wabuffo
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Posts posted by wabuffo
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But in this crisis, it is being asked to water down the collateral against which it will lend." By whom? i thought it was supposed to be an independent institution.
I always think of the Federal Reserve as the US Treasury's banker. All the 'rules' are political artifacts, not hard constraints. On one side of the table sit the Fed and the Treasury. Across from them sits the private sector.
A couple of other points about this crisis.
1) If you look closely at the Fed's balance sheet, around half of its liabilities are assets that are owned by foreign entities or circulate outside the US domestic economy. I think this is an underappreciated aspect of the US budget deficit and monetary operations. The rest of the world needs US dollars and US dollar assets. Increasingly, the Fed is having to support the foreign sector with its programs.
2) For all of the heavy breathing about the Federal Reserve 'monetizing' the US Treasury's borrowing, the Fed owns the same percentage of US federal debt held by the public today as it did in the 'good old days' before the Great Financial Crisis and the current crisis (16%). Sometimes the numbers just get really big and we fail to put them in context.
wabuffo
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But if so, the “10%” number is kind of meaningless right
Yep - meaningless. The Fed is not supposed to lend to anything but the very best collateral (Treasuries) since it must never become insolvent. If you look at its H.4.1 weekly balance sheet you can see it has only a tiny sliver of "equity capital". $63B of capital supports $6.6T of assets so even a 1% loss allowance makes it insolvent.
But in this crisis, it is being asked to water down the collateral against which it will lend. The SPV structure is just a political structure to allow it to do this while appearing to prevent losses to itself. Losses will be borne by the US Treasury probably via its General Acct at the Fed. I would imagine the US Treasury would just issue cash-management bills to the Fed or write down its Treasury acct balance to cover any losses. But its small potatoes vs all of the deficit spending the US Treasury is doing to do this year.
wabuffo
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The biggest disagreement I have is that I think the Fed will do absolutely anything to avoid a deflation trap. In fact with the latest round of interventions they are hinting how determined they are. Those interventions are not just another round of QE (which isn’t necessarily inflation-inducing for reasons correctly discussed in the interview), they are a step toward some real money printing.
In terms of "money printing", I always think in terms of this short-hand rule about US monetary operations:
1) US Treasury spends - creates a new reserve in the private sector banking system (money printing)*
2) US Treasury issues debt - swaps a reserve in the private sector banking system for an interesting earning asset. (asset swap)
3) Fed does a repo (or lends) - swaps a private sector interesting earning asset (collateral) for a reserve in the private sector banking system or vice versa (asset swap).
I think its pretty clear that money printing comes from the US Treasury (and not the Fed). The Fed is lending against collateral. It may sometimes weaken the collateral it is lending against, but it is still lending (swapping assets). So I would argue the Fed is not doing any money-printing. It helps me to think about every Fed/US Treasury transaction with the private sector from a T-account (debit/credit) point of view.
And bank reserves are not money creation. They are chequing accounts at the Fed for federally-chartered banks. Reserve balances are there to clear payments between the banks. They can only circulate between the Fed and the banks. The size of reserves are a policy decision by the Fed and its regulators.
Almost every new program that the Fed has announced is a lending program vs some collateral. The US Treasury, on the other hand, has postponed April Federal tax receipts (April is a big intake month for tax receipts) and is spending pretty aggressively (ie, sending direct deposits and cheques to all Americans, etc). Don't focus on the Fed - focus on the US Treasury as it creates new deposits in the US banking system out of thin air this month.
The key metric to watch IMHO is always US Treasury spending (net of tax receipts and other collections) as a % of GDP. We really only run the risk of USD devaluation when we ramp up to 10% or above. We are heading there now - though it will be a cumulative effect over the next few months into the summer.
*[of course, this spend is net of tax receipts - but the US runs a perpetual annual deficit except for '98-01]
wabuffo
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At first glance, those numbers a bit disappointing. On the other hand, that's $1B in three weeks
To be fair, those updated share counts are through March 4. BRK-B (for example) was still trading well above $200 til then with the lowest intra-day low of $199.68 in late Feb.
