arbitragr

The greenback effect

This is all macro stuff however. Bottom up, my view is that CRE stock prices have fallen far more than they should have, regardless of where the macro is heading. Prices are recovering now, though it may take a while before we get some optimism again, but the ones coming out of this better than most will be those stocks that have lower gearing levels with high quality assets whose values should hold up over the cycle.

You sound like you're describing the US market. Perhaps maybe, but not all non-US governments are deep in debt, and not all consumers of different countries are deep in debt ... and might I add unemployment is not particularly high in other parts of the world. But this is, only relevant if you're considering CRE in other parts of the world.

yeah right ... anything but simple.

Especially if you're a female, got hot legs and you're wearing a business skirt to work. Seriously though, the way I see it, some economies around the world are doing extraordinarily better than others. We all know the China story, and economies connected to it like Australia haven't even entered a "technical" recession - it's probably been one of the mildest recessions, definitely not nearly as bad as the early 1990s. Canada too. Back during Q109, when I was poo-pooing WFC what I did not expect was the extent to which the US govt would virtually guarantee bank loans, and underwrite bank debt - how much money they would print to get there!! The US Treasury and the Fed have shown their hand, and it's pretty clear that they will not let the markets fail. Never before in history have we seen a coordinated effort by central banks around the world to print money to backstop the markets. And for that reason, correction or not, I don't believe that we'll go back to the March lows we saw earlier this year. It might be long road to recovery for the US, but around the world, countries/economies that aren't overly leveraged at a Federal level and consumer level (mostly Asian countries) don't have a problem at all, and we'll see a rebound a lot faster there.

What a Ho.

Although this belief about the economy following the market is widespread, it is obviously a fallacy. The highest the S&P 500 ever got was just before the market meltdown. If markets indicated the future, we should still be enjoying the most robust economy in history. I like the logic your reasoning. i.e. "This belief is common, but it is obviously wrong." Anyways, the market obviously over-shoots and under-shoots. So you just have to be astute enough to pick it off when it happens. Obviously in 2007 it over shot, and probably now it's a bit frothy. Back in Q109, the bottom was priced, even though unemployment and the real economy was getting worse. It wasn't until July/August that we started seeing unemployment stabilize - if you had invested by then (i.e. now), you would have missed the boat. All the best bargains are gone now. Re CRE, my personal opinion is that the bottom is priced in. But this is all top down stuff. It won't matter at all, in the end if you pick off the wrong companies.

Didn't expect it to run up so quickly, given all the negative press surrounding CRE. Should hit at least 35 IMO, and then we'll see what happens. SLG vs. S&P - July 20th to present: http://i163.photobucket.com/albums/t314/ripleyx/Finance/SLGvsSP.jpg

the real economy usually lags the market in pricing a correction so in terms of securities valuations, I think we've seen the worst. However having said that, alot depends on where the commercial real estate is located. Location location. Commercial properties in places like Australia or Canada for example, where unemployment is only 5-6% (e.g. Sydney) and there are no supply issues, should recover and stabilize a lot sooner than in some parts of the US. What's more economic growth and demand, is tied to the resources/commodities industry so you'll get a pickup in demand much faster than in say, the UK. alot of the destruction in stock prices of certain REITs in recent times has more to do with the extent of deleverging and covenant breaches, and thus ... the need to raise capital = fear of dilution.

So what's the rationale for a buyout? I remember a buyout being discussed on the old board. Still hasn't happened yet. In the meantime some of the best companies in the world have gone to hell and back.

commercial property is interesting. ;) Looks like he's catching on.

I went in 2008, but not this year recently (2009). I met Mohnish in 2008. I'm friends with the younger people at yellow brkrs. I will be going next year if the markets recover well. Maybe I'll meet some of you guys there. cheers.

Derivative gains. Outlook is great, recovering housing, and GE should recover. However price is fair.

Okay with respect to selling uncovered calls/puts, what about margin requirements? I'm sure your broker requires you to at least have a cash balance of at least the liquidation value of the option contract (i.e. the amount of shares you're obligated to sell/buy upon exercise)?? If you can't use the rest of your cash balance, then you're not really "leveraged" are you? YOu're like an insurance company who has to maintain a reserve. My broker requires me to maintain a margin requirement of = liquidation value of option contract + risk margin (i.e. the potential change in value of option). This is for naked writes only however ... with long calls/puts no margin needed ... obviously. And second question; Why write puts on puts with short term expiration dates? this is the standard convention. Wouldn't it be better to write on long term contracts? That way you 1) get a higher premium for income (usually) ... and 2) get to buy the stock at a lower price in say ... 1-2 years ... which is way better than buying it next month ... assuming the market has moved up substantially in 1-2 years. Berkshire's written put option contracts are very long dated, like 15+ years, the rationale for Berkshire's puts are the same sort of reasoning I'm getting at.

