rules (setting aside whether it makes sense to actually require pension funds to set aside enough assets to pay their obligations) is all too real. And more pervasive than we now think.