HJ

Cut Throat, mostly written from Charlie Ergen's point of view.

I know there are plenty of Canadian constituencies on this board, but what do you guys think about this? http://www.bloomberg.com/news/articles/2016-05-25/blackstone-gives-pricey-canadian-energy-and-property-thumbs-down

Not quite the formal poison pill, but the Daniel Drew / Jay Gould / Cornelius Vanderbilt Erie railroad affair come to mind.

To the extent banking / insurance need to be regulated businesses, there's simply no way around rating agencies. It's impossible to ask the regulators to re-underwrite every single private credit that is extended. Someone has to play that role. Another way of saying these companies have huge pricing power if they chose to exercise it. That said, whether these agencies should be structured as non-profit in nature, to strip out any incentive to skew rating one way or another, is a different story. Regulatory risk is indeed high, but one can also take the view that this particular risk is only going down every day we step away from the '08-'09.

One thing about these very long cycle statistics that make me wonder is how consistent is the data set collected throughout history. Take the commonly referenced overall debt number, I don't know how much of the rise is just counting something that wasn't counted before. Credit card lending, for example, barely exists 50 years ago, today it's widely quoted at something like $900 billion, because it's quoted from the Federal Reserve G19 report. 50 years ago, it may well just be store /restaurant credit that never went through a financial intermediary, and therefore never counted in the data set. Take it to the extreme, slave ownership, likely not counted in this overall debt number for that period of time, but if one had to make a consistent set of calculation, should it be quantified as the life long earnings of a productive person, and be tabulated in this data set accordingly? Cycle exists, history rhymes, and today, we have arguably the most elaborate and sophisticated form of social organization the world has ever known. So it's not surprising certain data set, tabulated certain way, would look extreme by historical comparison. But to infer that this therefore has to mean revert, and we are doomed to war and can only start building a new social scheme from ground zero seems a suspicious idea.

Thanks for starting this thread. I didn't understand that aspect of the problem for European banks. A separate problem that is arguably more fundamental is alluded to in the Citi report, the interruption of "petrodollar" recycling. http://www.cnbc.com/2016/02/05/citi-world-economy-trapped-in-death-spiral.html In round number, if you say US was consuming 9MM barrel per day of oil, producing 5MM barrel / day before shale revolution, when oil was at $100 per barrel, there is recycling of 100*4MM*365 = $146 billion of annual petrodollar that US sends to the oil producing nations and somehow gets recycled through the banking system into the world economy and capital markets. If one reflects on how the most important USD money rate is determined in London (LIBOR), one quickly come to realize that the European banks served as the main conduit in recycling those flow. Now that $146 billion a year has been interrupted at least for a while. The last time this has happened in the 80's, we had the Latin American crisis which gave us Brady bonds, followed by break up of Soviet Union, then the Tequila crisis, and ultimately the Asian crisis. This was in the context of Europe brining on North Sea production, and didn't suffer much. Probably hard to argue all of these global events are directly and exclusively caused by oil price movements, but there's at least some level of correlation. And this time, the European banks are significantly more exposed to the emerging markets than the US counterparts. A weak financial system faced with the impact of redirection of meaningful capital flow and inability to raise capital. Not a recipe for smooth sailing for financial markets.

--Mr. Soros Mr. Watsa has been saying this all along, hasn't he? ;) Cheers, Gio But is the gigantic CPI put the right way to execute this thesis? So far not?

He's very impressive. God of global macro. And his views on international policies reflects the decency of humanity.

I found it surprising as well. Even Meryl Witmer, a Berkshire board member suggested a Republican win, although she did't say who. The other question that I'm curious about is how good these investors are. Not all of them have public track record that people can actually look at.

http://www.wsj.com/articles/how-the-third-avenue-fund-melted-down-1450903135 My lesson from this is that whenever you see several senior people leaving a fund family, there's usually more than that brewing in the background.

Just on this particular point, Ruble is cut in half, CAD is down 30%, AUD is down 30%, all within the last couple of years. Saudi has the peg, but there's speculation that may change as well at some point. So oil workers are working for less, just not voluntarily. But otherwise, yeah, what you said.

