arbitragr

I don't think there will be a full scale bull market like you saw in the 1990s again for a while. After we get out of this mess, we might have to worry about inflation problems and such. Bit similar like the 1970s. Or we could get a general sense of despair and fear prolonging about the stock market like in the 1930s. could be a long time.

so long as you have the capital to cover if things go south any more. BRK can do it b/c they have the capital ratio to cover. old adage rings true once again; the market can stay irrational longer than you can stay solvent. Things I thought would never happen have happened in this market environment; GE falling to 8 bucks, WFC falling to 10 (and thereby falling below WEB's original cost basis!!). BRK falling below tangible book value. In the middle of 2008 I thought credit spreads were huge, and thought they were going to re-correct and come back since they were wider than both the LTCM period and 2002 downturn. Turned out they blew out even wider ... 2x as much!! I agree that now is probably less likely to produce even more chaos, however it's all probabilities and you never just "know" ... probabilities might say 10-20% chance of going south even more. there are still people who are bearish about the current market, Shiller thinks p/e ratios should mean revert even more etc etc. People like howard marks still thinks we haven't reached bottom unless default rates reach 10% at least ... they're only about 6-7% roughly (I think). But that's the whole challenge of being a professional investor. You have to do your research and make your bets. You get it right, you win. Get it wrong, you lose ... or ... your career could end.

so long as its simple and easy to use, yet functional ... i don't think it really matters ... just as long as you have good quality posters who are knowledgeable and insightful.

This is debatable. Shiller has done studies all the way back to the 1800s where P/E ratios have shown to be mean-reverting again and again ... Right now he thinks the market is "fairly" valued based upon past P/E cycles. The market has a bit more to drop if it is to get cheap. Calling the bottom is almost impossible, however the problem is when you're a professional ... your clients will pull out of your fund if they see negative losses for too long, so if you're going to invest, and just sit there and watch yourself lose money, then your clients and assets under management will be gone. It's okay to say invest and just sit back and relax if you're investing personally, but professional it's not so straight forward. And no amount of haggling or convincing is gonna change your clients' minds - you have to show results all the time. The only way to combat this is to either hedge, or buy it cheap enough below IV so that you protect your downside ... but how far is cheap enough? Especially in this environment? Total fear has ensued, and the bubble in treasuries is evident of that. Right now, the markets are not even working, let alone reaching a bottom.

Down ... down ... down ... :'(

This what Berkshire's worst year ever in 44 years. Telling tale of the times we live in. Blue cover? That's a first ... Warren was selling this year ... Suprised with the -90% loss on the Irish Banks. Wonder what he was thinking. Derivatives seem okay ... long term.

Yeah sorry. I got confused between CDS vs. puts.

Arbitragr, I haven't read anything about those loss payments you mention. Do you have a link to something describing them, or giving them context? As of the Nov. 7th quarterly report, BRK hadn't needed to post any collateral for the puts. zarley Hi Zarely, See p. 24 of Berkshire's Q3 2008 10Q, about 5 paragraphs down: The estimated fair value of credit default contracts at September 30, 2008 was $2,525 million, an increase of $687 million from December 31, 2007. The increase included fair value pre-tax losses of $478 million and premiums from contracts entered into in 2008 of $265 million, partially offset by loss payments of $56 million. Berkshire made additional loss payments of approximately $91 million in October 2008. The estimated fair value of equity index put option contracts at September 30, 2008 was $6,725 million, an increase of approximately $2.1 billion from December 31, 2007. The increase was primarily due to fair value pre-tax losses of $1,731 million as well as $383 million in premiums from new contracts entered into in 2008. My only hope is that the Q4 result won't have any negative and nasty suprises on the derivative front. I trust Warren.

Although I have long term faith in BRK, I do have concerns about the derivative contracts. Of course they are European contracts, which begs the question why BRK has made some small loss payments upfront of $56 million and $91 million in late 2008?? I wouldn't be suprised if they were margin calls, albeit small ... as any sort of long term contractual position like that would probably require some form of margin maintenance to keep the contracts in good faith - much like a futures contract. Maintaining margin vs. exercising option rights are not the same thing. It is not completely black and white. ???

Not an expert, but they've got issues with their bond investments, in particular their financial and below-investment grade investments. They invested in stuff like Icelandic bank debt that went bust, and have high yield investments in things like Ford debt. If their Q4 results turn out to be bad, and if the credit markets continue the way they have, then they could be in trouble, especially if their equity base gets written down to below minimum-regulatory levels.

