TwoCitiesCapital

This is one of my all-time favourites... One can you think that Varoufakis was not full of shit? The guy promised three days ago on BBC that the negotians would be resumed on Monday "With 100% chance of success" and that "banks will reopen for sure on Tuesday". now that the got what he campaigned for, he just disappeared. Agreed! I am having more fun watching this than Breaking bad or other TV shows. Tsipras promised that if he gets the no vote, he will get a great deal from EU within 48 hours, guaranteed. And this guy Varoufakis also said that if referendum comes out as an YES, he would resign immediately because he cannot play the hide and pretend game anymore. Now he got this NO result and he resigned right away? WTF? Now we will see how this clown Tsipras is going to pull out a better deal within 48 hours. :D It's almost as if you expected them to tell the truth? If politicians were held accountable for their lies, there'd be few left outside of prison. The majority say whatever is necessary to achieve their ends. In this case, both of them said things to help achieve a "No" vote. What actually happens after they get it is in no way tied to what was promised before they had it. I don't know why anybody would put any weight on a promise that requires multiple parties cooperate when those parties aren't controlled by the individual making the promise. That's not say a deal won't get done - it just won't be because it was promised by the PM.

Wouldn't deflation have to be "significant" for all these bets to pay off in a meaningful way? U.S. CPI is currently at 202 I think that depends on your view of what "meaningful" is. The current U.S. CPI index is in the mid-230s. It would take deflation of less than 2.5% over the next 8 years for us to break even on this position. Every % point beyond 2.5% nets $588M. Not an insignificant sum! European figures are around 118. We need European deflation of about 6% over the next few years to breakeven. Every % past 6% nets $445M. You can peg whatever likelihood on deflation that you want, but considering the last two prolonged deflationary episodes of developed economies lasted over a decade with cumulative deflation figures well above 2.5% and 6%, then I don't consider the current positioning to be too bad if you think that deflation has a possibility of occurring. Also, Prem has previously purchased more contracts, extended maturities, and lowered strike prices - if that trend continues, we stand to make more money (increasing notional) and increase the chances of making it (by extending duration and increasing strikes) if he is right.

Maybe you should wait and see how you feel as a consumer when you have actually experienced deflation, instead of basing your opinion on how consumers behave when their whole life has been in times of inflation. I'm sure this happens in some respect, but you can look at industries that have constant deflation to get an idea of consumer behavior. Look at electronics - we all know that the brand new flat screen TV will be cheaper in a few months and significantly cheaper when the next model comes out. Some people buy it right when it's released, others wait a few months, and others wait until the next model comes out to pick this one up on the cheap - but what doesn't happen is an entire stall in the market where nobody buys a TV simply because prices keep dropping. It takes a few months, but eventually, everyone who wanted a TV gets one at a price they were willing to pay. I don't understand why this is worse than engineering false demand to buy something just because you think the price will go up in the future. Inflation and deflation bring with them both positive and negatives, but I don't think moderate deflation is anything of more concern than moderate inflation. It's only when you get to the extremes in either direction that you have a problem.

The stock is not officially yours until the settlement date even though it will appear in your account. Settlement date is what makes it final. You generally need to purchase the stock a few days before the record date to ensure that it's settled on the record date to be entitled to the spin-off. I think about it with dividends when running through these exercises. The general set-up of dates is as follows. 1) Ex-div date: T-2 2) Record Date: T 3) Payment Date: Not important The reason the ex-div date for most dividends is T-2 is because stocks generally settle 3 days after purchase. If you didn't purchase the stock the day before the ex-div, you don't have the three days for the final settlement to be entitled to the dividend, so everyone who purchases at T-2 or after doesn't get the dividend and the stock price is lower to reflect that. The dates should generally be announced though as you will find situations that don't match this "template" exactly; however, I would think you'd have to have purchased the stock already. Also, I don't know what stock it is, but these dates are affected by the holidays in Canada and U.S. if you're buying one of those jurisdictions so you might have had to purchase it back in June to be entitled to the spin-off.

I use debt consolidation offers from my credit card companies to borrow at low rates for 12-18 months. I only do this with small amounts (relative to my portfolio) though due to the risks involved. As an example, I currently have about 10k invested that I got from my Chase credit card at 2%. Every 12 months I roll this to another available card through whatever balance transfer offer they have available. Generally the interest rates are 2-4% on my different credit cards depending on the current deal availability. Once the balance is rolled, I remove that card from my wallet and don't use it for a year since you have to pay down the low rate balance before any high-rate balance is reduced. I've done this multiple times over the last 6 or 7 years for different types of borrowing - I even financed several thousand of a car purchase this way since the 2% interest rate was lower than the 6-7% the car company was charging me. Benefits: Consistently one of the cheapest ways to borrow 10-15k of non-callable, non-secured money at 2-4%. Risks: Duration mismatch between borrowings and investments and potential inability to roll the amount. Keep the balance small relative to your portfolio to manage this risk. I do this because it's the only form of debt I have outside of a small amount of margin debt, and it's a much cheaper substitution for margin debt through Scottrade.

