SharperDingaan

A few GTA comments. There is no shortage of land. There is significant mismatch between expectation and reality. That detached/semi-detached close to good schools, at a reasonable price, is available; but it is in the ‘burbs. The trade-off is commute time, and the cost is roughly an extra 75-125K (dependent on type of house) per 15 minutes of one-way commute. To live and work downtown is a lifestyle choice. Global, not local. Vancouver and Toronto are global, and cosmopolitan cities. In today’s negative global rate environment; cultures that prefer to save via land purchase - versus bank/broker deposit, are doubly incentivized. A high end purchase in a down town core is protected by both the lack of new land; and the market incentive to offer only high-end units on any land that might be reclaimed. Currently, you could buy a USD 7M apartment in New York; or one each in both Vancouver AND Toronto, PLUS have change to decorate with. Those times you stay in New York, use a hotel. As/when CAD appreciates above USD 1 again, simply sell one of the Canadian apartments and buy something in New York at what are highly likely to be depressed prices. You are simply buying/selling real estate that you can actually use (stay in), instead of financial paper (bonds, stocks) that you cannot. Functional asset class diversification amongst the global 1%. SD

Value investors buying on the cheap don’t like to admit it - but there is very little difference between themselves and a pawn broker. We make money on other people’s misery and panic; putting out low bids in illiquid markets, in the hope of a fill. Most folks measure *unrealized* loss as years of future earnings; retirees *with no future earnings* perceive it as a permanent loss, and an adverse change to their future standard of living. Hardly surprising that it triggers emotional selling, in the hopes of holding on to as much as you can. Of course, *unrealized* loss is just that – unrealized. If you hold quality; all you have to do it wait it out until the panic passes. A genuine Rolex watch is still a Rolex; either come back when you can afford to pay for it, or buy a ‘copy watch’ - your choice. If this isn’t your thing, you should not be value investing. SD

Yes. If you have 20yrs of experience as an industry analyst for XYZ industry; you have become very good at using the financials to forecast eps and correctly anticipate whether a price/earnings expansion, or contraction, is likely to occur over the next 12 months. A very valuable skill set, that used correctly, should made the analyst very wealthy over time. If you have 20yrs of experience as a senior financial manager in that industry; you have become very good at manipulating the financials that the analyst uses. Not fraud, or accounting tricks - just the proactive operating decisions that financials ultimately reflect. The business skills, that used correctly, will make the company either a success or failure. The analyst, & the financial manager, are complementary partners; but the analyst has only a surface knowledge as to how the industry actually operates. Consequently to address the shortfall, almost all long lived industry analysts will have spent quite some time working in the industry they analyse - prior to becoming the industry analyst. So ... if you haven't worked in that industry for some time as a finance manager, or accountant, are you really competent in it? Probably not. Does it matter? Not really; you just have to look better than your cohort, & if you all come from the same schools & are hired at the same time - a summers worth of experience in the industry may be all that you need to differentiate yourself. You talk to the 'grey hairs' for a reason, & the grubbier they are - usually the better. You'll also learn a few new words! SD

Research is not a substitute for experience. No industry experience = no competency in that industry. You wouldn’t hire a plumber to work on your teeth; same thing with portfolio management. You get paid for application (value add), not theory. Theory you can google, but application (alpha) you have to figure out yourself; it is the ‘edge’, underlying your value proposition. Inability to apply = a plumber working on your teeth. SD

Either don’t buy from them, or use their inevitable sales to bulk buy your household consumables. Occasionally look over their fixtures & make a low-ball offer on what you like. Industrial freezer, pretty lights, etc. SD

The EU 'idea' is a good one; but the EU-version 1.0 that we have now - is just a proto-type. It has worked very well as a proof of concept, but it needs a lot of improvement. EU-version 2.0 would be a lot easier to achieve as a new build, versus a refurbishment. Our own thought is that EU-version 2.0 would be better served by fewer, bigger, & more like minded participants. The obvious initial participants are Germany, France, & the UK; once the infrastructure is sorted, broaden it via treaties versus membership. A significant exit (UK), would most likely also start the process on the forced departure of the basket cases. It would also establish precedent that would allow a Germany or France to leave, leaving a rump of smaller more equal players. You don't have to marry them. SD

