TwoCitiesCapital

I'm open to the Fed hiking again. I think it would be a mistake. I don't think the data will support it especially now that we're seeing outright deflation in many goods/real assets. But I can believe that their motivations may be something other than "stable employment and inflation". Powell has basically said, in other words, that their intention is to drive the economy into a recession. Whether he does that by raising rates, or leaving them too high for too long, I can't say. But I've been pretty confident for awhile that 4% was too high and have been buying duration every time its available above 4%. I'm in a lot of things in fixed income at the moment. Started off in cash and iBonds when rates were basically zero in late 2021. Then started accumulating short-term spread products and agency mortgage expopsure as rates rose and certain spreads blew out in 2022. Then started adding intermediate government duration and core bond type products. Then I started adding TLT calls when rates were on their way up to 5%. In recent months I was adding fixed income CEFs at sufficient discounts to NAV to make me want the low-quality credit. 10+% cash yields. At this point, I don't really care what rates do. Lower rates benefits my duration exposures and can give me ~10+% while likely giving me attractive opportunities in stocks. Flat rates let me collect a yield that probably YTMs that are 6-7% in aggregate. Higher rates hurts my duration, but likely help my spread products - so maybe ~5+% while setting me up for even juicier returns next year. I'm ok with any of those scenarios.

Markets are plenty stupid from time to time. Pricing the 2021 stock market at 30x+ earnings while knowing inflation was accelerating was idiotic. Seemed like everyone was saying equities were an inflation hedge. Meanwhile, myself and a few others were suggesting real returns on equities were going to be poor, that margins were likely to contract (and profits fall), and that picking your spots in bonds and gold would likely outperform. And what did we see? Contracting margins and falling profits. S&P 500 profits are STILL below what they were in 2021 in real terms. Even after the double-digit rally in Q4 last year, nominal returns are mediocre and real returns are roughly -2%/yr over that time. The only real surprise here has been the markets willingness to bid stock prices up again, despite an environment that is clearly cautionary and even that couldn't deliver good results to the average stock. On rates: The problem that markets get wrong about rates is that if you're lowering your discount rate, then you should be lowering the average growth rate you expect as well. The effects largely cancel one another out. This was borne out in the 2010s when U.S., Europe, and Japan all had 0% rates. Broad revenue growth was abysmal. GDP was significantly below average. Real earnings to workers and etc suffered. The primary saviors of the S&P 500 came in the form of refinancing high cost debt and levering up which expanded margins, using cheap debt to buyback shares, and the eventual concentration of the index in a few hyper growth names that were ablet o buck the trend. But 2 of those 3 trends are basically guaranteed to reverse and act as headwinds in a decade of non-zero rates. Earnings have NOT been resilient and have NOT been better than originally expected. The only expectations beat were the expectations that were previously cut dramatically. The expectations were earnings would be inflation resistant. We are still below 2021 earnings in real terms by a fair bit. Not a huge amount of evidence? It's only in services consumers are "splurging". Retail sales plummeted in 2022 in real terms in 2022. 2023 basically got us back to even in real terms. The best characterization of that is stagnation. And that stagnation was existing before we entered a consumer credit cycle. Now? Credit card defaults are accelerating. Major economies ARE going into recession. Commercial real estate is beginning to weigh on regional banks and we know major banks have been cutting back on lending. I have to believe that sets us up for a worse 2024 than 2023 i.e worse than stagnation. I don't know what is delaying the recession. The timing of these things is always difficult - especially when confounded by trillions in an unprecedented bout of stimulus. But forward data continues to disappoint and now coincident data is starting to. The only three things that appear to be holding up are the 1) S&P 500, 2) the unemployment rate, and 3) GDP. 1) The S&P can make mistakes and turn fast. It has repeatedly done so in the past 2) On unemployment? The numbers have been trending in the wrong direction. And while headline numbers are fine relative to historic figures, the moves under the surface are concerning. More part time jobs and fewer full time jobs. Higher wages, but fewer hours, leading to less take-home pay. More government jobs, fewer private sector jobs. Etc. etc. etc. The weakness is there and growing and we know this is a lagging indicator 3) On GDP? It's painting an entirely different picture from GDI which aims to measure the same thing. And it can be revised lower as it has been in prior periods leading into recessions. My expectations are historical GDP figures will be revised lower and GDI figures will be revised higher and GDP will not appears as robust in hindsight And lastly, we have official recessions in Germany and Japan. France is teetering on the edge. Most of the rest of Europe is slowing. As is Canada. As is China. The majority of the global economy is pointing to a slowing.

