TwoCitiesCapital

Ha ha: I was wondering how many days of red screens it would take for this thread to fire up again. But I do agree. WSBASE dipping, all sorts of pieces of data pointing to an economic slowdown, rates rising (although my guess is they stop here). Then again: some evidence of rising wages, and eventually commodities get low enough that people start buying things. Who knows. Either way, can't be a bad time for Fairfax's derivatives book with deflation fears rising and the Russell teetering on the brink of technical bear market territory (down 195% from the highs). I wasn't firing this thread up due to the market declines. It was prompted by the article suggesting that there's more to the slow-down than simply energy and economists can no longer hide behind winter weather that happens nearly every winter... If we can only get 0.5% when times are "good", I'm pretty sure you can get sustained negative prints for a year or two minimum of you have a recession of any significance. I tend to think the stock market will go down as well, but my expectations for the stock market are removed from that of the expectations for the economy which is more impactful for the deflation hedges. I think stocks are likely to go down recession or not.

In general, I prefer buybacks/retained earnings to dividends given the tax treatment. That said, most of my dividend paying stocks are in tax-free/tax-deferred accounts so the tax penalty doesn't affect me outside of foreign withholding taxes...so in practice I'm generally agnostic, but do like receiving them as markets are falling as it allows me to reinvest and pick up more shares without having to trust that the management will be making smart investments.

http://www.bloomberg.com/news/articles/2016-01-11/bank-of-america-rail-traffic-is-saying-something-worrying-about-the-u-s-economy Rail activity suggests U.S. economy is slowing down. Even outside of oil/energy/industrial volumes. What happens when you have a recession with CPI already printing paltry inflation of just 0.5% YOY in November?

It was a little more than $250 cost upfront, but I'm definitely enjoying the fruits/benefits of upgrading to the Platinum American Express card. It was $450 up front membership fee, but I've made more than that back in in refunds/discounts that they give me for things that I happened to be buying anyways and I've only had the card for 4 months. Looks like I'm going to get paid quite a bit this year for taking the opportunity to upgrade.

All things being equal - the average age of the entire fleet would increase by 1 year every year. Each year ~17M old cars will come out of the fleet as they are retired and 17M new cars will be added - but that's still only 34M vehicles acting towards bringing down the average while the remaining 221M act to take it up by a year. It makes sense that the average age is still rising despite new car sales given this dynamic. You'd need to get to the point where we are seeing signifcantly more sales/retirements to start bringing that average down.

Dalio is brilliant - and he's been concerned that we're coming to the end of a long-term debt cycle and that people are too focused on the short-term debt cycle. Oil isn't the problem. Oil is a symptom. Oil prices were artificially propped up by a weak dollar which was held down by artificially low interest rates forcing people into riskier assets like commodities, EM, etc. etc. etc. The high oil prices drove a lot of investment into the area as new technology was discovered that could reach previously unreachable oil for singificantly cheaper than the current cost. That drove over/malinvestment into energy which increased supply causing a potential a glut. The glut was solidified when OPEC refused to cede market share. You can't look at all commodities being a 3-4 year bear market, except oil, and then suggest that when oil prices fell that they were the cause of the problem. All commodities have been falling for years because they are all affected by the problem - oversupply and malinvestment. It's funny that a few months ago people were expecting lower oil prices to be additive to GDP. Now low oil prices threaten the economy? Here's the deal - consumer behaviors have changed. This is what happens after deep crisis - this is why you need one every 3 generations or so because people forget the lessons learned in the first one. Consumers, who used to spend every penny they earned plus some, no longer spend that. Now they take the majority of their incremental savings from lower prices and use it to continue to deleverage. Raising the price of oil doesn't change that - it would simply delay the catalyst that will eventually occur to cause the system to reset and wipe out the poor investments. We've been delaying that catalyst for 8 years now. Maybe we find a way to delay it more, but a day of reckoning will occur and the longer it takes to get here, the bigger it will be.