Just so long as the cost of float doesn't exceed the cost of debt for most years I think it's okay. Suprising how bad it (underwriting loss) was this year however. Nonetheless, FFH's investments were good enough to overshadow the "ordinary" underwriting results for this year at least.

Bought a bunch today at avg price of $2280. Seriously out of whack just after lunch, when fear of bank nationalization was high. Couldn't believe my eyes what was happening. http://i163.photobucket.com/albums/t314/ripleyx/Finance/brkavsbrkb.jpg

Bonds are indeed good value. However for the average investor the bond market is almost off-limits, since the best junk bonds are usually over the counter and not readily traded via discount brokers.

Indeed it is. Picked up some BRK/B for 2280. What a bargain! :) I've been so busy just analyzing all the opportunities this week doing extra work that I haven't had much time to post!!!! :o ;D Yeah, but generally now is a good time to take a position in a good quality, safe, well run institution like BRK, or at least the time to be looking. I have been bullish in conservatism in the recent months, i.e. holding cash etc. but if you start allocating some capital throughout the year in good quality institutions it's hard to do wrong over the next 2-5 years. All the best everyone.

I'm not a holder. But 2009 is going to be extremely tough for two areas that WFC has a very large exposure to; (i) the consumer (ii) commercial real estate Both areas lag distress in housing and the economy. A general ratio used in the industry is; take the unemployment rate and add 1-2%. That ratio gives you a ballpark figure for loan loss ratios for the consumer business, especially with respect to credit cards. Should we see unemployment rise towards the higher levels of economists' predictions, that is, 10-12%, then loan loss provisions will reach 12-14%, which is very alarming for banks that have heavy exposure to the consumer (i.e. WFC). Add to that, you have commercial real estate loan loss provisions rising to record levels, and you have a really tough 1-2 years for most banks. My view is that most retail banks will not see any upward traction until at least the middle of 2010 at the earliest. 2009 will be the year of the distressed consumer. The market is not entirely incorrect with regards to the downward drifting as of late.

The problem with competitors is that they don't have Amazon ... :D Everybody buys their books from Amazon

Love the calendar!! Keep it updated please ... :)

Hi cheapguy, The most simplest way is to probably ask your bank to see if you can refinance your loan to a fixed interest rate. That's my advice. Otherwise you might bite off more than you can chew by trying to manage margin positions in the fixed income markets. Other than that you'll have to resort to fixed income strategies. There is no specific interest rate futures contracts that track the 12-month US LIBOR rates, however the closest interest rate futures contract would be the 30-day Fed Funds Rate Interest rate futures contract or the 1-month US Libor futures contract. The relationship is stronger long term however; even now, short term LIBOR rates vs. long term LIBOR rates vs. Fed Funds rate are different: USD Libor 1-month 3-month 6-month 12-month 0.45 1.24 1.75 2.04 Fed Funds rate = 0.25 http://i163.photobucket.com/albums/t314/ripleyx/Finance/12musliborvfedfundsrate.jpg Be warned however, the relationship isn't always clear cut in the short term as you can see in the latter stages of 2008 when we had the credit crunch blowups in full swing, since LIBOR is based on the inter-bank borrowing rates and not the Fed Reserve rate directly. So you should talk to your broker and ask about interest rate futures, and see the 30-DAY FEDERAL FUNDS INTEREST RATE futures contract specifications: 30-Day Federal Funds Futures - Trade Unit = $5 million - Settle Method = Cash Settled - Point Size = $10.417 per 1/4 of one basis point starting on the Monday of the first full week in the expiration month (1/4 of 1/100 of one percent of $5 million on a 30-day basis rounded up to the nearest cent) $20.835 per 1/2 of one basis point ( 1/2 of 1/100 of one percent of $5 million on a 30-day basis rounded up to the nearest cent) --> be warned with re point size, as 1 point size = $10.417 for every 0.000025 bp move up or down ... so if short term rates fall even more for some random reason, you might get a margin call. Current initial margin requirements for CBOT 30 DAY FED FUND FUTURES contracts are approx. $1,688 max. depending on whether you are a specialist or not. So you will probably be entering into 1 contract at $5M and maintaining the margin requirements from there on (correct me if I am wrong). As you're betting on the fed funds rate rising you will be shorting the fed funds rate interest rate contract, which means you will be selling it and hoping that the price will go down and then settling at a lower price to close out the hedge (no delivery/cash settlement). So current quotes on the CME are: http://i163.photobucket.com/albums/t314/ripleyx/Finance/quotes-1.jpg Notice how the market is already pricing in a rate rise the latter end of 2010; i.e. you get the implied fed funds rate by taking the quote for say, Nov 2010 = 98.265, and going 100 - 98.265 = 1.735%. So the market as of this moment, is betting that the Federal Reserve will raise the Fed Funds rate to 1.735% by Nov 2010. So right now, the implied rate is 100 - 99.7575 = 0.2425% ... which is correct (i.e. current yield on short term treasuries/fed funds rate). Now, your problem is that there no contracts that go all the way out to 2011-2015, and it also become very illiquid as you get longer dated ... so that's the hard part. That is the best way IMO. You can try options, or ETFs that are short treasuries too. You should talk to your broker for more info or visit the Chicago Merc Exchange website: http://www.cmegroup.com Good luck.