You can look at the profile of most recent hydrocarbon discoveries and wells. Apart from expensive oil sands, most of them are nat gas rich. For all of the claims of shale oil overcapacity, we've been swimming in shale gas for years. Heck, nat gas is still being flared in some places since it's not economic to capture/transport/sell. It is very unlikely that nat gas can recover significantly without oil recovery. Even if oil recovers, nat gas likely won't. The only argument for nat gas is local inefficiencies - if you could buy a company that does shale gas in nat gas importing area (assuming no country risk, exploration risk, regulation risk), you might do well. Also nat gas might swing a lot based on winter temperatures, since a large portion is used for heating. But that wouldn't be a secular swing. LNG even if it delivers will just drive global prices to the bottom that we currently see in nat gas rich areas. E.g. Russia is not going to just roll over and stop selling nat gas if Europe gets cheaper LNG. It will just lower the price to compete. Oil is much more likely to go up when/if big projects get delayed/mothballed/cancelled. Its demand is also based on transportation and not energy/heating. So if China/India/etc. continues to drive more, the demand goes up. If China/India/etc. consumes more heating/electricity, that's split between nuclear/coal/solar with only part being nat gas. With all that said, there might be some nat gas companies that will do OKish. Caveat: I'm almost ready to throw in the towel on both oil and natgas. Sign of the bottom perhaps. ;) But there is a linkage between natural gas and oil. If oil were to come up in price, and gas doesn't, all the LNG projects would all of a sudden come back alive, LNG delivered to Asia being priced mostly off oil prices, and Natural Gas Liquids would all come back alive as well. After all, shale gas has been around for quite a bit longer than shale oil, and natural gas prices has been low for a lot longer than oil prices has been, yet the natural gas producers were all doing just fine right until the moment oil fell off the cliff, because they were making plenty of money off NGL's. I just think it's very difficult to generalize, and each company has its own circumstances that impact its own supply/demand dynamics.

Not that I am an expert in oil & gas, but I do find this question interesting to ponder. I'll only make the following observations: 1.The low cost oil production in the world is largely not investible to most, being controlled by the national oil companies based in the Middle East or Russia. What is investible to most investors are higher cost productions, shale oil or otherwise. The North American shale gas production on the other hand, seem to be world class on the cost curve. 2. Gas is much more local commodity. The cost of transport relative to the cost of the commodity itself is significantly greater. Oil, on the other hand, is much more compact, and cheaper to transport relative to the underlying commodity cost, making it a much more global commodity. Therefore one can make an argument that the dynamics impacting oil is much more global in nature on both the supply and demand side, whereas the dynamics that impact natural gas is much more regional, a mostly North American affair if that's the region you are looking at. But which market has the greater supply / demand imbalance, and therefore needing more time to work out is a very difficult question to generalize and figure out. As far as North American gas is concerned, whether its infrastructure is already overbuilt because of an expectation of LNG export that might not be fully realized is probably THE question to figure out.

There is no doubt from the little that I have read about blockchains that it is an interesting and likely very useful piece of technology. But to my mind, perhaps more geared towards cost saving / minimizing fraud or just plain human error in the settlement / clearing function of the financial service industry. The client facing piece of the industry is likely further removed from its impact. Perhaps the financial institutions themselves will adopt the technology voluntarily down the road. After all, the industry did voluntarily establish sophisticated settlement/clearing protocols through entities like DTC / Clearstream and until their privatizations, entities like NYSE, NASDAQ, Visa and Mastercard. And many of these protocols are designed to satisfy regulatory concerns, rather than purely efficiency concerns. Why do we still have physically settled securities, for example. It wouldn't be surprising at all if these entities one day decide to adopt some version of the technology in their daily activities in the future to take advantage of what the technology has to offer. But to position this as something based on which the entire financial service industry (including all the client facing aspects of the business) will be overhauled is a bit far fetched. The financial service industry is constantly "re-architecting" the settlement / clearing aspects of its business, whether it's in credit card transactions or equity/fixed income / derivative sales & trading, and will continue to do so, applying the latest advances in technology. Think how trades are confirmed before all the modern communication technologies are available. I'm inclined to think this is yet another advance of this nature. The future is in all likelihood not a fight to the death between blockchain and the establishment entities, but some complex coexistence of blockchain and these establishment entities. And the industry will be all the better for it.

