shalab
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Posts posted by shalab
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I am fairly comfortable with Howard Buffett on the board as a BRK shareholder - his integrity is beyond reproach. He has been compared to his grand father and father in that respect.
However, there is very little information available about Watsa kids. One shouldn't compare Berkshire and Fairfax.
I am certain some folks would be offended if one compares Watsa and Biglari. I dont believe any comparison exists between Fairfax and Biglari.
Heh, I wondered how long it would take you to react SJ ;)
Fair points all. My comment about communications is related to the fact that I’ve often had to go direct to the company to clarify comments made on calls etc, and often they didn’t mean what people on here thought they meant. By definition that’s bad communications.
Serious question to which I don’t know the answer: why is Howard Buffett qualified to be on the BRK board?
He isn't qualified to be on the BRK board. That's a pipe-dream that WEB cooked up with the notion that it will perpetuate the BRK culture. Nice dream, but IMO, that culture is toast after a couple of CEOs post-WEB.
SJ
Howard Buffett did serve on a number of boards over a 20 year period. Some of them Fortune 500 companies. But it still smells like nepotism. At least he won't be wielding a shitload of multiple voting shares as well.
Well, more importantly, at BRK Charlie has been playing the role of providing the challenge function to ensure that WEB doesn't execute wacky ideas. As a result, BRK has been managed well and conservatively. In contrast, Prem very badly needs a board with strong external voices to tell him when he's being wacky. Without that, Prem keeps rolling around in his little echo-chamber.
The other detail is that WEB owned more than 7% of the economic interest when Howard was appointed, and he didn't re-weight his multiple voting shares a year before engaging in nepotism. In contrast, the Watsa family, which owns 7% of the economic interest, has three BoD positions.
Bad governance all around, but egregious in Prem's case.
SJ
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There are two issues with this sort of thing:
- they are less than forthcoming in a lot of places - I believe they still have their CPI hedges on in the US. Any orangutan living in the US could have said that wages and prices are increasing. Even in Canada, the house prices have been going through the roof totally out of sync with incomes. So has been the case with income in US and especially so in Canada.
- the level of criticism leveled at FFH for their behavior is very very low in this board than warranted
They said they were 'required' to sell these holdings --why required to sell these holdings?:
Another cost of our hedging, and why it is extremely unlikely that we will repeat this in
the future, is that it required us to sell some wonderful long term common stock holdings, as shown below:
EDIT: Were these holdings in particular posted as collateral for the hedging?
As I recall the hedges required them to post cash collateral on a regular basis. So they weren’t required to sell these holdings particularly, but they chose to. Again I may be wrong but I remember a lot of debate on the board at that time as to whether these sales had been motivated by the cash calls and it seems they were.
And here is what they said in the 2013 letter -- no mention of a 'requirement' to sell. It has migrated from 'concern' to 'required':
Given our concern about financial markets and the excellent
returns we achieved on our long term investments, we reluctantly decided to sell our long term holdings of Wells
Fargo (a gain of 125%), Johnson & Johnson (a gain of 47%) and U.S. Bancorp (a gain of 135%).
Yes - they definitely didn't admit at the time that the sale was to finance the hedges. Someone on here figured that out - can't remember who.
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FRFHF or FFH is mostly invested in the US - that is why they report their book value and dividend in USD. So you aren't getting more geo diversification by holding it.
Well I don't share Gremal's writing style, but he has a point. Yes, mistakes were made. But the type of mistakes matter. For example, Berkshire made a mistake when they bought IBM. They broke even for a few years on that capital. Fairfax shorted a massive bull market. Different sort of mistake. If they didn't think that stocks were expensive, then why short? That's not value investing.
Then there's the individual picks. Then there's the macro stuff. I agree that there was a macro case to be made in 2010 that you could have a replay of the 1930s, albeit in a lighter way. But if you're still thinking that in 2014, then you're no good at macro. So did they swear it off? Did they say never again? No. In fact, in my opinion it was shameful the way they took the shorts off. Oh Trump get elected, stocks are good value now. Yea, after the S&P did a 100% run which they shorted.
These were big mistakes which should raise serious questions about what they're doing. They can't just be brushed off. Are they still really good capital allocators? Do I want my capital to be handled in this manner?
