TwoCitiesCapital

I've struggled with what kind of multiple to apply in the past, but this thought always crossed my mind. It doesn't make sense for me to discount their future earnings streams by some massive percentage unless if I think they'll be equity-hedged with bonds yields at 2% into perpetuity. I have no idea where bonds yields go, but I bet they're higher in 10 years. Also, Fairfax has a history of hedging and then removing the hedges so we cant expect them to hedge into perpetuity. So today they're worth x, but tomorrow they take equity hedges off and they're worth 1.3x because of the increase in earnings power? It'd be hard for me to get behind such a drastic change in valuation for something that is so easily changed and that they have a history of changing. I think it might be better to change your position sizing instead of multiple you buy at. Maybe instead of a 10% position if they were fully unhedged, you do a 3-5% position so the opportunity cost doesn't kill if you they're wrong. If they remove the hedges, or appear to be right, you can rebuild your stake. It seems like this would be an easier way of controlling for the uncertainty than trying to come up with a different multiple of book for every change in interest rates, deflation hedges, and %-equity hedged status.

If you buy some of their special deals, you get an additional incremental discount for each special deal in your basket - at least that was my understanding. It doesn't add up to huge savings, but maybe an extra few bucks on a $50-$100 order. Also, you can receive other discounts for waiving the ability to return, etc. I haven't done a broad based comparison of jet vs amazon vs walmart, but it seems that it's still worth shopping around to get the best deal from each.

Sold OCT 16 puts against ACI @ 4 for $1.00

http://www.reuters.com/article/2015/09/03/us-ecb-policy-idUSKCN0R30O120150903 Euro area to cut inflation expectations through 2017. Seems like QE was only good for a few months and the disappointment is already setting in. What's the over-under on ECB doubling down and expanding the current program?

I would actually say that Japan is very similar to many European countries with poor demographics, birth rates, high debt, low-growth, export driven, etc. etc. etc. Two Cities, as promised, I'm coming back to you with some delay. You bring up a lot of points so I'm going to try to address it as much as I can. So let's begin with Japan. It's harder for me to do a very deep dive with numbers on Japan because I don't have much access to Japan stats so please excuse me if I stay a bit high level. The similarities between Japan and the US are that they had real estate bubbles (in Japan it was commercial RE in the US was all RE) and that a lot of risk related to that was concentrated in the financial system. That's kind of where similarities end. Japan's households are prodigious savers that's why Japan is dependent on exports. US households are prodigious consumers and got levered up. In the US households were levered up, in Japan corporates levered up. In the US you had trade deficits, in Japan you had big trade surpluses. In the US the government moved to clean up the banking system, in Japan you had zombie banks. I could go on but I'm starting to sound like George Carlin. Japan had an issue where the corporates behaved like households instead of corporates, cutting investments and hoarding cash instead of issuing equity when trying to delever. Add to that the fact that they had new and fierce competition in their export markets from Korea, China and other players and you get a massive deficit in demand. The households did not step in to fill that demand gap because over there they're savers not consumers so you end up with a huge output gap and deflation. Demographics played a part too mainly on the domestic consumption side. But I'm not sure that if Japan had better demographics things would have been different. Domestic consumption over there is and has been very weak. As you can see about the only comparison between Japan and the western economies is that they've had a bubble too. you mention the European economies that are export driven, bad demographics, high debt, etc. The European economy that comes closes to Japan is Germany and they didn't have a real estate bubble and the debt isn't very high. Bond yields are cratering in some European countries: of note are Germany, France, Netherlands and Finland. These have more to do with the Euro crisis than inflation expectations. Basically Italians, Spaniards, and Greeks would rather have German, French, and Dutch euros rather than their own. They're willing to pay for that. Further on, slowing GDP growth doesn't mean deflation, the sign of a tight labour market is inflation - so you don't have a tight labour market. Debt overhang leads to deflation if you have an uncontrolled deleveraging - the US has delivered a lot in a controlled way. Could it have been handled better? Yes. Is the risk much much lower today than in 08? Hell yes! You bring up the US deflation of the 1930s. Back then the US was on the gold standard, it had a high interest rate environment in the midst of a massive economic contraction and it was running budget surpluses. Does that sound like the situation we're in today? I'm not saying that high inflation is around the corner. I'm just saying that deflation is far away. Yes the creation of credit is inflationary and the reduction deflationary. But you have had a lot of credit reduction in the US with the government stepping in and closing that output gap with it's own credit. Also right now the US fiscal position looks pretty good. You will probably see US budget surpluses when the economy gets to full employment. So to argue that we're at risk for inflation you have to make an economic case that there will be such a dramatic drop in demand (the kind that results in 20% unemployment or something like that) or that the US government will be forced to undergo a significant uncontrolled delevering at the sovereign level. I don't see that even remotely happening. But if you do, please make the case. Let's just agree to disagree. You have all your reasons for why Japan, America, and Europe are different. I have my reason for why they're the same - a decade of massive malinvestment fueled by debt that exploded. I think the other stuff is important, but not nearly as important as this later similarity which I believe has the ability to trump the other factors. I'll make money if I'm right. I'll lose money (or opportunity cost) if I'm wrong. I'm happy with the trade off and don't really need to convince others. In fact, the fewer people are convinced, the more money I stand to make if I'm right, so I'll just leave this conversation here.

