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TwoCitiesCapital

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  • Birthday 04/04/1989

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  1. Your questions: 1) Can you take physical delivery? No. These are most likely cash settled. So every period, Fairfax will get paid in cash (less financing fees) for the positive performance on the notional amount from the counterparty. If performance is negative for the reference period, Fairfax would pay the cash to the counterparty. 2) What happens if it's a grower? There are two types of swaps: fixed notional and floating notional. Fixed notional mean the notional remains the same at the end of the reference period. In the example of $10,000,000 in notional going up 10% during the reference period, Fairfax would receive $1,000,000 cash (less short-term financing fees) and the notional would remain at $10,000,000 for the next period's performance calculation. If Fairfax wanted to increase exposure, a) they could renegotiate the notional at the end of an observation period b) buy more swaps from a different counterparty or c) use the $1,000,000 in cash to repurchase physical shares Floating notional means the notional gets adjusted for performance at the end of each reference period. In the same example as above, Fairfax would still receive the $1,000,000 in cash, but the notional for the next period would be adjusted to $11,000,000 and all performance and financing fees would calculated off that $11,000,000 figure in the next period. Negative performance would reduce the notional. This would more closely replicate ownership in the underlying stock and Fairfax would NOT have to trade to increase economic exposure as Fairfax's price rises unless if they wanted to. We should be able to figure out which Fairfax has simply from the disclosures of P/L over the time period, but I haven't dug into those details to try to back into this yet. 3) Fees? As referenced above, typically a short-term financing fee. Most of the time reference periods are 1- or 3- months in duration so the fees would typically be a benchmark rate like 1-month LIBOR or 3-month LIBOR plus a spread for the market maker. The fees would literally be a fraction of a percent given where rates are today.
  2. I have a large portion of my account in FFH and so obviously trust Prem to an extent and I'm not trying to imply he ISN'T trustworthy with the following. But foregoing selling BB has nothing to do with integrity. I mean this is the same company, and the same investment, that they publicly announced they'd take private and then bailed on doing so. Where was their integrity then? That, along with the Fibrek examples discussed elsewhere, have demonstrated that FFH doesn't believe it owes anything to external managers or the minority shareholders that invest alongside it. I'm not saying that is a bad thing. Most companies operate like this and FFH's only legal duty is to its own shareholders. Just pointing out it is NOT a distinguishing feature as you imply and that it surely can't be the reason they've chosen not to sell as it would be at odds with their history.
  3. Increased FFH by ~25%. This thing should be at $600-700/share USD IMO.
  4. Who knows. The gap has been there since pre-covid when BV was estimated to be ~$16-17 and shares traded for $12-13. I'm tendering my shares at various strikes with the hope the share price remains flattish below those strikes and I can buy the position back. I only have the confidence to do this because the discount has been so persistent.
  5. I honestly think this is the problem. He's too close to it. He's seen opportunity in it for over a decade and it's failed to deliver. Time to cut the losses. Wish he'd resign from the board and find the most advantageous way to exit the equity position. I'm fine with them holding the converts, but at least get out of the stock!
  6. Now watch - it'll trade flat tomorrow and be up 5% on Monday/Tuesday.
  7. This is true. I did this exact thing myself and am saving over $500/month from it. But even many of my coworkers in finance don't think this way. The two colleagues on my team hadn't even considered refinancing until I mentioned how much I had saved doing so myself. My guess is that a minority of homeowners will take advantage of this. It will still be lasting stimulus - but largely insubstantial in the grand scheme of removal of ongoing stimulus measured in trillions. Also, from a GDP perspective, you're just moving buckets. Whether that money goes to a mortgage servicer or bank to be spent on dividends, buybacks, wages, bonuses, etc that then get spent in the economy OR goes to the consumer - it's mostly zero sum. The consumer will have a higher multiplier, so it'll be a small positive impact, but it's not as if that money wasn't going to be earned/spent elsewhere otherwise.
  8. It's behind a paywall so I can't read what the article is saying. As far as agreeing or disagreeing with Wabuffo - I'm afraid I can't say one which way or another. I've read most of his posts, but I just don't quite understand enough to agree or disagree with them. My rates trades are driven by two factors: 1) I still believe in the "lower for longer" trade in rates. None of the disinflationary/deflationary factors have fundamentally changed in the U.S. and as long as stimulus is temporary - so too will the inflation be. 2) I expect rates to move +/- 0.50% in any given 6-month period. This is historically true (though less so in the era of exceptionally low rates). The move from 9/30/2020 - 3/31/2021 was over 2x that amount and 9/30/2020 wasn't even the low in rates...they'd already come up quite a ways. Was simply too far, too fast IMO. Now that we've moved 0.50% back to the downside, within my realm of reasonability, I've closed my TLT positions. If we keep moving lower, I'll move my intermediate bonds funds to money market and will look to add PFIX or TLT put spreads to play a 0.50% rise in rates over the next 6-months.