Increased my position in ATUSF by 15% around $6.00. I just don't understand this market...

Shorted a tiny amount of NFLX as an auxiliary to my much, much larger SPY short. Just wanted more exposure to the expensive names in the index than straight up SPY gives me. Trying to sell puts on BBRY and purchase PDER but none of my limit orders are getting hit yet.

+1 Service sector doesn't require much in the way of a college education and we're a nation built on services telling everyone to go to college or they're stupid and looked down upon. I know individuals who went into trades right out of HS and they're doing better than A LOT of my college grad friends. Maybe the college grads catch up in 20 years after student loans are payed off. Maybe they don't. It's a coin toss. For those who do need college, I'd also argue that the value is likely to be found in the lower/mid-tier schools and not in the high-end, but it's going to require a lot more work on your part to make that investment pay. I went to school in MS and now work in NYC - my discretionary income has been significantly higher than the majority of my friends who have salaries that are significantly higher because I'm not paying 2Gs a month in student loans and was in a lower tax bracket. Also, the gap between salaries has generally been narrowing every year for the 4-5 years I have been here as I'm nearly making double my starting salary 4 years ago.

I think the times were different when he did it. He had an information advantage that doesn't exist today. Genessee Gas was one IIRC, selling for $50 with $200 in cash. He did the legwork that nobody else did to find these gems. Today every stock website in the world makes it very easy to find this kind of thing. In the '50's this worked like a charm for him but today the net cash companies don't always work out. But I think you're right that he wouldn't do that today but if he went back in time he would do the exact same thing. I would assume Buffett of 2016 would be a micro/small cap investor looking for a fantastic CEO building a business to last decades. Edit: Actually a quick Google search found this from the '99 meeting notes on doing it the same way or doing it different. I think it was in his partnership letters when he was dissolving the funds that he mentioned that he was intending to participate in a new form of investment that had similar amounts of risk and lower levels of return but did not require him to be fully focused on finding the absolute cheapest/best bargains available and would still have suitable returns. Probably right around the time he started making the bulk of his investments through Berkshire Hathaway.

I think more people are in your boat than you realize. I'm going to stick with my deflationary thesis - every year we've inched closer and closer to deflation despite the supposed recovery, trillions in stimulus, etc. and yet people still seem to think it's a possibility that is very var removed from reality. I think it's much more likely than most seem to and that the last five years have only served as confirmation of the thesis. To be more localized, I'd suggest that NYC real estate is due for a nasty correction. I understand it could become the next London, but prices have outpaced wages by a significant amount for a significant time. My friends look at me like I'm crazy when I say it - they can't imagine a better investment than buying their own apartment in NYC because the prices "have never gone down" or that "everyone wants to live here." It just seems like prices seem generally unsustainable for the local population but the local population justifies it with the flawed reasoning that doesn't necessarily support the current prices. Seems like the tinder is there - just waiting for a spark. Totally agree with you on NYC real estate. Cap rates are way too low. Similar bubble dynamics at work. The great interest rate reset (when interest rates rise) should be interesting. Very high end NYC real estate has already cracked (~$10M and up) over the last year and $3M+ is also not selling as well. There already has been a correction in a large part of the market. I've seen different sources come to different conclusions. I've seen articles talking about how high-end apartments sit for months before selling and that there is a general glut at the high-end, but then I also see articles that point that point to record sales prices for individual units and that average sales prices are also up due to the price/volume at the upper end. I haven't dug into the data to figure out how both can be true, but it's not clear to me, or anyone else I know, that there's been a large correction anywhere yet...just slowness in selling some units. Average sales prices and average rents were both up in 2015 - significantly over 2014. If you have seen otherwise, than I would be glad to see you source and become the prophet with 20/20 hindsight. Not looking to derail the thread though so we can move this to PM if you'd like.

