TwoCitiesCapital

Didn't miss anything negative. Just Chapter 8 of The Intelligent Investor playing out. Have been trying to pick some up - can't get a fill at the prices I want though :/

I think they say that because it's abused by companies as opposed to judging its overall usefulness. It's like when analysts say "excluding energy, everything looks good." No shit. It's always the case that everything looks good if you ignore all of the bad. EBITDA allows people to ignore all of the bad and companies abuse that option. GAAP has it's own problems, but at least it generally tries to not mislead people. EBITDA has the potential to ignore the replacement costs of running a business. Pro-forma earnings ignores everything that went bad in the quarter. Adjusted EBITDA ignores both. Etc. etc. etc.

SU-24 is a variable wing ground attack aircraft. The variable wing aspect is the only similarity with the F-14 flown by Tom Cruise in Top Gun. A Su-24 is more like an A-6 Intruder or an F-111 Ardvark. These aircraft are ground attack and electronic warfare aircraft...they are not intended to operate in contested airspace, without fighter cover. A Su-24 Fencer would not stand a chance in just about any scenario against an F-16. You should give a fuck now. Russia has been predominantly operating Su-24's and Su-25's in Syrian airspace. These are ground attack aircraft. If Russia was attempting to pick a fight with Turkey, they would be operating these aircraft real close to Turkish airspace in conjunction with cover from Su-30's. The Su-30 would make it a pretty interesting fight, and that type of dog fight would likely cause Turkey to activate the NATO mutual defense clause, drawing other NATO countries into their fight with Russia. How do you think that would work out for everyone? That later point is my concern. Regional instability pulls larger powers in with conflicting interests and those larger powers clash. No different than world war II where everyone from Russia, Japan, the U.S., and Norther Africa got involved with a war that was mostly for Europe. I'm not saying that this will be the beginning of that war, but I do fear it has the potential to escalate things until we get to that point. I posted on Facebook yesterday that I feared that we may have just witnessed the assassination of the Archduke Ferdinand. We'll see if things escalate or every keeps their heads cool and de-escalates the situation, but last I knew, Russia was sending in warships to the area to provide cover and the U.S. and French were discussing doing the same...

Hold on to your hats! Merk, anything we dont already know in the article? It's this article in print http://fortune.com/2015/11/13/fannie-mae-freddie-mac-nationalize-housing-finance/ ahh its that article....l. This will be in every newsstand and every book store at every commuter station and airport in america....people will notice the headline when they get bored waiting for their departure. Yea, and for those who care, probably the Govt will gain their support vs. the hedge funds. Let's hope that's the case. The price of the stocks get driven downward on the negative sentiment, and we can pick up more shares waiting for a logical judge to rule on the matter.

I don't think there is anything defensible about current U.S. foreign policy - especially in the Middle East. We're arming people in one country and blowing up those same people in another country. We've been at war for decades with extremist groups in the Middle East, and now we're arming individuals connected with those same groups to help us fight the very same dictators that we armed and funded decades ago. We claim that we're there as a force for democracy to save the innocent civilians, but then are responsible for more innocent civilian deaths than terrorist groups (also, see the bombing of the Doctor's Without Borders facility). Of course, this follows a decade of other similar blunders - like declaring war on Iraq for housing terrorists cells and WMDs but largely ignoring Afghanistan (where Osama was supposedly hiding) and remaining allies with Saudi Arabia which has been linked to funding terrorist cells.... So yea, nothing defensible about wasting trillions in taxpayer dollars to cause chaos in a region and then fight on both sides of the war. That being said, my guess is that Turkey is at fault here. I don't necessarily support Russian actions, but they have been consistently logical in their approach to these global themes - especially regarding Syria and Ukraine. I really highly doubt that they were aggravating Turks for no real reason by flying into their air space.

+1 Looking forward to hearing your thoughts on developments as they come. Thanks for sharing!

are you actually going to do this? I would be open to it, I am not at this point in time going out to actively seek such an opportunity. Right now my life is fairly busy with 3 young kids and our spare bedroom is already occupied but an 18 year old student who's parents are abroad. So I am not seeking it out but if the opportunity sought me out I would see if we could accommodate them. The government might have something to say about it though. These Groups Have An Idea To Help Syrian Refugees: Let People Sponsor Them "Every single day we get phone calls from Americans who want to privately sponsor a refugee," said Omar Hossino of the Syrian American Council. "But since the private sponsorship is not legal, it's not an option, the government doesn't permit that, they're unable to do that." I think the problem is that the Republicans don't want the refugees here at all and the Democrats would rather funnel them into the welfare system where they will become multigenerational dependants on government (and thus become multigenerational Democratic voters). The last thing either party wants is for private people to bring them here, sponsor them, and help them get on their feet. I'd support private sponsorship.

Nice! I've been planning on adding the same when my puts on FCAU expire.

