TwoCitiesCapital

It looks to me like airlines, hotels, restaurants, cruise industry, travel industry, Boeing are all essentially bankrupt as of today. Most will not survive with no revenue if we do a soft lockdown that next 2-3 months. We know the government is going to try and bail some out. That is a tough thing for an investor to figure out (who the winners and losers are going to be). Didn’t work great for bank investors in 2008 (BAC and C); the companies survived but shareholders had their head handed to themselves. Shadow banking system might be the next shoe to fall... overleveraged companies. Oil and gas industry... Looks to me like their might be a real bifurcation in the market. A stock pickers market. 30% of companies weather the storm and 70% get shit kicked. Not great for ETF holders. Private equity would be my guess as a casualty. Another thing I noticed - treasuries were very weak today and interest rates have shot up. That rarely happens in such a down market. Is the financial system getting squeaky? If treasuries yields would explode upwards it would be game over, imo. Noticed that too - people have been saying even Treasury liquidity is off so people dumping what they can at what prices they can to get cash. Could it be the inflation scare of the House floating 2k/month payouts to every adult citizen and 1k/month for every child? If it passes, That's lots of f*cking money about to flood the system to a lot of people who don't really need it at a time when you dont have to spend it on the essentials (same bill allows deferral of ALL consumer and small business debt service like mortgages and credit cards and student loans w/ no penalties). I'm all for getting money into the hands of people who need it - but 4-8k/month for a household is A LOT and it sounds like it would be going to everyone regardless of immediate need.

Yeah, I just saw this with mREITs today. Two UBS leveraged ETF's in mREITS were just liquidated! Most of these stocks were down 40 to 50%! HOLY SHIT! My gawd, man. I'm freaking the fuck out right now. What's crazy about the mREITs that they basically are 5-7x leveraged versions of govt bonds. Even before today they were trading @ 20-30% discounts to NAV and then were down another 30% today!!!! NLY is down 50% from its recent highs. To compare w/ 2008 (which was a crisis in their investment product of mortgages), they were up significantly depending on where you start and end you observation. But flat to plus 50% is still significantly better than the minus 50 we're seeing now :/

Been rolling a number of my long positions into two year, deep in-the-money LEAPS which has freed up 40-50% of the cash in the positions. Will be missing out on some sizable dividends, but have same notional exposure for capital gains and will hopefully make more than the dividends missed by putting the incremental capital to work as new names go down further.

I'm hopeful that they can get this done quickly. Rolling the proceeds from the warrant sales into new bailouts that are also punitive would look great for the treasury.

Agreed. Was getting excited what the last 30 minutes would hold after we were down 7%....

I voted 2300. When we breached it today I put in orders to move some money market to HY bonds and a hair back into stocks for my accounts that can only own mutual funds. Each day we're below 2300 I'll continue to add to HY and stocks until my portfolio is right sized at 65/35. If we keep moving down below 2000 (which I anticipate as a very real possibility), I'll move to 80/20.

I wouldn’t get your hopes up. He was in big and/or illiquid cyclicals and won’t have been able to reduce much. The best that happens now is they do a great job picking up corporate bonds and don’t have to raise equity in the meantime. With this market disruption, let's just hope that they don't find themselves in violation of some covenant in that goddamned revolver. SJ Isn't "now" a bit early in the game for corporate bonds? https://fred.stlouisfed.org/series/BAA10Y Related to SJ's concern, last February (before the R2000 went down by 37.5%), Moody's made some comments and listed the following risks: high common stock investments, general investment strategy, earnings volatility and added: "A material expansion of the group's investments in stressed or turnaround assets as a proportion of shareholder's equity could also lead to downward pressure on the rating". https://www.moodys.com/research/Moodys-assigns-provisional-ratings-to-Fairfax-Financial-shelf--PR_1000002128 I just want to politely mention that, even if nobody knows the future, the posture comparison, at this point in time, between BRK and FFH, is simply mind boggling.. Too early to go all in? Absolutely. Too early to begin accumulating selectively? Probably a good time to get started. Spreads are at roughly prior peaks outside of 2008/2009. You don't wanna blow the whole load in the event things get worse, but picking IG selectively @ 3-3.5% pick up or HY @ and an 8% pickup isn't a terrible place to start. Certainly a better outcome 3-4 years from now than waiting in 2-year Treasuries for the Fed to hike rates. I agree with you on the concept but... For FFH, fixed income portfolio management has a been a large driver of returns over the years. Given that a significant amount of float has to be invested in fixed income, only small relative outperformance can result in a huge difference because of the embedded leverage. It's interesting to think of their fixed income float management from the perspective of an individual investor whose objective is to remain always fully invested. Dynamic (fellow Board member) explains this very well for equities and the following quote from Keynes is complementary: "In the main, therefore, slumps are experiences to be lived through and survived with as much equanimity and patience as possible. Advantage can be taken of them more because individual securities fall out of their reasonable parity with other securities on such occasions, than by attempts at wholesale shifts into and out of equities as a whole. One must not allow one’s attitude to securities which have a daily market quotation to be disturbed by this fact." Quoting others doesn't result in good returns but, from a humble perspective, this juncture appears to be one of the trickiest, by far, and I would tread very carefully along the fixed income parity curves. The wild card remains what public agents will do (or come up with). Honestly this fall out is the best thing to happen to Fairfax. The 15% goal was laughable as recent as January 2020. Interest rates were too low and equity multiples too high to have any reasonably foreseeable and sustainable path to it. Sure, insurance may be hardening but it's not going to pick up the slack and is also unstable and unpredictable. Just two months later and interest rates are still trash, but there are some reasonably good alternatives to invest for a reasonable long-term rate of return. Not to mention that Fairfax's stock price was falling @ the same time. It's 1000x easier for me to make a case for 15% annualized going forward from here.

