TwoCitiesCapital

Since my short of NFLX had worked out pretty well as high-beta exposure to the S&P, I've decided to try it again with another momentum stock that's bounced real hard off it's recent bottoms. I shorted a very small amount of TSLA today as a high-beta exposure to SPY downside. Current short position is as follows: -7% SPY -1.5% IWM -0.7% TSLA +0.5% 1/2017 SPY puts at 140 Also sold some covered calls against BBRY, VALE, CHK after the recent rally. Had other orders out but they didn't fill :/ We'll see if this more than just a bounce.

I like how a 0.22% move is indicative of a crash. Wonder what this algorithm thought when it went ex-div at the beginning of the year...

To his credit, Dalio does advise that every investor have an allocation to gold. Who knows - which is really better? A deflationary spiral or a hyperinflationary bust?

Markets are nowhere close to pricing in deflation. We'd see equity markets fall SIGNIFICANTLY more than we have if a deflationary scare was considered to be a credible threat. Further, there are market-based indicators of inflation expectations like TIPS breakevens (the differential between TIPS yields and nominal treasuries). 10-year breakevens in the U.S. are around 1.25%. That literally means the market is pricing in 1.25% in U.S. annual inflation for the next 10 years. That is the lowest since the inception of the TIPS market (if I'm not mistaken), but it's FAR, FAR cry from pricing in actual deflation as I've seen many suggest. For some reason, people seem to think a 15% decline in an equity index and a 50 basis point rally in bond yields suggests the markets have priced in a healthy amount of deflationary fears. In reality, we'd need something on par with 2008 for a deflationary episode to be truly priced in.

I hate these articles. I saw this exact same thing in Motley fool Canada that suggested Fairfax could make 109B too - the only way that happens is if the world ends and money means nothing.... Realistically, even in a very, very favorable scenario for Fairfax, they'd only make 15-20B over the course of several years. That's assuming we get the same amount of deflation that was seen over the decade following the Great Depression. No way he makes anywhere near $109B... I think what we'll see is that he makes WAY more money from the TRS hedges than he does from the deflation swaps, but the deflation swaps could still turn out to be great investments even if they only return 1-2B given the cost basis being $650M and a current carrying value half of that. It just blows my mind how clear and open he's been with the details of these swaps and yet the media still misunderstands them years and years later. Obviously the suggested $109B gain for Fairfax, in the event of deflation, is ridiculous, but I asked myself the same question: for a given level of inflation, how much will the notional $109B return? For instance, if we get a drop to the CPI level where the positions were opened (about 2-3% below today's levels), and then another 10% drop, can we assume that we will get 10% (pre-tax) of the $109B notional exposure? In other words, is the return linear? I would assume so, but I could not find anything in Fairfax's reports that actually estimate how these things work. Brooklyinvestor (https://www.google.ca/url?sa=t&rct=j&q=&esrc=s&source=web&cd=2&cad=rja&uact=8&ved=0ahUKEwi84em8xf3KAhVovIMKHVO7CpwQFggkMAE&url=http%3A%2F%2Fbrooklyninvestor.blogspot.com%2F2015%2F01%2Fwatsas-massive-bet.html&usg=AFQjCNH7gf6kiJGUKy3Mt8ScoQ64ST4PIg&sig2=eoSYaTP3cOjT5v2el_7I3w&bvm=bv.114195076,d.amc) seems to be assuming it is linear, but doesn't say how he knows; does anyone have anything more definitive? They return 1% of notional for every 1% below the CPI strike price headline inflation is. I believe the lump sum would be paid at maturity. Both these and the TRS hedges are linear in return profile.

Fingers crossed - I imagine it'd still get caught up in a massive sell-off in which everything is liquidated indiscriminately, but the behavior we've seen YTD is suggesting this won't be a 2008 scenario where they're minting billions that you can buy for 50% off.

It's a motion asking the court to decide the case without a full trial. What would be the timeline for such a decision? Can we expect a possible near term pop before the inevitable appeal/retracement.

