TwoCitiesCapital

+1 Hadn't considered to check the NAV, but ultimately this should act as a super leveraged exposure to rising 20-year rates which was my intention.

Agreed. Unfortunately (or fortunately for me) I started accumulating and saving assets early and planned tax efficiently. Thus - 90+% of my invested assets in the "markets" are through tax free and tax deferred entities that I've been maxing out for the past 10-12 years. IRAs, HSAs, and 401ks don't currently allow me access to margin or shorting (on a leveraged basis). So I do most of hedging with cash, put spreads, and things I'd expect to have some negative correlation with equities. But as well saw in 2020, gold tanked, bonds were erratic, non-government bonds and munis tanked, and puts got expensive before the real crash set in. So cash really was best. Any taxable savings I have has been put into my home equity, my crypto assets, and debt reduction.

Late 2019. Have been ~50% cash/intermediate bonds since mid-to-late 2019. I still haven't bought into the idea that this is a sustainable recovery, but my caution hasn't previously been rewarded so am staying half invested just in case.

I disagree. We've done it for two decades. So has Europe. So has Japan. Is it sustainable? No. Will it end? Yes. But we've successfully done it for 20-years. What's another 3-5? If there is a sovereign debt crisis, it's likely to hit others before us. And since currency values are relative, who do you think the relative beneficiary of that crisis would be? The USD and our interest rates. Now, don't get me wrong, you'd likely do better off with gold in that scenario, but I don't think the USD is going to get hit by a currency/rate crisis - at least not without it being telegraphed months in advance. That being said, I'm still VERY cautious of equity exposure. Everything seems expensive. Everything seems distorted. The slightest rise in rates causes chaos (as 2018 demonstrated) and I don't know where that chaos will hit first. It would not shock me to see a continuation of the rolling bear markets that we saw from 2010 onwards where at any given time some sector is down 20-50%. I'd rather wait to deploy it in those rolling bear markets and swing trade rates with my cash position until then.

Leverage. PFIX is a swaption wrapped in an ETF. Basically they own options to enter into floating rate interest rate swaps once 20-year rates get to 3-4%. In short, it's an option (leverage) that allows you to enter into a contract where you short fixed rates and go long floating rates (more leverage) on 20-year rates (massive duration/leverage). Up 3% today. Dunno what the 20-year reference rate moved, but 10-year is only up 0.07% so this thing gives you MANY multiples exposure to the rise in rates and doesn't come with any of the business specific risk of owning financials directly. Also, I already own a ton of European financials so covered there.

Bought some PFIX yesterday to profit from higher long-rates. Moved 15-20% of my intermediate bond funds to money market. Still in the lower for longer camp on rates - definitely don't see 2-3% interest rates anytime soon, but the move down in rates has been strong and fast and TLT has been bouncing off of over-bought levels for a bit now. Also, seems as if the consensus in some places is now for another major leg down ...which made anxious that we're now ready to move the opposite direction and head back closer to 1.5 - 1.6%

Lol - if they'd been reading this forum, they'd have known to load up at prices 10+% ago and that the earnings were going to be momentous.

I stand corrected. 4 days after announcing phenomenal earnings. After today's 4% pop - we're now up ~8% from the pre-earnings prices.

Agreed w/ everything except the expectation for 1.5x. I think we could get there in an environment where interest rates were sustainably rising and there was a decent market for insurance, but I don't think we get there in a near-zero interest rate environment. I would be a seller at prices of most of my position above 1.25x my estimation of adjusted book value. At this point that is roughly ~$850/share so we've got a long ways to go and I expect that the BV will be improving along the way. And who knows - maybe by that point I've changed my mind on disinflation/rates. An outlook of higher interest rates would make me more comfortable holding at 1.25x to realize those higher future earnings, but we'll have to wait and see then. As for now, I see no reason to believe the "lower for longer" trade isn't still in effect with the stimulus taking us on a temporary hiatus.

Thanks for posting. Not an expert myself in these legal arguments/analysis, but certainly sounded like the judges were VERY skeptical of the gov'ts framing and POV and less so of Fairholme's lawyers. Would also add that Fairholmes lawyers just sounded more impressive because they spoke with confidence and didn't stumble all over themselves like the govt's guy was doing. Not that it ultimately matters, but perceptions like that can sway lesser people - maybe it can sway a judge.

I think this is fair. It also still is the primary reason why I have $600-700 as the bottom of my range of reasonability. Considering the fair value of associates and those most of the insurance subs should likely be above book value on their own, an implied BV of $644 is the minimum it should trade for with a reasonable discount for potential cat claims.

