TwoCitiesCapital
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Just went through a relatively large rebalancing effort. I try to develop most of my investment ideas myself, but will occasionally steal one of I like it enough.
DBLTX - 11%
FRFHF - 12.7%
BBRY - 11.3%
MBI - 5.1% - board idea. Thanks guys
SAN - 5.1 %
MURGY - 4.7%
ATUSF - 4.5% - board idea. thanks guys
AAPL - 4.8%
SB - 4.3%
OGZPY - 2.0%
MRVL - 2.0 % - following David Einhorn on this one.
GOOG - 2.0 %
TOT - 2.0%
SLV - 1.75%
AMZN - (3.2%)
Cash - 16.2%
Other market exposure through various funds
Stocks - 6.3%
Bonds - 2.7%
Real estate - 2.3%
I'm also short calls covering half of my MBI position and long calls for BBRY. Net long exposure through calls is only 1.3%.
Totals don't equal a hundred because these were my best estimates off the top of my head.
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Thx all for great input!
Yes, this question derives from BRK letter 1983. But as munger recently said: "just because buffett said something 20 years ago doensnt make it an eternal law".
Me too would go for Company A, but Im not so sure with our current economic environment. Would it have been the best choice in Japan 1983 going forward?
Lets add reinvestment into the equation, that is under current market environment and we dont know the future rate of return.
Inflation is currently running at a negative rate and who knows the future of inflation? Which law states it cant run at a negative rate many years to come? (though In my opinion with current stimulans programs spread around the world its highly unlikely). Further on, we are in a deleveraging process (regardless of centralbank balance sheet expansion) which as you know put pressure on ROE in regards to margins and capital structure. Also, when the historically low interest rates normalises it will put pressure on ROE.
Some wrote that in a longterm perspective company A would be the best choice, I agree. But considering the arguments above, what then would be the probability that your investment lost purchasing power of the holding period (your Risk) compared to company B and, what would be the opportunity cost? Could this be a reason that Buffett is willing to accept more capital intensive businesses ie utilities and the purchase of BNSF that probably under these circumstances will provide a higher margin of safety inside the business?
At its core, could our current economic environment potentially twist or harm your transferred purchasing power into a high ROE vehicle such as Company A, to a degree that it will not deliver the expected purchasing power - after taxes have been paid on nominal gains - in the future and, as a corollary, would you then be better off or worse with Company B as an investment?
I realize its diffcult to discuss this without knowing the characteristics of the companies. Im just throwing up the ball here because my best decisions always come when I get input from all perspectives.
Best Regards,
In an environment with low interest rates, companies that aren't capital intensive will be undervalued and companies that are capital intensive will be overvalued. This is simply because a company that can generate tons of cash on a small asset base has less of advantage if companies who can't can cheaply lever up to achieve the same results. If your paying 0%, you could borrow all the money you needed to operate and the ability to generate it internally isn't very valuable.... until interest rates rise. If you think rates will be low for a long time,then the company with a higher return on equity may not receive the premium valuation it deserves until rates move higher giving it a clear competitive advantage.
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While I understand that they should be moving up with decent job numbers and improving economic performance, or a healthy thing, what I find shocking is that they are moving up despite the Fed buying $40 billion a month non stop or pretty much the entire new supply. It wasn't the entire new supply just 6 months ago. Then you have insurance companies, pension funds and other institutions buying treasuries to meet future obligations no matter what the rate is day in and day out. So who is selling to create such upward pressure on rates? And where are they going?
You may say that I exaggerate, but for the 10 year yield to move above 2.2% in about a month from 1.6% is a big percentage move. If you look at this chart you can also see the 1 year trend which is clearly upward.
Cardboard
There was a similar large move upward during tax season in 2012. Rates came back down afterwards. Rates will likely remain low if history is any guide. I only see them rising in the near term if Bernanke admits he was a total failure and his policies flawed from the start which I think is unlikely. Even then rates could remain low. Some points to make:
) Market rates are set at the margin. The Fed may be buying 90% of government issued bonds but the price will be set by the remaining 10% and what they are willing to pay.
