TwoCitiesCapital

70 basis points for the duration (13 months), not the month, no? 70 Bo's would be the cost for the entire duration. Ackman is paying 0.50% for the year and us a little more with that bet. The difference is you're really only hedging for drops in excess of 12% since LQD currently trades @ $136. The whole ride down from $136 to $120 is unprotected (depending on timing/speed/etc of the drop.). Bill's bet would be paying out the entire time AND still be cheaper while the option holders risks riding out a 10% decline and still losing their principal. These institutional guys get access to superior products than us average Joe's.

LOL! Agree. Gold miners are perennial destroyers of capital. Calling gold miners a value play might be the biggest oxymoron I've ever heard. Let's take a look back to the beginning of Covid how did that work out for the investors holding gold as a hedge? They took an even bigger beating than the market. But that's where your wrong D33pV4lue gold is a hedge against inflation. Then can someone show me a chart of equities index to inflation vs Gold indexed to inflation? Investing in gold is a fool's game why don't we just go out and buy some crypto? Not to say there arent times when trading miners isn't a good strategy, but as "long-term investors" it makes no sense. Sorry for the rant I will now mute myself from adding my 2 cents so as not to disturb the people in this thread that are actually interested in gold. BOL I would actually argue it's a hedge against negative real rates, not inflation. Typically you get negative real rates when inflation exceeds nominal rates, but that doesn't mean it hedges inflation because you can have high inflation and even higher nominal rates and gold will likely do terribly. It did terribly early on in Covid b/c 1) everything gets sold in a liquidity panic and 2) deflationart pressures increase real rates which is negative for gold

https://www.wsj.com/articles/freddie-mac-ceo-quits-as-prospects-dim-for-exit-from-government-control-11605292952 WSJ's view is he's leaving due to LACK of forward looking progress, not that progress is being made in settlement discussions :/ All speculation, but doesn't sit well with me.

Well he's not in charge and he's not a politician. He has little skin in the game. Like I said, I don't think there's the political will for nationwide lockdowns particularly if a quick fix like a vaccine is around the corner. The politicians will seem the increase in mortality a worthwhile sacrifice to avoid another lockdown.

I don't think there is the political will for another nationwide lockdown - especially if a vaccine is on the horizon. Not locking means the bulk of the cost is borne by those marginal individuals who die - and dead people don't vote (insert joke here). There is unlikely to be lasting and long-term consumer behavior change since the vaccine hope is still alive and the impact to businesses from accelerating case counts is moderate. If there was no vaccine, and no hope of one, and the exponential growth curve is getting out of hand, lockdowns become way more likely because the cost of not doing them isn't measured in tens of thousands lives and moderate economic losses, but rather hundreds of thousands of lives and significant economic shocks as the fear of doing anything outweighs the impulse for discretionary spending. I think it's clear which if these two scenarios politicians will lean towards as long as a vaccine is on the horizon.

Why don't you buy puts on LQD or HYG? You probably could. Benefits would be no margin requirements, finite/manageable losses, and non-recourse leverage. Downsides are that it costs way more than 0.5% annually for ATM exposure, you're probably getting slightly less leverage (estimated 10-20x leverage in CDX pending margin requirements), and significantly less liquidity with wide bid/asks.

Agreed with this characterization. Have been focusing on real assets for the last few years, to my detriment, but still not convinced that it's a mistake.

I've got a 996 to sell you if you're willing to pay me the right price in BTC ;D

I think markets did exactly as they were expected to. Sold off as uncertainty increased and reached it's peak in (night of the election). And now that every day passes, the election results become more and more certain which si positive for equities. We can try to break it down in a "Biden wins, but stocks aren't worried b/c Republican senate won't pass higher taxes or tech regulations" or whatever, but ultimately I do think it came down to the simplicity of elimination uncertainty.