Your questions: 1) Can you take physical delivery? No. These are most likely cash settled. So every period, Fairfax will get paid in cash (less financing fees) for the positive performance on the notional amount from the counterparty. If performance is negative for the reference period, Fairfax would pay the cash to the counterparty. 2) What happens if it's a grower? There are two types of swaps: fixed notional and floating notional. Fixed notional mean the notional remains the same at the end of the reference period. In the example of $10,000,000 in notional going up 10% during the reference period, Fairfax would receive $1,000,000 cash (less short-term financing fees) and the notional would remain at $10,000,000 for the next period's performance calculation. If Fairfax wanted to increase exposure, a) they could renegotiate the notional at the end of an observation period b) buy more swaps from a different counterparty or c) use the $1,000,000 in cash to repurchase physical shares Floating notional means the notional gets adjusted for performance at the end of each reference period. In the same example as above, Fairfax would still receive the $1,000,000 in cash, but the notional for the next period would be adjusted to $11,000,000 and all performance and financing fees would calculated off that $11,000,000 figure in the next period. Negative performance would reduce the notional. This would more closely replicate ownership in the underlying stock and Fairfax would NOT have to trade to increase economic exposure as Fairfax's price rises unless if they wanted to. We should be able to figure out which Fairfax has simply from the disclosures of P/L over the time period, but I haven't dug into those details to try to back into this yet. 3) Fees? As referenced above, typically a short-term financing fee. Most of the time reference periods are 1- or 3- months in duration so the fees would typically be a benchmark rate like 1-month LIBOR or 3-month LIBOR plus a spread for the market maker. The fees would literally be a fraction of a percent given where rates are today.

Put those limit sales in @ $696.96

I have a large portion of my account in FFH and so obviously trust Prem to an extent and I'm not trying to imply he ISN'T trustworthy with the following. But foregoing selling BB has nothing to do with integrity. I mean this is the same company, and the same investment, that they publicly announced they'd take private and then bailed on doing so. Where was their integrity then? That, along with the Fibrek examples discussed elsewhere, have demonstrated that FFH doesn't believe it owes anything to external managers or the minority shareholders that invest alongside it. I'm not saying that is a bad thing. Most companies operate like this and FFH's only legal duty is to its own shareholders. Just pointing out it is NOT a distinguishing feature as you imply and that it surely can't be the reason they've chosen not to sell as it would be at odds with their history.

Increased FFH by ~25%. This thing should be at $600-700/share USD IMO.

Who knows. The gap has been there since pre-covid when BV was estimated to be ~$16-17 and shares traded for $12-13. I'm tendering my shares at various strikes with the hope the share price remains flattish below those strikes and I can buy the position back. I only have the confidence to do this because the discount has been so persistent.

I honestly think this is the problem. He's too close to it. He's seen opportunity in it for over a decade and it's failed to deliver. Time to cut the losses. Wish he'd resign from the board and find the most advantageous way to exit the equity position. I'm fine with them holding the converts, but at least get out of the stock!

Now watch - it'll trade flat tomorrow and be up 5% on Monday/Tuesday.

This is true. I did this exact thing myself and am saving over $500/month from it. But even many of my coworkers in finance don't think this way. The two colleagues on my team hadn't even considered refinancing until I mentioned how much I had saved doing so myself. My guess is that a minority of homeowners will take advantage of this. It will still be lasting stimulus - but largely insubstantial in the grand scheme of removal of ongoing stimulus measured in trillions. Also, from a GDP perspective, you're just moving buckets. Whether that money goes to a mortgage servicer or bank to be spent on dividends, buybacks, wages, bonuses, etc that then get spent in the economy OR goes to the consumer - it's mostly zero sum. The consumer will have a higher multiplier, so it'll be a small positive impact, but it's not as if that money wasn't going to be earned/spent elsewhere otherwise.

It's behind a paywall so I can't read what the article is saying. As far as agreeing or disagreeing with Wabuffo - I'm afraid I can't say one which way or another. I've read most of his posts, but I just don't quite understand enough to agree or disagree with them. My rates trades are driven by two factors: 1) I still believe in the "lower for longer" trade in rates. None of the disinflationary/deflationary factors have fundamentally changed in the U.S. and as long as stimulus is temporary - so too will the inflation be. 2) I expect rates to move +/- 0.50% in any given 6-month period. This is historically true (though less so in the era of exceptionally low rates). The move from 9/30/2020 - 3/31/2021 was over 2x that amount and 9/30/2020 wasn't even the low in rates...they'd already come up quite a ways. Was simply too far, too fast IMO. Now that we've moved 0.50% back to the downside, within my realm of reasonability, I've closed my TLT positions. If we keep moving lower, I'll move my intermediate bonds funds to money market and will look to add PFIX or TLT put spreads to play a 0.50% rise in rates over the next 6-months.

