wabuffo

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

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

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

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

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

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

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

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

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

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

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)

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

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

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

Fair enough. I'm glad you get value from his work. I will accept that I'm in the minority here. wabuffo

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

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 1997_01_14_Competitive_Advantage_Period_CAP.pdf

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

Madison Square Garden(if post spin, the sports teams) owns one of a kind, trophy assets. Not to hijack this thread, but Forbes just came out with its yearly NBA sports franchise values and the Knicks are no. 1 at $4.6B. Historically, Forbes' valuations have been under the level at which transactions occur. FWIW. https://www.forbes.com/sites/kurtbadenhausen/2020/02/11/nba-team-values-2020-lakers-and-warriors-join-knicks-in-rarefied-4-billion-club/#6f4c918e2032 wabuffo

I think Walmart's biggest advantage is grocery. They dominate grocery (at least in physical store sales) as it makes up 55% of total US Walmart revenues (~$180B in annual net sales). Amazon is a non-player in grocery (though they made a splash with the acquisition of Whole Foods). To put it in perspective, Walmart's grocery sales are bigger than Amazon's TOTAL NORTH AMERICA net sales. I still believe grocery is a poor fit for on-line sales (witness the numerous disasters - Webvan, Peapod, even Amazon Fresh). There are numerous reasons why most grocery will not work with on-line delivery (except for maybe some packaged dry foods). Amazon has advantages vs Walmart in other areas - but Walmart is the 800-lb gorilla in US grocery and its a very important segment that entails frequent store visits. wabuffo

The biggest leverage-fest that we've ever had on this board was probably the widespread purchase of bank LEAPs LEAPs can be expensive. LEAP calls are essentially margin with an embedded put option. You can often achieve the same result (more cheaply) by buying the underlying stock on margin and writing LEAP puts to protect the downside of the margin. Plus - if the underlying pays a dividend, you get to keep the dividend (which you don't with a call option). Margin interest rates can be low if you use a broker like IB. Its not out of the question that a margin+put can cost 500bp less than the exact same position via a LEAP call. wabuffo

Appaloosa, absolutely, like 1000% certainly, does use leverage, as do most major funds. Especially those who run credit funds and get involved in distressed asset investing(which is Appaloosa's bread and butter) Even the simple structure funds like Perhsing Square deal in swaps/OTC derivatives, which is another form of leverage. I wouldn't condone or recommend it - but every great investing track record employs leverage, in some form. Buffett has used leverage at every stage of his investing career (Munger was even more aggressive). For example, Buffett talks about the great returns he made in the years before the Buffett Partnership (1951-56) ("I killed the Dow"). But he was aggressive in the use of leverage even then (this is before insurance float or Blue Chip stamp float). There's a page in one of Andy Kilpatrick's books that shows Buffett's personal portfolio for 1951. His opening capital is $9,800, but he basically buys GEICO ("the stock I like the best"), his biggest position during the year, on borrowed money ($5K) and makes a 76% return on the year. Leverage is best left to the pros (and they do use it). wabuffo

Berkshire May have a lot of cash, but it has had several 50% drops during its trading history, so a 2:1 margin could definitely wipe you out, regardless of the fact that Berkshire ultimately was fine. Spek - that is a great watch-out. The only nit is that the two times in the last twenty-five years that BRK dropped by 50%, it did so from a starting point of trading at 2X book value per share: 1) Q4, 98 to Q4, 99 - BRK-B fell from $ 54.26 to $27.02 (BV was ~$25 per B-Share) 2) Q3, 07 to Q4, 08 - BRK-B fell from $101.18 to $44.82 (BV was ~$51 per B-Share) Both of these occurred in the absence of any announced BRK buyback policy (though the first instance caused Buffett to write an open offer to buy shares in his March, 2000 Chairman's letter). The second instance caused Charlie Munger to "sell" a ton of BRK shares to his heirs on margin (via a note - so, like 95% margin) in a shrewd-tax planning move in Nov. 2008. One could say a bell was wrung in both cases near the top and bottom. Since then, BRK has communicated various forms of buyback policies starting in 2011. Short-hand rule used to be - buy at book, sell at 2x book, rinse and repeat. wabuffo (who sometimes uses a bit of margin against his BRK position to buy market-neutral positions like liquidations ;)).

In addition, the FED repo action since Fall 2019 provides them with more liquidity (hedge funds are one beneficiary of the Fed providing liquidity via Repos). Bingo - that's it. The Fed expanded its balance sheet and stocks went up. But, wait ... before the Sept repo madness, the Fed was removing liquidity, right? To the tune of $300B! So of course, stocks went....DOWN UP...22% during that time. Fed removes liquidity, stocks go up, Fed adds liquidity, stocks go up. Maybe, just maybe one has nothing to do with the other and our mental models when it come to how the Fed works are ... wrong. wabuffo

If generating prosperity were as easy as keeping rates low so that extremely high P/Es could be justified ("rates are 1%, a P/E of 50 is low"), Europe and Japan should have been booming I'm trying hard to avoid pulling back the curtain on my weird devil's-den of macroeconomic theory,... but I'll just say this. 1) Perhaps we are very wrong about what a central bank does, and how limited its power truly is. 2) Perhaps we are also very wrong about deficits and how they work for a fiat currency issuer that is also a global reserve currency. This is why its so tough to make predictions about macroeconomic theory. wabuffo