+1 +2

I can't tell if you're being sarcastic and funny or if you just slept through August/September.

Seems to me like that's a potential opportunity and not a real risk, am i right?

I was pretty heavily in cash through August - but had to make a large withdrawal from my investment account to fund a move, so that removed about a 10% portfolio allocation to cash. Right now, I'm about 5-7% in cash with another 5% straight short of the SPY index that I've been building. The cash yield from my portfolio, including options sales, is around 4% which mostly remains in cash as well so the cash number is growing most every month.

I liked this piece: I know that board members have done the analysis and that backtesting suggests holding cash detracts from your returns, but that doesn't make as much intuitive sense to me. I feel like once you consider reality of human emotions and etc. that you find that having a cash buffer gives you more confidence to hold onto positions as they're falling AND gives you the resources to buy more of them at those lower prices. If you buy something, it's down 50%, and you have no cash to add not only do you miss an opportunity to average down but you may also have greater aversion to further losses and may pair the position down. I would think that the average investors would fare better with a disciplined cash approach despite what the robotic back-testing suggests.

Eric, I absolutely agree with your broad point here and I do think that all multiples will compress in the next crash. I don't expect to make money in Fairfax the first 6 months of a crash. That said, I do think you're picking your dates a bit too carefully! I just (fairly randomly) chose Nov 2006-Nov 2010 to graph FFH CN, and it basically goes from bottom left to top right. The selloff starting March 08 lasted five months, took you back to where you would have been in Sept 07, and reversed rapidly. The same thing happened starting early 2009. So yes, the start of the storm felt shitty both times, and maybe that'll happen again and we'll will get a great opportunity; but all the graph really tells us is that this is a volatile stock that performed extremely well through the crisis. And we all know that what matters far more is how IV trends, and I believe FFH's IV could explode in the next crash if there is a deflationary panic. I think 2008 is not comparable to today in two ways: as soon as the next crash happens people will look to Fairfax, remembering what happened last time, which is bullish; but the starting multiple is higher, which is bearish. P People may look to Fairfax in a crash, but they will be selling none-the-less. The reason is fairly simple: the need to raise money for margin calls, and generalized panic. It absolutely will happan again. Your naive to assume otherwise. Going into March 2009 FFH dropped by 100 on the heels on extremely high earnings. I know because I was buying FFH at the time. Its posted somewhere on this board. I believe that people will see other stocks they love down 80%, and they'll dump FFH to buy those stocks. I've said this before: once you think the bottom is in, FFH is the wrong stock to own. I think they only had like 50% of their book value in stocks in March 2009, and a lot of it was stuff that wasn't all that compressed (JNJ for example). THE BIGGEST mistake I made in early 2009 was smugly believing that FFH would be backing up the truck and loading up on bargains. HARDLY! Not a single share of AXP for example. And MKL? I think the only thing they bought through the crisis was a teensy weensy bit more KMX. So look, there won't be much buying pressure on FFH stock itself if people remember what happened last time. But that was my mistake in misreading them -- they probably were uneasy after dropping their hedges and/or couldn't add more risk being an insurance company. Yes, you have said this before. I was buying the Leaps back then. FFh did some merchant banking as I recollect including H&R Reit, and Mullen Group. Most of my money in spring 2009 was going into SBux, GE, Axp, wfc, hd, and a couple of others. The others were much cheaper than FFH in March/ April 2009. Which begs the question: Why hold FFh at all? Returns now are middlng, and getting to the bogey of 15% for any further 10 year period is unlikely. Please dont take it that I hate the company at all. Its just there better investments. I have more confidence in understanding what value accrues to FFH in a deflationary scenario. If we get mass deflation, it's hard for me to work that through how it would directly impact companies based on the changes in prices but also the potential changes in consumer psyche. Also, it'd be hard to know how much deflation we'd get to know when a good multiple could be had on the stocks. With Fairfax I know that if we get deflation that it will directly benefit their hedges by a calculable amount. It will impact their bonds by estimable amount. I don't really care about the equities because they'd largely be hedged. So the only unknown for me is the insurance business. I'm ok with that uncertainty with the certainty surrounding bonds/hedges/CPIs linked derivatives. I don't expect Fairfax to be the best investment at the top or the bottom. I expect it to be a decent investment all the way through that doesn't require constant monitoring from me to ensure that it remains that way.