I'm not saying that they're uninvestible. But they're trading around book. Why would I buy them at book when I can buy BRK at 1.3x book? (yes I know both books need to be adjusted). How many fiascoes happened at BRK?
I agree with much of this and also own BRK (but smaller, for various reasons including the impact of geographic exposure on my overall portfolio which has a lot of US as it is). FWIW:
- the short wasn't value, it was macro, and I think they were pretty clear on why they did it.
- you're right they have a very mixed macro record. They got the CDS bet and much of the bond stuff right, but the equity hedge and deflation swaps wrong (both direction and especially sizing).
- removing the hedge was the right thing to do and for the right reason. They said Trump would unleash animal spirits and he did. Holding the hedge through 2900 on the S&P would have been disastrous. They took the long bonds off at the same time for the same reason, a decision which has been lauded on here. They did NOT say stocks were good value - in fact they said they still had worries about valuations, and bought almost no stocks, focussing instead on converts.
- I would add to your list of questions "have they learned?". It will be interesting to look back on the next decade.
I'm not defending them here. The errors have been gargantuan. I'm just trying to help make the critique more accurate.
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I see several issues with this setup - some of them below:
- Watsa is 70 or 70+ and is in the middle of transition to his kids
- he is semi-retired and not clear how long he will continue
- They still promise to deliver 15% returns even after a decade when they haven't done it
- The dividend is static at 10$s/share - apparently this is for management that holds significant chunks of their assets in FRFHF. That shows the company's attitude - what about ordinary shareholders
- The investment return from the past decade speaks for itself
I personally view FFH to be uninvestable.
This is a company I have really wanted to like for a long time, but could never get comfortable with it simply because there are others who do what they do, but are better at it. The investment decisions for the past decade have been atrocious. Off the top of my heads its what? BBRY, RFP, SHLD, VRX, SD... probably more that I am forgetting, all of which fit the same theme. Troubled companies, with mediocre management, and TONS OF DEBT. The results have been as expected given those things. Not only have these been heavily concentrated positions, but they've collectively shown poor judgment and demonstrated a lack of an ability to locate good investments in a fertile environment.
Going off of a comment by rb, how the f*** was ANYONE, let alone a professional, looking at the market in 2010 and calling stocks richly valued????? I can understand having macro concerns, or thinking trouble lays ahead, but richly valued???? "Oh gee, let me short the market with the S&P trading at 13x!" Pure stupidity.
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Hope so - but looking at comments from others - it looks like the Fed may still raise rates
Cleveland Fed:
https://www.cnbc.com/2019/01/04/feds-mester-says-if-inflation-doesnt-rise-fed-could-stop-hikes.html
"If we don't see inflation picking up and we see the labor market staying reasonably strong from where we are now, that may tell us we're not neutral."
Cramer thinks Fed has outdated models and I tend to agree:
https://www.cnbc.com/2019/01/04/cramer-fed-will-hike-rates-until-there-are-firing-and-layoffs.html
CNBC's Jim Cramer argued Friday that the Federal Reserve's policies are severely outdated, and said the central bank won't stop its rate-hike policy until Americans suffer from "firings and layoffs."
Ah... the guy woke-up!
Cardboard
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Looks like sanity is prevailing with some folks - Dallas Fed thinks we shouldn't raise rates:
WSJ chimes in with the prospect for rate hikes -
A bond-market indicator also is sending a bad signal. The difference between the three-month Treasury bill and the 10-year note has narrowed considerably. With the former at 2.41% and the latter at 2.58% midday Thursday, an inversion in the yield curve is a real possibility.
Inversions have often preceded recessions, even as economists still debate whether they correlate with downturns, or cause them. A recent San Francisco Fed paper said a sustained three-month to 10-year inversion is the most reliable market indicator of recession.
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Market expecting the fed to stay pat on rates - with 80% probability
Apple CEO also came out and said the dollar appreciation is impacting profits.
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Here are the bench mark returns for the year from WSJ:
For the year, the Dow industrials were down 5.6%, the S&P 500 off 6.2% and the Nasdaq down 3.9%.
Stock markets elsewhere around the world fared even worse. The Stoxx Europe 600 shed 13% in 2018, while the U.K.’s FTSE 100 declined 13% and Japan’s Nikkei Stock Average fell 12%.