) 90% of new issuance is still a small part of total government debt/mbs markets.
) interest rates have to remain low for the government to finance itself. Its curious that Fed buying has roughly matched deficit spending. Does Bernanke want to be remembered as the man who bankrupted the U.S.? Probably not. The deficit is doen due to forced capital gains last year in fear of higher taxes. It'll likely be back up next year along with increases in Fed buying.
Just my two cents
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I'm about halfway through the Shipping Man and have been a little disappointed.
Maybe it's because I've owner shares is Safe Bulkers for the past two years and have been reading a lot about shipping as it is, but I feel that there are much better way to learn about the industry. I guess my complaints about the book so far are
1) The story itself seems made up, characters are exaggerated, no real character development, etc. Overall just bad writing
2) Knowledge gained is really basic and could be likely picked up elsewhere without wasting time on a bad story
I haven't gained anything that I haven't been able to pick up elsewhere and I largely feel like I'm wasting my time reading it. Maybe it's a little too early to judge, but after reading half I don't know if I'll take the time to bother to finish.
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Level 3 candidate here. Good luck to you guys. Tou
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US Budget deficit is shrinking.
- http://www.bloomberg.com/news/2013-05-14/u-s-deficit-to-fall-to-642-billion-says-budget-agency.html
US house prices are increasing.
US Trade balance is improving.
US retail investor is not shying away from the stock market.
US is not experiencing a deflation - yet.
1) take anything the CBO says with a very large grain of salt. Their prediction record has been abysmal.
2) housing prices are increasing? Maybe the third time since 2009 will be the charm. Tell me who will buy them when the coming generation is graduating with the largest amounts of student debt and the lowest paying jobs we've seen in a decade?
3) trade balance is improving precisely because individuals can no longer afford many of the imported luxuries they used to buy IMO. Hardly bullish.
4) stock mutual fund flows have consistently been negative up until this year. Not sure if this will last through the next correction or not.
5) deflation takes years to culminate. Even Greece is just now experiencing it. Increased Federal debt has made up nearly every penny of consumer deleveraging. All that's hit the economy has been corporate deleveraging if I recall my numbers correctly. Realize that all interests have to do is go back to the 4-5% they were at before the crash and we're spending more than 30% of current government receipts servicing interest. You don't think that will be a drag on th future economy? Spending will have to be cut somewhere or revenues will have to rise or we can keep interest rates artificially low until we've inflated enough of the debt away where that's not a threat (not bullish for the economy either),
US industrial production is increasing
US retail sales are increasing
US non-farm jobs being added
US housing affordability at multi-decade high
US consumer debt service at multi-decade low
US price-to-rent at multi-decade low
US bank capital levels at multi-decade high
US banks wrote-off ~500B of losses with write-offs declining
US new home sales / construction growing from a level lower than when US had half the population it has now
1) industrial production increasing isn't a substantial part of the economy anymore. I'd say this is more of a lagging indicator and is a small part of a much much larger economy.
2) debt service is only at multi-decade lows due to extremely low rates. What happens when rates rise with a recovey?
3) bank capital ratios mean nothing in light of the trillions of derivatives that they hold on their books with global counterparties who aren't as strong (European banks leveraged 30-to-1 who have gone double or nothing in buying European sovereign debt).
4) the level that housing construction is rising from is meaningless without the context of the overbuilding that occurred. There are still empty neighborhoods with vacant houses in places where the most overbuilding occurred.
5) housing may be the most affordable it's been, but only for those who can obtain credit. Not the easiest task nowadays.
6) non-farm jobs are being added but they're typically low wage, part time jobs that are replacing the full time jobs. Not bullish for real wages (which have been declining for a decade) which means its not all that bullish for the long-term economy. Granted, some jobs are better than no jobs.