  9. Yes. Any regular dividends reduce the price and make it more likely to hit in your strike. But theoretically the markets are aware and price the puts accordingly. I used TLT call spreads to play the drop in rates. I have considered using PFIX to play a potential rise in rates. I don't know how the leverage compared to TLT puts, but I'd imagine it's somewhat comparable.
  10. I'm curious if the income is still considered "passive" if Elkann sits on the board and has acted as CEO in the past? I get the overall tests, but Elkann is quite a bit more involved with his portfolio of investments than, say, someone like Buffett is. To call the gains/income from these investments "passive" undersells his involvement and influence. I would have to think that some consideration is given to his involvement on board seats, Chairmanships, and prior executive positions within some of these companies instead of just blindly applying a % rule that is impacted by a merger that HE negotiated....
  11. LOL!I mean don't get me wrong. There's been plenty of dogs over the years. There's also been plenty of home-runs. We spend way more time focusing on the dogs here which is the only reason I brought up the converts as being brilliant. I view Prem similarly to Bill Ackman - each one is swinging for home runs instead of base hits. Ackman had a multi-year stretch (2012 - 2016 ish) where multiple large and public bets failed to work out (JC Penney, Herbalife, and Valeant). But in late 2016 he hit his stride, basically called the bottom on Chipotle and has been hitting home runs since. The results are a little less clear with Prem, but it seems to me that a year or two ago, we began moving more towards home runs (Digit, Stelco, insurance subs, Atlas, BB converts re-strike) and away from strike outs (short-TRS 'hedges', Blackberry, Resolute, etc.). Maybe I'm wrong, but I anticipate we'll be back to 1.2 - 1.3x book value within 2 years and that the book value will be relatively elevated from what it is today. I'm here for that expected ~50%+ swing on top of the the ~40% i've already captured.
  12. It is amazing to see how robust GOOG has been through this entire pandemic given that the travel industry was one of their biggest, if not the biggest, advertiser. Its mind boggling to see their results up so massively knowing that there has been very real, very long-term damage done to that sector. I bought Google in the bust of 2009 and rode it up and was very happy to do so. I thought about doing it again this time around, but couldn't get over my concerns that there would be moderate impairment in both their advertising customer base and the consumers who consume the advertisements. It seems I was very clearly wrong.
  13. I tend to agree with this too. Market is indiscriminately selling them because the biggest piece of the earnings pie (interest on their float) is constrained in a low rate environment. This whole "well, the market is justified in hating Prem" explanation would make A LOT more sense if it had traded for a discount to book for the last 5-years. But it hasn't. It traded at a reasonable premium to book in 2018/2019 with the same Prem, the same hindsight, and the same mistakes. I pointed out at that time that the math was hard to make sense of unless if you had unrealistic projections of the returns they'd earn on their equities and debt investments. Here we are 3-years later. Book value has caught up to the excitement that was priced in back in 2018/2019. We've had a free look at the growth of Digit and the other Indian investments which are doing phenomenally. Insurance subs are improving and Fairfax owns more of them today setting up a long-term sustained improvement in earnings power. And while I don't believe rates are about to sky rocket, I think the likelihood of treasury rates heading higher from 1.2% is quite a bit higher than it was at 3.25% back in 2018. And on top of that, instead of paying 1.2-1.3x book value (IIRC), you get it all for 0.6 - 0.8x book value if you've been acquiring for the last 12-18 months. Seems to me it's not Prem that the market is discounting. Mr. Market just gets too excited, or too dejected, on interest rates at exactly the wrong times. I would hope this would be the case, but then remember that they closed out their duration bet in 2016 thinking Donald Trump would lead growth massively higher. They don't have much life left on the deflation swaps and they've sworn off shorting meaning if it's a deflationary bust they likely won't benefit much at all. Beyond their superb bond management in general, I don't think there is much else to hang our hat on here for them to outperform in deflationary and/or low rate environment unless if they were to do another immediate about face with there investment policies.
  14. I mean, I get your point and don't disagree that Buffett may be better at it, but this is pretty close to what he did with holding Coke back in its heyday at a 40x PE. He got to collect the dividends, but the price was flat-to-down for the 15-years that followed and he held it. I think BB was a mistake. Admitted as much myself and sold my position after BB10 was a flop. But I think the convertibles were brilliant and the recent roll of them even more so. IF we make money on this trade after all of this time, it will only be because of those convertible bonds. Now, were those convertible bonds better than the alternatives? I don't know. I have no clue what Prem would have done with the money otherwise.
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