SharperDingaan

Couple of add-ons: Re Slave to Kelly: Kelly is just a principle applied in a particular way. Nothing prevents you from applying that principle a little differently, according to situation; as many here do. Re Concentration: For practical purposes, most concentrated positions are actually independent of each other. You invest your whole financial services sector allocation in 1 bank, not 5; & it is in either Europe, Asia, or NA. Your next allocation is in some other sector, in some other geographic location. With only 3-4 stocks & only 3-4 locations, co-variance is pretty mild. Re Time Horizon: Strategies change as time & investment thesis advance; they do not stay constant. Todays dividend paying equity investment can easily become tomorrows synthetic FI, with all accumulated house money removed via margin. SD

We should add that each stock is stand-alone idea, independent of everything else in the portfolio, and that the portfolio itself is a stand-alone asset. Example: ABC may be a new addition. It is Kelly sized, leveraged, independent of the portfolio, & a bet on European recovery. Most likely a very large bank as any kind of recovery will have to pass through the banking system. DEF may be an older addition. It has been sold down to remove the leverage, but its too early to reduce the position any further. GHI may be a maturing addition. Leveraged to remove our capital investment & fund a FI instrument, & ideally a dividend payer entirely funded with house money. JKL may be a series of FI instruments; convertibles, laddered T-Bills etc. MNO may be a leveraged portfolio overlay; options, special situations, etc. where we have high conviction. PQR may be the cash/margin you have. + 25% through -40% plus, depending on circumstance. Total of 6 investments, with only 1 being Kelly sized .... & then only temporarily. ABC investments become GHI investments over time, & CF increases semi-annually as long as we continue to invest. SD

We use Kelly as the starting point, at initiation, then discontinue its use. We see the highest risk as being at initiation; a high conviction, leveraged punt, that could fall 30% the day after we buy it. The lower end of our uncertainty sets the initial size, the upper end sets the limit if we have to average down. Around 25% appreciation we sell down to remove the leverage, thereafter its a rolling quarterly 6-9 month forecast. Averaging down is a very dangerous game, when leveraged; the upper end Kelly forces selling. We focus on risk; so no leverage unless its tactical, & removal as soon as practical. Once we 'know' the security, we usually find our forecast picks up the seasonality & add a few points. It means you cant own the whole world, & that you have to be the guru/analyst on each stock you own; therefore you need the same CFA, & other technical certs, that most sell/buy side analysts have. Your advantage is few stocks, & you do not have to toe your employers line. Your disadvantage is that you are prone to sipping cool-aid; usually not a problem if you keep a lot of knuckle-draggers in your orbit! SD

Look at the I, G, & S utilities for yield, & oil/drugs for growth ;)

We don't need no stinkin' sophistication .... We got per-son-ALITY!

FFH strikes are deep out of the money, so the insurance cash costs are as cheap as possible; but FFH shareholders pay with high quarterly MTM adjustments. A valid approach. You're free to hedge FFH directly if you dont like it

You have to be able to enter/exit the hedge in scale, quickly, easily, & discretely. Equity indexes are preferred as they are also the instrument of choice for all kinds of other long/short strategies (ie: ETF's, market guaranteed rate deposits, etc.); your trades look like all those others, & nobody is any the wiser. Keep in mind they also have an oversized position in the restructured asset heavy RFP (one of a few), & a commodity collapse will trigger massive write-downs. As you cannot short your own stock, or industry sector in this case, equity indexes are the next best choice ;) They are in a box, & are executing fairly well - but are getting punished because it is too difficult for most to get their heads around. It is really an indication that they need to restructure their business into simpler, easy to understand, components. Unfortunately, we just do not see it happening any time in the forseeable future. o SD

Wests counterparty exposure: To do domestic business in China you have to do it with a partner. Either an entity that is state controlled in some fashion, or with state permission (ie: in an economic zone), or via a corrupted state mandarin giving you cover. No different to Russia. You start out with Chinese Assets, & Western Debt. Moving through time the Chinese books accumulate retained earnings that support new Chinese debt on a 1:1 basis; those Chinese debt proceeds then repay the Western debt. Western exposure is all cumulative investment less all cumulative debt repayment. Chinese exposure is all cumulative BV write-offs that have not yet occurred. The more corrupt the environment, the higher those unrecognized BV write-offs are, & the smaller the Western debt repayments. Assuming no additional investment - Western financial exposure declines over time, & Chinese exposure increases. Standard investment procedure for high risk locations. The commodities impact is not just pricing. If business is booming you open new plants closer to your buyer, & you justify the loans based on those higher commodity prices. Total investment increases, & China gets new P&E on the ground – in China. The experienced will make their state-of-the-art investments in the West, & only invest their old & used equipment in China. As much of the investment in-kind as possible. The expectation is that the music will stop, & that you will lose the entire Chinese investment. In the meantime at the company level, you book higher EPS, try to keep your payback period as short as possible, invest in commodity sellers (via the treasury portfolio), & hedge the index. When the music stops, your share price collapses, & the cash gain on the index finances your share buyback. Standard operating procedure. At the state level, you issue as much paper as practical to the Chinese, & try to lengthen the maturity as much as possible. When the music stops, you seize the paper as compensation for the lost Chinese investments. You stop paying interest, & defease the debt. Standard operating procedure. The net impact is mild, but the gross impacts are extreme & offsetting. Obviously the state level gaming is extreme, but it is nothing new (oil, arms, drugs, etc.). It is also one of the realities that hedgers do not like to remind people of. SD