All of this isn't to say that I think Watsa will be right. It's simply saying arguments could very easily be made for the other side. He's been cautious in his approach to protect capital, not necessarily to maximize short term gains. Also, we're seeing unprecedented amounts of global stimulus that aren't sustainable. What happens when trillions in liquidity stops? The velocity of the dollar has continued to slow and has fallen very far from where it began in 2007. This is not the sign of a healthy economy, but is partly why we aren't seeing inflation from printing.
I think Watsa made a very smart choice. He looked at the unprecedented rise in global debt over the last 30 years, asked himself what are the consequences if this goes South, and hedged accordingly. This was a way to protect his business. Could we have profited from it? Sure. Was that the intention? Unlikely. Secondly, you focused on all U.S. statistics but the majority of the deflationary derivatives were written on Europe. Europe does appear to be heading towards a deflationary end game and these may still pay off in the next 5 years.
I have nothing to add but do I count as an upcoming generation? I graduated in 2011 and I bought a house in 2012 and now I am trying to buy another. ;D This is in the SF Bay area too so no 200k house for me.
Plenty of people still have money.
As for inflation or deflation, I have no clue!
The recovery is bifurcated. I've been fortunate to see both sides. I graduated in 2011 in Mississippi. Many friends are still unemployed, or employed at part time jobs, can't afford to move away from home and certainly can't afford to save any significant amount. Me? I had no student debt, moved to Manhattan, got a job and have done well for myself. Most people up here seem to be doing well. Many people I know from MS, AL, LA, GA , etc. aren't. It seems like the upper 10% are doing pretty well. Everyone else is struggling and jogging in place.
Congratulations on the houses though. I was trying to buy a piece of rental property 2 years back that was occupied by a Dollar General. Place yielded $50K a year, was on sale for $250K from a motivated seller. I had 20% down between myself and my business partner, had been to the property in person, we had pristine credit, banks approved us on cash flow coverage, collateral, credit scores, business model, insurance, and still refused to give us a loan. Said they don't give loans to new businesses, or they don't give loans to out of state principals, or th don't give loans for out of state properties. Every where we turned we got turned down for reasons that didn't seem to really matter (non-economic reasons). This was banks in NYC and MS. Didnt sound as if banks were too interested in making loans if they're turning away business like that. Can't even imagine what's its like for someone with poor credit and/or no savings.
As Prem might say, it appears to still be "early days" with this trade.
Sure the U.S. has picked up, but look at any industrial company in Europe and sales and order backlogs are doing a cliff dive. Plus who knows what Asia looks like as China cools. I think it is Time to review some photos of Ordos, China.
http://www.time.com/time/photogallery/0,29307,1975397_2094502,00.html
The photos of Ordos are dramatic, by our standards, but keep in mind that the estimates are that urbanization increase over the next 15 years will be 300 million people. That's about 12 Manhattans a year, 1 Manhattan every month for the next 15 years. Approximately 1 America. Now that's dramatic!
I think when you say Manhattan, people who don't live there typically think of the entirety of NYC (could be wrong). Just to make things clear in those terms, it's about 2.5 NYCs every year. That being said, this has been the trend for awhile and Ordos has been empty for years, just because that many people are urbanizing doesn't mean they're going to move to the empty cities. They're going to move to the cities where there are jobs. Jobs will be provided by businesses who need customers (also not found in empty cities). I have a hard time seeing these places filled up without the government forcing them to be. Then the question becomes what kind of long term structural disadvantage do they have in that location. Large cities grew to be what they are largely because they were at the center of some big trade activity (close to ports, rivers, or the source of raw materials). They dont just pop up out of nowhere for no reason. Was there a reason that not many people lived these areas of a China in the first place? Probably because they weren't well situated for large cities. Governments without a profit motive often misallocate capital in this way.
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Hmmmm. Any idea what the room for growth is in the U.S. or globally? Seems hard to imagine this ever contributing in a meaningful way. I mean, if they're one of the oldest and operate in all states and still only maintain a market cap of $15 M it seems like growth is very very limited.