Meh [<- sorry, typo!] Me: Minus 3.1 percent, measured in my local obscure currency DKK, pegged to EUR. [My worst year so far.]
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John, appreciate your thoughts
Dalio could be wrong overall - but Dalio is right about asset price weakness.
Asset prices have contracted in the last quarter - in all major metros from LA, DC, Boston, Chicago and Seattle. As we know, the stock prices have also dropped.
https://www.redfin.com/blog/data-center
Overall, the projection for next year is for tepid rise of about 3%. One can compare against the asset prices in Canada as an example:
https://www.livingin-canada.com/house-prices-canada.html
Regarding rate hikes next year:
https://www.cnbc.com/video/2018/12/31/we-are-at-neutral-rate-fed-shouldnt-go-higher-strategist.html
Economy activity contracts in December:
Ray Dalio on the fed rate hikesHedge fund billionaire Ray Dalio argues the Fed has raised rates to a point where they’re hurting asset prices.
The central bank needs to start looking at monetary policy’s impact on asset prices before economic conditions, Dalio says.
Dalio also laughs off the notion that the Fed needs to raise rates so it would have room to make cuts if the economy were to take a major downturn. ...
shalab,
I actually had to read the quotation of Mr. Dalio three times and think a bit about it before posting this. Taking it verbatim [the second line], it could be understood as Mr. Dalio just wants the FED to divert from its mandate. [And I don't think that it should be understood that way, actually, but that was how I read it while reading it the first time.] After reading it the third time, I think it means, that asset prices effects from FED rate decisions are a logical and natural part of considering the total effects on the economy via the feedback loops to the real economy from the financial markets, and thus such effects should be taken into consideration under the FED's interest rate decisions. [And that is actually also what I get from reading Cardboard's last post in this topic.]
The reason for this is there exist feedback loops from asset prices to the activity level in the real economy [i.e.: think real estate].
If this is what Mr. Dalio meant, then I think every CoBF member agree on that.
With regard to Mr. Dalio's last sentence: I think that should be read exactly the same way as what I have phrased above about the first two lines. It is a fact [at least to me], that it must easier for the FED to be downward flexible with interest rates, if you already are in an interest rate territory, where being downward flexible with interest rates don't bring in a territory, where interest rates doesn't bring you in a territory, where the FED start screwing up healthy incentives & things by creating a negative price on money. So, in short: Yes, it's "just" a side effect, but to me certainly not a laughable one.
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Edit: And after reading it the fourth time, I just think : "Yes, naturally, Mr. Dalio is just yet another money manager with his personal incentives."
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Ray Dalio on the fed rate hikes
Hedge fund billionaire Ray Dalio argues the Fed has raised rates to a point where they’re hurting asset prices.
The central bank needs to start looking at monetary policy’s impact on asset prices before economic conditions, Dalio says.
Dalio also laughs off the notion that the Fed needs to raise rates so it would have room to make cuts if the economy were to take a major downturn.
John - you are right that all else being equal, it is good for the fed to have the tools at their disposal.
However, it is not clear to me that they understand the economic machine and the interaction between various components.
A fed chief once said Ray Dalio had better statistics than the federal reserve, so I will be watching Ray Dalio closely.
Europe looks like it will have a secular decline for a long period of time - here is a projection of Germany's population in 2050.
https://www.pop.org/germany-to-shrink-by-10-million-people-by-2050/
Well, the poll does not tie well with the activity level in the Druckenmiller and Trump were right topic, right? [ : - ) ]
Getting back to "normal" interest territory in the US is not a bad thing at all. Yes, it creates volatility etc. [- perhaps even some pain some places -] in some markets right now, but then you avoid a multiplier effect on the pain now instead of it gets worse at a later point in time. [i think Viking has mentioned that earlier somewhere.]
It also - gradually - brings back the interest tool in the toolbox of the FED.
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I too like Apple - right after Berkshire.
Apple has introduced Apple Watch which is a huge hit and a fantastic device.
Apple Home is a very good device and has established some market share with room to grow
The new generation ipads and iphones are excellent devices and I am upgrading my old devices with newer versions.