Congrats!

You can't judge the decisions by the outcome - you have to judge them by the information available at the time they were made. I think most of these, with the possible exception of the equity hedges, pass this basic smell test. Consider the following bet: I have a deck of 100 cards numbered 1 through 100. I offer you $100 every time you play and pull a card that is not 1. You pay me $100 if you pull a 1. You can play unlimited number of times. Now let's assume that you do the odds, realize that it is hugely in your favor, and you draw. The first card is a 1 and now you owe me money. Tough luck, but you realize you can play again and the odds are still massively in your favor. We shuffle the cards and you draw again. Another 1. You now have lost $200 in a game that is seemingly impossible to lose. Was it bad choice to play? Would it be stupid to continue? Would it be stupid to stop? Can someone look at your result of $200 and determine that you were a fool to have participated? Any intelligent person with the ability to play would have played the game but it still ended up badly for you. I can't speak to Resolute forest products or Dell because I'm not all that knowledgeable on those situations. Prem has already admitted the to early purchases of BBRY being a mistake. I think the fact that it's still around 3 years after people were calling for it's bankruptcy suggests that the story is TBD on the purchases from the last 3 years and the convertible debt is likely a great move. Even if BBRY goes the way of the buffalo, Prem will get paid and collect hefty interest on top of it. If they recover, a $10 price entry won't be too shabby. The deflation hedges are smart risk management and still appear to be a very smart bet from a man who was years ahead of the rest of the world in worrying about deflationary outcomes. We're supposedly years into a recovery, with trillions spent on stimulus, and yet several developed countries are still experiencing negative growth, disinflation, and ballooning debts...and it appears to be getting worse and not better. The equity hedges are somewhat indefensible. I understand his reasoning, but it does seem like they were put on too large, for too long, and have cost a lot! I don't have an issue with them hedging, but to go to 100% hedged on top of deflation hedges when equity markets were still relatively reasonably priced does seem strange. That being said, at current levels, I don't mind that that they're 80-100% hedged, but I think I cede this point to you. The Greek investments were fine until the Syriza party was elected. You'll recall that Prem purchased his equity stakes long before them and that Greece was actually doing relatively well and was even running a primary surplus in recent quarters. His recent purchases seemed to have coincided with the near bottoming in values back in March/April meaning he could be up 20-30% on those purchases despite all the BS that has happened since the end of Q1. You can't blame him for the unexpected outcome of an election.

I certainly agree that the market conditions probably wouldn't have allowed for rolling the debt at low yields, but it certainly makes a case against the draws from the Treasury. If all they needed to survive was to be able to roll their financing, couldn't this have been done with an explicit, verbal, government guarantee without forcing a pre-emptive $180B in Treausry draws that were only necessary due to paper losses and the subsequent interest owed on those Treasury draws? It seems like it would've been better for the Treasury to back stop them and only give them cash if they needed it. Not cash to cover accounting write downs that may or may not occur/be reversed...especially given the dubious nature of some of those write downs. They could have suspended MTM accounting, placed them into conservatorship to get the house in order, and only provided cash as cash was needed for actual losses and shortfalls. I don't have enough knowledge of the court system to know how they'd look at this, but I'm not crossing my fingers for the $180B to be wiped out. Just seems ridiculous that it was forced on them in the first place.

If you re-read my post from the prior page, mathematically there is no difference between the two IRAs other than the differential in tax rates now and later. It doesn't matter what your return is.

I would doubt it. He's already got quite a significant amount at stake in the company. His convertible debt helps cover him in the event that this investment doesn't work out, but the more common he buys the less protection it offers.