People really need to fully understand interchange fee, who gets what. Here's from Wikipedia: "For one example of how interchange functions, imagine a consumer making a $100 purchase with a credit card. For that $100 item, the retailer would get approximately $98. The remaining $2, known as the merchant discount[11] and fees, gets divided up. About $1.75 would go to the card issuing bank (defined as interchange), $0.18 would go to Visa or MasterCard association (defined as assessments), and the remaining $0.07 would go to the retailer's merchant account provider. If a credit card displays a Visa logo, Visa will get the $0.18, likewise with MasterCard. Visa's and MasterCard's assessments are fixed at 0.1100% of the transaction value, with MasterCard's assessment increased to 0.1300% of the transaction value for consumer and business credit volume on transactions of $1,000 or greater. On average the interchange rates in the US are 179 basis points (1.79%, 1 basis point is 1/100th of a percentage) and vary widely across countries. In April 2007 Visa announced it would raise its rate .6% to 1.77%.[12]" So the card issuing banks get the bulk of the interchange! Visa and Master gets their assessment, which is a much smaller fraction of the overall interchange. V and MA are creation of the banks. They weren't operated as profit maximizing commercial entities till the banks decided to spin them out to distance themselves from the antitrust lawsuits by the retailers. These entities set the interchange fees, but they don't get the bulk of the interchange fees. Now, debit volume has outgrown credit volume forever. With the Durbin Amendment effectively capping the debit interchange in 2010, banks are no longer pushing the debit card spends. For the last 2 years, growth of credit spend volume has been higher than growth of debit spend volume for the first time since debit cards have been pushed beyond ATM's. Not to say things can't change, but these are facts as of now.

I think Glass Steagall preempts that. For a commercial entity and a banking entity to be under the same roof potentially gives that commercial entity a very strong financing advantage, which, in a guaranteed deposit world, is arguably derived at the public's cost. With the right management, it's not a bad thing, but regulation is never intended for the well behaved. The closest banks got to own a legal "diverse income stream" is owning the credit card processors, Elavon in the case of US Bank, Vantiv in the case of Fifth Third, and they haven't been bad things to have during the tough times. But such is life with these heavily regulated entities.

Cars are dangerous and people are still going to be hurt and killed (hopefully much less than now though), so insurance will be necessary. You will still need liability insurance against accidents from mechanical malfunctions, from software glitches, from hackers, and from situations the software simply wasn't anticipating and/or didn't know how to deal with. As long as there is something flammable in the machine such as fuel and/or batteries you will still probably need fire and theft insurance as well. All of these adverse events should be relatively rare compared with today, so the insurance should be much cheaper. And if I'm correct and things move away from private ownership and towards the large fleet model, then there should be much fewer cars and many fewer insurance policies in existence. One thing people don't think much about is with a large fleet model, a lot more gas will be burnt for a vehicle to go from one mission to the next. I don't think the impact on energy consumption will be trivial if such transition were to occur en mass. As for insurance, one of the foundation to the auto insurance market is legal requirement that everybody will have to carry one. And legislation always lags actual implementation. It's easy to imagine a scenario where say 20% of the vehicle on the road can function driverless, yet the owner will be required to carry insurance anyway. The big question is precisely whether such insurance will be negotiated with an individual, or with the manufacturer. The implication to the profitability of the industry is dramatically different under those 2 scenarios.

SBGI. Know it's a bit of a cigar butt, but seems like there's a few more puffs left. Earnings wasn't bad, but got sold down with all the media companies as they pronounced today to be "the day linear TV bundling died". $6 billion enterprise value, CFO on the call said they believe they can get up to $2 billion in the upcoming spectrum auction with minimum effect to their business. The few puffs left: 1) 2016 is set up to be an all time record political advertising year. And local news seem to have that piece of the political ads locked down pretty well 2) New broadcast TV standard may free up more spectrum that may allow them to offer new wireless communications services. This one could be worth billions to the industry. 3) There's a bit more retransmission upside to go.