With 72B in earnings and EV/EBITDA in high single digit, this is definitely attractive. Apple has already retired 1 billion in stock and may retire another billion in stock in the next 4 years. I expect the dividends to go up as well. This compares to Microsoft which sports a higher valuation than Apple, 30B in adjusted net income and EV/EBITDA of about 25. Apple pays about 20% of earnings as dividends whereas Microsoft pays out about 40%.
Thoughts?
I think it's a good bet but many unknowns so I would need to size it fairly small. Same with FCAU, which I do own.
My concern with AAPL is there really hasn't been any dominating new tech since the IPAD. What role did Jobs play in it all and can they innovate without him? Didn't the IPOD/IPHONE/IPAD all happen within about 7 years? Now it has been 8 years without anything comparable. You can also throw in itunes I think. The company really went to hell the last time he left, I am concerned it can happen again. I am not really into tech so I might be missing something but this is how I understand the company.
That is the bear case and you have laid out the bull case succinctly. I have a hard time deciding which side is correct but agree the market is not pricing much of the bull case in. I think closer to 10x earnings and it's a 5% position for me. That's about all I can do with this one. What I would like to see is some new innovation that review sites are pumped about. If that happens and the stock doesn't move I would make it a larger position.
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John - you are right that all else being equal, it is good for the fed to have the tools at their disposal.
However, it is not clear to me that they understand the economic machine and the interaction between various components.
A fed chief once said Ray Dalio had better statistics than the federal reserve, so I will be watching Ray Dalio closely.
Europe looks like it will have a secular decline for a long period of time - here is a projection of Germany's population in 2050.
https://www.pop.org/germany-to-shrink-by-10-million-people-by-2050/
Well, the poll does not tie well with the activity level in the Druckenmiller and Trump were right topic, right? [ : - ) ]
Getting back to "normal" interest territory in the US is not a bad thing at all. Yes, it creates volatility etc. [- perhaps even some pain some places -] in some markets right now, but then you avoid a multiplier effect on the pain now instead of it gets worse at a later point in time. [i think Viking has mentioned that earlier somewhere.]
It also - gradually - brings back the interest tool in the toolbox of the FED.
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I am surprised by how there are still more votes in support of the Fed. There are some that want even more rate hikes in 2019 - either the votes are politically motivated or people don't see what is going on. The 2018 economic gain in the US was because of the one time tax cut.
Canada has kept interest rates low (1.8%) eventhough there is a housing bubble.
https://www.theglobeandmail.com/real-estate/article-canadas-house-price-data-centre/
China has been cutting interest rates as well. Euro is at 0%.
Oil price futures 2019 - flat compared to 2018:
https://longforecast.com/oil-price-today-forecast-2017-2018-2019-2020-2021-brent-wti
Housing market cooling in 2019:
https://therealdeal.com/2018/12/26/us-housing-market-will-continue-to-cool-in-2019-redfin/
Car market under pressure:
https://www.bworldonline.com/mild-recovery-in-car-market-seen-in-2019-but-pressures-remain/
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Thx for clarifying. I picked up a bunch of assets this past week - may be I should thank the Fed.
Here is the foreign currency rates - one can't keep hiking rates unilaterally when the main trading partners currencies are dropping in value with similar or better economic growth.
USD/CAD
https://www.bloomberg.com/quote/USDCAD:CUR
EUR/USD
https://www.bloomberg.com/quote/EURUSD:CUR
USD/CNY
https://www.bloomberg.com/quote/USDCNY:CUR
Shalab,
Thanks.
I think I actually haven't expressed any opinion yet in this topic, so far, if you ask me. [About if FOMC has made a mistake with the last rate hike, or not.] So please consider me the glowing doubt on that as of yet. In this topic, personally, I'm [more or less desperately] seeking input in this topic to make a judgement on that - data driven input - for discussion & evaluation.
Today, I came across of this: Bloomberg Markets [December 27th 2018] : Traders Face New Landscape With Powell at Microphone After Every Fed Meeting - More flexibility? - perhaps both with regard to communication, & mentally?
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Sorry, fixed your name.
Yes, that is what I thought of your thought process from the link you posted - if not, what is your thinking?