When does the mania start? I use the premium on GBTC to measure sentiment - when it's below 15%, sentiment is typically terrible and the Bitcoin pricing is declining. When it's 25+%, sentiment is euphoric and the price is rising. Pretty easy to swing trade this (premium was @ just 7% a month ago and is closer to 22-23% today near the close and have successfully done this 3x times now this calendar year). That being said, we're still not in euphoric 25+% premiums to NAV despite the 50% rise which is surprising to me. Is this a flawed measure of sentiment OR is 50% in a single month so underwhelming relative to expectations that it doesn't yet deserve the NAV premium? Or something else I'm missing? Another piece of anecdotal evidence - at these prices in 2017, every single one of my finance friends were following it, trading it (and shit coins), and talking about driving lambos to work. This time around? Not a freaking peep!

Indeed... which is why I don't make any election trades. Right?!?! When Trump first won back in 2016, futures cratered by like 6-7%. By the open the next mort, everything was green again.

It's the difference of buying for income versus capital appreciation. You may not get much appreciation in the Midwest, but cash yields ar healthy. You won't get much in the way of cash yields on the coasts, but the capital appreciation has historically made up for it. I find I am more comfortable with the idea of cash yields and expected flexibility that they provide when things hit the fan

I have noticed this for years. Doesn't happen every time but more often than not, especially if there is good news. Who needs a crystal ball? Right?!?!?! Glad I had an order out at the open to increase my position 25% @ $268. It's possible we revist that, but not counting on it and was glad to see it filled when I noticed we were up 5+% at the time. 7% yesterday. Up another 6% today. Basically back to knocking on $300/share door which is still stupid cheap IMO - but crazy to think we were at $268 following decent earnings just 48 hours ago.

Fairfax always seems to trade with a delay after earnings... Up 6.5% today despite being down 1% on Friday after earnings were announced. I can't say I've paid close attention the last few quarters, but I know this isn't the first time it's taken Fairfax stock a few days to respond to decent earnings. Almost as if the market allows you to see the result, then make the buy decision, and get rewarded for results that were already clear in hindsight.

I agree low to mid single digits on equities should be easy, but it would have been easy to do a lot better than they did on equities the last 10 years as well. If they changed their approach to buying "easy singles" and just bought the low multiple large caps you mention their returns would almost certainly be fine. Is there evidence they will stop doing their "swing for the fences on structurally distressed" style of investing? Even if the don't, I have to imagine that in the environment where those same distressed investments are down 50-75% from their peaks it'll be easier to make 2-3% on them going forward. My only point is the opportunity set for them in 2018/2019 was scarce IMO and they traded at 2x where they do today. Now opportunities abound and Fairfax is undeniably cheap. Maybe they fail to capitalize on it. It's possible. But the decision for me to buy today is way easier than the decision was for me to sell in 2018/2019.