Can you look in the rear-view mirror and point out what the second shock to Japan was that caused their two decade long deflationary trend? I hate to get in the middle of other people's debates but I actually do think there is a fundamental difference between US & Japan, or a secondary shock if you prefer. It's demographcis. A shrinking population is a major impediment to economic growth. You could probably apply that to some European countries as well but the US has relatively good demographics due to immigration. So you're saying that Japan's deflation was due to demographics and totally non-related to the real estate/equity bubble that bursted in the early 1990s? What about the deflation in the U.S. after the Great Depression? I don't know who we can look at the trillions spent globally in fiscal and monetary stimulus, which has failed to produce any respectable amount of GDP or inflation growth, and then determine that there is absolutely no deflationary threat or support for Prem's thesis. Then add to that the commodities are crashing. Bond yields are cratering and were at substantially negative levels just a few months back in certain European countries. Global GDP growth is slowing. The debt overhang for the developed world is massive. And despite a tightening labor market, no sustained growth in real wages has yet occurred. Somehow, we're supposed to look at all of this information and determine that deflationary fears or totally unsupported? Maybe I'm a fear-mongerer, but it certainly seems to me that the data is showing that deflation is, and has been, the predominant threat since 2009 and that the inflationary story has been BS. The creation of credit is inflationary. The unwinding of credit is deflationary. I don't know if we're into that unwinding phase yet, but when we get there you can be guaranteed that it will be deflationary with, or without, an economic shock. Considering that the globe as a whole is carrying unprecedented amounts of debt, it could certainly be a very prolonged period. Don't fail to see the forest for the trees. I would actually say that Japan is very similar to many European countries with poor demographics, birth rates, high debt, low-growth, export driven, etc. etc. etc.

Can you look in the rear-view mirror and point out what the second shock to Japan was that caused their two decade long deflationary trend?

Sold FCAU Oct15 13.000 puts @ 0.42 Sold SPY Mar16 190.000 puts @ 10.25 I'm trying to figure out what I want to do to hedge my portfolio. The volatility premiums have been juicy recently so I've been selling options (calls & puts) to increase income/cash positioning. I'm disappointed that my SPY puts limit orders didn't fill to sell the position last week at $17 and $14, but I got some great prices on other put sales for my underlying equity positions, and later on covered calls, to increase the yield on my cash. I want to remain hedged, but am hesitant to roll puts forward at these prices because I'm not good at timing when the decline will occur. Hoping for a nice day or two of solid market action to bring those prices down 20-25% before I begin rebuilding my hedge for 12-18 months out.

Who do you trust? A market full of intelligent participants who have money on the line banking that interest rates and deflation remain lower or a room full of people who believe they can control the actions of hundreds of millions of people through pulling financial levers that are unprecedented in size and application?

http://www.bloomberg.com/news/articles/2015-08-28/all-of-that-dollar-borrowing-in-emerging-markets-looks-like-it-s-been-one-giant-carry-trade This seems like one of Soros' reflexive situations. It will probably only get worse if the Fed actually moves forward with hiking rates as that would likely signal the beginning of the unwind if the recent slowdown in EM hasn't already forced the hands of those who borrowed. The dollar grows stronger -> slows growth and investment of companies that need to repay in dollars while forcing them to sell local currency -> dollar appreciates against local currency due to repurchase of dollars and relative economic growth -> restart cycle. We might see more to this strong-dollar, deflationary thesis than I had originally anticipated as I hadn't been anticipating a multi-trillion dollar unwind. It'd be interesting to see who the biggest borrowers were and what the maturity schedule of their debt looks like. At least it was "healthier" institutions doing this and not subprime entities that would absolutely blow up at a dollar that went 10% higher.

Picked up some more WFM and OUTR today to repurchase prior sales that I was lucky on my timing. Picked up more OGZPY and SBRCY during the recent sell off. Waiting for a good opportunity to sell my SPY puts and roll them forward. My limit orders didn't fill on Monday-Wednesday.

Since it's going to come up from someone else, I suggest you peruse the Altius thread.

I've got limit orders to sell my SPY puts just in case. Planning to take some money off the table and the maturity forward and the strike price down for another 12 months of protection.

Had Southern Tier Choklat Oranj recently. It's a great stout if you're into those. Also had way to much Don Julio last night at Taco Tuesday....