Federal Reserve Bank of New York - Liberty Street Economics [December 4th 2018] : Labor Markets in the Region Are Exceptionally Tight.
... John Hjorth <fixed my last name here, John> thinks the Fed's job is to loosen labor markets - that is not its mandate. ...Shalab,
Interesting discussion technique here. Are you trying to tell me what I think, or what? - Or are you just deeply condescending? [,- on a professional level for an economist [, which I actually happen to be.]]
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I would also consider PDH run by Sanjeev and MPIC funds. I think if Sanjeev writes more often about the business and the investment thesis, I am certain more people will consider it.
I'm still doing my DD on these companies, but given the massive losses they've taken in just the last 2 months, I think that US Natural Gas upstream producers are undervalued. I'm bullish on NatGas breaking out of its 2.50-3.00 long term range to $4+ in 2019 or 2020, which would be a significant tailwind for these companies. And right now most of them look as cheap as they've ever been.
Biglari Holdings (BH, BH/A) is currently trading at 0.7x book value, but owns close to 50% of its own shares, so its really closer to 0.35x book. Of course its trading down there because Sardar Biglari controls over 50% of the voting stock and I might be the only living person remaining that still believes he will deliver long term out-performance.
Still, the value of the shares are significantly less than the value of their CBRL stake, a stake Biglari has started monetizing over the past few weeks.
Note that Biglari has been buying BH and BH/A shares in his personal accounts recently.
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Well written.
John Hjorth thinks the Fed's job is to loosen labor markets - that is not its mandate.
Furthermore, EU should have the same rate of 2 - 2.5% as the US as they have similar economic growth as the U.S, but they have their rates at 0%.
https://tradingeconomics.com/european-union/gdp-annual-growth-rate
50% chance of a rate cut next year:
Potential rate cut in 2019 and low economic growth in 2019:
https://www.cnbc.com/2018/12/27/jim-paulsen-expect-slow-growth-rates-cut-and-a-bull-run-in-2019.html
Cramer on Fed chairman:
https://www.cnbc.com/2018/12/27/cramer-says-the-fed-is-recklessly-confusing-the-stock-market.html
Here's my own personal "data":
1. Fed members are human beings.
2. These people have incentives, political ideas, and biases.
3. Sometimes, their decisions are directly linked to political events, see Yellen's decision not to raise rates when she should have.
4. The Fed chairman has a significant influence on the other members. Either directly or by providing their view to the public in advance. The chairman's impact in the real world is far greater than just being one vote of several.
Imagine, if you will, that before the previous vote, Powell would go on TV stating that there should be a pause. He would then start the meeting by declaring there should be a pause. You can bet that such actions would flip some votes. That's the way it works.
"My colleagues and I may have misjudged the strength of the labor market, the degree to which longer-run inflation expectations are consistent with our inflation objective, or even the fundamental forces driving inflation," -- Yellen
5. They have shown time and time again they do not really understand how the economy works. They just play with the models they learned in school.
6. The natural state of the market is disequilibrium. This is something the Fed will never accept. Which is why they end up creating worse bubbles and recessions.
And I'm saying this as someone who thinks the institutions, the institutional capital, is what makes America great.
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Yes, Fairfax India will also work but I don't like their fee structure. One can do better by opening a brokerage account in India - it is a bit of a hassle but well worth the trouble IMO. My belief is that India will do a lot better than China in the next decade.
Shalab, Fairfax India Holdings would check the boxes to what you are describing, right?
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I too have cleared my FRFHF in favor of Berkshire. Berkshire is a high quality business which will find ways to deploy its tens of billions of dollars in money making ventures. Furthermore with the addition of buy backs, I can easily see Berkshire returning 10-15% per year in the next decade.
FRFHF has a huge exposure to BB which is cratering. It also has a portfolio of low quality businesses.
The attractive thing about FRFHF is exposure to India - which is a high growth market. GDP is expected to grow from 2.6 trillion to 5 trillion in the next decade. One simply has to open a brokerage account in India and buy Thomas Cook which is FRFHF's India arm. There is no need to own FRFHF. In addition, there are other investment vehicles available in India other than FRFHF.
Same situation here. I have been owning FFH for years. At this time (timestamp: S&P ~20% drawdown) I am not adding to FFH because relatively speaking, higher quality assets like BRK (and even MKL) are a better buy.