Bite the bullet & vote to leave. Heads it avoids any pending 'restructuring', tails the winners will be all over the UK trying to get it back in. Greece had to negotiate from weakness, the UK is haggling from strength - use it. SD

Everything about this suggests that one or more GSIBs is in very big trouble. A operating loss goes directly against T1 capital via retained earnings. If you cannot restore the T1 (or AT1) capital via an offsetting equity issue; you have to either 1) improve the quality of the loan book so that it requires less regulatory capital, or 2) shrink the total loan book so that less capital is required. Apparently central banks will not tolerate the level of dilution that would be required; so they are going to let the banks use repo's instead. Gimme back my T-Bills, & take your sh1tty sovereign loans away! Obviously, the PIG DSIBs will become far more toxic than they already are. The good news is that with the repo's, they will now be largely warehousing their own sovereigns debt (lowest capital requirement); were the PIGS to subsequently exit Euroland - the sovereign would be able to extinguish that debt via a cross, & restore them to health almost instantly. A back door martial plan. Greece by itself wasn't enough to force a change; Greece, Portugal, & Italy together - is. Given that the German finance minister appears to have recently changed his view on martial plans (Soros comments), it also suggests that DB may well be one of the GSIB's in trouble; hence your problem is now finally - my problem. Hopefully we're more or less right. SD

The desperation, and arrogance, of Euro bankers truly continues to amaze. .... the only place in the world where a stress test has no pass or fail; where were these tests at school! .... we only test who we think will pass; none of those sleazy Portuguese, Greek, or Italian banks! …. we test conduct risk – ‘cause it’s insured against! Apparently there is no possibility of the junk assets being repo’d into the excluded banks, in return for treasuries provided by the ECB. Gotta de-louse DB – somehow! Conduct risk is covered under Directors and Omissions insurance. You would only look at this if you intend to claim big, & you think the claim may be so large – that it could put the counter-party insurers under their capital requirements. Bottom line – collectively the banks don’t think they can raise enough equity to cover forthcoming losses; without access to the CoCo of the AT1 market. The reality of course is that they could issue equity, but there would be so much dilution - that the bank will be controlled by new owners; with different agendas. http://www.nytimes.com/2016/02/25/business/dealbook/european-union-updates-bank-stress-test-beyond-pass-fail.html http://www.euromoney.com/Article/3531616/Bank-capital-Sell-off-sparks-game-over-fear-for-AT1.html Gentlemen - welcome to the CoCo market. Its 15%, pay at the door, or PFO! Preferred shares always welcome. SD

Pennwest - not for the faint hearted Pennwest is not worthless today... or is it? ;) IMO, there's a lot of small caps some even without debt loads that will go 2x+ if oil goes to 50+. So pick your poison. Actually Whitecap issued 95 million in equity today to develop production. Worth a look. Why does it make sense to develop production today versus defer it until prices rise? I can see raising money to buy cheap assets but developing production today appears to be a negative NPV project or at least a less profitable project than it will be 18 to 24 months from now. Packer Develop your field today, & you lock in todays discounted drilling costs for life (very attractive). The kicker is that the field has to be profitable at today’s prices - or less. That may be 2 in 10 fields at best, & even then – only if the operator has a strong competitive advantage. You also have to drill to keep your land position. However you can farm out the drilling; but only if the field is profitable at today’s prices - & there is local available capacity to move the product to market. SD