Prices really declined since then and trading volumes ramped up. There's no guarantee that Buffett got more active since March 4th - but here's hoping he did.
wabuffo
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The lesson from 2003 (after the 2000-02 deflationary bust) and 2009 (after the 2008 GFC) is -- buy the trashiest micro-caps you can and buy a bunch. Their share prices go up the highest.
In my previous post about which stocks performed the best after the deflationary bust of 2000-02, I mentioned a study I saw about 2003 stock performance by various classes of stocks. It was from Morningstar. I was able to find the article and am posting a link here:
https://www.morningstar.com/articles/102369/the-real-stock-market-story-of-2003
Some highlights:
Financial HealthMorningstar assigns Financial Health grades to all the stocks in our database (A is the best grade, and F the worst). These grades are based on interest-coverage ratios and debt levels. Here's the breakdown of 2003 stock returns by Financial Health grade:
Grade Average Return
A 55.6%
B 68.9%
C 94.9%
D 115.8%
F 110.7%
Stocks with Earnings vs. No EarningsOut of 5,999 stocks in our database, 2,496 had negative earnings last year. These 2,496 stocks gained 117%, on average. They have a trailing three-year standard deviation of 102%. (Standard deviation is a measure of volatility--the higher the standard deviation, the more volatile the stock.) By contrast, stocks with positive earnings gained 68% last year and have a standard deviation of just 44.6%.
Of course, I am in no way recommending this strategy.
wabuffo
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Strange thing to see all canned tuna is gone
canned items tend to have a seasonal harvest/catch. For vegetables, for example, the packing into cans happens in the fall and the items put into inventory with/without labels (for private label - the "bright" cans are labelled just-in-time) and shipped out per demand. If there is a sudden surge in demand and inventory is depleted, that could be it until next fall.
Food is an agricultural item that has to be processed based on its season (though global sourcing helps for some items and provides more year-round supply). Commitments for supply are made way in advance.
There are lots of individual supply chain wrinkles for individual food items and the supply chains are more flexible and agile than in the past - but this surge in demand is historic because 50% of food consumption is out-of-home and that is shifting to in-home plus the "run-on-the-bank" hoarding has amplified the underlying trend.
For food companies, no doubt its a good thing (though many supply foodservice as well) - but their inventory forecasting models and product supply chains are encountering the equivalent of a financial six-sigma event. And that is before dealing with the management of the myriad human resource issues of working-from-home and the very real hourly employee health-and-safety safeguards that must be undertaken.
The food companies have really stepped up to the plate in the face of this storm, IMHO.
wabuffo
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I thought that product shortages will be short.
Its people - primarily skilled people. Processed food manufacturing is highly automated and also dependent on suppliers' operations to keep them supplied with key raw materials and packaging.
You can't just hire people off the street to run complex, automated and highly computer controlled equipment. If a key operator falls sick or fears getting sick and reports absent, you're done. Especially since companies are also having to increase shifts of production by asking for volunteers to run overtime shifts (again if you have two skilled operators for 2 shifts - when you go to 3 shifts, you ask the two operators to each work 4 hrs of OT rather than hiring/training a new operator).
In addition, you are reliant on suppliers to keep their operations running as well. If a packaging supplier goes down - you can't run the lines to produce the finished good.
Employers are trying to deal with the worker health & safety concerns, paying "hazard pay" and OT, and dealing with 2x-3x un-forecast production volume increases. Its actually pretty remarkable that the supply chains have largely met the demand. Its a tribute to the people running these manufacturing operations.
wabuffo
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My conclusion is that we are above where there stocks should/could trade for using several frameworks.
a variant perception is that on a dividend-discount model valuation basis, the S&P's annual dividend check for 2020 got lost in the mail (and is never going to be replaced). Plus, the risk-free rate to use to discount future dividends from here to eternity is likely going to be lower for longer.