I just hope HWC is busy these days, carefully buying high quality assets.
I haven’t added either, in fact I sold a few shares when there was a spike to $480 a few weeks ago. My concern is that HWC busy buying low quality assets. there are some dislocations in the credit markets, that they pot. could take advantage of, or perhaps just buy back their own preferreds (if they is possible).
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You are right about the pace of increase - the rule of thumb is to keep interest rates around inflation rate. So the current interest rate is right and no more increases are needed. It is not that hard - especially when the economy is decelerating and the yield curve is flat.
But the decision making is partly qualitative, subject to human biases and this leads to incorrect decisions.
The federal reserve could have simply said - we keep the option of increasing interest rates if the situation changes. The biggest concern of the market is that this federal reserve goes off rails in 2019.
I read an article that said - the market has predicted 10 of the last 5 recessions whereas the federal reserve has predicted none. This is very accurate.
Here is one prediction of potential interest rate cut in 2019:
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The argument remains whether the rate of change for interest rates is too fast. Now, that we are about level with inflation, further increases need to be more carefully considered. There is also the “risk” that inflation falls with a slowdown, pushing the net interest rate (interest rate minus rate of inflation) up.
...
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Spekulitis - I generally like your posts but the below doesnt make sense. If China has 10% growth rate and 4% inflation, they should have 14% interest rate per your calculation. That kind of interest rate will kill any growth in China.
Fed's mandate is to keep inflation low and employment high. Their goal is not to kill wage growth, employment and cause deflation. The fed badly missed the boat here.
That said, I appreciate their help to make me rich in the longer term - a lot of assets are going cheap and I like it.
Robert Shiller on the Fed and the hike:
https://www.valuewalk.com/2018/12/robert-shiller-fed-hike-rates/
The link includes a transcript but it's poorly done. I recommend that you watch the short video.
As far as interest rates are concerned a 2.5% interest rate seems on the low side, if we get 2.5% growth ne t year and 2% inflation. That’s still basically free money
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The markets tanked after the Fed chair communicated about relying on models and pretty much guaranteeing rate hikes next year. The yield curve has flattened further - https://www.treasury.gov/resource-center/data-chart-center/interest-rates/pages/textview.aspx?data=yield
Let us use this poll to figure out what the group is thinking
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FRFHF - 2009 Chairman's letter:
This, combined with our ability to invest the float well over the long term, is why we
could achieve our long term objective of 15% per annum compounding of book value per share over time. The table
below shows you the breakdown of our year-end float for the past five years
FRFHF - 2018 Chairman's letter:
With $40 billion in investments, a current run rate of $11.5 billion in net premiums written and $12.5 billion in
common shareholders’ equity, we need an investment return of approximately 7% in order to achieve an annual
15% increase in book value per share, assuming a consolidated combined ratio of 95% at our insurance operations.
We have drilled deeper and by analyzing each of our consolidated insurance companies (a total of 21), we have
estimated the investment return needed for each company in order for us to achieve our 15% target. We have
delegated investment responsibility for each of our insurance companies to one member of our investment team.
10 years is a long time - at some point, they could have dropped the 15% per annum target. There are other issues that people have raised - family members on the board, diluted book value per share etc. It is not all roses and sunshine with this one.
shalab,
OK, but to me it reads somewhat snide here. Personally, from here, I'll let this topic go. [Not worth my time.]
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Another example of Buffett's quote "It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price". My son (8th grade) and I were looking at these two investments today. The dividends almost covered the price paid over a period of ten years. Fortunately, I don't hold much FRFHF in my portfolio any more - trimmed it down around 2012.
shalab,
To me, a meaningless comparison you've done. -So what?
POLL: Fed and interest rates
in General Discussion
Posted
Yes, ideally it is how it should be but it isn't. It is unlikely to change anytime soon.
https://www.wsj.com/articles/fed-faces-a-fresh-test-engineering-a-soft-economic-landing-11546822609?mod=hp_lead_pos1
Here is another article on the motivation of the fed - they would like to push unemployment up without triggering a recession. Seems like a tough job when asset and commodity prices are dropping. As others have said, Fed seems to be having some outdated models.