It is highly likely that global demand has already begun to exceed supply. Most would expect oil in storage to aggressively start drawing down at USD 40-43/bbl (estimated CNOC marginal cost of production) Shut-in oil will stay in the ground until price rises enough to make it worthwhile. Most wells will be under new ownership, incentivized to keep it shut in. Production commitments will be met out of oil in storage, via physical delivery on maturing forwards. For the foreseeable future, the industry will buy versus drill. Tremendous job loss, & a decline in NA production anywhere between 10-20% - depending on how long it lasts. SD

Sharper, not sure I'm following your portfolio theory here. The T-Bills make sense enough, but are you arguing for straddles as the most efficient method for taking advantage of future destabilization? This seems pretty inefficient to me as your outlay would be substantial and for your trouble you might get stuck in a "suddenly, nothing continued to happen" situation. I'll be honest, I'm not a big fan of options unless I can buy them way out of the money and feel reasonably convinced the strike will be reached. Unlike Taleb I don't wait for the swans to show up - I go hunting for them :) The long call is central bank intervention. The cost of the call is indirect, and it is spread over all the citizens in the state (ie: nominal); no different to defence spending. The premium for the long put is whatever direct cost the entity has taken on to benefit from a failure in the central bank intervention; often at no cost other than a re-arrangement of existing affairs (ie: long term assets matched against short term liabilities, or CAD liabilities matched against USD assets. No actual premium paid for the term, or FX, mismatches. If intervention fails - CAD short term rates & the $C are likely to fall drastically). Heads I win, tails I win too. Agreed that in capital markets the straddle will come at a net cost; but on main street - it will almost always come with a significant and material net benefit. ie: I studied to become an accountant, & work as a CPA during the day (long call); but I apprenticed as a chef to put myself through school, & moonlight (long put). If I lose my accounting job tomorrow I am still an employed chef (hedge creating the long straddle), but my chefs papers are contributing additional moonlight earnings every week. Could just as easily be a plumber, electrician, educator, uber driver, etc. - versus a chef. To capital markets an option is just a wasting asset (whether or not it is used in a straddle); but in the real (or corporate) world it is very different. Every positive NPV investment in a trade, designation, or technology platform that the individual (or corporate) makes in itself - is an option. Add 2 positive NPV options together, & the straddle will be at a net benefit. We used the put/call terminology so that we could reference the long straddle & tie in directly to Taleb. Actual equivalent execution will differ according to circumstance, setting, and opportunity. The majority of trades folk who moved on to professions, may also not be fully aware that this is what they have actually done - it just felt like the right thing to do. Of course, nothing particularly new. SD

Just finished re-reading “The New Paradigm for Financial Markets” (Soros G, 2008). This entire thread is an example of the reflexivity he described. Central bankers pushing in one direction *in the absence of facts* (‘cognitive’ function) against market participants bettering themselves by pushing in the other direction *in the absence of facts* (‘manipulative’ function). The resultant ‘angst’ is reflexivity. The level of ‘angst’ reflects the state of information in the market; the *less facts* the higher the reflexivity. View the cognitive function as a long call, and the manipulative function as a long put; the result is a long straddle on the current market ‘equilibrium’ state. You are anti-fragile, in the words of Taleb. Both the reflexivity of Soros, and the anti-fragility of Taleb, are new additions to theory; they didn’t really exist prior to 2000. More recent practical additions to finance are P2P networking, block chain & smart contracts. * Absence of facts* also means predicting off of out-of-date theory. Take this to the extreme, & it really means a 100% T-Bill portfolio + a 100% portfolio of puts/calls. Arguably, an investor would favour long T-Bills and use the Basel liquidity requirements to drive yields down (all GSIB’s & DSIB’s must hold a risk weighted portion of their capital in unencumbered treasury bills; the more risky they are, or the bigger they get, the more total $ in T-Bills). The risk is that the next round of QE gets funded with a flood of long maturities; excess supply driving down price, raising yield, & restoring the yield curve to normality. The reflexivity we see in the thread. SD