Yes. Any regular dividends reduce the price and make it more likely to hit in your strike. But theoretically the markets are aware and price the puts accordingly. I used TLT call spreads to play the drop in rates. I have considered using PFIX to play a potential rise in rates. I don't know how the leverage compared to TLT puts, but I'd imagine it's somewhat comparable.

LOL!I mean don't get me wrong. There's been plenty of dogs over the years. There's also been plenty of home-runs. We spend way more time focusing on the dogs here which is the only reason I brought up the converts as being brilliant. I view Prem similarly to Bill Ackman - each one is swinging for home runs instead of base hits. Ackman had a multi-year stretch (2012 - 2016 ish) where multiple large and public bets failed to work out (JC Penney, Herbalife, and Valeant). But in late 2016 he hit his stride, basically called the bottom on Chipotle and has been hitting home runs since. The results are a little less clear with Prem, but it seems to me that a year or two ago, we began moving more towards home runs (Digit, Stelco, insurance subs, Atlas, BB converts re-strike) and away from strike outs (short-TRS 'hedges', Blackberry, Resolute, etc.). Maybe I'm wrong, but I anticipate we'll be back to 1.2 - 1.3x book value within 2 years and that the book value will be relatively elevated from what it is today. I'm here for that expected ~50%+ swing on top of the the ~40% i've already captured.

It is amazing to see how robust GOOG has been through this entire pandemic given that the travel industry was one of their biggest, if not the biggest, advertiser. Its mind boggling to see their results up so massively knowing that there has been very real, very long-term damage done to that sector. I bought Google in the bust of 2009 and rode it up and was very happy to do so. I thought about doing it again this time around, but couldn't get over my concerns that there would be moderate impairment in both their advertising customer base and the consumers who consume the advertisements. It seems I was very clearly wrong.

I tend to agree with this too. Market is indiscriminately selling them because the biggest piece of the earnings pie (interest on their float) is constrained in a low rate environment. This whole "well, the market is justified in hating Prem" explanation would make A LOT more sense if it had traded for a discount to book for the last 5-years. But it hasn't. It traded at a reasonable premium to book in 2018/2019 with the same Prem, the same hindsight, and the same mistakes. I pointed out at that time that the math was hard to make sense of unless if you had unrealistic projections of the returns they'd earn on their equities and debt investments. Here we are 3-years later. Book value has caught up to the excitement that was priced in back in 2018/2019. We've had a free look at the growth of Digit and the other Indian investments which are doing phenomenally. Insurance subs are improving and Fairfax owns more of them today setting up a long-term sustained improvement in earnings power. And while I don't believe rates are about to sky rocket, I think the likelihood of treasury rates heading higher from 1.2% is quite a bit higher than it was at 3.25% back in 2018. And on top of that, instead of paying 1.2-1.3x book value (IIRC), you get it all for 0.6 - 0.8x book value if you've been acquiring for the last 12-18 months. Seems to me it's not Prem that the market is discounting. Mr. Market just gets too excited, or too dejected, on interest rates at exactly the wrong times. I would hope this would be the case, but then remember that they closed out their duration bet in 2016 thinking Donald Trump would lead growth massively higher. They don't have much life left on the deflation swaps and they've sworn off shorting meaning if it's a deflationary bust they likely won't benefit much at all. Beyond their superb bond management in general, I don't think there is much else to hang our hat on here for them to outperform in deflationary and/or low rate environment unless if they were to do another immediate about face with there investment policies.

I mean, I get your point and don't disagree that Buffett may be better at it, but this is pretty close to what he did with holding Coke back in its heyday at a 40x PE. He got to collect the dividends, but the price was flat-to-down for the 15-years that followed and he held it. I think BB was a mistake. Admitted as much myself and sold my position after BB10 was a flop. But I think the convertibles were brilliant and the recent roll of them even more so. IF we make money on this trade after all of this time, it will only be because of those convertible bonds. Now, were those convertible bonds better than the alternatives? I don't know. I have no clue what Prem would have done with the money otherwise.