This is incorrect, and dangerous thinking. It is true: accurate information is a critical factor, but it is not possible for humans to obtain such early in these viral outbreaks. The pandemic response is warranted - the precautionary principle is the only guide that would ensure the survival of the species. In these situations, you don't need accurate knowledge of the probabilities in order to know what to do. Our emotions and stress are wiser guide than our intelligence in deciding how to react. Strongly agree with this. That's how the precautionary principle works. When there is wide uncertainty with a lot at stake, you err on the side of taking things seriously and overreacting. Better to over-react and survive, albeit with damage, than to underr-eact and die.

Yea, I think this would be too hard to implement. Maybe at the commercial level to give small businesses a break on mortgage loans while they shutter to prevent the spread, but to give everyone one in America a mortgage moratorium? Most homeowners are likely salaried and won't need it. Those who do would likely better served through beefing up unemployment benefits. Also, what about those who rent? Are we expecting that landlords will just give them a break on non-payment? Just seem like this would be largely ineffective, very difficult to implement without further disruption to capital markets, and largely targets the wrong people.

I wouldn’t get your hopes up. He was in big and/or illiquid cyclicals and won’t have been able to reduce much. The best that happens now is they do a great job picking up corporate bonds and don’t have to raise equity in the meantime. With this market disruption, let's just hope that they don't find themselves in violation of some covenant in that goddamned revolver. SJ Isn't "now" a bit early in the game for corporate bonds? https://fred.stlouisfed.org/series/BAA10Y Related to SJ's concern, last February (before the R2000 went down by 37.5%), Moody's made some comments and listed the following risks: high common stock investments, general investment strategy, earnings volatility and added: "A material expansion of the group's investments in stressed or turnaround assets as a proportion of shareholder's equity could also lead to downward pressure on the rating". https://www.moodys.com/research/Moodys-assigns-provisional-ratings-to-Fairfax-Financial-shelf--PR_1000002128 I just want to politely mention that, even if nobody knows the future, the posture comparison, at this point in time, between BRK and FFH, is simply mind boggling.. Too early to go all in? Absolutely. Too early to begin accumulating selectively? Probably a good time to get started. Spreads are at roughly prior peaks outside of 2008/2009. You don't wanna blow the whole load in the event things get worse, but picking IG selectively @ 3-3.5% pick up or HY @ and an 8% pickup isn't a terrible place to start. Certainly a better outcome 3-4 years from now than waiting in 2-year Treasuries for the Fed to hike rates.

They have a pretty good track record on explaining the underlying plumbing of the financial system that we all ignore. Just take the end of world predictions that come with every article with a massive grain of salt.

No freeze up for me, but definitely taking a lot longer to fill marketable orders from my experience today. Testament to liquidity conditions.

If Hussman though the market might lose two-thirds before reaching fair valuation (without overshooting), I'll be curious what he thinks it might lose with the pandemic. After buying today, I've now burned through half my dry powder. Probably prematurely, but the popping has been a long, long time coming. I'm afraid it's frayed my discipline (I fear Trump/Fed intervention too). When you (and others willing to chime in) make comments about being premature in buying, what timeframe do you have in mind? It seems like there’s no way to know the bottom. Personally, I’m just continuing to buy most of the same stuff I had been before the virus because I think in 5 years those businesses will be doing well. Am I being naive and underestimating this virus and its impact on the economy? I think he means because he expects the markets to continue dropping. And while I have generally been optimistic about the impacts on the economy long-term, I did have a conversation today with a local banker friend of mine who thinks SBA loans are going to get soaked and he doesn't see any banks willing to lend in this environment. A credit crunch on top of the dramatic drop in economic environment on top of the dramatic drop in oil seems like a confluence of a lot of events that are very impactful in and of themselves. This may be way worse than anything I anticipated if policy makers don't prevent a total lock up of the economic gears.

It does seem that way on most days.