Fairfax is a three legged stool: 1.) insurance / underwriting - solid 2.) investing part 1: fixed income - solid 3.) investing equities / op co’s - a mess The way to make very good money with Fairfax for the past 20 years is to wait for the turn in stool leg 3. (Mr Market was always slow to catch on so the shares became $20 bills lying on the ground in plain sight for all to see.) The problem for Fairfax investors is stool leg 3 has underperformed for the last 7 years (more than offsetting the gains made in stool legs 1 and 2). The good news for new investors in Fairfax is with shares trading at US$266 they will likely do well moving forward if Fairfax simply stops losing money with bucket 3. Crazy thing to say... but i think it is true (posters think i am only hard on Trump :-) And that is how out of favour this company is today... People do not want to own it because they expect Fairfax to lose more money in bucket 3. There are lots of legacy dogs still barking in the shadows: Toys R Us, Recipe, Blackberry to name a few that quickly come to mind... Now having said all that i might reestablish a position tomorrow. Because, to Sanjeev’s point, if they ever start to make a positive return from stool leg 3 the stock will rock. The other potential catalyst for shares is Prem’s creativity in surfacing value. Hi Viking...I agree with your 3 legged stool analogy concerning Fairfax with one exception. To date Fairfax's fixed income investing has been very solid---in my view the real strength of the company over the last many years. My concern is that given the ultra low interest rate environment we are in and will likely remain in for a very long time I am not at all optimistic going forward that Fairfax will enjoy the lift that it has from its fixed income investments in the same way that that it has over the last 30 years. Sure it can fund some private debt deals and achieve some yield enhancement in the corporate market but the bulk of its fixed income investments will be in governments bonds and hence return virtually nothing for the foreseeable future. This will put even more pressure on its equity investments and on this point point I could not agree with you more---- this part of the 3 legged stool is a total mess. So although a few posters on here are saying that all Fairfax needs to do is achieve a 3% return on its investments in order to achieve a 15% long term compound on its shares from this point forward I am not so sure this is as much of a slam dunk as some others on here seem to think it is. Your thoughts/comments and those of others would be appreciated. Well, then create your own pro-forma income statement for 2021. It might look a little like this: 1) UW profit Net Written Premiums $16B (up 6.5% over 2020) Consolidated Ratio: 94% (take the YTD CR, strip out the 10 cat points for 2020 and replace with 4 cat points for 2021) UW profit = $960m 2) Investment returns Investment portfolio $40B Investment return 2% (bond duration is strangely favourable for this assumption) Inv profit = $800m 3) Overhead = $200m (just grab the number from 2018) 4) Interest = $500m (run rate the first three-quarters of 2020) Earnings before taxes = $960m + 800 - 200 - 500 = $1,060m Taxes = $281m (tax rate 26.5%) Earnings after tax = $779m Sharecount: 26.2 milion EPS = $779/26.2 = $30 Is there anything outrageous about that bit of school-boy arithmetic? The current stock price is US$268, so a basic EPS of $30/sh would be an 11% earnings yield, which is not reliant on much of an investment return and makes no assumption of further price increases. The 15% target would be left in the dust if FFH actually got a 3% investment return. SJ SJ---your "school boy arithmetic" seems reasonable for 2021. My question however related to the potential for long term compounding for the shares at the 15% level. Your 2% investment return assumption which produces $800m in your analysis for 2021 seems high post 2021(note the drop off in interest and dividend income from 2019 to 2020). If my concern is correct on this point than an investment return well in excess of the 3% target is needed to achieve the 15% overall earnings yield. Expecting Prem (and team) to produce this level of long term investment returns on a sustainable basis is simply not reasonable based on either the results of the last 10 years nor the longer term prospects for the company's current equity holdings. The 2% is already very conservative. Of the portfolio, about $10b is corporate bonds yielding about 3.5% with a 3-yr duration, ~$17B is governments bills and bonds yielding about 0.5%, plus another ~$13B is equity-like investments (preferreds, common