Fairfax has demonstrated time and time again that its share price is NOT part of an efficient market. As mentioned in my post, there used to be stellar earnings reports that the stock wouldn't react to and then 2-days later the stock would pop 4-6% for seemingly no reason. I actually started a strategy of adding to my positions after great earnings and then selling into those pops that worked reasonably well for 12-18 months. So while there is nothing that surprised us, given things like the headlines characterizing these earnings as a "miss" or as lower than last-years (without adjusting for the $1.2B gain from a subsidiary sale), or the share price tanking after the MW report, it's clear that the market doesn't follow this anywhere near as closely as we do as is regularly missing the story here. Which is why I'm surprised the earnings report didn't spell it out for those folks with $1.7B in Q4. That could be. That was exactly my plan into a 5-10% earnings pop ABOVE the pre-MW report prices. Broke my own rule on position concentration to allow adds in the wake of the MW report. Gains since then have been satisfactory, but was definitely expecting more "oomph" from it. Now I have to decide how long I'm going to allow myself to break my rule for. Yea - we'll see. Hoping it's the return of the 2-3 day lag in share response to earnings.

Going to be honest - the share price reaction to an a amazing earnings report is a bit disappointing Makes me wonder if 1) the market had it "right" and the earnings rally was what we saw in January or 2) if we're back to the days of the getting the earnings look for free and the stock responds 2-3 days later Either way - I am somewhat shocked we didn't get a pop of 5-10% from market participants who haven't been following this as closely as we have.

This is concerning me as well. Was already on edge with the U.S. markets ignoring leading indicators, tax receipts, PMIs, composition of jobs, etc. But now we actually have corroboration from other countries that this slowdown is global and still nothing. Lines go up. Seems like this is going to be one of those things that appeared obvious in hindsight, but that markets were able to ignore in the moment. In the meantime, content to be heavy in bonds.

If long-term, rates go from 4% to 5.5%, which do you think will likely lose more? Stocks or bonds?

Jeezus.... You just can't win, can you. No mention of last year's profits being goosed by $1.2B from the per insurance sale.... No lower quality than the $1.2B in losses taken last year for interest rate moves. Most of these gains won't be given back because it's not reflective of premiums to par as much as it the reversal of prior discounts to par from interest rates running higher in 2022 as well as the amortization of those discounts as portions of bonds come nearer to maturity.

I'm giddy myself Is gonna be high quality earnings (not accounting/paper gains) and a killer report

The hand wringing is largely just due to the liquidity drag it can potentially create. Just like I was paranoid about their duration until they got around to locking it in. There has been a history of mistakes made that we don't want repeated. Fairfax damn near run afoul of covenants and cash @ holdings company before. Having to come up with cash to front the movement on 7% of it's shares every quarter is not chump change. Particularly as the share price has moved from $500s to $1000s. This isn't like their other equity investments because those wouldn't necessarily require additional cash infusions to continue holding through a downturn. And as the financing hurdle rises, and as the stock price rises, the potential cash cost of holding a position through a downturn is rising significantly For now, I'm comfortable with it. But I would prefer them to let it go too early than to be forced to let it go too late. "Buy fear, sell dear". Selling dear by definition means it hurts to sell and you don't want to do it.

This. All currencies have sucked relative to the USD over the last 10-15 years. I've been surprised by the staggering amount in some countries that aren't really "hyper inflationary" and the currency drag is the predominant reason my EM value plays at 3-5x earnings didn't trounce the S&P. The below aren't peak to trough - they're just rough approximations of the exchange rates that existed in 2011 compared to where they're at today. Mexican Peso is down like ~40%. Brazilian Real is down ~70%. Korean Won is down ~20%. Euro is down ~25%. Australian dollar is down ~40%. Yen is down ~50%.

Jokes on us. Brett Horn hired MW just to have a second voice agree with him

This indicator is less relevant with multi-national companies that exist today. At one time, it made sense that the capitalization of companies in the US would be tied to the incomes/economy of the U.S. and could not meaningfully grow beyond that. This was the case for much of Buffett's early career. But now? Companies do a ton of business overseas and are no longer linked to just American incomes (what GDP is measuring) allowing for higher multiples to U.S. incomes to persist. I doubt we see 70-80% again outside of some economic depression.