Doubled my SPY short today. Also sold FCAU 11/20/15 PUTS @12 for $0.60. Sold BBRY 11/20/15 PUTS @ $7 for $0.67. sold WFM 11/20/15 CALLS @ 35 for $0.45 Sold ACI 11/20/15 PUTS @ 2 for $0.30 Last set of puts worked out pretty well. Sold 10/16 puts @ 4 for $1.00 when it was at $6+. Incredible that the stock can fall 50% and you still make 25% in a month by selling puts. Bankruptcy is a real risk here but selling puts is more attractive to outright equity exposure which is what my passive P/B strategy would have me doing. I think the puts are a better option for exposure at this point until the bankruptcy/debt swap issues are worked out and then I'll probably roll the exposure into equity. Sold more FCAU options. 12/18/2015 PUTS @ 15 for $0.85. Also sold CHK 12/18/2015 PUTS @ 5 for $0.21 Sold about 40% of my Posco position today after selling about 10% a week ago. I generally think I've been wrong here. China may have slowed production, but the drop in domestic demand more than compensated for that drop leaving the market still flooded with steel. Also, my sizing of the position was too large not to be reducing into some strength given how wrong I've been even if the price remains cheap :/ The proceeds pay down some margin and about half of it went into increasing my allocation to WFM by 25%. Considered options given the technical pressure I'm expecting from repurchasing 10-12% of your shares in a 6 month period but I don't have the conviction to play the short term options market and LEAPs don't give me any margin credit. WFM is now a 5% cost-basis position.

http://www.valuewalk.com/2015/11/stan-druckenmiller-dealbook/ "I'm working under the assumption that we entered a primary bear market in July"

I would agree that they'll likely fall. When investors are caught in a massive drawdown, they have two options - sell something that has fallen significantly to pay down your leverage and incur significant capital losses OR sell something that hasn't gone down as much to realize fewer gains and hold for the rebound. The only reason that I can think that may cause it to be different the next time is that people saw what happened in 2008 - they saw that Fairfax made a killing and quickly deployed those earnings into depressed asset valuations etc. to catapult it to new highs shortly thereafter. With that knowledge, if you see the exact same circumstance coming to fruition again, people may be more inclined to enter Fairfax on any weakness with the knowledge that it will likely be significantly higher soon. I think scenario two is unlikely to offset the tide of the investor exodus from forced selling and panic, but I never really know and don't try to trade around my Fairfax position much for this reason.

I don't think that's fair at all. I think the answer is far more simple than that. Fairfax wasn't buying equities, and was near fully hedged in 2014, so why would they be purchasing shares that were simply back to year end 2014 levels? I wasn't buying back in August/September. I did close out some puts and switch them to straight shorts on the S&P since volatility went so high, but I didn't buy anything. That's because I didnt find much value at the end of 2014 so I wasn't finding much value in August/September. I think it's odd to have expected them to be buying back after such a minor correction. It was barely a 10% correction. Fear of a 10% correction is not why they've been 100% equity hedged.

Just want to make sure that you're clear that they didn't close any shorts in the Q4 and only closed 100M worth sometime this year. I don't know exactly what it was, but in the past they said that they realized losses on some shorts and reduced exposure to better match the long-portfolio. I do wish there was more information on the individual name TRS - $1.6B isn't an insignificant sum of money and it would be nice to know a general view of the exposure (# of companies, breakdown of industry, etc.).

Right on the freakin' dot! Net income of $451M for the quarter. Also, looks like they provide some more information on how their shorts are positioned. Dazel was right - they're short 1.6B in notional of individual name TRS. No TRS were closed during the 3rd quarter and the realized gain seen will simply be cash-settlements that could be reversed in future quarters.

Yes, that sounds right. Although (separate discussion) I questions whether investments accounts and corporations are *net* cash-heavy. A lot of the evidence I have seen suggests otherwise. My other point would be that clearly bond, equity, and bull markets will make people feel they have 'saved' more than the cash figures alone suggest. Problem is, that can reverse. Absolutely. I think we're on the same page then. People have been saving way more heavily than they were pre-crisis. This makes the economy deflation prone. There is the possibility for a correction in financial markets, or in real economic activity, that could exacerbate the issue. I would also add that growing debt levels could hurt as well given that increased debt could lead to increased debt service with any appreciable rise in rates. It's certainly been an interesting decade and I think it will only get more interesting. I'm expecting one more large correction to shake out the excess and to really set the mood for the next generation.

Once again I agree with the thinking - although I need to think about the validity of equating M1 with savings in a QE environment. That said, there seem to be the green shoots of wage growth and that might be the start of an acceleration in confidence/money velocity/inflation. I have a huge deflation protection position in FFH (which I also expect to compound healthily in the long term regardless of whether the deflation bet works) but it's protection, not prediction. You can correct me if I am wrong, but I was pretty sure that excess reserves, which is where most of money from QE has gone, are excluded from M1 and M2 measures which should just be physical currency, demand deposits, and time deposits (maybe a few other knick-knacks here and there). So realistically, M1 and M2 should both be a measure of cash savings with M2 reflecting the larger cash positioning of a lot of investments accounts and large corporations regardless of what the Fed is doing with QE since little of that money is even finding its way into the real economy.