Well ... since you asked (I'm not pumping :D) I'm looking for good quality assets in prime locations where I think the vacancy & cap rates are topping out. I'm not looking for real estate financing/debt businesses, so NRF isn't something I'd be interested. Just really good quality class A office or retail, with long term leases and not too much debt (relatively speaking), and also where the demand/supply fundamentals are still in tact or will recover. New York, despite its short term problems, will always be a prime place for doing business. So SL Green (SLG) looks good, to me at least - built a position last 1-2 weeks or so ($20-$25). They own good quality buildings around Grand Central, Times Square, Park/Fifth Ave and the Rockefeller Centre - those properties aren't going to fall by 50% - the market is pricing in 50% or so reductions. Also places like Australia, and Canada, whose financial sectors haven't been hit as hard by the GFC, with lower unemployment rates, less overbuilding/inventory/higher absorbtion rates and stronger economic growth tied to commodities. So I've been buying some REITS that are based around the major cities there. In general we're in a deleveraging environment, so good to check if they don't have any wholesale funding problems down the road, and also if they have debt covenants that may require them to raise equity (thus dilution ... don't get screwed!).

I think they're just snapping back from their unprecedented lows. No doubt, default rates might climb a bit further from here, but credit markets have definitely recovered and liquidity will more than likely comeback ... if it hasn't done so already.

An update. I've been buying some commercial real estate stocks/REITS. 10% of portfolio. Down to 25% cash now. Sold off some junk bonds.

Okay, so continuing on ... let's say if we wrote a put and the market price is above the strike and the written put enters profitability ... what happens when 1. you exercise early and take the profit and 2. leave it to expire whilst the mkt value of stock is above strike/exercise price? I assume for situation 2 that you earn the premium originally written. But I'd like to know the mechanics of it ... does the put buyer exercise/sell it back or something? Thanks.

Great investment opportunities come around when excellent companies are surrounded by unusual circumstances that cause the stock to be misappraised".

One more thing about the topic however... It is important that all children (and still most adults) be taught to buy assets with disposable income (things that pay monthly income). This is the start of the virtuous cycle (buy yet more assets with the new income) which leads to financial self sufficiency. Most people do the opposite... they buy liabilities which depreciate or create other liabilities and creates the kind of downward spiral that is just now coming to a head in the economy. Cheers Ah, nice. Never thought about it that way. I've always been taught/thought to buy stuff that appreciate by certain amounts, i.e. capital gain. You don't have to earn yield necessarily, but high yield begets capital gains anyways, due to more demand by the market, pushing the yield down (in most cases).

Don't buy them an Xbox, or else they'll lose interest in business/finance. ;)

I bet CIT group cares about who gets credit.

However the thing with the premium, is that in most cases it is often quite large if you're trying to replicate stock-like returns. Let's take an example; Strike price = $25 Leap/call price = $4 Qty purchase = 100 So premium cost = 4 x 100 x 100 = $40,000 If the stock stays flat, and you exercise at $25 near the end of the contract, you lose 40K, assuming the leap expires worthless. In most cases the option price will decay in value due to time, so it might be about $2-$3 by the time you roll it over (or before the expiration date), so that's probably a loss of 10-K-20K. Of course you could gain alot too, but your exercise price has to be above $29 first. So the stock in this case, must increase in value by at least 16% first, or else you'll make a loss. I remember going through this argument/exercise last time on the old Berkshire board, with regards to FFH. And same thing came up: if you held stock (not the option) for $40K and it stayed flat forever, your only cost is broker commission. If the stock price went up to $29 you'd make 16% i.e. 6.4K, on the option you would only break even. Correct me if I'm wrong here, please. (sorry I'm at work, so I'm in a rush, and haven't thought it through totally and trying to watch over my shoulder if my boss is seeing me type this ;D)

I'd start with a balance sheet, and maybe a P&L, or some budgeting. Get them to manage their balance sheet and grow the asset base responsibly and effectively. I'm not sure where I'd go from there, it depends what you want for them and who they are. If they're young, maybe you could get them to explore their interests. Maybe they don't want a career in finance/business ... maybe they want something else, like sport. Or if you want to push them in a certain direction, then give them some money to play with and see how good they are at growing it/investing it. Or get them to move out and pay the bills, that will really teach them. ;)

I like this strategy in the current environment. Have been investigating ways to enter an options trade and this is one of them.