Yes and no. As mentioned by others, the index essentially represents the best of the best (not always, but a close approximation) and thus isn't representative of the "average". Also, a chunk of revenues/profits are derived overseas which may be less sensitive to the ebbs/flows of U.S. specific economy.. Historically, they are related but not perfectly correlated. If only because weakness in the overall economy tend to lead to weaker consumers which will hit even the best of companies, a slowdown in the US can cause slowdowns elsewhere globally given how much we import, and because as people are laid off there are fewer $ flowing to excess savings/investments to bid up shares. But they rarely coincide perfectly - stocks often lead, and sometimes lag, the developments in the economy.

Good call - hadn't realized it was already in the Canadian models either so I suppose still good news to me, but certainly less impactful. That being said, hard to say it won't be a road map for US models now that the ETF is approved.

What's interesting about all of this, to me, is the 10% move today had me buying shares and increasing my position by 10%. But I wasn't increasing my position by 10% when we were at this price 4-6 weeks ago. Probably 1/2 anchoring bias and 1/2 knowing earnings announced next week are gonna be amazing

Cash would flow out of Fairfax to the counterparty. But this dip so far only takes us back to where we were in January, so nothing to be concerned with on Q1 at this point as it's just reversing cash that would have been due to Fairfax. Plus, we've got blowout earnings coming in a week that may take us right back up. TRS is only concerning when the economy actually tips IMO. Then you'll likely have falling asset values AND falling liquidity as it drains cash from Fairfax's coffers.

Yea, I dunno about how he expressed the short, but I tend to agree with Greg's take here. I'd prefer Fairfax without all of the inter-related transactions, paper gains, etc. because it definitely muddies the waters That being said, the transactions that are the most questionable are tiny, the transactions he points at that are off-balance sheet debt have already been identified as such here and were obvious done to raise liquidity and stay compliant with bond covenants amongst other things, and ultimately I would argue it's probably a good thing Fairfax has these relationships and avenues for recognizing value when the market won't give it to him given the regulatory importance of book value and liquidity for underwriting. Just glad I got to pick up more shares before what is likely to be an absolute smasher of Q4 earnings. Looking at $1+ billion just in fixed income gains/coupons - not even touching equities or insurance which we know also did strongly.

Thank you, Muddy Waters!

Just updating here: Received a second separate distribution of 0.1055 BTC. Not sure how they decided the make up of BTC and ETH for the recovery, but I wasn't expecting two separate payments. Better than what was implied by my original post but still a far cry from the crypto lost

In other news, it has begun.... No shock that Fidelity is first to incorporate it for model-type portfolios

Just got my Celsius distribution today. Had a hair over 0.5 BTC there and ~4k of stable coins. My distribution today was for 1.6 ETH. 85% loss in nominal terms compared to what the crypto would be worth today had I just held the BTC and stable coin in my wallet No idea what the value of the private mining co is ,or when I'll get my shares and it'll IPO, but that is supposed to be the bulk of the recovery. clawvacks from on going litigation could add a few more %, but it's looking ugly so far in comparison to my cousin was made whole in BlockFis bankruptcy

Why own the 10-year? Because a money market won't go up 10-15% if the Fed cuts to 2%. It's total actually falls as every day a portion of the money market resets to lower yields. Govt duration is a primary hedge in most risk-off environments. 2022 was an exception given that it was an inflation scare and yields started at 0% at the start of it.

I purchased the ones that had the largest discount to notional that traded regularly enough for me to establish a position. At the time, that was FMCCJ and that is what I still own. There are other more liquid shares at higher valuations as well as different coupons which some have theorized may make a difference in damage calculations and potential recoveries, but I haven't speculated about any of that.

This. Overall earnings growth is still not great for most other companies, even with easy comparables from the prior year contraction. And it's all quite a bit worse when you adjust for inflation over the last 2-3 years to gauge the real earnings growth/contraction.

Yea, have been holding/adding since 2012. Has dwindled from a 10% position to a 2% over that time as this has taken way longer than I thought, the courts haven't been as kind as I thought, and I've allocated quite a bit more to other positions over time (and those positions have grown). I have more confidence in the preferred given any value accruing to the common, requires certain assumptions on capital levels, how that is split between debt/equity, and the timing. And I have no ability to know the outcome for any of those three variables. But if the common is worth $0.01, then my preferred are worth at least $50 and I'll 7-10x my investment at minimum. As far as the run-up? Seems to be a 'Trump trade' as a bet on the outcome of the presidency. Not that Trump was particularly great for them last time around, but he's probably better than Biden if you want to see this handled.