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Something that I meant to include in my original post: your shouldn't be contrarian for contrarianism's sake. There needs to be a fundamental reason. You could argue that the number going back up to where it was should be bullish, but then the converse should hold true of them coming down being bearish. The stock market has risen quite a bit over the past 4 years. Either QE has been enough to overcome deleveraging, a sluggish economy, and this trend or this trend has very little impact.
Its not just about the supply and demand of people buying stocks; the price is set by the marginal buyer. This number could fall to as low as 10%, but if the market P/E were 1000 and the next marginal buyer was unwilling to pay that amount, prices are coming down regardless of how underowned stocks were.
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I don't think it is necessarily for a near term catalyst. Think of major demographic trends occurring right now:
1) Boomers are retiring. Many can't live off the interest income from their portfolio and will need to sell stocks and bonds if they can't find another way to supplement their income.
2) The current generation of graduates are graduating with the highest debt loads and the lowest real wages in the past decade or two. I know many recent graduates who can't afford to move out of their parents' house, let alone begin investing in a meaningful way.
3) Even if this trend were to reverse, I'm not sure it would be enough to counteract boomers selling increasingly large positions as time goes on.
The stock market may go up, but I don't think this will be the reason nor do I think there will be a reversal of this trend anytime soon
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Problem with shorting is that you need an active catalyst. Otherwise shares could stay elevated for years. Tesla may be a good option now that it's up over 300% and the recent rally has likely been shorts covering the 45% of float they borrowed. Once theyre done covering, who is going tombuy at these prices???? Now may be a good time to initiate a small position. Have your stop loss set according to the loss you can afford to take though.
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US Budget deficit is shrinking.
- http://www.bloomberg.com/news/2013-05-14/u-s-deficit-to-fall-to-642-billion-says-budget-agency.html
US house prices are increasing.
US Trade balance is improving.
US retail investor is not shying away from the stock market.
US is not experiencing a deflation - yet.
1) take anything the CBO says with a very large grain of salt. Their prediction record has been abysmal.
2) housing prices are increasing? Maybe the third time since 2009 will be the charm. Tell me who will buy them when the coming generation is graduating with the largest amounts of student debt and the lowest paying jobs we've seen in a decade?
3) trade balance is improving precisely because individuals can no longer afford many of the imported luxuries they used to buy IMO. Hardly bullish.
4) stock mutual fund flows have consistently been negative up until this year. Not sure if this will last through the next correction or not.
5) deflation takes years to culminate. Even Greece is just now experiencing it. Increased Federal debt has made up nearly every penny of consumer deleveraging. All that's hit the economy has been corporate deleveraging if I recall my numbers correctly. Realize that all interests have to do is go back to the 4-5% they were at before the crash and we're spending more than 30% of current government receipts servicing interest. You don't think that will be a drag on th future economy? Spending will have to be cut somewhere or revenues will have to rise or we can keep interest rates artificially low until we've inflated enough of the debt away where that's not a threat (not bullish for the economy either),
US industrial production is increasing
US retail sales are increasing
US non-farm jobs being added
US housing affordability at multi-decade high
US consumer debt service at multi-decade low
US price-to-rent at multi-decade low
US bank capital levels at multi-decade high
US banks wrote-off ~500B of losses with write-offs declining
US new home sales / construction growing from a level lower than when US had half the population it has now
1) industrial production increasing isn't a substantial part of the economy anymore. I'd say this is more of a lagging indicator and is a small part of a much much larger economy.
2) debt service is only at multi-decade lows due to extremely low rates. What happens when rates rise with a recovey?
3) bank capital ratios mean nothing in light of the trillions of derivatives that they hold on their books with global counterparties who aren't as strong (European banks leveraged 30-to-1 who have gone double or nothing in buying European sovereign debt).
4) the level that housing construction is rising from is meaningless without the context of the overbuilding that occurred. There are still empty neighborhoods with vacant houses in places where the most overbuilding occurred.
5) housing may be the most affordable it's been, but only for those who can obtain credit. Not the easiest task nowadays.