The vast majority of this DDM DCF is based on what happens in 2021 and beyond. So is value being down over 20-25% ytd a fair trade for the loss of one dividend check?
So long as a company isn't over-leveraged (fixed costs count - like leases, in addition to debt).....
But I could be wrong.
wabuffo
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Today at the Fed:
NY Fed to the banks: "Here - take all these reserves! We have an infinite amount available!"
Banks to NY Fed: "Nah! We're good!"
https://apps.newyorkfed.org/markets/autorates/temp
wabuffo
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This is an experiment on a large scale that has never been attempted in the entire history and wabuffo's right that the outcome is anything but certain but, conceptually, I find it hard to see a good outcome when the solution to get out of the hole is to dig deeper.
You have to draw a line at 1971. Prior to that the reserve currency was gold and the leading economic power of the day (UK, then US) subordinated its fiat currency to gold (followed by a worldwide pegging system where other major currencies engaged in hard-and-soft pegs to the 'reserve' fiat currency.)
That's not the world we are in today (although some of the pegs to the reserve currency still exist like the HKD to the USD). Our monetary process today basically consists of three steps (I'll use the US as my example):
1) The US Treasury spends more than it taxes, thus creating a new cash deposits in the private sector banking system.
2) The US Treasury then issues bonds and bills to convert those new deposits into interest-rate paying accounts (thus setting long-term risk-free rates).
3) The Federal Reserve issues reserves for govt bills (thus setting short-term risk free rates).
# 1) is where new money/financial assets get created # 2) and # 3) are simply asset swaps with the private sector and should be thought of as not creating new money, but rather, interest-rate maintenance mechanisms.
So if we look at the responses by the US govt with the new bill it is approving, $2T will be net spending by the US Treasury. Add to it the $1T that was already the steady-state deficit. There's also going to be $500B in less tax revenues. So the size of the short-term deficit (ie, no 1 in the list above) will be about $3.5T on an economy that will be reduced to $19T-$20T?. That's a deficit-to-GDP about 17-18%. That's a bit larger than the peak at the GFC (which was ~13%). Is that going to be too big and cause damage? I don't think so - particularly if we can get most of the employment back by 2021.
The rest of the package will be an SPV that the US Treasury will set up at the Federal Reserve which will be expanded 8-10X by the Fed to encompass $4T-$5T of lending by the Fed using its 13(3) authority. How will that work? No idea. But if I had to guess, there will be some small business lending by the private sector banks that will bring the loans to the Fed for a swap with new reserves. But I don't think there's going to be that much small business lending possible safely, so I think the vast majority of the funds will be used by the Fed to buy high-quality, investment-grade corporate bonds. So again, this will be a huge asset swap that will suppress long-term yields on both corporate bonds (as well as the QE the Fed is already doing on Treasuries).
How will this all sort itself out in terms of macroeconomics? No idea. Probably negative yields will manifest itself in America. Probably gold gets a bid throughout the next couple of years. Other than that, I dunno. Will it help the US economy recover and bring back pre-crisis risk appetites? Again, no idea - but I hope so.
Of course, I could have this all wrong.
wabuffo
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I looked and couldn't find charts going very far back. Since 1975 the UK appears to have generally followed the US.
Japan and France (as two examples) run much higher central-govt-debt-to-GDP ratios than the US and seem to have no trouble floating long-term sovereign debt at near-zero. Here's the comparison of France to the US.
wabuffo
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We can't have wartime deficits without pretending to try to pay the bill, right?
The US ran 13% deficit to GDP ratios after the GFC, and neither taxes nor inflation went up, net-net. These CV deficits will probably a bit higher but will recede since they are either temporary measures or loans that need to be paid back. I think the Fed balance sheet will expand greatly - perhaps to $10T. But that isn't inflationary since it doesn't create new financial assets and is more asset swapping with the private sector.