stocks, investments in associates). There should be no trouble at all to make 2% until the end of 2022 when the corporates will mostly need to be rolled. When you weight it all out, getting a weighted 3% might require about a ~6% return on the equity-like investments, which is not a particularly outrageous hurdle. After 2022, who the hell knows? It could go a couple of different ways. Either the risk-free rate remains at 0.5% in the "lower for longer" scenario, in which case you should expect to see tighter underwriting practices and higher insurance prices, or the risk-free will return to a more "normal" level which makes the 3% return easily attainable. But, over the longer term, capital will leave the industry if there is not some acceptable combination of underwriting and investment profit. SJ Very reasonable---thank-you! Seems like a good time however to remind everyone of the compound total annual investment returns actually achieved by Fairfax over the last 10 years or so: 2011-2016: 2.3% 2017-2019: 5.6% And yes I know that we need to look forward and not focus on the mistakes of the past however Prem seems unwilling to address several losing equity positions (both private and public markets) which account for a significant portion of Fairfax's current equity holdings. Combine this with the ultra low interest rates which in my view will be around for a very long time and we have a perfect storm which will work against Fairfax achieving the overall investment return it requires to achieve the 15% earnings yield. For what its worth...I hope my concerns are not valid and Fairfax shares soar however we are dealing with Prem so I believe a healthy dose of skepticism is warranted! So what this is saying, is even over past decade where investment returns were dismal and outweighed by short TRS and deflation swaps, they still managed the +2-3% compounded that is the benchmark for a 15-20% ROE going forward? And we don't have a hedged equity portfolio any more and many of their investments are off 50% or more from peaks at the end of 2019 period so seems to me that it doesn't take much to get this shop moving in that 2-3% direction. TwoCitiesCapital---that is certainly one interpretation of what has been presented. Another way to look at it---despite the higher yields offered by bonds between 2011 and 2019 and the gains realized on their massive bond portfolio during that same time frame due to falling rates they were only able to realize average overall investment returns of 2.3% for the period 2011-2016 and 5.6% for 2017-2019. As SJ pointed out earlier....Fairfax currently holds $10B in corporate bonds yielding 3.5% for another 2 years, $17B in government bonds yielding 0.5% and approx $13B in equity like investments (preferreds, common stock and investments in associates). Unless interest rates rise (in my view this is not likely) then $27B in overall bonds will earn next to nothing within 2 years which means the overall investment return will be solely dependent on the equity holdings which I believe is a very scary prospect for any investor into Fairfax who is looking to achieve a long term earnings yield of 15% or better. I certainly understand this concept. That was precisely why I sold the stock back in early 2019. It was clear interest rates weren't rising anymore and Fairfax wasn't locking in long term gains and future income/rates were at risk. I figured Fairfax couldn't get decent returns on bonds with rates halted and that equities would prove difficult and that @ $550-600 US that the bar was too high for returns. 2-years later we're at less than 1/2 the price (much lower bar) and there are certain sections of the equity markets still dislocated. It's pretty easy to get a 4-7% yield - AT&T, Royal Dutch Shell, China Mobile, any European financial, REITS, auto companies, etc. Let's nor forget their fast growing investments in Digit in India and Fairfax India being roughly half of NAV. It should be relatively easy to accomplish 2-3% returns in equity markets with low multiples to earnings, low multiples to book, and high dividends currently available. And while bond markets are at zero, thats probably closer to the lower end of their range. The time to be paranoid about rates was 2018/2019 when they were at their local highs - not when they're near their local lows. While they can always go lower near term, I'd imagine there will be opportunities to pick up some bonds at higher rates and higher spreads with localized disruptions over the next year or two while Fairfax hides in cash. Also, they've proved themselves to be willing, and semi-adept, traders which means they can make capital gains here too.