6) non-farm jobs are being added but they're typically low wage, part time jobs that are replacing the full time jobs. Not bullish for real wages (which have been declining for a decade) which means its not all that bullish for the long-term economy. Granted, some jobs are better than no jobs.
All of this isn't to say that I think Watsa will be right. It's simply saying arguments could very easily be made for the other side. He's been cautious in his approach to protect capital, not necessarily to maximize short term gains. Also, we're seeing unprecedented amounts of global stimulus that aren't sustainable. What happens when trillions in liquidity stops? The velocity of the dollar has continued to slow and has fallen very far from where it began in 2007. This is not the sign of a healthy economy, but is partly why we aren't seeing inflation from printing.
I think Watsa made a very smart choice. He looked at the unprecedented rise in global debt over the last 30 years, asked himself what are the consequences if this goes South, and hedged accordingly. This was a way to protect his business. Could we have profited from it? Sure. Was that the intention? Unlikely. Secondly, you focused on all U.S. statistics but the majority of the deflationary derivatives were written on Europe. Europe does appear to be heading towards a deflationary end game and these may still pay off in the next 5 years.
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What do you guys think about Russian stocks. You have entire ETFs trading at single digit PEs and below book value. You also have megacap companies like Gazprom trading at .3x it's book value. Obviously there is political risk and corruption, but valuation makes it tempting.
I guess my main concern is that I've been burned badly on cheap companies with shady management (Chinese reverse mergers) and etc before and want to make sure I'm thinking through this correctly before taking capital.
What are your thoughts?
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Sanjeev,
I was wondering if you could elucidate your approach to these options. I'm fascinated with options and have tentatively been trying out different strategies as I learn about them over the past 3 years. My two favorites are to go long deep, LEAP call options to get get a delta of 1 to the common stock with less money down or to buy way out of the money calls/puts in a binary outcome type situation. That being said, I have yet to ever make any significant returns using options and have typically ended flat or at a loss. I'm curious to know why you picked the options over common and what your thought process was on the risk/reward of the situation.
Thanks for any insight
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I'm a little late to this discussion now that the Russian bailout appears to be the way they're going; however, I figured I'd toss in my 2 cents since I didn't have the ability to respond at work and this is a good discussion.
cypress is a tax haven right? So a 6.7% one time tax in a tax haven appears to be peanuts to foreign account holders who are paying no income tax.
Wrong. As mentioned previously, it's not just Russian oligarchs that will be paying. Secondly, it puts in place a precedent that could be abused in the future. Who is to say they won't do this again in the future. Also, maybe they're Russian criminals, maybe they're not. Why is it their responsibility to foot the losses that should be borne by bondholders and equity holders? This totally upsets the precedence of bankruptcy law and etc. Bondholders and equity holders are the ones who accepted this risk. Not the depositors who thought they were insured. Lastly, and the biggest issue IMO, is that this is a tax so they could receive a bailout loan the size of 50% of their GDP. So the depositors are paying 6.7%-10% so that the citizens (many of them depositors) have the privilege of paying back 50% of GDP at interest.
If you lived, or currently live in PIIGS or Cyprus, would you empty your bank account?
I never really thought it was possible to make such poor economic decisions. With what is happened in Cyprus, would you keep any more than a tiny minimum bank balance necessary to function if you lived there? Greece? Italy, Ireland, Spain?
Considering interest rates are nil, it seems there is little incentive to keep money at a bank. If I were in Cyprus or Greece, I think I would buy a combo lock, hide my cash in a box, and call it a day. It seems you'd be taking a bigger risk of theft in a bank account than hidden in a locked box. If I were an Oligarch, I'd be transferring my cash to a more friendly nation like Switzerland.
I never thought such pro bank run policy choices could be made...
With that said, I'm long EWI, EWP, EIRL, GREK :) Maybe I'll scoop up some more if they crater.
This. I too am long certain European securities and am looking to increase my exposure, but I'm mainly picking up European assets that have exposure to the emerging markets or real assets.