For an apples to apples comparison - Roth IRA final value: (1-t)P [(1+r)^n] That is you reduce your principal by current tax, and then compound that tax free at whatever rate for n years. Regular IRA final value: P [(1+r)^n](1-T) That is your principal compounds by whatever rate for n years and then is taxed at whatever rate is available to you when you retire. You'll notice that there is no difference between the two formulas except for what the values of t and T are. If you believe taxes (T) will be higher when you retire, it benefits you to put away (1-t)P today. If you think taxes (T) will be lower when you retire, you should put P away and pay the (1-T) rate later. That keeps the comparison equal across both. As Eric and others have pointed out, if you're choosing to max out the contribution either way, then technically the $5,500 you can put into a Roth is quite a bit more than the $5,500 you can put into a regular IRA. This is actually how most people should look at it even though it's not an "equal" comparison, it's more likely to conform with how people save - by using the upward limit as the target and not some esoteric (1-t)P amount. Diversification across the two does make sense as you get older, make more money, and move into higher tax brackets - you won't always make more in retirement than you're making currently and when it gets hard to decide you should be diversifying across both types of accounts. Now that I'm a few raises into my career, and live in a high tax jurisdiction (NYC), I have begun prioritizing maxing out my 401k before I contribute to my Roth that I have prioritized since I opened it in high school. I like my Roth though - now that I've been contributed for nearly 10 years, I view it as a retirement account and an emergency account since there's quite of principal contributions that I could access in a pinch AND I can pull out principal and earnings for certain qualified purchases like my first house or certain medical expenses. If I don't ever need the money, it compounds tax free. If I do need the money, it's there for me. A regular IRA/401K can't really do either with anywhere near the same flexibility.

Just purchased a speculative position in BBRY again as software revenue does seem to be accelerating. Somewhat "blind" faith in John Chen but the numbers do seem to merit some confidence in the guy.

Sold about 40% of my OUTR position today. This is a continuation of my slow deleveraging to pay of margin debt and to raise a cash balance that I have been doing over the past few months. I'll continue selling at intervals as soon as the gains hit their long-term status and the price stays around here or higher. Now that the shares are up 40%, I have to be more accurate in my assumptions of how quickly its business will decline for further value appreciation and I'm concerned about an overall market decline. I'd rather take the ~30% net profit over the last 12 months generated by margin and not be greedy and regret it.

Just stumbled upon the Yelp reviews for the Centurion Lounges as I'm pondering if an upgrade in my AmEx card is worth the additional annual fee or not. Seems like there are a lot of satisfied customers which is totally unsurprising given my experience with AmEx customer service. http://www.yelp.com/biz/american-express-centurion-lounge-dfw-airport I still haven't made up my mind if the additional $250 is worth it to me at this point, but I'm definitely excited to try these lounges at some point.

Seems odd to me. The reason no damages were awarded because the judge says that Greenberg failed to show the harm to shareholders given that the alternative was an AIG bankruptcy with no government support; however, that wasn't the only alternative. The alternative was that AIG receive support under similar terms given to other massively troubled financial institutions at the time. I haven't read the full docs - just an article or two covering the decision so it could be the judge is giving credit to the gov't claims that no bailout would have happened without the equity kicker, but it seems like a strange line of reasoning assuming that bankruptcy was the only other alternative just because the government said so...

I own it in my low-P/B portfolio. I have some shares purchased back in the high 5s and some puts sold against it at 6.50. That being said - I don't know much about it. I don't do any research on these companies other than buying them under book value. Do you run funds? People are paying you to put no effort into this? its my IRA so maybe "portfolio" was misleading. Nobody pays me to be lazy except the people selling me these stocks.

I own it in my low-P/B portfolio. I have some shares purchased back in the high 5s and some puts sold against it at 6.50. That being said - I don't know much about it. I don't do any research on these companies other than buying them under book value.

Meh - I rarely pay attention to anything released by Zack's, the Street, or the Motley Fool. If software revenue doesn't come in over the next two quarter's results like Chen suggested, then you can be relatively confident that this was a poor investment all around. If software revenue does come in, then purchasing shares and convertible debt with a strike price of $10 will likely prove a stroke of genius. Time will tell.

1% lottery ticket. Holding prefs. No buy timing. Would sell if it went to ~0.5 expected value without resolution in courts. Otherwise hold until resolution one way or the other. Unless you are a lawyer experienced in this particular branch of law, have read through all the legal documents and are experienced in assigning probabilities based on legal documents so far, this is a pure lottery ticket. Don't kid yourself that you know the "certainties" or probabilities based just on what Merkhet, Fairholme, Ackman and a bunch of journalists write. I agree -- it's hard for anyone without some sort of legal training to really understand this situation. As a result, I would size it based on your level of understanding of the situation up to some cap. Makes sense. Given how quickly it will take to me to recoup a total loss, which isn't likely to happen in the near term, I've been comfortable with a 3-4% position and wouldn't expand it much beyond for a straight bet on the outcome of the current trials. But given that I don't see any large near term downside risks on the horizon, I expanded it recently benefit from any change in sentiment a positive AIG ruling might bring and plan to reduce it back down to 3-4% after those results have been announced.

