bmichaud

Again, zero debate here. I too find that the best way to keep yourself from becoming a lemming is to engage in no debate. :P I believe this is an argument that will not be resolved between the two sides. I think it'd be useful to consider the opportunity cost of shorting -- being up 50% on X% of your portfolio in a year where the rest of your portfolio is down 50% is only useful in so far as the redeployed capital can then capture the lost opportunity cost of not having invested your X% of the portfolio at a compound rate commensurate with the (1-X)% of your portfolio. Otherwise, it's probably a really expensive alternative to the pepto bismol I can purchase from CVS to deal with volatility. Example: Split your portfolio 50-50. Market: 15% per year Long: 25.89% per year for 10 years (10x return) Short: 0% per year for 10 years (the pupil & bmichaud might consider this significant alpha) In the 11th year, 50% correction to the market and the long portfolio so it's merely a 5x return or a 15.75% return per annum. Better hope the short portion of the portfolio can create a 3.33x bagger just to break even with the opportunity cost. So I'd say the answer is "it depends" rather than "there's no debate." This is not a debate about hedging, it's a debate about the value, or lackthereof, Chanos adds. If you want to hedge against market risk, there is no debate that Chanos is the better option based on historical data, unless the numbers Sanjeev posted are somehow false.

So, this is all about being a better lemming? Twenty years is a long time for everyone to be wrong because they all read the wrong book and now we want to add to the wrong book collection. Swell! No, it's not about being a better lemming. It's about not being a lemming and thinking for oneself about the very interesting potential of someone who can consistently identify stocks that materially underperform the market, about the potential of someone that can provide capital (either within a fund, or if done through a separate account platform, within a portfolio of other managers) at a negative cost. Am I the lemming? Or are you? Am I seriously the only one here impressed by that track record and think that it has some function, that finding 10 Chanos's would be a worthwhile activity? No you are not the only one. It's ABSURD to say that Chanos does not add value. +2.1% over 20 years versus +12.7% for the market? That's 14.8% alpha. Sanjeev compares his performance to the market and other participants. This is no different - Chanos just happens to short. Yes he is not morally all there - is Buffett? Chanos was part of the short attack on Prem was he not? Hence the animosity toward him..... Think of it this way....Baupost hedged significantly leading up to the 2000 bubble peak. Not sure what the exact numbers were, but I am pretty sure he hedged using index puts etc....Doing so would have generated the following losses on that hedge: 1996: -23% 1997: -33% 1998: -29% 1999: -21% Compound that all together and you lost 72% of your original hedge position. Now compare to Chanos: 1996: -14% 1997: +5.4% 1998: -1.3% 1999: -.8% Compounded together, your hedge position via Chanos' fund lost 11% cumulatively. HOW IS THAT NOT VALUABLE ALPHA IF YOU ARE LOOKING TO HEDGE THE MARKET? Ok so now let's look at how the market hedge would have performed when needed, i.e. in the 2000 and 2002 downturns.... Market: 2000: 9.2% 2001: 11.9% 2002: 22.2% Compound those three returns with the returns from above, and your original $100 market hedge position initiated in 1996 is now worth $43. CONGRATULATIONS. Now Chanos: 2000: 47.4% 2001: 18.2% 2002: 35.4% Compound those with the returns from above.....and your $100 hedge position from 1996 is now worth $209. This is not even a debate. If Chanos' fund is looked at as a market hedging tool, then like with a market hedge you want to utilize it when the risk reward is best. You would not employ Chanos at the 2002 and 2009 market bottoms. Would you utilize him now? HECK YES. Why? 1. Because even if the market continues to move up, he has proven to add significant short alpha when the market is going up, thus you will not have your market hedge decimated like you would have from 1996-2000, and... 2. He adds SIGNIFICANT alpha in actual market downturns b/c most of the time the crappiest companies will get crushed in a downturn. Again, zero debate here.

Race, I've been following this entire discussion, as it's been a months long project of mine to figure out how Eric thinks (he is utterly brilliant, and we are extremely lucky that he takes the time to explain soooo much!!). I'm dumb, so it took me until now to figure it out. I was struggling with the whole if you only have $18 and can't margin thing. BUT this entire thing makes perfect sense when you view it in terms of the stock price doubling, as Eric pointed out.... Say I have $36 in an IRA where margin is not allowed. If I buy one share of GM and the stock goes to $72, then I make $36, or a 100% roe. Now say I put $36 into two $18 calls. If the stock doubles to $72, then each call is worth $72 - $18 strike - $18 cost, or $36, and since I own two calls then my proceeds are $72 net of strike and option cost. Roe = 200%. Modifying Eric's BAC warrant leverage calculation for the dividend... GM stock price $36 GM divy $1.08 GM option price $18 Strike $18 36 stock price - 18 option price = 18 leverage Assuming no dividend: 18 leverage x (1+x) = 18 strike. X = 0%. With dividend, the $1.08 gets added to the strike: 18 leverage x (1+x) = 19 adj strike. X = 6%. So it's like the warrant dividend adjustment in reverse. Where the warrant strike gets adjusted downward, the option strike gets adjusted upward (in Eric's leverage calculation).