The CYPRUS event is one of the most important of the last 25 years and ranks in line with the Greenspan post 9/11 reduction of rates to 1%, the bernanke AIG bailout and QE, and the Argentina default.
The Cyprus event confirms that all this debt will have to be paid. For a country that is not able to print its own currency the debt is paid in the form of a wealth confiscation (the savers prudent capital is unfairly used to pay for fiscal irresponsibility) but as I continue to say, for a country like the US the result will be far worst. But not a nominal confiscation of wealth (the keynsians will never let that occur) but a disgusting inflationary confiscation of the kind that will make the 1970's look like a walk in the park.
I disagree. The Cypriotic banking system functions as a massive money laundering system for (mostly) rich Russians. My guess is that the EU made the clawback a requisite for a bailout because they don't want to pay so the 'mobsters' can keep all their money. Cyprus is tiny, can be saved easily, it's just a bit of politics. Basically Europe is saying: "if you stash all your money here, you better help us.". The EU doesn't want to target the local population, they affirmed this today:
The Eurogroup continues to be of the view that small depositors should be treated differently from large depositors and reaffirms the importance of fully guaranteeing deposits below EUR 100.000.http://www.eurozone.europa.eu/newsroom/news/2013/03/peg-statement-cyprus-18-03-13/
Small depositors treated differently then large depositors? Maybe the pay a lesser amount upfront but they'll be the ones repaying the loan at interest, and struggling under the debt burden even more. Just look at Greece. The problem is that EU still can't admit that it has a debt problem. They're still viewing this as a liquidity driven epidemic and treating a problem of insolvency with emergency credit and printing money. Neither one of these is directly addressing reducing the debt and it simply increases the debt load, by a massive amount, at the expense of the tax payers. Default. Bite the bullet and get better.
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Japan is an interesting case study on the end of deflation and the monetization of debt. If you look at what happens when a central bank prints money to reduce the debt you see that the yen has collapsed but the Nikkei has rallied even more since the BoJ's plans have become more defined. If this happens to the US and other developed countries then FFH will lose on both ends as the stock hedges will lose money as well as the deflation hedges. Seeing this makes me even more wary of being all-in on the hedges.
Packer
I think you're looking at a very limited time frame. Japan has been printing money with the encouragement of people like Bernanke and Krugman since the 90s. They just recently announced QE8 (or was it QE9). Has the currency "collapsed" over the past 20 years? No. It's down maybe 20% in the last few months, but it's up a significant amount over the past 20 years if I'm not mistaken. The stock market has also rallied by a similar amount, but still remains at less then 1/3 of its peak value even after the recent rally.
If a similar situation does happen in the U.S., we could definitely expect another drop in equities of 50-80%.
Secondly, the recent occurrences have been in large part predicted by Kyle Bass. He believes Japan is going through a currency collapse given that they are the most indebted nation in the world. The U.S. is a long way from there, but definitely going down that path, IMO. It might be 10-15 years before we experience similar happenings as Japan right now.
I tend to agree with Watsa on being concerned about deflation. We haven't seen deflation because there has been no deleveraging. Private households have mainly delivered by defaulting (not paying down credit) and the government picked up the slack by spending with massive deficits. On a net-net basis, no deleveraging has occurred. What has occurred is that wages are down and prices for necessities are higher meaning less disposable/taxable income to service the same amount of debt. the next crisis will be worse because we're in a much worse spot to handle it.
Secondly, I don't know if this is a macro "bet" as much as it is a hedge and our attitudes towards the 2 should be different. Watsa spent what was roughly 1 year of earnings (~6.5% of market cap) on deflation hedges to protect the entire company against a very serious outcome that is definitely a possibility. Not only that, he gave himself the ability to profit from it if it does and place him in a fine spot to swoop in with cash at the bottom. I don't care if deflation happens or not. This is a smart way to protect your business. it is prudent to protect assets and capital when they are in danger even if the danger never materializes. Hindsight is always 20/20.