Nice find! I'd be interested in having a discussion on how you guys manage the risk of a position like this all things considered. This is a really interesting situation due to the risk/reward, the time-frame, the restructuring uncertainty, and the multiple securities available with different pay-offs and certainties. It'd be interesting to hear how people are sizing this, how they trade around certain events, what securities are being used, and if they're managing for themselves or for others. I think at the very least it'd be instructive for some of us more junior investors. Personally, I manage money for myself and this is sized at 7% of my portfolio (which would translate to about 5-6% of my total net worth). It's a little larger due my recent additions that I intend to sell after the results of the AIG whatever the results may be. I see a long-time frame with little in the short-term that will really move these things so I'm more comfortable trading around the position on related news over a short-to-medium time frame. The majority of my position is in common shares of Fannie Mae now that recent evidence has revised my probabilities of success upwards. I still hold some of the higher "yielding" preferred shares that I had originally purchased to help hedge the event that they're treated more favorably in the restructuring. The majority of the position is held in a taxable account to help hedge my losses in the event I'm wrong - this also allows me to feel more comfortable taking a larger position knowing the IRS will subsidize the downward volatility. I have a small piece in my Roth IRA to allow for the benefits of tax free compounding if this thing really does go back to $20-30.

The way Prem talks about The Great Depression, about being cautious in 1925 and waiting through 1932, suggests he is going to wait a whole lot longer than 2 or 3 years. So I think he is going to stick to deflation camp for a very long time. A couple of years of inflation would seem similar to the way he had to wait for CDS bets to come through. Vinod You'd have to consider that 2-3 years on top of the years we've already been waiting which would be closer to 6-8 years at that point. The real "problem" is that the last 4-5 years have largely validated Prem's concerns. *Commodities have been eviscerated *Trillions in global stimulus still can't buy growth above 2% for the Western World *Inflation has trended lower and lower and lower until it went negative for much of the developed world last quarter. *Bond yields are significantly lower than they were 4-5 years ago and there are negative yields in Europe. *The velocity of money continues to hit new lows every quarter. *Wage growth has been totally stagnant If you had a 2-3 years where inflation picked up, wage growth picked up, GDP prints at 3+%, and bonds yields begin rising then I think you have significantly more pressure to forget the deflationary thesis than you've had over the last 4-5 years where everything he was concerned about has generally occurred - and within his time-frame too as he's constantly mentioning that it took a few years for deflation to set-in during Japan's crisis. I don't think that last 4-5 years of resilience and commentary in the face of confirming economic data can be used to predict how he would or wouldn't behave if that data was no longer confirming his concern. I don't think Watsa was soundly in the deflationary camp. He saw it as a distinct possibility and so hedged for it. I'd say that is a wise move - though generally costly. Similarly holding a cash under certain market conditions is also a prudent move - though generally costly. The economic conditions have indeed seemed to have revealed a deflationary bias. Central bankers are in a big fight to offset it - though it would be very interesting to see how their books would revalue should they loose the battle. I have a hard time imagining how they'll fight it. Very few of their policies make it through to the average consumer and the causes of their inability/unwillingness to purchases at current price levels. Consider that bond yields rose or were flat through every period of QE and only fell when the QE stopped? Consider that the Euro area tried to talk down their currency for a long-time before the rumors of QE did it for them - now the currency is rising again despite the actual QE being done. Consider that credit is still not generally being taken out by consumers despite insanely low interest rates. I think it's pretty clear that the Central Bankers have never had the control over the economy that the "textbook economics" would suggest which is why all of these market responses have been opposite of what you'd have imagined. A sustainable increase in after-tax take home pay is probably the one reliable way to achieve what the Fed has been attempting after the near-Depression scenario that occurred and none of their polices are really able to target that. That is the fiscal side and the fiscal side is constrained with gridlock and a massive deficit/debt to deal with.

Sold all of my SB and rolled into an equal number of SBLK. I still like SB better, but I need some short-term losses to offset some gains this year. SB has also outperformed SBLK by about 35% over my holding period meaning I can book the losses to offset gains, increase my exposure to the dry bulk on a percentage ownership basis across the industry, pay down some margin, and consolidate in a company that is cheaper on a relative basis. Also, picked up a starting position in PDER to motivate myself to look into it more.

