TwoCitiesCapital

I've been rolling back and forth between intermediate treasury funds and money markets. When yields were closer to 1.7% was rolling to intermediate. When the curve flattens I roll back to money market. Easy to do in 401k/HSA type accounts where transaction costs are nil and I have access to the i-shares. It's picking up pennies on small 20-30 bps moves but it makes me feel better that I'm doing something to manage a close to 0-return position

Many ways to do it, including: 1) Use the dividend capacity already approved by regulators to send a divvy from the capital-rich subs to the holdco and then it's no trouble at all to shift if from the holdco to the capital-poor sub; 2) If the capital poor sub operates in the same jurisdiction as a capital-rich sub, merge them; 3) Float another holdco bond issue for $500m, and sprinkle the proceeds into the subs that require more capacity; Maybe it's just a one-time freaky thing in Q4 that they were laying off premium on the reinsurers? But, that's not exactly how I imagined the company attacking a hardening market. SJ That's a concern I had about the capital flexibility to grow in a hard market. When you look at yr-end 2018 regulatory dividend capacity at the (re)insurance subs, only Allied World (685.6M) and OdysseyRe (329.7M) had significant capacity. Crum and Forsters had some dividend capacity but up to Q3, after an early upstream dividend, overall, net capital has flowed to the sub to 'support' growth. Up to Q3, OdysseyRe has paid 50M in dividends to the parent and Allied World has paid 126.4M to minority interests. I'm not sure how easy it would be for the parent to obtain dividends from Allied without some kind of permission or sharing to the 32.2% minority interest. If this hard market continues, in order to participate, FFH needs profitability from operations and investments which renders the premium growth (and its retention) conditional. Even if their equity investments are not likely to be correlated with markets, the level of equity investments to total capital is high and unusual in its composition and that aspect has regulatory capital implications. I haven't dug into the numbers in any depth yet to know how true this is - but it would be a massive slap in the face if all of these years we were told the company needed a fortress balance, that having tons of cash on hand was necessary, that hedging was necessary, all to be able to support subs in a hard market...only to get to the hard market and find out that they still can't do so?

Here is what the CEO of Chubb had to say: "On pricing, I think, it endures. The fundamentals speak to it. And so the environment we see is the environment I imagine and will continue for some time, it's rational. And there are many reasons for it. And there is nothing that I see that tells me the momentum will slow. If anything, it's picked up, and it is spreading more broadly. Industry needs rate and needs it in quite a number of classes and across the globe. And then you're in a low interest rate environment and you can hardly rely on investment income to bail you out. And the industry needs rate because rate has just not kept pace with loss cost trends for quite a number of years. The math is so simple. People seem to over intellectualize this. And then on the other side of the coin, in the numerator, there are a few discrete classes where the loss environment is more hostile, and that is out there. That is understood. That is known and you either recognized it and reflected it in your reserves and in your loss picks and pricing in the past come, or it's something that you're doing with currently and is in front of you. But I think that just varies by organization." I mean, I guess I'm just skeptical. Interest have been excessively low for years. Capital has flooded into the industry and driven down pricing for years. Insurers have made subpar ROE for years and didn't raise pricing. Neither of those have changed, but I'm expected to believe that industry players who priced insurance too low to make a decent ROE for the past several years have suddenly all had a come to Jesus at the same time and raised pricing? Why wouldn't they have done this in 2016/2017 instead of waiting until 2020 of this was truly the case? I'd be very excited for Fairfax if this was, in fact, the case. But having a hard time believing we're in a sustainable pricing environment because I can't explain why they weren't doing this years ago when the industry dynamic doesn't appear to have changed much. I thought most hard markets occurred when capital fled the industry. It seems odd to expect that it just happening now simply because company's collectively raised premiums.

Has anyone explained the 'why'? It doesn't appear to be due to a pick up in catastrophes scaring capital from the markets. Also doesn't appear to be because of a withdrawal of insurance linked products from securitization. So is it as simple as insurance companies acting with discipline to collectively raise premiums to make decent ROEs?