Malone owns something like over half of the timberland here in Maine - of course it is all for the tax advantages. hahahha I love it :)

http://www.swingtradingdaily.com/2013/12/09/its-time-to-take-action-against-washington-and-wall-street/ I first came across Larry Edelson in my research on the gold market, and he has actually made some great calls on precious metals since 2000, including the peak in 2011. But WOW have his writings turned bizarre lately. It just is further feeding my growing hatred for the newsletter writing community. He is calling for the "war cycle" to start ramping up soon, and supposedly a "source" in Washington is saying the USA is going to impose a 10% wealth tax in order to help pay off debt. Crazy stuff. If this is the case, perhaps this is along the lines of what Cardboard has been talking about with regards to Iran and what the market is missing. Ironically, Larry believes the equity market will rise despite war and confiscation ramping up. How is everyone else incorporating the "war cycles" into their stock picking? hahahah kidding of course 8)

Those posts tell me nothing. If there is truly a hidden $35B balance sheet, then that is a massive game changer. But nobody can say where that number comes from. It appears to be complete crap... Plus how is it possible Eddie is sooooo brilliant that he can hide a $35B reinsurer from the capital markets??? Impossible!!!!

If there are assets outside of SHLD that means SHLD does not own 100% of sears re. At what point did they sell an interest in this sub?

Luke, How do they know there are $35B in assets? Does the 10k disclose that?

I'm confused - how does Sears RE have $35B in assets yet SHLD itself only has $20B? Can insurance assets be held OBS?

The Bitcoin comment was shocking. Gotta be some type of a sign that momentum is coming into vogue.

As a reminder, Ned Davis Research is why I started this thread, as they are arguing quite strongly for a secular bull market, primarily as evidenced by the market behavior since the March 2009. In the 4 years since the market bottom, the average price return has been 24% give or take, directly in line with other secular bulls (though it is bothersome to me that they exclude the 4 year period out of the 1933 bottom that ended in a huge crash despite average returns of over 25%...). However, they are calling for 2011-type market weakness (if we have a recession then it could be larger) toward the middle of the year. They view the weakness as akin to the 1987 crash (they r not calling for a crash here) that reset the overly optimistic market for a continued secular bull run. All that to say - I found the following Bass interview rather interesting and potentially in support of market weakness next year: http://www.marketfolly.com/2013/12/kyle-bass-long-general-motors-exits-jc.html?m=1 1. Believes equities are the only game in town, as QE forces investors out or all other assets 2. Is pitching GM for a potential 40% return over 18 months 3. Thought JCP was an interesting turnaround play, but exited when he thought vendors bailed on the Company 4. Believes HLF will obtain an audit before December, but will maintain a hedged position given the risk if it does not obtain an audit. Believes they can buy back a ton of stock once they receive the audit. 5. Believes HLF fits into his macro view of a higher than average long term unemployment rate, as HLF offers opportunity for those unemployed 6. Completely uninterested in US banks My thinking: 1. He hinted performance hasn't been great the last two years. I think he is trying to make up ground and is succumbing to the equity herd mentality. Hearing him on this topic is telling, IMO - lacks the conviction he typically expresses with his macro views. 2. He is late to the game with GM - when do you ever hear HF managers pitching an idea with only 40% upside? Not saying GM won't go up, just saying I think it is his excuse to play the equity game. Plus his presentation was terrible - 12 pages long??? Come on!! 3. He was in and out of JCP very quickly. And in this interview he talks about "doing the work" - how rigorous is his process if he was surprised so quickly on JCP's weakness?? 4. His HLF reasoning is piss poor IMO. He adds zero value or originality to the long thesis. I think he is just going along with others trying to screw Ackman. What kind of thesis is this long term macro unemployed crap? You want the unemployed to sign up for something that doesn't pay anything??!! Makes no sense. 5. His uninterested stance on banks based on his smart sounding "we will be at zero bound forever" thesis represents consensus on the banks, and lends strong credence to Ericopoly's bullish stance, IMO. Overall he sounds sooooo weak in this interview. It seems like he is trying to apply his subprime "rigorous macro process" to anything and everything, and is coming up empty. His whole japan thesis is nonsensical. He is dead wrong yet won't admit he is wrong. And he thinks the US is on some unsustainable debt path without acknowledging that countries that can issue their own currency are not a credit risk. Unfortunately I have had to learn the hard way that Buffett and Munger could not be more right about macro thinking infiltrating value investment decisions. I have let these macro idiot managers and newsletter writers get into my head that the environment is far more dangerous than it actually is. Complete waste of time, and guys like Ericopoly and Packer price that wonderful stock picking, while at times subject to large declines, far supersedes worrying about debt levels, broad market valuation, inflation etc.... to the point where one avoids investing in particular attractive situations.