Think of what would happen were China to experience material banking disruption. All those new built empty cities, debt financed, with no visible CF to service that debt ..... so just how exactly is the magic being maintained, & what are the limits. Almost all financial flows with the outside world pass through a few, & tightly controlled, portals. Counterparty risk is concentrated, & controlled centrally. Most would argue that the financial risk, net of forfeited western deposits, is actually being borne by the outside world. The net risk may be small ... but it is net of extreme gross upside and downside volatility should China have a blowout. And every expanding trade nation suffers a blowout at some point .... Remove a good chunk of the demand from a commodity & its price will drop. Do it on a lot of commodities .... & at the same time; & you get contagion. Over the short term, the replacement cost of virtually everything falls like a brick (deflation), loan collateral evaporates, banks fail. Over the medium term; cash on corporate books flows to new equipment purchases, & the old equipment (plus the people who operate it) gets scrapped. Significant & material disruption for an extended period. China can close the wall again at any time, it is a communist country, & you are not going to be foreclosing on any Chinese assets in China. Crocodiles basking at the watering hole are playing the waiting game - & eventually those jaws snap on something. SD

Hopefully just another book of business in a field that they actually know something about; but the meter is running.

Given the size, the price, & the fact that they could have easily issued low cost debt instead ... most would expect that there is more to come. SD

Drink enough cool aid - & you are going to make errors. It is going to take a while for them to show themselves; but survive the ass kicking you deserve .... & you aren't going to be making any more of them for a while. Lot of upset folks over BB, & there is a need for a target - so why would you NOT expect the stock to drift lower over the next few weeks. And if there is the slightest negative around Q4 earnings, real or imagined ........ But 3 months from today, are you really going to feel the same way about it ? SD

You might want to look tactically at FFH, over the next 2-3 months ;) SD

HFT reminds us very much of Judo ... gaming, & the concept of letting your opponent do the work for you. Link your software to trigger off the frequency of key words showing up in select locations, tie the signal to the ticker symbol & derivative markets of select deeply traded stocks, feedback words/blogs/market data to drive up the count at your source locations, & let it rip. To get ... rapid volatility perfect for option trading ... so long as everyone plays the game. So .... if I put out some favourable messaging (selling calls, buying puts, synthetic shorting), & them suddenly dump a lot of negative (buying back calls, shorting), ... & keep doing it waves; I am going to make a LOT of money, & none of it illegal. I have essentially just created a new age Pump and Dump - move over Carnegie! Until you meet those evil bastards who also know how to play the game ;D You just got the opportunity to buy in a big long position at an artificially low price (short sold stock) I can dump positive messaging - at any time - to reverse the sentiment (& use their machinery) I can average up in the physical market - at any time - to push the message (using the low cost base & their machinery) I can sell the entire position via calls - hopefully at peak frenzy (they developed the put/call market for you) I can suddenly withdraw - at any time ( & let time decay erase the value of the calls I just sold) .... leaving a long position 2-3x its former size for no additional cost .... and a welcome mat to the door of a target that I may be trying to acquire - move over Mellon! Games will be played, but most would argue that they are not in the general interest of the population as a whole. SD

Forget the stock market measures determining bull/bear status, & look at the quality of the major business in those indices. After 5-6 years of 'crises', the majority are doing very thank-you, and at today’s very low growth levels. Most have also maintained total leverage by increasing operating leverage (CM/NOI) at the expense of financial leverage - and it has largely been by scaling up to reduce variable cost/unit; ie: size matters. Increase growth by a small amount (ie: 1.00% to 1.25%) & the CM on those incremental sales flows straight to the bottom line - & if your market share is already large, that total incremental CM will be massive. But …. only if you have scale, .... & are therefore a high quality large cap. Look at the real companies, with ‘real’ (little transactional trading) businesses, & you will be very surprized. Some of those beat-up Greek, Spanish, Irish, & Icelandic banks are actually very attractive - simply because of their high DOL, and market share in markets that are at multi-generational lows. Most would argue that we’ve been in a European bull market for a few months already …. SD

"The greater trick is to identify decent companies not in secular decline these days" Look at those with a high DOL & demographic/economic trend ... there are at least one/two in Canada that you wouldn't expect ;) SD