So Gold prices are rising, and as per our previous discussion on the other board ... speculators are flocking to Gold for insurance. My research indicates that the gold price rally has been driven by fear of sovereign default risk. Historically, under normal conditions with no sovereign default risk, there has been a very strong relationship between: - the price of gold in USD vs. the USD exchange rate compared with a basket of other currencies. Essentially, gold and a weighted-basket of other currencies act as an alternative store of value to the US dollar. However that relationship has begun to breakdown with gold pricing well above the non-US dollar currency basket: http://i163.photobucket.com/albums/t314/ripleyx/Finance/goldvscurrency.jpg So this probably means that speculators are getting fearful of sovereign default and inflation of non-US government currency and paper more so than they are afraid of US-dollar denominated paper/currency. To get a general sense of the fear in the marketplace you can check this out: http://i163.photobucket.com/albums/t314/ripleyx/Finance/goldvsetfsvsdefaultcds-1.jpg CDS spreads on sovereign debt is rising in lock step with Gold ETF demand. This shows the fear in the market place in all its glory since it backs out anything to do with gold prices and central bank activity that may manipulate the relationships we want to see due to currency stabilization activities. I personally don't see the gold price crashing down anytime soon, unless problems in the financial sector are solved first. And that may take a while. If foreign central banks decrease their rates to 0% where do investors go? They go to the US. But hey ... wait a minute ... yields on US treasuries are 0% too ... so now where do we go?? Goldrush ...

I'm more positive on the deal. On the positives, WEB structured the deal so that the perpetual capital instruments/bonds will earn coupons at 12, for the 3 year period which will then be converted sometime thereafter at 25 euros or so. Looking at the current stock price there is a lot of upside, whilst the short term, the downsides are mitigated with the coupon payments: http://i163.photobucket.com/albums/t314/ripleyx/Finance/swissre.jpg One should also note that the 3B investment was made in Swiss Francs (CHF), with the recent appreciation of the US dollar this is a good time to be looking overseas, if inflationary pressures do cause downside risk to the USD. What is interesting is Swiss Re has about 42% of it's premiums from North America and another 45% in Europe. The European diversification gives Berkshire better strategic positioning in the European market should WEB choose to exercise the bonds and take 25% ownership of Swiss Re later on. Long term market trends point towards more consolidation among the bigger players in the P&C insurance business, and this can only be a good thing for Berkshire. On the downsides, what concerns me is Swiss Re's investment portfolio: - mortgage loans/securities = 11% - corporate bonds = 15% - structured products = 14% - With the rest primarily in government + cash. This is predominantly why they've run into capital problems and will be needing a further 2Bn CHFs capital injection. Combined ratios are decent, and if anyone can work the reinsurance business it's Jain/WEB. With the added protection of the 12% coupons in the meantime, I think it's a winner. Main issue is the asset side of the balance sheet.

So what happened afterwards? Did you end up tangling yourself into this? What are we supposed to do when faced with a similar dilemma? Call the authorities? (FBI, police?) or something?

Good deal terms once again. Magnificent. Initially, bonds at 12% yield, convertible to stock in 3 years. If converted now would represent 25% of the company. Nice way to gain a stake in their largest best run competitor. WEB working his magic in this downturn.

Thank you.

Thankyou.

cool ... thanks for everything. ;) [move]thank[/move] you