Buffett pretty explicitly utilized leveraged as an offset to "workouts", up to 25% of BPL's net worth. Tepper mentioned 1.4X leverage in 1998 during the Russian crisis, but FWIW said it's been 0% since. No doubt Tepper does not appear to be a WEB-type "business analyst", but he's certainly not momentum driven from the standpoint of his event-driven investments. He's buying distressed assets with a huge margin of safety and holding for long periods of time. That's what I find so unique about him is that he appears to be a WEB/Graham-MOS investor overlayed with Soros-like macro precision.

when you cite a significantly larger asset base, are you comparing them on an inflation adjusted basis? if not then its still apples to oranges. Good question. Tepper started with $57 million in 1993, which is $18.5MM in 1955 USD at 3% inflation. At BPL's largest in 1970, it was ~$200MM - 3% p.a. for 40 years is ~$650MM. 13 years into Tepper's career, he alone was worth over $1B - AUM in 2006 was north of $10B.

Good thoughts. Here's what I would say. I was trying to compare Tepper's 17y career to WEB's 13y hedge fund career, not WEB's entire career. Absolutely Tepper has a long way to go to match WEB's entire career record. This could go both ways. I look at it as Tepper has had to weather pretty poor market environments (remember he has had pretty significant down years multiple times throughout his career), whereas WEB in a way quit before the going got tough. Same kind of thing as I pointed out above - Tepper also had down years where WEB never had one. Tepper has stated many times that he "holds stuff" for long-term cap gains. So might be difficult to compare based on turnover. Overall my point was quite simple: Tepper has out-managed "hedge fund WEB" by a significant margin with a significantly larger asset base.

And yet, WEB's record was only 13 years long versus Tepper's 17 year long record (as of 2010). Alternatively, if I've compounded at a gross 50%+ for the last two years versus 20% for the market, does that make me as good as or better than Tepper? See the point I'm trying to make? I feel like you just made my point but I must be missing something. Tepper generated at least 30% alpha over 17 years versus 20% alpha for WEB over 13 years - how is that not better than WEB? And why would your 30% alpha over two years even be comparable to either of those track records? Yes if you do that for the next 15 years, you would be on par with Tepper....but again, I doubt you are managing billions (aren't you up to 3 or 4 million?).

How is 30% net for 17 years far outpassing WEB's track record? WEB was 31% gross versus 9% for the market for the life of his partnership (see attached). Tepper is 40% gross versus probably 5 to 10% for the market since inception. 1969.01.22.pdf

http://nymag.com/news/features/establishments/68513/ Great profile on Tepper. Key characteristics of his success IMO: 1. Distills complexity into several common sense bullet points 2. First mover into distressed situations 3. Takes concentrated positions 4. Zero use of leverage - buying at 20 or 30% of FV provides natural leverage! 5. Appears to wait for some type of floor to be in place before buying equities - govt backstop of banks in March 2009, QE2 in September 2010, LTRO in September 2011, QE3 December 2012, Japan whatever it takes proclamation late 2012 - whereas distressed debt has a natural MOS via post-BK recovery 6. Naturally optimistic 7. Appears to respect economic momentum and how a bad econ environment can mess up even the cheapest situation Absolutely phenomenal stuff. This guy is a Buffett on steroids with a track record far outpacing WEB while managing sums WEB has historically deemed virtually impossible to generate such returns!!

Thanks to Cardboard for putting the Iran situation onto my radar - still struggling to figure out myself how the recent deal ultimately affects the market, but here are a couple of good articles from this week's Economist: http://www.economist.com/news/briefing/21590959-encouraging-interim-deal-iran-makes-permanent-check-its-nuclear-ambitions-easier http://www.economist.com/news/briefing/21590958-deal-between-america-and-iran-would-have-big-repercussions-shifting-sands

He has been fully hedged since 1100 in the 2011 euro crisis. You cannot take him seriously. Think the Fed is reading his "open letter"? Hahahah

http://mobile.bloomberg.com/video/appaloosa-s-tepper-says-stock-markets-not-in-bubble-xsuYVJ46Qu6E52XtN0tX6w.html Tepper says nowhere near a bubble. Could see another 30% next year. With Yellen at the fed head, conducting the easiest money policy in history, for the longest duration in history, could we not be setting ourselves up for the most epic bubble in history? Could we not get to 35x $100 earnings in a tech bubble-like market?

another note LMC11202013.pdf

Watsa, That's interesting - I always thought the mgmt fee was to cover audit, admin, legal, custodial etc...? I know hedge funds do not report an "expense ratio" like mutual funds do, but are all of these expenses taken into account in the "expense ratio"? i.e. expense ratio = mgmt fee + fund expenses?

Quick question.... FNMA's fully diluted share count is 5,893 million taking into account Treasury's warrant. At the recent PPS of $2.61, the implied market cap is $15.4 billion. The FNMAS preferred series is trading at $8.26, or ~33% of its $25 par value. Applying the 33% to the $19.13B face value of FNMA's private preferreds, the implied market cap is $6.3B. Am I looking at this right? Is there really a high enough probability of a favorable restructuring for the common to warrant a market cap over 2 times the value of the preferreds?

Great write-up by Deutsche Bank on the history of XOM XOM_DB_Note_9.3.13.pdf

Phenomenal stuff out of GMO's latest quarterly. Grantham's conclusion on where the market currently stands, on page 13: GMO_Quarterly_November_2013.pdf