Only problem with this example is try to live on $7200 per year or even $7200 investment + $7200 moonlighting + $7200 regular. That barely covers rent. And if you have 500k, you don't need any of the moonlighting. You can probably live off something like well chosen but slightly distressed bonds. Bottom line: most people will have to work full time or very extra part-time unless they are getting stellar investment returns. We were thinking of someone saving up 100K as a down payment on a house, where the funds are invested with intent to grow the payment as much as possible. The intended take-away was that they would make more (& with less risk) if they either 1) put the $ in a GIC & diligently added their moonlight earnings, or 2) if they chose to invest - withdrew any exceptional return they made, & paid off debts with it (the take $ off the table argument). The funds themselves are for a house purchase - not to live off. Interestingly .. the 500K is not far off the case for boomers who involuntarily got packaged early. Many will continue to work at lower pay - if only for the health & social benefits; but like their kids - they are really relying on inheritance as their margin of safety. At best it'll go 3 generations. SD

A little numbers practicality ……. Assume a Jan 01 portfolio valued at 100K. Our investors simple average return (after fees) over the last 5 years has been 7.2% (-10, 12, 30, -6, 10 = 36/5 = 7.2%). Our investor does well at times, does better than the index, better than most funds after fees – but still only averages 7.2%. Top quartile performance. Assume our investor lives in Ontario. Minimum wage is $11.25/hr. Our investor could also reliably moonlight for nearly as many hours as he/she wants at $30/hour. 100K @ 7.2% = 7,200 investment return for the year 7,200/11.25 = 640 hours at minimum wage = 16 weeks at 40 hours/week 7,200/30 = 240 hours at $30/hour = 6 weeks at 40 hours/week If our investor has 100K - he/she would be better served just buying a GIC & moonlighting. Same 7.2K return, with zero risk to capital. If our investor had more invested - he/she would be better off simply buying a property, & moonlighting to pay it off faster. Absent the outlying 30% year (30K) & he/she averages a return of 1.2% - a GIC return. When there is an outlying windfall – the money really needs to be withdrawn and applied elsewhere (education, transport, bills repayment, etc.). Outlying losses need to be toughed out. If our investor has 500K – the portfolio earns an average 36K/year, but it varies between -50K to 150K. To most folks that 50K potential loss is large enough to require that the portfolio be hedged at all times. This is practical ‘macro’ at the portfolio level. If this is not part of your consideration – you have to be asking yourself why. SD

Long LEAP + a discounted treasury/gilt with the same maturity date. If it matures in the money the treasury proceeds permit physical delivery on maturity date, keeps the cost base at the price of the LEAP, & defers tax. If the security also pays a dividend - you get an ongoing cash yield (assumes ongoing dividends) up in the high teens+. If it doesn't, the return is the bond discount less the cost of the LEAP; you know exactly what this is on the day you enter the trade. Heads - the return could be spectacular. Tails - the return can be no lower than it was on the day you entered the trade. Don't like? - don't enter. End point is a portfolio of very low cost bases, & an annual cash yield in the 15-35% range. In the meantime - the bulk of the capital is sitting in a highly liquid treasury/gilt with very little risk. ... pretty much what the poster is doing, & very Taleb (benefits from disruption). SD

Some additions for the mix. All valuations assume the future will resemble the past in some fashion. Problem is - we haven’t had markets without continuous seriously overt central bank intervention since the crisis started; 10 years ago in 2006. The last ‘norm’ period was also not the 2001-2006 ‘deregulation’ bubble – it was 'maybe' the 1990’s. 20 years ago! Macro analysis is simply an attempt to predict the local economic tide. Where there are many cross-currents, predictive application is obviously very limited; but still rational. I don’t go fishing in a row boat when it is either storming outside – or I can see that it is about to. A win today is to bet against central bank intervention; a bet against stability that forces a different way forward. EU breakup, fiscal over monetary stimulus, mass debt forgiveness, martial plans, etc. The obvious approach is to be anti-fragile (Taleb) – a technique that largely didn’t exist 20 years ago. It means simultaneous risk-on, & risk-off, on the same security – over different time horizons. Comfort with routine volatility in the +- 35% or more range. New approaches, techniques. Diametrically opposite the requirements to marketing for OPM. And the root cause of much of the anxiety. SD