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Damage from sandy seems pretty bad in the tri-state area. Fair fax doesn't have much exposure Coming in at 74 on estimated impact. Berkshire may not be so lucky.
http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/2012/10-2/20121030_sandy2.png
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I think equity indices tend to give negative real returns but strongly positive nominal ones in hyperinflationary periods. So yes, an OTM call on the SPX would be a way to protect yourself against hyperinflation. The author also discusses volatility derivatives as a way to do this but the discussion went rather over my head!
I have a hard time believing that any financial assets (paper assets) do well in a hyper-inflationary environment. I guess it all depends on the rate of the hyper-inflation. The simplified scenario looks like this:
1) You buy an ownership in the business through purchase of stock.
2) The earnings of the business should grow with inflation, but will likely lag a little bit given lower earnings/prices at the beginning of each period.
3) The price of the stock might rise to reflect these gains in earnings
However, if we're talking real hyper-inflation like Weimar Republic, then I don't think it works like this. Think about it; it takes a few days for trades to settle and cash to be withdrawn from your account. If there is a danger of that cash losing a significant portion of value of that 3 day period, then that will have to be discounted into the prices. Secondly, in a hyper inflationary environment, investors will be drawn to real assets as a hedge. Third, there are huge risks to companies for holding cash for liquidity/safety/flexibility because it's losing value so fast. This means they have to either continue holding a depreciating asset or accept the risks involved investing it in other less liquid assets. This increases the risk to businesses and exposes you to the risks involved with whatever investments they are making.
Stocks may appreciate some, but I do not see how it will keep up with inflation. I think that there could be massive real losses resulting from P/E contraction due to the loss of attractiveness in stocks for the aforementioned reasons.
Just my two cents...
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From the Q3 2011 NAIC filing, their counter parties are: Deutche Bank, Citibank Canada & JP Morgan Chase
I was under the impression that PIMCO was the one who sold them the contracts. Can anybody clear this up?
Secondly, it's a very real threat given that derivatives are a legal contract that follow very, very specific rules and guidelines (just like any other legal contract). If something occurs that is outside the bounds of these limits, it's likely in legal limbo. For small deviations, counterparties will generally work out agreements/compromises to maintain their rapport with clients; however, if you're talking about a multibillion dollar payout from institutions who will already be struggling from such harsh economic conditions, then it's a matter of survival and you can be sure they'll fight it.
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I have had similar thoughts about this. One way to do this is to buy puts. You can get SPY puts at a price of about 10% per year. Frank Martin has done this. I like this because it is an action you can take to protect and make money.
The other thought pattern which I think is also true with this uncertainty has come some great bargains. Today, like the 1970s we are in a crisis that has no clear solution. It is going to require some pain to get out of like in the early 1980s with Volker's high interest rates. However, the late 1970s were a great time to buy stocks because the demand was somewhere else (oil, gold, etc). Today it is in bonds and commodities.
As a aside, what space are your private investments in? I look at my small media plays and real estate workout names as private illiquid investments.
Packer
Low interest rates and low prices make real estate a very attractive play at the moment. My business partner and I have started a LP to collect money from family and friends and we are identifying properties that we would like to own if we can get the right price. We're working on our first acquisition right now. Both residential and commercial real estate offer huge opportunities. For example, it currently costs 30% more to rent a home than own in Atlanta. That means if you can buy the home and find a tenant, you could have 20-30% gains on it in just the first year employing absolutely 0 leverage...that's incredible.
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I agree that it is going to be a bumby ride but a good number of the firms I own are under 5x FCF and most are under 10x. Unless these firms fall apart (literally), I feel comfortable. I base my view on the bottoms-up availabilty of "cheap" stocks along with looking at sentiment and prevoius narratives. If I could not find cheap stocks, I would agree with you.
Packer
I typically ignore "small bumps" in the macro economy for a more bottom up view. I'm still highly invested in individual equities as well, but just as a rising tide lifts all boats, a receding tide will likely lower them all. I agree with Watsa that this is not like other recessions. If it was, I'd be buying now and all of the way down to the bottom; however, if this really is a one-in-50 year event and if the U.S. does really have 10 years of slow growth and the possibility of deflation ahead, then equities will get slaughtered no matter how cheap they appear to be now.