There is probably some truth to that, just witness all the Asian faces in US casinos. But when we are talking about such huge amount, I think it is more reflective of the extraordinary money printing that has gone on in China, and the fact that there is no credible way of "preserving" these perceived wealth. I was in conversation with a local business man who owns a meaningful amount of his own stock. Going into the peak, he sold some, but not all, not even majority of his stocks. When I asked him why he didn't just sell it all, since by his own admission he knows the stock market is getting out of hand, the answer was "but where am I going to put the cash?" Now he's a very wealthy man just on what he sold, but as long as he's reluctant to move his capital out of RMB denomination, there's simply not much he can do to preserve his paper wealth.

Think US in the roaring 20's before the SEC. Bucket shop, Ponzi schemes, Stock manipulations, think what Daniel Drew did to Vanderbilt. Minority investor protection is a fairly modern concept even in the US. There is a reason why in China, real estate is the preferred mode of wealth preservation, not stocks.

This looks great. Thanks for sharing.

Thanks for sharing. Great job, Keith!

Bank loans these days are typically structured with LIBOR floors of 0.75% - 1%, so the loan coupon is max(LIBOR, LIBOR floor) + spread. For the first couple of rate rises, your loan coupon don't change. After LIBOR goes through the floor, your loan coupon then adjusts in accordance with LIBOR. BDC's stand for Business Development Companies. Basically a tax structure, similar to REITs, except they make loans to middle market companies, sometimes subordinated loans. In general these taker on greater credit risk than the "broadly syndicated loans" in these bank loan funds. They do yield more, and a lot of BDC's also invest in CLO equities. Their dividend is supposed to float, as most of their assets are floating rate based (also subject to LIBOR floor issue), but the manager will probably manage the actual dividend, so relationship between LIBOR and dividend yield is probably not 1:1.

They are mostly bank loan funds. Closed end funds all have a bit of leverage, call it 30%, but higher expense ratios, generically 2% +/-, they mostly trade at a slightly discount to compensate for that, also tend to have a small allocation to HY bonds. Liquidity is suspect, daily transaction dollar volume of a couple million, maybe more for the larger ones. Greater than that liquidity needs you need to potentially deal with higher discounts. The combination gets you to 6-7% dividend yield. Alternative is the ETF's, Invesco runs BKLN (Bank Loan), the biggest. Blackstone runs one for the Spider family, SRLN (senior loan). They generically have lower expense ratio, less than 1%, but no leverage. Less discount/premium issues to deal with, and can accommodate large sized liquidity needs. Then there are some open ended unlevered ones out there you can research, mostly retail mutual fund shops run those. Fidelity, Oppenheimer, etc. all have a version of these. They have expense ratio similar to, maybe a bit higher than the ETF's. Without leverage, the current dividend tend to be lower, 4-5%. Beware that most bank loans these days have LIBOR floors, so they don't really get the benefit of the first 75-100 bps of rate hike, if that's what you are gaming for. They will still be lower volatility than other fixed income alternatives. Asset class is quite homogeneous, not sure management adds that much. You are basically paying fees for access to the asset class. If you want to be more venturesome, you can try for higher leveraged / higher fee versions, CLO equity funds like OXLC, ECC (generically 10x leverage), but you pay fee on fee (fee to the manager, call it 40-50 bps on portfolio to manage the CLO (which is 4%-5% on your 10x levered equity), and fee to the closed end funds). The behavior of the asset changes as more and more leverage is added on to it. Alternatively go for the deeper credit versions, which are essentially the BDC's.

Inability for most active manager, value or otherwise, to outperform passive index over long enough horizon. Market is more efficient than most active managers would like to believe. What visually looks like value based on whatever metric, P/B, P/E, EV/EBITDA, etc., may well be simply higher risk.