The man does good work, but he’s pushing a 1 string pony. Monetary policy doesn’t work when interest rates are either very low – or negative; get over it. Most would agree further stimulus is needed; but it makes far more sense to go fiscal vs monetary. Sovereigns, states, provinces, etc. borrowing & reinvesting in economic infrastructure - & hiring Joe Blow construction worker to build it. Sale and leaseback of public assets via P3 partnerships, borrow domestic, pump the interest expense back into the local economy, & suck up the excess cash driving rates down. FDR called it the new deal, to everyone else …. it’s the martial plan Hated because it will force bond defaults as the better credits crowd out the junk. SD

Listen for tone ... and what is NOT being talked about. It's also theatre, so allow for spin. SD

3. Bankers will charge as long as their competitors charge, & their regulator allows them to. The threshold seems to be around 50bp. 4. Canadian banks routinely charge for everything they can. Individuals traditionally hold the minimum balance needed to waive the charges; a $2500 balance saves roughly $225-250/yr in fees (10-11%/year) + a $500-$1000 float to cover everyday draws. Lots of chatter amongst very smart people around what to do if Canada goes negative. Most wouldn't change their basic banking. However, a number would simply pump surplus cash into the banks prefs - & put the prefs into a margin account. Whenever a block of cash is required, the bank credits your bank account. Earn 6-8% on the prefs, pay 3-5% on the margin, & claim a tax credit on the margin interest. Basically f*** with me, & I will go out of my way to hurt you. You might also want to keep in mind that it is highly likely that Eurobank capital ratios are severely inflated, re the practice of underweighting risk (Greek government debt carried a 0% risk weight). They are nowhere near as strongly capitalized as advertised. SD

Deutsche Bank’s vast and opaque balance sheet is holding it back; but according to the finance minister & the co-CEO – trust us. Yet the DB co-CEO has to twice come out & say the bank is ‘rock solid’; & no one believes him. And the finance minister Wolfgang Schaeuble ALSO has to come & say that he isn't worried; & no one believes him. http://www.cnbc.com/2016/02/09/deutsche-bank-ceo-says-bank-rock-solid.html http://www.businessinsider.com/wolfgang-schaeuble-on-deutsche-bank-2016-2 http://www.reuters.com/article/us-deutsche-bank-bonds-idUSKCN0VI266 http://blogs.reuters.com/breakingviews/2016/02/10/deutsche-has-enough-capital-but-not-enough-clarity/ http://afr.com/business/banking-and-finance/deutsche-bank-woes-not-an-american-lehman-brothers-moment-20160209-gmpwlc Yet DB continues to execute on its emergency buyback plan of senior bonds, of which it has about 50 billion euros ($56.44 billion) in issue. To most folks, either DB is incredibly tone deaf; or there really is something badly askew. And now DB & Lehman are being compared to each other; cannot happen, trust us – yet the share price & the volatility index say otherwise. Vast and opaque - and deadly. http://www.theguardian.com/business/2008/sep/15/lehmanbrothers.marketturmoil "Like Northern Rock, it mattered less that 80% of its assets were rock solid if 20% were considered toxic. We don't know the exact proportions at Lehman and neither do the bank's trading partners, which is why they refused in growing numbers to do business or buy it once the bank was up for sale." We wish them luck, but they clearly have a problem. They can continue to do business only so long as they retain the confidence of the market, & that confidence appears to be crumbling. SD

It smells a lot like there's such a large loss coming up, that its going to change the risk profiles across the board. Friends of the Bundesbank being bought out of their Senior Bond Holdings with CoCo proceeds - so that they will not experience a loss? SD