Keep in mind that quality from a business perspective is very different than that from an investment perspective. Generally speaking, the higher the quality of the business, the easier it is to run - so quality matters. Whereas in the value world a fallen angel (ie: sh1te business), dirt cheap, is nirvana. And after a while .... you learn that putting up with the sh1te while you are waiting for changes - is not worth it. Looking at quality vs metrics is just evolution. You have begun to look at the businesses that you own - as an actual businessman. You don't need the metrics as a substitute for experience any more. SD

To each his own ... just keep in mind that long dated Treasury's and Canada's also exist; you could just buy a series of different maturities & clip coupons every 6 months. SD

We aren't the same people at 80,that we were at 60; & that assumes ongoing perfect health. Is she really going to be able to do this, if she contracts any of the stroke &/or mental diseases that come with age? ... & really the biggest part of the annuities zero investment risk. SD

Agreed re annuities, but they do serve a purpose ... & at a very low cost You are dead - when the annuity is paying out. The recipient gets a 'pension' of $X every month for life (possibly even inflation indexed). Zero investment knowledge required, or investment risk undertaken, for life. It is highly likely that on death, there will be a forfeited stub residual - but so what; you have already provided for the heirs, & the payouts were higher than they should have been during the living phase (re actuarial adjustments). The recipient could just as easily choose not to linger, as outlive the annuity; & you can do nothing about either. Your best defence really is to live life to the fullest, while you are still able, & ensure there are no regrets. SD

Involve your heirs in the investment process. If they take great, if they don't - pay off their mortgage on passing, & leave it at that. Buy your wife an annuity that runs to zero over 15-20 years. SD

"They win more often when the favorite errs, not from their own transformation. The favorite is the favorite for a reason!" The favorite lost because they drank the cool aid, & got addicted to the public adulation; to keep the adulation coming they progessively stepped further out on the risk curve - & eventually overstepped. Identical to feeding an addict; except that its ego versus herion, & the fall from grace costs 'status'- not your life. The effect, & consequence, has been well known for a very long time. The traditional solution has long been the periodic beheading, head spiking, & burning of publicists. Permanent solutions were preferred over humiliation to prevent retaliation, & it was usually the 3rd or 4th most prominent publicists whose head graced a spike. The message was very clear ..... Unfortunately we're not allowed to do that any more .... though a Putin or Stalin might disagree! SD

It would seem that you do not have to wait 1 year to get a 25%+ gain on the dog of the month. There would also seem to be some other people who read this board ;) SD

We had to make a very similar decision when we withdrew capital from our portfolio to buy a property in London (UK). It has worked out very well, & the property is already worth 30-40% more than what we paid for it. Use the opportunities. Mortgage rates, the word over, are at record lows - & likely to remain below the norm for a good many years; foolish to not take advantage. Governments are also giving some very rich incentives; & it requires very little deal structuring to take advantage of it. Think risk reduction - not elimination. Assume you could withdraw 100K from an equity portfolio, or withdraw 50K from the portfolio & incur a 50K mortgage. You reduced total risk by 50K (DP) & swapped 50K of equity risk for mortgage risk. Given the typical casino effect that equity portfolios generate, & that you control the mortgage, there are major benefits. ..... and there is nothing to prevent you from doing multiple withdrawals from your equity portfolio over time to deleverage the property. Think usage. Living in it, renting it, planning to be there a long time, significant others consideration, etc. Our London property is leased for its first 5 years, nephews will then live in it (& charge rent to flatmates) for 3-5 years while they attend university in London, & then it will be sold for a tax free gain. Over the 10yr holding period we expect at least a triple on the property itself, & that total nephew education costs will be minimal as much of the COL will be eliminated. Nothing new to this approach, & the highest & best usage (to us) is not to lease it out for the entire 10yrs Remind yourself that money is the slave, not the master. There is no point to investing unless you intend to use the gains, & do it within your lifetime - while you are still able. Life is short, & it should be as well lived as you can possibly make it. SD

Re the moratorium & regulatory capital: As most of these mortgages are currently non-performing, they have very high amounts of regulatory capital attached to them. When those mortgagees start paying again, their mortgages will require less than ½ the regulatory capital currently attached to them, NBG will not require any additional injections of capital to meet rising BIS standards, the bank will start earning a spread on its mortgages again (income), & some of their very high provisioning levels will start getting released. Then remind yourself that one of the ongoing German financing conditions is the ending of the moratorium; nothing but tailwinds. Re spreads: Apparently it is not possible for NBG to earn the average 50bp spread of a Mediterranean bank, or even the average 70-80bp spread of most western banks. Then keep in mind that over the last 5 years the mortgage portfolio was not contributing (moratorium), & that the average professional life of an analyst is around 3 yrs. Todays analyst was still in college, 2 years after the moratorium started, & has no experience in NBG with anything but moratorium. We are sure NBG is crap, solely because it is Greek. Yet their capital level is almost 1.5x better than most UK banks, & they have not had the corruption or capital scandals of a Barclays, RBS, LLoyds, etc. Where is the real crap. SD