Maybe in Europe and EM. We're nowhere close in the U.S. VIX is only at 30, which is elevated, but not insanely so considering we're firmly in a downtrend and have fallen 15% over two months. August was more like a panic taking us down that far in just a few days - but a 15% fall over two months seems more "thoughtful" and less emotional. Now, if this accelerates like August did and we get taken down another 15% in a few days from here, I might consider covering my shorts some. Gold may be up 12% this year, but it's still down significantly from 2011 highs - just like all other commodities. Being up 12% after a 5-year bear market hardly points to a panic or a bubble in fear assets. Bank of America is down because with the yield curve getting flatter by the day, their earnings power is seriously called into question plus the concern about energy contagion have a multi-billion dollar impact on their profits/reserves. I don't think we're quite there. I imagine we'll probably take out the 10-year lows that we saw in 2012. Maybe even 10-year at 1% - though that's harder to picture. Who knows where the bottom is at in a world where central banks talk about negative rates like the concept makes any sense whatsoever. I think you're right that bonds will be a terrible investment in the long-term, but for the next 2-3 years they may still be the winners of the asset class race. if you exclude the Federal Reserve and it's $4+ trillion balance sheet, then sure. I'm not so certain it's wise to ignore them though. They may have to reach a point of capitulation too given they're such a large player in the markets.

I hate these articles. I saw this exact same thing in Motley fool Canada that suggested Fairfax could make 109B too - the only way that happens is if the world ends and money means nothing.... Realistically, even in a very, very favorable scenario for Fairfax, they'd only make 15-20B over the course of several years. That's assuming we get the same amount of deflation that was seen over the decade following the Great Depression. No way he makes anywhere near $109B... I think what we'll see is that he makes WAY more money from the TRS hedges than he does from the deflation swaps, but the deflation swaps could still turn out to be great investments even if they only return 1-2B given the cost basis being $650M and a current carrying value half of that. It just blows my mind how clear and open he's been with the details of these swaps and yet the media still misunderstands them years and years later. The financial post article is the same article as Motley Fool. The Financial Post is a shadow of its former self, years ago. Mostly regurgitated hooey from Bloomberg these days. I sent the dude an e-mail. Maybe we can get this corrected :/

I hate these articles. I saw this exact same thing in Motley fool Canada that suggested Fairfax could make 109B too - the only way that happens is if the world ends and money means nothing.... Realistically, even in a very, very favorable scenario for Fairfax, they'd only make 15-20B over the course of several years. That's assuming we get the same amount of deflation that was seen over the decade following the Great Depression. No way he makes anywhere near $109B... I think what we'll see is that he makes WAY more money from the TRS hedges than he does from the deflation swaps, but the deflation swaps could still turn out to be great investments even if they only return 1-2B given the cost basis being $650M and a current carrying value half of that. It just blows my mind how clear and open he's been with the details of these swaps and yet the media still misunderstands them years and years later.

Anyone know off the top of their heads the breakout of their bond portfolio. How much in Treasuries, muni's, etc.? I know that falling yields is obviously good, but trying to figure out how much widening muni/credit spreads are going to offset that. Thanks!

Look at the return on U.S. banks from pre-2008 to now and ask yourself if the gov't stepping in really means much in the way of putting a floor on your prospective losses...

There's no logical reason to waste energy via emotions on what should or should not be. I have my large position and will wait for the results, all the while sparing myself (as best as I can) from the emotional torture that most investors/traders willingly subject themselves to. I'm trying to be stoic as well. It's been hard not to increase my position with the new flow of information and the massive drop in price, but I was probably already over-allocated given the risk and will still make out handsomely if we're right so I just sit and wait....

same with EM Exactly.I'm still a net buyer every month of European and Emerging Market assets. On a CAPE basis, EM has only been cheaper like 4% of the time. The U.S. on the other hand is the 94th percentile of its valuation range on a CAPE basis...

I'm not necessarily forecasting another 16 years of the same, but I'm saying that's the result of the 2000 bubble and 2015 was more expensive on a general market level. Maybe it's not another 16 years of 0 returns. Another 8-10 would still be terrible. Especially since investors may not be able to hide out in bonds this time around given that yields are negative in much of the short-to-intermediate universe.