We'll see, I guess, but I don't think you can predict with certainty what will happen.
wabuffo
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I can't seem to find an equal weighted Wilshire 4500 or extended market (ex-SP500) etf. Do you know if one exists in ETF or Mutual fund form? The results of SP500, SP600 and RAFI equal weights don't look as good.
It doesn't exist. It's a theoretical portfolio that Wilshire constructs and calculates every month:
https://www.wilshire.com/indexcalculator/index.html
Equal weight portfolio have one big design problem in real-life. The monthly re-balancing to get back to equal weights for 4500 stocks imposes huge frictional costs that really punishes returns.
I use the Wilshire 4500 to get a feel for what the average small cap stock does each month. I call it the dart-throwing monkey portfolio. So my example upthread is not to suggest an ETF or fund, but rather to answer the question of what type of stocks rebound most after a sharp bear market.
Hope it helps,
wabuffo
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BA is finally getting interesting though I would still hold fire for awhile, but what is US going to do, buy all of our planes from there EU?
The intervention models were setup in the 2008 crisis.
BA won't be allowed to fail - but bailouts will be designed to punish equity holders on behalf of US taxpayers who would take a senior position in the capital structure. A massive US Treasury-owned preferred with a high coupon rate that takes over 80+% of BA's equity would be one model here. (i.e, 2020 BA = 2008 AIG)
If any large company goes Ch. 11, then it will be the GM model. That is, a 363 sale of the large company's good assets and NOLs into a NewCo, along with protecting employee pensions (and stranding legacy debt, wiping out old sharehodlers into an OldCo shell - with perhaps some warrants for creditors).
wabuffo
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I would like to discuss how the most money was made from the depths of the last crisis.
The lesson from 2003 (after the 2000-02 deflationary bust) and 2009 (after the 2008 GFC) is -- buy the trashiest micro-caps you can and buy a bunch. Their share prices go up the highest.
I'm going to use the Wilshire Equal-Weight 4500 (ie, excludes the top 500 stocks in market cap and thus is the equivalent of throwing darts at all the small-cap names). Here's some data.
2003:
S&P 500 Tot. Return: +28.7%
4500 Equal-Weight: +97.5%
2009:
S&P 500 Tot. Return: +26.5%
4500 Equal-Weight: +88.0%
I had a study from the 2003 market that further stratified the returns. IIRC, it stratified the 4500 small caps by debt to equity ratio. No surprise, the bottom decile in terms of debt/equity (ie - highest debt to equity) did the best (well over 150% on average). In fact, there was almost a perfect negative correlation -- ie low debt equity did less well (vs the overall average of 88%) and each decile of greater debt-to-equity did better.
FWIW,
wabuffo
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Futures are limit down, interest rates are zero. That went well.
Limit down just takes the S&P back to where it was at 3:30 last Friday before the big last half hour ramp. That move felt unnatural (perhaps short-covering) and was bound to be given back - rate cut or no.
This rate cut isn't to help now. It's to get the economy going again quickly after this virus-induced shutdown of the economy is over - hopefully soon. Better to do it too soon, than too late. If too soon, you can always mop it up later.
wabuffo
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Using the latest quarterly book value per share and the BRK-B share prices...
2011 First Greek Debt Crisis:
During Q3, 2011, BRK-B fell to 99.3% of book value per share (BRK-B lo price =$65.35). Buffett introduced his 1.1x BV per share buyback price shortly after that.
2008-09 Great Financial Crisis:
The B's fell to 94.8% of BV per share during Q4, 2008 (BRK-B lo price = $49.02 per B-share). It's important to note that the absolute lo price for BRK-Bs was $44.82 per share during Q1, 2009. But BV had fallen too such that the price-to-book was slightly higher than the previous Q at 95.3%.