Completely agree. Equally, if the change turns out to be temporary, we will get an inflation. Going to be an interesting 20 years. Both measures have been declining for many years. I think we're well past the point of being able to call this temporary. The real question is when does the decline stop? When do we get to the point where people have saved enough to be comfortable to start spending a larger portion of their income again and the velocity of money stabilizes and/or grows again? That's the real question - as it stands, the increase in the M1 money supply over the past 7 years is "only" about $5,000 per person. If you were someone who was long-term unemployed, you know that $5,000 doesn't necessarily take you very far if you have kids, a house, food, and a car to pay for. If you were someone who lost your house, $5,000 may not be enough for your next down payment. If you lost 50% of your home value, $5,000 probably isn't anywhere near enough to make you feel like you're getting back to positive equity (though rising home values certainly have helped here). Of course, this is obviously extrapolating using the average figure to individual cases which is mostly inappropriate to do. In reality, these are the people savings more than $5,000 while others are hoarding less, but I guess my point is that a $5,000 increase in savings really isn't that much in the scheme of things.

Money velocity today is 1.5 - the chart in this link is a bit out of date. Amazing that it's only been below 1.5 twice in 115 years! The velocity of money has been my main indicator for the deflationary thesis - there are two pieces to this that we should understand though. GDP and the M2 monetary base. Theoretically, dividing GDP by the M2 monetary base gives you the velocity of money. ($17.9 T/$12.02 T = 1.49). There is only 1 way for this ratio to fall - if the growth rate of the monetary base exceeds GDP growth. Generally, if there is more money to circulate, more money gets circulated and GDP increases at the same, or a higher rate, than the monetary base (because each $1 can be spent more than once). What we have seen over the last decade is that there is far more money to be circulated but we're generating far less activity with every $1 of it. This is a fundamental change in consumer behavior. The M1 money supply has grown by about 1.65 trillion since 2008. The M2 money supply has grown by about 4 trillion since 2008. These figures do not count the reserves held by the banks at the Fed and are happening despite tighter lending standards which should constrain the money supply growth in a fractional reserve system. Individuals and companies are hoarding 2x as much in the way of demand deposits as they were pre-crisis. Including non-demand deposits (CDs, Money Market funds, etc.), we're holding 50% more than pre-crisis. People and companies are not spending money - they're "hoarding" it. Even when accounting for the demographic shifts of boomers who should be spending more of their savings. Why they're hoarding it is anyone's guess. Companies may have been scarred by a near death experience in 2008. Those who experienced layoffs may have seen that their cash savings weren't adequate and are now changing their behavior to ensure it doesn't happen again. Investors may be scarred by the 50+% drop in equities twice in a single decade. Near retirees may realize they had been slacking on their savings to survive a 2% interest rate environment. The list goes on and on, but these types of economic occurrences scar people and change their behavior. There's a reason that depression-era grandparents have very different savings/spending attitudes than our parents. This is also why some forecast that a Depression-like economic scenario needs to happen once every 3 generations or so. As they save more cash, people will be buying less as a % of their income. Until they hit that savings goal, as an aggregate population, we'll continue to see more money being withheld from economic circulation which means less purchases as a % of income which means we may need less capacity than we have traditionally needed which means that production should fall to balance demand or prices should fall to increase the demand - sometimes both. I think this is the main deflationary force at work - the change in consumer behavior. The velocity of money shows a non-temporary change in behavior that the CPI fails to capture. The Federal Reserve can't do much about the velocity of money because they can't force transactions. Even having a negative interest rate on consumer deposits would likely just mean people hoard cash in safes and remove it from the financial system - it doesn't mean they'd just go spend it all and jump start the economy. That being said, it doesn't guarantee deflation as we have seen by the CPI - what it does mean is that it's far easier to get a deflationary event in the past because people, whose transactions account for the majority of economic activity, have a much higher propensity to save and that can be accelerated by any hint of another downturn in economic activity. At least, that has been my thinking for the past 2 or 3 years.

Doubled my SPY short today. Also sold FCAU 11/20/15 PUTS @12 for $0.60. Sold BBRY 11/20/15 PUTS @ $7 for $0.67. sold WFM 11/20/15 CALLS @ 35 for $0.45 Sold ACI 11/20/15 PUTS @ 2 for $0.30 Last set of puts worked out pretty well. Sold 10/16 puts @ 4 for $1.00 when it was at $6+. Incredible that the stock can fall 50% and you still make 25% in a month by selling puts. Bankruptcy is a real risk here but selling puts is more attractive to outright equity exposure which is what my passive P/B strategy would have me doing. I think the puts are a better option for exposure at this point until the bankruptcy/debt swap issues are worked out and then I'll probably roll the exposure into equity. Sold more FCAU options. 12/18/2015 PUTS @ 15 for $0.85. Also sold CHK 12/18/2015 PUTS @ 5 for $0.21