Food for thought - AXP now trades for the same price it traded for back in 2000. That's 16 years of 0 price return and a paltry dividend. It's 10% below where it traded in 2007. A negative return price return over 8 years! That's what equity bubbles do - destroy value measured in decades. The general market in 2015 was more expensive than the general market was in 2000... You could say I'm cherry picking a top - but it's to prove a point. Valuations matter and the CAPE was screaming terrible value long-before 2000 and not just for tech. Sure, you can make the argument that anyone who watches CAPE missed the entire rally from 2009. Realistically, if they followed CAPE religiously, they've missed everything since 2000 and did way better in bonds than equity holders did over that entire 16 year period. I don't think they'd be too mad about that. Missing the rally isn't that bad when you miss the subsequent bust as well. Also, we likely haven't seen equity market lows because we haven't seen a recession or multiple contraction yet. Further, AXP isn't the only company exhibiting this type of weakness. Energy is there. Materials are there. Retail is there. We're back to registering 0 price returns over a decade plus for many equities AFTER a 7-year bull market that saw values more than triple and only a 12% correction in the index? Something seems seriously wrong with that picture. You can look at this and twist it to be very bullish or see it for what I believe it is which is a warning sign. If equities could have gone nowhere for 16 years since 2000, and the general market is more expensive than it was in 2000, then we could go easily another 16 years with 0 returns again for the general market. I doubt that we get to those 0 returns by staying flat for the next decade plus...

Covered my short of NFLX for a 23% gain in a little over a month. Still think it goes lower from here, but covering to lock-in some profits just in case I'm wrong to be bearish here. Added 15% to my FCAU. Reinvested dividend in SAN to increase exposure by ~1%.

Quite. It's absurd to believe that P/normalised earnings on an individual stock basis might be meaningful (and as value investors we all believe that) but P/normalised earnings for the market isn't. If anything, the later should be MORE useful as it's an average and the idiosyncratic risks would largely cancel out to give you a more meaningful understanding of the valuation of the market. I understand that the CAPE is a terrible timing metric - probably for many of the flawed assumptions pointed out in that article. But what I can't wrap my head around is that every single long-term indicator, that has shown past predictive power for 7 and 10 year forward returns, suggests that we are significantly over valued and at risk of a 50-70% drop just to reach longer-term averages (without assuming a recession, economic destruction, etc). and that we write it off because what is meaningful over a 7-10 year period in markets doesn't appear to be meaningful over a 30 year period in markets? I'll give you some evidence why it may not be meaningful over 30 years - because we have a Federal Reserve that manipulates markets and blows bubble after bubble to prevent the damage from the last one bursting, compounding the damage that each future bubble causes. At the valuations in 2000, 30-year forward returns would have probably been pretty terrible if we just left things alone, but instead the Federal Reserve blew the real estate bubble to preserve asset values and now we have a risk-asset bubble that is being blown. If this thing collapses by 50-70%, you can be damn sure the 30-year returns from 2000 will still be terrible and that the model will fit again over a 30-year time frame, but we're just not there yet. Also, the article suggests that the data from 30-year periods should be a tighter fit because it averages out the extremes, but I don't know if I buy that either. The CAPE is already supposed to be smoothing out extremes in valuations/profits so to do so again by extending the duration seems like it might be overkill. Further, there are far fewer 30-year periods witnessed than 10-year periods suggesting that a single occurrence of the model being "wrong" has a much larger impact on the overall fit and reliability than does a 10-year period in which it was "wrong." Granted, it should have a larger impact if the model was wrong over a 30-year period, but my point is that you have 1/3 the data points and that the current impact may be very, very exaggerated.

Will read - but it is curious that Tobin's Q and other basic measures of valuation have similar back-tested predictive records. If they don't, then starting valuation has nothing to do with future returns, in aggregate. Do we really believe that? Are we really suggesting that because CAPE isn't relevant over a 30-year period that it's not relevant over a 7-10 year period either? I guess since stocks have gone up for the last 100 years, there's no reason to every worry about valuation or potential down years.