It might be a bit too high at this point in time, but WLRH regularly fluctuates at prices between $9.90 and $10.75. It's a SPAC with Wilbur Ross and it has less than a year left to announce a deal - if no deal is announces the fund will liquidate and shareholders will receive approximately $10 per share. I use this as a riskier form of cash and regularly purchase shares when it's around $10 and sell them as they get nearer to $10.50. This has multiple benefits: 1) Much more potential upside than cash in the event that a deal is announced while you hold the shares 2) Potential to trade in and out of the shares as the price rises/falls to generate a "yield" of around 5-7% pre-tax. 3) Near certain downside protection around $10 per share until a deal is completed due to knowledge that you'll get $10 back if no deal is announced by December. This is definitely higher risk than cash because the market could just decide to value this thing at 0.01 and you'd end up having to wait until the fund liquidated to get your full cash back and that might be in several months, but I think the likelihood of this is close to nil. Beyond that, you have a relatively certain downside that you choose with your buy-price and have the opportunity for much greater upside than cash. It currently trades for around $10.60 so it's a bit rich relative to the potential $10 downside, but if you are patient there are opportunities to trade it and will likely be more before it liquidates. I've entered and exited 2 separate times in the past year and hoping to get in one last time before the deal announcement deadline in December.

The way Prem talks about The Great Depression, about being cautious in 1925 and waiting through 1932, suggests he is going to wait a whole lot longer than 2 or 3 years. So I think he is going to stick to deflation camp for a very long time. A couple of years of inflation would seem similar to the way he had to wait for CDS bets to come through. Vinod You'd have to consider that 2-3 years on top of the years we've already been waiting which would be closer to 6-8 years at that point. The real "problem" is that the last 4-5 years have largely validated Prem's concerns. *Commodities have been eviscerated *Trillions in global stimulus still can't buy growth above 2% for the Western World *Inflation has trended lower and lower and lower until it went negative for much of the developed world last quarter. *Bond yields are significantly lower than they were 4-5 years ago and there are negative yields in Europe. *The velocity of money continues to hit new lows every quarter. *Wage growth has been totally stagnant If you had a 2-3 years where inflation picked up, wage growth picked up, GDP prints at 3+%, and bonds yields begin rising then I think you have significantly more pressure to forget the deflationary thesis than you've had over the last 4-5 years where everything he was concerned about has generally occurred - and within his time-frame too as he's constantly mentioning that it took a few years for deflation to set-in during Japan's crisis. I don't think that last 4-5 years of resilience and commentary in the face of confirming economic data can be used to predict how he would or wouldn't behave if that data was no longer confirming his concern.

I agree with the comments regarding the income generated by their investment portfolio. Fairfax has $1240 per share in investments. If they can achieve just 3% returns on this amount, that would amount to a 7% return post-tax. Not stellar, but reasonable outcome based on a very low performance bar. 3% is hard for them to achieve with 50% of the portfolio hedged/cash with the rest being in bonds, but the portfolio won't resemble that forever. Also, this analysis totally excludes any gains generated by underwriting and the consolidated affiliates which have the potential to impactful in any given year. Ultimately, in a normal environment, I'd envision Fairfax being able to easily generate $85 per share on it's current assets/insurance business. We're currently far from a normalized environment, but I see these working out one of three ways: 1) Fairfax is right and there is deflation in western economies. Bond portfolio pays off hugely with Fairfax recognizing billions in gains. The hedges and deflation derivatives quite literally mint money and give Fairfax large upfront gains which would be subsequently deployed into assets classes that now have attractive forward valuations. We get a large bump in earnings on the front side and then very volatile earnings afterwards with the inevitable ups-and-downs associated with the value assets purchased. Fairfax likely manages to make greater than my $85 per share per year over an economic cycle during this period. 2) U.S. economic growth picks up and inflation with it. Fairfax waits for another 2-3 years (maybe shorter) in the face of strengthening U.S. data before determining that their deflationary thesis has been invalidated. Fairfax re-risks their portfolio for a more normalized outlook and begins generating the $85 per share that I believe they can earn. 3) Economies continue to muddle on with some quarters validating Fairfax's cautionary stance and others making them absolutely wrong. Earnings will be hard to predict and will be entirely dependent on underwriting results and alpha generations. Earnings per share are more likely to be in the $25-30 per share range but will be extremely bumpy due to the constant shift in asset prices back and forth between positive and negative sentiments. It's hard for me to say which one of these scenarios is most likely, but scenarios 1 and 2 don't end up so badly for investors other than being volatile or requiring additional patience. Option 3 would be moderately troublesome from current prices, but I also think that it's the least likely. We've muddled through for the last 7 years, but without any significant slowdown and with trillions in liquidity and support pledged from central banks along with zero-bound interest rates. The seeds of the next crisis have likely been sown and something will happen somewhere to re-awaken volatility and the concept of loss at some point in the next few years. I have a hard time imagining a muddle through scenario if we see severe asset price correction or a recession in the major economies - either one could easily happen after 7 years of relative calm.