Yea, but his comments like that are typically meant to be understood systematically. He's already on record saying he believes the next decade will be a paradigm shift from disinflation/deflation to something more inflationary. So when he says says cash is trash, he means holding an allocation to cash for the next 10-years will be a mistake. Not that holding cash for the next 10-weeks is to be understood that way.

For 1), statutory surplus is determined by state regulators who typically use a risk-based capital framework (similar to banks) to reduce the value of certain elements (and increase the margin of safety for the policyholder) of the balance sheet, as reported. The discounts vary and depend on the perceived level of risk. FWIW, I've been looking at a few insurers who carry a heavy load of BBB rated corporate bonds (not the case for FFH). An interesting feature is that, in the event of a recession, on top of the decrease in market value for the bonds, surplus capital gets a double whammy because the discount factor is higher for downgraded securities. For 2), your statistical appreciation of forward returns is interesting and is in line with the idea of reversion to the mean, which has been a significant long-term feature at Fairfax (investment strategy, seven lean years analogy etc) but I wonder if such an approach is satisfactory on a forward basis as the investing environment has changed and the Fairfax investment recipe has been changing (some aspects dramatically so) so the future may not be correlated to the past. I think I read you're an MD and the following statistical "joke" came to mind when reading your post. There's this surgeon who comes to the patient waiting to be rolled in and explains that the death risk with the procedure is 1 in 2 but that the patient should not worry because the previous patient did not make it. Thanks For the detailed response. You are absolutely right if the underlying people, processes, and investing environmental context change then the underlying distribution will change and the mean reversion effect may not happen. I love the joke, as most physicians have no or little statistical training/understanding despite three decades of evidence based medicine. I guess the meta question is “has hamblin watsa adapted to the environment and learned from its mistakes. Is their devil’S advocacy before investment commitment as a effective as they think it is?” That the distribution of investment outcomes is something other than 60-40 for 7%? With so many interacting variables involving a biological system, I guess this question may be impossible to estimate with any precision. We know their value principles but how about their learning and leadership principles. Certainly it appears there are a number of individuals that no longer think they have the adaptability moving forward to make decent investment returns. But everything has its price in the market and there is an argument that the past is a sunk cost and all that matters is future behaviour. Ps You might enjoy this randomized control trial from the British journal of medicine https://www.bmj.com/content/363/bmj.k5094 I don't think they have and whether it's a good thing or a bar thing is up to you to decide. They have decades of making macro calls and decades where it served them well. To expect that they'll stop just because 2011-2016 didn't work out for them seems naive. I also made the point in 2016 that them dumping all duration following Trump's presidency was just another macro call. I believe macro calls will continue to be made in the future and shareholder results dependent largely on the success of those calls.

Crazy that his book was down 20%....

I had, and still have, puts. But in retrospect I let too many of them go to early. Also failed to see that mortgage REITS would get slaughtered in all of this despite having portfolios of govt guaranteed bonds that are doing just fine so that 10% of my portfolio hasn't been as defensive as I would've liked. Ultimately, the best and smartest move for me remains having moved to 50/50 mid-2019 and not any tactical trades I made in 2020. Even those of us who prepared for a popping of the equity bubble were ill-prepared for the economic damage of the pandemic.

This is largely because South Korea was VERY quick to contain the spread. Italy and the rest of the Western works have not been. Containment is likely no longer an option - now we're onto mitigation.

I dunno. I don't need the extra money. But people working at the restaurants a few blocks away might along with the restaurant owner who needs to pay the mortgage. Some sort of immediate income assistance to part time workers and small business owners should be the critical concern. Us salaried folks at large scale employers probably don't have much to worry about yet in that I suspect I'll continue to draw a salary while working from home.

Agreed. Pretty certain that in hindsight the start date of the recession will have been before today.

I don't short full time because I don't trade full time. But I have shorted and have gone long puts and have profited from downturns and etc and understand that's it's NOT the same action, mentally, P/L wise, risk management wise, etc. But it is the same topic - buying/selling. And all of the strategy/risk management of buying and selling could still be discussed in the same place

I'm not saying it's the SAME thing. I just don't understand why it needs a separate thread. Is it not a form of selling/buying(covering) that could be discussed in the buy/sell threads? Like I said, I'm sure I'm overreacting. Just don't get why we need to clutter the board with 3 different topics that all are discussing the same thing - what we're currently buying/selling.

The latter. The time to reach for yield is when you are paid for the risk. There's starting to be a bit more reward for risk in the market. Yea, I'd say both if they hadn't dumped all of their duration back in 2016, but short-term bonds aren't going to go up much - even if the Fed cuts rates to zero. Best case scenario is you get a few percentage points as a one time gain and that's it because yields are back to 0%. The higher credit spreads allow them to sustainably lock in higher yields for the long-term even if interest rates aren't cooperating - this was not an avenue that was available to them a month ago.

I mean, I'm sure I'm just being a curmudgeon but do we really need ANOTHER thread for this.... Already frustrating enough that there are two separate threads talking about buying/selling that could be done in a single one. Do we really need a 3rd?