I'm not selling my current holdings but I am diversifying and putting all my money for the next year or two into privately traded investments that will likely perform well no matter what happens in the economy, and I benefit from not having glaring red numbers stare at me everyday. I think if you cherry pick your investments well, you could stand to profit (even in the short term); however, I think more losses are likely to come for most everyone before the gains.
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To the contrary, I think all the US bearish sentiment around is an indication we not go down much further. If you look at a the VL average we are at the same level as 1994 and the S&P 500 1998. This sideways movement may continue but I think a large scale decline (absent an economic collapse) is unlikely.
This period is similar to the late 1970s with low US confidence and declining real returns to stocks. I think once the debt issue does what it is going to do in Europe (most likely selective default and Euro ???) and China has its own bubble burst (not to mention the fraudulent accounting), the US will once again be the place where capital flows.
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I disagree. If Italy gets to the same point that Greece is at, Europe will have a crisis that causes more global financial loss then did the U.S. mortgage debacle.....and that's just Italy. What happens when Greece, Italy, and Spain topple? Or all of the PIIGS? This European debt crisis is far more serious than the U.S. mortgage debacle both in the severity of loss and the inability of over-indebted governments to be able to do anything to prevent it due to fiscal inflexibility from decades of overspending.
Value investing is all about downside protection. Do you really believe that stocks are at reasonable prices assuming a worst-case scenario?
U.S. businesses are in a much better shape than they were in 2008, but sovereign entities are not. Thus, if we dip back into a depression (assuming we ever really recovered from the last one) we won't see the same kind of steep 2009 recovery that we saw before that was induced by trillions of government stimulus because the governments will not have any flexibility to spend anymore or borrow anymore. Try to convince companies to spend their cash piles going into such a depressionary environment.
I'm no expert about what is occurring in Europe, but it seems that a Greek default is all but inevitable and is likely the best solution in terms of biting the bullet now for a better long-term outcome. Beyond that, I think there is still the possibility for other countries and their banks to be spared; however, there is no guarantee of this. Whatever the outcome, we can be certain it will be painful for the entire Euro area, and thus will be painful for the U.S. and the rest of the global economy. It seems like a decade of flat/declining equity markets may be just what we have ahead of us. Japan lost two decades and had long-term spouts of deflation even though the global economy wasn't in a recession. Can you imagine the global consequences if both the Euro area and the U.S. go into a decade or two of little to no growth and are in deflationary depressions?
This to me would suggest that markets are actually UNDERREACTING and that we could certainly go much lower. I'm not a fan of speculating in commodities, and I do not personally own gold, but I think that equities will go much lower and gold will go much higher before this is all over. Market timing is near impossible though and I could always be wrong. I would think that beginning moderate positions in undervalued companies now would be a good idea, and to add to these positions slowly over the next two years.
I think going forward is going to be a once in a lifetime opportunity for stock-pickers/value investors; however, it's going to be a very rough ride. If you can't stomach extreme volatility, you may consider other investments outside of stocks, bonds, and commodities over the next two or three years.
Fairfax in Greece
in Fairfax Financial
Posted
Just because they have the ability to hold to maturity doesn't mean that they will. It's their investment portfolio; if stocks, crater they would sell alot of their treasuries at a loss in hopes of picking up stocks for a large gain. Marking down the portfolio and discounting for such seems appropriate to me. Secondly, low rates have really been the only thing supporting the higher P/E multiples we've been seeing. Volatility within interest rates will result in volatility within stocks as the multiple adjust to expectations on inflation/disinflation/deflation as well as supply/demand differentials due to competitive investments now offering higher yield.
Frankly, I think what we're seeing is overblown; rates will likely come back down due to the fact that they can't go back too high without shutting down the economy and/or cutting profit margins down from historic highs. Deflation is still the main threat and higher rates and deflation don't really go together unless if you're a credit concern.