The buyer would really have to be an idiot to buy this DB piece of junk, & the seller would need a very well bribed vendor to push it… The buyer takes all the risk, but only gets paid interest IF the Tier 1 does not fall < 5.125, AND the Bundesbank allows it We have the right, in our sole discretion, to cancel all or part of any payment of interest, including (but not limited to) if such cancellation is necessary to prevent our Common Equity Tier 1 capital ratio pursuant to Article 92 (1) (a) CRR or any successor provision, determined on a consolidated basis (which we refer to as our “Common Equity Tier 1 Capital Ratio”) from falling below 5.125 per cent or to meet a requirement imposed by law or our competent supervisory authority The buyer is never getting their principal back, & agrees to lose the entire investment. Accordingly, we are not required to make any repayment of the principal amount of the Notes at any time or under any circumstances, and as a result, you may lose part or all of your investment in the Notes. In addition, you may not receive any interest on any interest payment date or at any other times, and you will have no claims whatsoever in respect of that cancelled or deemed cancelled interest. Upon the occurrence of a Trigger Event, a write-down will be effected pro rata with all other Additional Tier 1 instruments within the meaning of the CRR (Additional Tier 1 capital), the terms of which provide for a write-down (whether permanent or temporary) upon the occurrence of the Trigger Event. For such purpose, the total amount of the write-downs to be allocated pro rata will be equal to the amount required to restore fully our Common Equity Tier 1 Capital Ratio to 5.125 per cent. For which the buyer will earn a spread of just 5%, which CAN BE REDUCED, on future roll-overs. For the period from (and including) the First Call Date a rate which will be the Reference Rate plus an initial credit spread of 5.003% per year. We describe the Reference Rate in “Description of the Notes—Interest Payments on the Notes” below. If I have 1.5B, & am desperate to hold DB, why would I not just buy the preferred? You have to be desperate to try this. It suggests that DB must have at least a 1.5B hit to capital coming, & that the Bundesbank is tightening the rope around their neck. SD

SD: Why not own the Latin subsidiaries of SAN? By the sounds of it that is the part you find attractive. We’ve just being overly conservative. Agreed we could do better if we stayed with just the Latin entities, but we would also take on the volatility as they deal with periodic sovereign defaults. The performance drag is not meaningful. Negative rates. Ordinarily, a corporation will maintain a minimum +ve balance in its account after the end-of-day sweep, & put the balance into the overnight market. Now they model the size of the optimum –ve balance, against the available spread. The bank makes additional spread (small amount) on this new overdraft, but loses spread (large amount) on the loans that the deposit would otherwise have permitted. The banks NIM gets bled, & the higher the leverage – the greater the bleed. The modeling is because the term structure favours a borrower. Buy the banks paper &/or preferred, & use it to secure the overdraft. The banker cannot challenge as to do so is to question their own solvency, and their paper is getting an artificial liquidity boost from the nightly roll-over process. DB We look at Barclays & find it highly unlikely that DB wasn’t doing much the same; the big differences are that DB enjoys Bundesbank protection, & it has been used as a conduit to support various bail-outs. Even if the Sh1t has been contained, the condoms have to be pretty full, & there have to be a lot of them. Assuming the toxics moved to the Bundesbank book, DB is still exposed to much of the MTM; on bail in - the CoCos would ramp up the share count, & the Bundesbank may well match the share ramp us well; to offset the control loss to the CoCo holders. Severe share dilution. Of course, the establishment will swear it cannot happen! The market seems to think around 50% dilution. Pure guess as to who’s right, but carrying an umbrella might be pragmatic. SD

DB is operating at the pleasure of the Bundesbank, & the Bundesbank will not tolerate a default. DB will do whatever it is told to. It will be a very simple matter to make the CoCo payment out of funds allocated to the bonus pool - and it will not be a discussion. We also expect that once the precedent is set (anywhere in euro-bank land), there will be a strong regulatory push to issue more of these. Primarily as an aggressive & proactive way by which to claw back bonus as/when the bank doesn't meet its targets. Agency can be a bitch! SD