Samsung and Posco both have ADRs that trade in the U.S. The Samsung one is incredibly illiquid though. Hyundai preferred shares trade as a GDR in USD on the LSE. So if you can get a broker that has access to u.s. and london exchanges, you can have your pick of those three. I've been finding it difficult to get access to much more than that. I think someone here said Schwabb would work at one point, but it's like a $50 fee to execute the trade.

this is part of their strategy...not just get rid of current production, but create fear of future collapses thereby suppressing investment thereby keeping supply tight for years to come. So....buy the ones that will survive :)

Yea...down 5% at the open was incredibly weird and reminiscent of days of trading in 2008/2009. I'm certainly saying we're in for another run like that, but that's what I've been concerned of with high multiples in a deflationary environment. As long as inflation stays near 0%, we can probably maintain these asset price levels. The moment it starts moving higher, or lower than that, watch out below!

I don't think selling covered calls or puts is a bad idea, but I think it's like anything else: wait for the price to come to you. I generally wait until there's been some market volatility (like today) to sell options. If the stock pops 8-9% in a day for seemingly no real change in underlying fundamentals, I sell a 1-2 month option on it to capture the inflated volatility premium and to have quick theta decomp. I normally do this at strike prices 10-20% above the current price with the intent of making 1+% of contract notional per month of exposure. I do the same thing with puts, but demand juicier premiums to earn a higher return on my cash and to compensate for the downside risk. You don't have rolling options positions, but you'll be selling options when it is most advantageous for you to do so. Sure, I've missed upside on some individual positions by doing this, but I've also managed to increase the yield on my entire energy portfolio by about 6% annualized by selling select options on select positions at select times. It's actually quite lucrative in volatile times like this.

Muni spreads have widened, but it's hard for me to know that impact versus the gain from generally falling rates. There's no doubt that the portfolio will have underperformed Treasuries, but we also have a higher yield which may make up for it. I am fully expecting a reversal of the losses, but there are reasons why it may not. Also, I know what Fairfax's exposure is the explosion in China, but that could be a one-off impact too that gives us a chance to dig in at better prices.

If you weren't bearish before today, then I don't see why you would increase your cash position after today. Your portfolio positioning should probably be made independent of the daily market gyrations. The only information we should take from any day's market movements is the price available to enter/exit positions and how attractive that is on an absolute basis. I'm sure there are exceptions, but in general that's how I would look at it.

Yea - I'm excited too. I could definitely be wrong, but multiple massive down days with extreme volatility and low volume don't seem to be "normal" occurrences. I am biased, but I am thinking this may be the beginning of the long-awaited for correction. My portfolio has taken a massive beating since it's been very focused on Europe (down to flat due to Euro depreciation) and EM/commodity companies for the last two years. I am happy to see that my recent efforts to lower leverage, hedge U.S. equity downside, and sell call options against a lot of positions appears to be paying off some and am looking to build positions at even more attractive prices. I don't have much cash since I just liquidated 10% of my portfolio to cover some expenses, but I've got puts at about 35-40% notional value of the portfolio along with 5% in cash and another 5% in bonds so I'll be alright if it continues to dump. Most of my portfolio isn't all that correlated with U.S. equities and so I'm hoping for something idiosyncratic to drive returns to FNMA, Fairfax, FCAU, etc. to drive up returns so I can rotate profits into new positions at better prices. Some U.S. equities like Whole Foods and Outerwall are looking mighty attractive to be adding to... The stock market and the economy don't have to move in the same direction. At these valuations, stocks could easily take a large correction/bear market even as the economy recovers. I believe that valuation is the #1 driver of forward looking returns. Studies have pretty much proven that on a generalized level across all stocks. If valuations aren't attractive (they're not), then it's possible for equities to do terrible regardless of the economy and trend in profits. It's an easier sell if you have a recessionary thesis, but it's certainly not necessary.

I was surprised at the intensity of the drop this AM, but was even more surprised at the pace of the recovery from the lows once it happened. Who was so desperate to sell this morning where they're not really selling now? It's weird to see S&P and Dow down nearly 5% to come back to being down only 1.25% in a single day. Market efficiency at it's finest. I was trying to exit my puts that I bought a few months back for a double (from $8.50 to $18.00). Unfortunately, orders filled at $17.00 with bids at $17.75, but nothing really hit $18 and it's back down to $13ish.

I sold some puts on CHK today. I'm getting a 5.6% cash yield to purchase it if it drops by more than 28% in the next two months. Seemed like reasonable compensation.

This is more what I'm interested in. I haven't read the 2008 report cover to cover, but it doesn't seem to have much in the way of the thesis on the individual short positions or which companies are being shorted. I did like how the broke out in the table the notional amounts by equity index, equity index trs, and outright shorts. We don't even have that today (unless if there exposure is actually just limited to the Russel). I'm just curious how they think about shorting, what they shorted, and how that might be impacting what they're doing today. I've known they were short the Russel for a long time but I'm curious as to what individual names are, or could be, included in their basket.

I'm seeing you guys mention single name shorts and that they've done it before - where can I get information on what kinds of companies they were shorting in 2008 and potentially currently?