Today:
At today's lo price at the close of $175 per share, it sits at 100.4% of book value. Of course, book value (as during the GFC) has probably fallen - so who knows really. But to beat the low of the GFC of 94.8%, the BRK-B shares would have to fall to $165.23.
As I look at the after-hours price, BRK-B sits at $173.50 - so the recent record is within sight, unfortunately.
Bill
(p.s. - my quarterly records go back to 1998. I'm sure during the 1973-74 or 1981-82 bear markets, it might have gone lower. I believe it did during '73)
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FWIW - bot a couple of slugs of KNOP at $10.94 and then $10.40. Its a C-Corp oil tanker company that is basically a floating pipeline between offshore drilling rigs and port oil terminals. At $10.40 - it yields 20%. Reported earnings last night - everything looks fine, conference call mid-day today that I will be listening to.
I think the selling is overdone - but what do I know.... it could still go lower, selling feels pretty indiscriminate.
wabuffo
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ETFs that mirror the Dow, S&P and Nasdaq are showing down -6.75% to close to 7% in the pre-market. S&P down 7% would trigger circuit-breaker and stop trading for 15 mins, I believe.
It's going to be an interesting day.
wabuffo
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Here's a weird (and potentially ominous) coincidence. In the latest letter, Buffett listed his broker (Mark Millard) and his direct-dial number and solicited offers for shareholders to sell their stock directly to Berkshire Hathaway.
To my knowledge, the only other time Buffett has done that before (broker, phone number, offer to repurchase) was in the 2000 Chairman's letter. That marked the top of a bull market in March 2000, and the subsequent bear market probably went on for two years and didn't hit a bottom til October, 2002. The market finally took off in 2003.
This year's letter came out this weekend. And the market has swooned. Does history repeat?
Regardless - it is a very weird and spooky coincidence.
wabuffo
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Fair enough. I'm glad you get value from his work. I will accept that I'm in the minority here.
wabuffo
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Liberty - of course we all make mistakes. That's not my point.
This was months after Skilling's profanity-laced conference call and his subsequent resignation. It was obvious by this time that Enron was a fraud and going down. In Valeant's case, those smart people went in before it blew up.
My point is a subtle one - there are plenty of smart strategy people who are well read - but it would be a mistake to trust them to run a lemonade stand. There's many folks who can quote Buffett but aren't capable of running a business or allocating capital in real-life. That's because the business world (and markets) is a lot more complex than can be fitted into a Powerpoint presentation.
That's what makes Buffett and Munger so unique. They embrace mental models and optionality but reject strategic planning and its rigidity. There are other CEOs like Buffett who are smart in that way - "ie, I'm a better investor because I'm a business manager, I'm a better business manager, because I'm an investor".
That doesn't mean there isn't some value in reading HBR articles or Mauboussin's writings... just be careful trying to apply these strategic planning models to real-world businesses and investing.
wabuffo
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It is likely that his thinking has evolved since then.
I dunno man, he had been writing his strategic think pieces for almost five years when he picked Enron. Here's one of his early ones from Jan. 1997. I think he's a case of those who can't do, teach.... or something like that.
wabuffo
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We talked about what advice he’d offer his younger self today
How about don't pick Enron as your stock pick of the year for 2002 on a Forbes "Pick One Stock" panel just a month before it enters bankruptcy (Dec. 2001):
https://www.forbes.com/forbes/2001/1210/174.html#5427bb575a96
Ok that's a bit harsh. But it shows how analytical ability and strategic thinking is not enough - one needs more than high IQ to be a successful stock picker. Its easy to think you are investing when you are speculating.
wabuffo
Companies Maintaining Guidance
in General Discussion
Posted
ATCO, KNOP
KNOP reports Q1 before mkt open on 5/28 - but I expect it will be steady-as-she-goes...
My add - BWXT. I recently bought some during the dip into the $40s.
I guess the business of refurbishing the US Navy's submarine and aircraft carrier nuclear reactor power systems is unaffected by the macro environment.
wabuffo