Actually, I believe the way he positioned that trade was in the currency options. He said there was two ways it could play out - bond yields would explode or the currency would collapse and he said the later was more likely given the central banks intervention. The JPY is down ~40% since it's highs in 2013 and Japan still can't get any inflation, still has a massive debt burden to deal with, still can't get any growth, and is still facing a demographic cliff...so it probably has further to go. All said, I'd say he was right. No idea how much he made on the trade though.

Nah. I used to work there - that's just how things are and the media is likely blowing it way out of proportion. There were regular internal spats, even high up, when I was there and they were generally resolved reasonably.

Count it.

There's not enough negativity yet. This thread is an example. Exactly. Alright, I'll bite. Agreed on cycles and this one has already been longer than most. Economically speaking, I don't expect the U.S. to fall off a cliff, but I do expect U.S. equities to fall off a cliff. The last cycle for U.S. equity prices wasn't really that deep considering the end-point was the long-term average and NOT below it. Further, it wasn't anywhere close to where it would need to be to put longer term valuation metrics anywhere near where prior secular bull markets have started. Because that excess capacity is indicative of a demand problem and the very real potential for a deflationary cycle - not good for equities either. Agreed on your last point, but I do expect a recession. The majority of the growth in U.S. GDP since the crisis has been in shale states - you remove that growth which has been crippled and the paltry GDP figures look even worse before you even consider a contraction in those states. Further, U.S. consumers aren't spending that windfall as is evident from the increase in the savings rate. Deleveraging continues and the growth rate going forward will be lower than the low figures we were already seeing. You mean like all that excess capacity you mentioned above? No deleveraging took place - it was simply shifted onto public balance sheets instead of private balance sheets. Sure, that lowers the interest burden, but it doesn't actually result in a deleveraging and the policy for most everyone has been to increase this burden over past several years. Corporations have also re-levered in the buyback craze that defined the last 18-24 months. Yes, because of the overcapacity and demand problem mentioned above. Still deflationary. U.S. equity valuations are still basically near the most extreme levels they've seen in the history of the U.S. equity markets. There are sub-sectors that appear to be getting more attractive, but that is because the profits are threatened in this type of environment so they may not be real deals yet. Any long-term valuation metric still showing that we have much, much further to go to the downside before the excess in the financial markets is wiped out. Further, while I understand the logic and reasoning behind comparing equity multiples to interest rates, the truth is that they're really not that correlated. When did equities hit their lowest multiple - in the midst of the great depression and what were interest rates at then? What about in the depths of the 2008/2009 GFC? What about in any recession. While the levels should be comparable, history suggests that it's more the direction in interest rates/inflation that direct the equity market and not the absolute level of interest rates. Use this knowledge to your advantage. None of what impacts the "real economy" matters because equity markets are actually largely uncorrelated from the real economy in the short-to-medium term. Average equity returns in years with negative GDP growth rates are actually higher than average returns in years with positive growth rates. Go figure. The one thing that matters the most and trumps all other considerations has continued to be the value you buy the equities at - if equities are good value, then buy them. If they're not, then sell them. You can basically ignore what the "real economy" is doing in those scenarios. Equities are, and have been, expensive and a small decline that takes us back to mid-2014 levels hasn't really changed that much. +1. Exactly. Nowhere near the bottom of this cycle.

I'm pleasantly surprised that Fairfax has been totally immune to recent market weakness. I knew it was a possibility, but I thought it would be more likely that it would decline with the general market as it did in 2008. I'm waiting for the rest of the quarter to play out and to get the end results of what may be a phenomenal quarter, but I actually may end up reducing my holdings a little bit after that to re-balance the portfolio more towards the names that have been absolutely trashed in the last 4-6 months.

That 299M is an understatement. It's closer to $4.3 billion in equity index swaps with another 1.7B in single name swaps. Now way he'd generate $600M in gains on a 300M position. Glad to see he's getting some recognition though now that it appears 2016 may move very favorably in his direction after years of being "wrong." Now way he generated $600M in gains off of 300M in swaps. Also, it depends on how well the deflation swaps and insurance do in Q1, but I'm beginning to think this may be a billion dollar quarter for him.