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

Buffett never predicted whether inflation would go up or down in "how inflation swindles the equity investor." He explained how it affects return on capital and business investment decisions, didn't predict the future. Sure - he never made an outright prediction - but he was pretty gloomy about inflation being a perpetual issue in the US. Here's the "money" quote that ends the article: ...this is how the long-term stagflation environment looked like after the publication of his article. I'm not knocking Buffett here - you are correct that his purpose was mostly educational. But if we give him credit for "Buy Stocks, I am" in 2008, then he gets dinged for the pessimism in this article, IMHO. wabuffo

in 1999, (one of the very rare occasions when he talked more specifically about the 'market' in general) that expectations that net profit margins could go higher than 6% for any sustainable time..were not reasonable Buffett is not a great macro-forecaster (and he admits as such). Remember his "how inflation swindles the equity-investor"? Well the publication of that article pretty much marked the top for inflation in the US. As I continue to point out - there are two major valuation inputs that have changed since Buffett's iconic 1999 Fortune article. 1) At the time of the article, the 30-year Treasury was yielding over 6.5%. Today it is 2.3%. Buffett admitted in that article, that this was a factor that could change his forecast (though he didn't predict it). This input is a two-fer for valuation purposes. Corporate America is paying less for its debt - plus discount factors for equity valuations have to be pegged lower. This was also a reason Buffett was bearish at the time - in 1999, 30-year Treasuries were yielding a higher rate than the earnings "yield" on Corporate America. That is not the case today. 2) The Federal tax rate on corporate pre-tax income was 35%, today it is 21%. Uncle Sam has decided to transfer 14% of his ownership stake in Corporate America to us, the private sector owners, at no cost. I think that's a big deal. It seems to me, one would have to adjust a time series of market cap ratios for these two important input factors. Whether these input factors continue to stay at their current values, I have no idea (though I am not betting against it). wabuffo

Corporate debt to after-tax corporate profits currently at 5.42X (average for the last 65 years = 5.43X) Max was in 1990 = 9.08X, Min was in 1966 = 3.32X In a recession, profit dips, so the ratio will increase, but it doesn't look like businesses would be starting from an overleveraged position (relative to history). FWIW, wabuffo

Not a big deal, but minor correction: S&P 500 TR for 2019 was 31.49%. Yes - you are correct. Sorry about that, I had an error in my spreadsheet. Thanks for pointing it out! wabuffo

Interesting to see that ... the mean/average of this years returns seems to be significantly below the index with the most people having a 20-25% outcome, not one, but two steps below the option that includes the index return. Hielko - not terribly surprising. I think there are two reasons: 1) The average stock underperformed the big market-cap weighted indices (the FAANG influence). I would guess the COB&F stock pickers are value pickers and generally are underinvested in FAANG. One way I measure the annual return of the average stock is to take a squint at the Wilshire Equal-Weight Indices. The Wilshire Equal-Weight 5000 Index had a 28.9% return in 2019 (vs 31.05% for the S&P 500 Total Return). So basically a bunch of monkeys throwing darts at the WSJ stock pages underperformed the S&P but still edged out the average COB&F value investors in 2019 by the looks of the self-reported survey. 2) The other factor that I think comes into play is BRK's underperformance. Just like the COB&F value investors are underinvested in FAANG, they are probably overinvested in BRK and BRK underperformed the indices by a lot this year (e.g., BRK-B had a 10.9% annual return vs 31.05% for the S&P 500 TR). wabuffo

canadianinsider.com sedi.ca wabuffo

Negative rates didn't change anything, why? Maybe because negative/low rates hurt savers (in terms of lost interest income) than they "help" debtors. It's a tax basically and destroys the banking sector (which probably also hurts debtors - so no gain). I remember an analysis that Einhorn did a while back during Bernanke's drive for zero short term rates that used US Household data from the Fed to quantify the negative net impact (savers vs borrowers). The US was heading in the same direction, but then cut federal taxes which helped to offset the impact to savers by increasing after-tax incomes. wabuffo