This article nicly describes the thinking behind the limited option selling I have ever done. Providing insurance for someone else and being fine if put to because I wanted to own the company in the first place and this gets me in at a discount to the share price at the point I decided I wanted to own the company. I will tell you that so far I have been put to since I have sold the most put options on PWE as it declined. Psychologically that's a hard pill to swallow as I have been put to at $5 when the share price is 90 cents. But I have an idea that the emotional difficulty is what makes most people shy away from it. Then again maybe I am just delusional. I have a question from those who have more experience. I have seen good arguments that when buying call options you commonly get better returns by going with the long term leaps. But when you sell puts is it generally better to stick with the short term or the long term duration? Depends on what you're purpose for selling the puts is, right? If you're selling to capture the decay of the value of the option, you want short dated options where theta is high so the option is worthless quickly. If you're selling to enter the position at a discount, selling longer-dated options can get you a larger discount by increasing your premium.

Margins will revert like they always have. It appears to have begun, but we'll see. Also, I'd be willing to bet that taxes go up in the future - it's insane to have record levels of deficit/debt while maintaining some of the lowest tax rates we've seen in modern history. I'm generally not for higher taxes, but it's the rational response to the current budget crisis and it will likely hit high earners disproportionately. NYC has a high proportion of "high earners", even if you are just middle class in the city. So, wages haven't kept up with prices, taxes likely to go up on a number of those same individuals at some point, and corporate profits unlikely to last. It's just a guess though - I'm not actively shorting NYC real estate or anything. Just paying rent and using Airbnb to help cover that so my net exposure to prices in NYC, for the time being, is zero. Really, the only thing that I see that would prevent this is if foreign money continues to flow in and buy the properties at any price. Even that looks like it might be changing with the city considering increased property taxes on properties vacant for the majority of the year and the increased capital controls that appear to be taking hold in places like Russia and China.

I think more people are in your boat than you realize. I'm going to stick with my deflationary thesis - every year we've inched closer and closer to deflation despite the supposed recovery, trillions in stimulus, etc. and yet people still seem to think it's a possibility that is very var removed from reality. I think it's much more likely than most seem to and that the last five years have only served as confirmation of the thesis. To be more localized, I'd suggest that NYC real estate is due for a nasty correction. I understand it could become the next London, but prices have outpaced wages by a significant amount for a significant time. My friends look at me like I'm crazy when I say it - they can't imagine a better investment than buying their own apartment in NYC because the prices "have never gone down" or that "everyone wants to live here." It just seems like prices seem generally unsustainable for the local population but the local population justifies it with the flawed reasoning that doesn't necessarily support the current prices. Seems like the tinder is there - just waiting for a spark.

I was hoping for a bump this year given the acquisition of BRIT and the strength of underwriting, but maybe next year...2% isn't an awful yield, just has been the same for the last 6 years. Maybe 2016 is the 7th year of lean dividends before we feast

+1 More likely Klarman than Burry, but I wouldn't mind having money with both. Also, I'll add Fairfax to the list so I do have a substantial amount of my networth tied up in them.

I can't speak to this bond specifically, but credit spreads as a whole have blown out and are some of the highest potential returns for credit in years.

I haven't tried to figure out what my return is for the year, but abysmal comes to mind. I'm down some 30% in my passive low-P/B portfolio which is largely U.S. resource companies. I was helped by quite a few options sales which probably increased returns by 5-7%. Probably somewhere close to -20% in my regular accounts due to heavy allocations to Altius and Santander paired with near-total losses in some much smaller positions in Eurobank and drybulk shipping. All in all, a very disappointing year. Was heavy into Europe and EM going into the year and added heavy commodity exposure around March. Ultimately, what was already cheap got significantly cheaper and I continued to add to exposure through the year. We'll see if next year proves to be a rebound for commodities and emerging markets, but otherwise I'll probably be in the tank again.