There is an argument that if not for the government's investments in infrastructure that businesses wouldn't be as successful today. That if not for the government's investments in research, much of the technology behind business application wouldn't exist today. That if not for the governor investment in education, that you wouldn't have a populace educated enough to work the jobs that generate the profits that these business owners are entitled and etc. Ultimately, I think there's a pretty good case to be made for the government being entitled to SOME of the success of private enterprise that thrives on the environment the government provides and protects. The question remains how much and whether you want it to be equally distributed or equitably distributed across the population in terms of collection. I am independent and tend to lean conservative right on matters of government size and finances - I'm very much OK with higher taxes if it's clear to me the benefits that the population is getting from them (a la NYC taxes support a vast infrastructure of public transportation that allowed me cheap transportation at all times without me need of a vehicle, or paying for parking, or sitting in traffic, etc). I live in St Louis now - it charges a fraction of the taxes but looking at the downtown area versus NYC it's also clear you're getting a fraction of the benefits.

Fairfax is a three legged stool: 1.) insurance / underwriting - solid 2.) investing part 1: fixed income - solid 3.) investing equities / op co’s - a mess The way to make very good money with Fairfax for the past 20 years is to wait for the turn in stool leg 3. (Mr Market was always slow to catch on so the shares became $20 bills lying on the ground in plain sight for all to see.) The problem for Fairfax investors is stool leg 3 has underperformed for the last 7 years (more than offsetting the gains made in stool legs 1 and 2). The good news for new investors in Fairfax is with shares trading at US$266 they will likely do well moving forward if Fairfax simply stops losing money with bucket 3. Crazy thing to say... but i think it is true (posters think i am only hard on Trump :-) And that is how out of favour this company is today... People do not want to own it because they expect Fairfax to lose more money in bucket 3. There are lots of legacy dogs still barking in the shadows: Toys R Us, Recipe, Blackberry to name a few that quickly come to mind... Now having said all that i might reestablish a position tomorrow. Because, to Sanjeev’s point, if they ever start to make a positive return from stool leg 3 the stock will rock. The other potential catalyst for shares is Prem’s creativity in surfacing value. Hi Viking...I agree with your 3 legged stool analogy concerning Fairfax with one exception. To date Fairfax's fixed income investing has been very solid---in my view the real strength of the company over the last many years. My concern is that given the ultra low interest rate environment we are in and will likely remain in for a very long time I am not at all optimistic going forward that Fairfax will enjoy the lift that it has from its fixed income investments in the same way that that it has over the last 30 years. Sure it can fund some private debt deals and achieve some yield enhancement in the corporate market but the bulk of its fixed income investments will be in governments bonds and hence return virtually nothing for the foreseeable future. This will put even more pressure on its equity investments and on this point point I could not agree with you more---- this part of the 3 legged stool is a total mess. So although a few posters on here are saying that all Fairfax needs to do is achieve a 3% return on its investments in order to achieve a 15% long term compound on its shares from this point forward I am not so sure this is as much of a slam dunk as some others on here seem to think it is. Your thoughts/comments and those of others would be appreciated. Well, then create your own pro-forma income statement for 2021. It might look a little like this: 1) UW profit Net Written Premiums $16B (up 6.5% over 2020) Consolidated Ratio: 94% (take the YTD CR, strip out the 10 cat points for 2020 and replace with 4 cat points for 2021) UW profit = $960m 2) Investment returns Investment portfolio $40B Investment return 2% (bond duration is strangely favourable for this assumption) Inv profit = $800m 3) Overhead = $200m (just grab the number from 2018) 4) Interest = $500m (run rate the first three-quarters of 2020) Earnings before taxes = $960m + 800 - 200 - 500 = $1,060m Taxes = $281m (tax rate 26.5%) Earnings after tax = $779m Sharecount: 26.2 milion EPS = $779/26.2 = $30 Is there anything outrageous about that bit of school-boy arithmetic? The current stock price is US$268, so a basic EPS of $30/sh would be an 11% earnings yield, which is not reliant on much of an investment return and makes no assumption of further price increases. The 15% target would be left in the dust if FFH actually got a 3% investment return. SJ SJ---your "school boy arithmetic" seems reasonable for 2021. My question however related to the potential for long term compounding for the shares at the 15% level. Your 2% investment return assumption which produces $800m in your analysis for 2021 seems high post 2021(note the drop off in interest and dividend income from 2019 to 2020). If my concern is correct on this point than an investment return well in excess of the 3% target is needed to achieve the 15% overall earnings yield. Expecting Prem (and team) to produce this level of long term investment returns on a sustainable basis is simply not reasonable based on either the results of the last 10 years nor the longer term prospects for the company's current equity holdings. The 2% is already very conservative. Of the portfolio, about $10b is corporate bonds yielding about 3.5% with a 3-yr duration, ~$17B is governments bills and bonds yielding about 0.5%, plus another ~$13B is equity-like investments (preferreds, common stocks, investments in associates). There should be no trouble at all to make 2% until the end of 2022 when the corporates will mostly need to be rolled. When you weight it all out, getting a weighted 3% might require about a ~6% return on the equity-like investments, which is not a particularly outrageous hurdle. After 2022, who the hell knows? It could go a couple of different ways. Either the risk-free rate remains at 0.5% in the "lower for longer" scenario, in which case you should expect to see tighter underwriting practices and higher insurance prices, or the risk-free will return to a more "normal" level which makes the 3% return easily attainable. But, over the longer term, capital will leave the industry if there is not some acceptable combination of underwriting and investment profit. SJ Very reasonable---thank-you! Seems like a good time however to remind everyone of the compound total annual investment returns actually achieved by Fairfax over the last 10 years or so: 2011-2016: 2.3% 2017-2019: 5.6% And yes I know that we need to look forward and not focus on the mistakes of the past however Prem seems unwilling to address several losing equity positions (both private and public markets) which account for a significant portion of Fairfax's current equity holdings. Combine this with the ultra low interest rates which in my view will be around for a very long time and we have a perfect storm which will work against Fairfax achieving the overall investment return it requires to achieve the 15% earnings yield. For what its worth...I hope my concerns are not valid and Fairfax shares soar however we are dealing with Prem so I believe a healthy dose of skepticism is warranted! So what this is saying, is even over past decade where investment returns were dismal and outweighed by short TRS and deflation swaps, they still managed the +2-3% compounded that is the benchmark for a 15-20% ROE going forward? And we don't have a hedged equity portfolio any more and many of their investments are off 50% or more from peaks at the end of 2019 period so seems to me that it doesn't take much to get this shop moving in that 2-3% direction.

Well the whole rationale for having lower rates for capital is to stimulate economic activity. That means new real means of production. So from that perspective dry cleaning would qualify and clipping divvies would not. As for inheritance taxation I would say that duties that amount to seizure are not the way to go. But I also don't think anyone is talking about that. I do think that income shouldn't be sheltered forever and has to be taxed at some point. Personally I like Canada's system where there is no estate tax but you have a deemed disposition on death. But even that system could use some improvement especially when it comes to IRAs. Income is taxed when you earn it.... Not really. "Income" is an accounting convention. Cash is what is earned and what is spent. You make make CASH that can be earned and spent off an investment property where your INCOME is 0 due to depreciation and interest write-offs. Sure, all that gets lobbed into your basis - but then you can always do 1031 exchanges or hold it to death and get the step up and never pay any taxes on the CASH or the INCOME. This can apply to stocks as well. You've held Amazon for 20 years. Congrats - you've made millions and are now dying wealthy. The step up in basis ensures that you and your heirs are never taxed on those millions.

Especially given the behavior of some billionaires and CEOS recently and the very poor optics of lower and middle class Americans struggling while the billionaires get even more billions. Don't get me wrong, I totally understand Elon Musk cutting workers' pay in a vacuum considering COVID's impact on the auto sector. On the flip side, we don't live in a vacuum and his net worth was soaring with Tesla stock at the time and they successfully did a $5 billion offering. Couldn't it have been $5.1 billion instead to make workers whole on previously agreed upon salaries so everyone benefits instead of Musk's network quadrupling while cutting worker pay? Just terrible optics and outcomes for a country already very divided by wealth and the outcomes it affords you and is likely to build support for greater taxes on these assholes.

Number seem alright. Liquidity still seems a little constrained, but they were able to send $100M to insurance companies for growth, retain holding company cash, repurchase a few million in shares, and still have liquidity available to them on their revolver. Insurance results were positive which is a plus for me after COVID and hurricanes and wildfires. Ultimately, float + equity + debt is $1,600/share working on your behalf for every $265 US invested (6x leverage). Very low bar for shareholders to hit 15% compound here on out as return on float/equity/debt @ 3% will accomplish it even without considering benefits of repurchases below book.

GBTC Primarily the only way I can own Bitcoin in my Roth IRA and the premium to NAV is getting back to the extreme lows of its historical range.

Have been buying more mortgage REITS - primarily Annaly and AGNC. Selling deep ITM covered calls against the new shares to recoup some cash and insulate against price movements if we hit volatility surrounding the election or if defaults/refinanced are worse than normal. Just collecting double digit dividends with limited price exposure waiting for a little more confidence in the market/economy.

+1

Most float won't go to equity investments. It'll go to fixed income which they've proven quite adept at. Secondly, the equities have been a mixed bag. Sure there have been things like Blackberry which haven't been great. And the macro calls/hedges. But then they've also had the CDS and ICICI investment that we're home runs. Overall, growing the float will likely more beneficial long-term than share repurchases IF equity and fixed income investments are just average.