This is probably the better route - Fairfax is like Buffett in that it appears to be relatively hands off. I doubt this feedback would be passed along by them.

Not to derail the topic, and not that I necessarily agree with a pact with Iran, but this story seems like it's been blown up and exaggerated by the news sources I've read. The missiles were shot in the opposite direction of the U.S. carrier and they were given warning by the Iranian navy that a live-fire exercise would be occurring. Obviously tensions would be high with live fire in that proximity, and I don't know the protocol for distance before testing, but it doesn't appear that the U.S. carrier was ever in danger, or fired upon, as many of the articles seem to insinuate. Anyways, I appreciate your updates and commentary on oil inventories. Thanks for your contribution!

Its exactly the same as selling a put option, so to make it easier think about the up and downside of that. You are an insurance provider, in the long run you will make a small profit taxed at short term rates. Not a good business to be in, and a lot of people overestimate the returns and underestimate the risks, which leads to leverage and a black swan event erasing all your profits and some more. Read some books of Nassim Taleb. I regularly write calls against the more volatile options in my tax-free accounts when there's a large upswing - say after earnings or something. I generally try to shoot for 1-2 month options that pay a minimum of 1-1.5% per month but have regularly found opportunities to sell covered calls making 2-3% a month that have generally turned out pretty well. So, just wait until you're being very well compensated for the elevated volatility and limit it to tax-free/tax-deferred accounts - but it's better with individual names because you can get higher premiums while having a better understanding of the underlying value.

Thanks for the feedback, but there is already a thread on this not even half the page down. Let's try to keep it all in there to keep the forum cleaner, eh?

Had no idea! Haha

I've been thinking about HY, but haven't taken the plunge yet. I don't think we've seen capitulation in the debt markets yet. I'm waiting for the waive of defaults from prolonged $30-$40 oil to creep through - then I want to pick up HY. Close ended funds at a 15-20% discount seem reasonable picks at this point, but for most anything else I'm still waiting for it to get worse before allocating to fixed income products in that area. Brazil might be a place to look at yield too. I think they're problems are more manageable than much of the energy complex's given that much of it is political in nature and you can get double-digit yields in the sovereigns if you accept currency risk - which for a currency that has collapsed in value by 30+% this year may have largely been removed. Also, EM currencies as a whole are the most undervalued they've been since the asian currency crisis in the late 90s so it's not a bad risk to be taking. Just some thoughts on where the relative return is at...

Space elevators are probably a non-starter, neat idea though. You'd have "anchor" it in geosynchronous orbit (22,000 miles) while low earth orbit is quite a bit closer for example the ISS is at about 250 miles. You can't exactly ride the elevator up to the LEO floor and hop off either since you need horizontal speed to stay in orbit. If I were forced to bet on our next path to orbit after chemical rockets it would be a very long coil "gun" up the side of a mountain at the equator. Chemical rockets will probably still be our only ticket off this rock for the next couple decades though which is why getting their cost down is such a monumental achievement. With current technology you are correct a space elevator is not possible. I think you will see one in your lifetime however. The rail gun method will only work for cargo, never for humans. The acceleration would kill you. A coil gun is a series of railgun, each providing acceleration which could be scaled to achieve the necessary velocity over a long track theoretically making the acceleration survivable for cargo and humans. One thing everyone who's a proponent of space elevators seems to miss is this. They require an extraordinary amount of engineering and materials science to construct on Earth. If we're to the point where constructing one is a possibility, why not just build it on the moon where construction and design requirements would be orders of magnitude easier and then just use lunar resources for construction. Wouldn't the problem with any of these "static" location ideas be the non-static nature of orbits? Maybe an elevator to space would still be energy efficient even if it points you in the wrong direction and you have to traverse half the circumference of the globe to head the right direction, but I really have no idea on such things. Just seems strange to have a static elevator shaft always pointing in a single direction when the direction that goods/people would need to be heading always changes with the orbit and rotation of the earth.