Care to PM me your thoughts on this? I also own minor puts on SPY & QQQ - but was doing it primarily due to the cheapness of VIX and only using proceeds from covered call sales. A little scared to re-enter heavily. Have lost money on puts nearly every time I entered them in a big way. Thought I was going to turn it all around in 2018 with decelerating economic indicators, cheap options, and etc but Q4 smoked me and ensured I had a sizable loss on puts. Still looking at leading indicators, corporate profits, treasury rates/curve, and etc and think it's pretty clear we're continuing to decelerate, but less excited to lose money betting on that again. Do you have a process or thoughts on how you structure/size the positions as well as when you enter/exit? I seem to do better when I trade the positions rather than hold them but then it's not a hedge for the portfolio - just swing trading for small profits.

I enjoy it. If I need to be productive, I just put headphones on which is the universal sign of don't bother me. Otherwise, it was nice being in an environment where I didn't feel suffocated by walls/limited space and could casually chat with coworkers from time to time. But I'm also a social animal and thrive off of interaction with others so maybe it just better suits my personality and disposition versus your typical value investor represented on this board. I'm also a millennial so there's that too ...

Also positive today while GLD and 10-year treasury are down. Could it simply be that Bitcoin is simply in an uptrend and not have anything to do with Coronavirus or Iranian tensions? On this note, Bitcoin obviously didn't behave much like the other safe Haven's through 2018 either. I think it's a mistake to think of it as akin to holding gold or treasuries. With those you expect NEGATIVE correlation with equities in a downturn. Rather, I'd expect Bitcoin's correlation with equities AND safe haven assets to be fairly close to zero in both healthy and unhealthy economic environments.

Over the last week, have been rolling out of 10% or so I've my Gazprom position to buy XOM with the proceeds. Plan to continue to do so if OGZPY continues to significantly outperform.

I heard this on the radio and made a note to follow up. I mean, Australia seems to be doing it so why not US? He did say we are importing deflation so as long as you don't import too much of it or too little, things will stay as is. Maybe, this time is different :). On a more serious note, I'm having hard time identifying excesses. Everyone around me (and I get the concept of selection bias) is cautious and is sitting in 60/40 portfolios and this includes newcomers to the market, old timers, and those who bought and lost houses in 2007. Market climbs the wall of worry. The excess is in risk free rates which also inflates other assets. Like how US stocks can be at the highest EV/EBITDA ever while technically having shrinking earnings. And I don't see the same cautiousness working with retail clients in finance. I don't see exuberance either, but I do see things like clients not wanting to de-risk due to tax costs or think that 7-8% a year after fees for a 65/35 portfolio is "low" which obviously defies the long-term average for equity returns and fixed income returns. People outside of finance-heads equates the stock market to the economy and to them it's booming. It's only the investment professionals who seem to be on the cautious side of things.

...economic theory suggests the share prices of “sin” businesses will become depressed if a large enough proportion of investors choose to avoid them. Such stocks would have a higher cost of capital because they would trade at a lower price-to-earnings (P/E) ratio, thus providing investors with higher expected returns. ...as more investors express their personal beliefs through their investments, shunning sin stocks, it seems likely their prices would be further depressed, further raising their forward-looking return expectations. Thus, it is possible the sin stock premium (relative to the market) could not only persist, it could increase... https://www.etf.com/sections/index-investor-corner/swedroe-sin-stocks-are-profitable?nopaging=1 +1 If you're holding for the long-term, you don't need a re-rating if you have a low multiple and you, or the company, can reinvest those earnings at a sufficiently high return. If you're getting a 20% return per annum by buying a company at 5x it's earnings - you don't need it to relate relative to it's book or earnings. Just that those earnings continue to be retained and redeployed at attractive returns OR paid out as a dividend for you to reinvest for more shares. No turnover. No transaction charges. Few taxes. And 20+% compounded pending how well you/company did on reinvesting the earnings. The problem is precisely when it DOES re-rate and then you need to pay to sell it, pay the taxes on it, and find another opportunity worthy of the capital.

Yes, you're right. I should have been more specific. I wasn't just referencing the comparison of EBITDA/net debt specifically, but just valuation and liquidity metrics as a whole being more favorable after tax reform. Having substantially more income after taxes allows for higher debt service and more turns of leverage and better liquidity. On a net basis, the reversal of tax reform would be a net negative to companies' flexibility to carry their debt loads even if EBITDA/Net Debt as a metric is unimpacted. Regarding the pensions, they've have been handed a gift from the heavens by being overweight equities during the rally of 2016-2019. The situation today does appear better - but it also appeared great in 2000 as well. We'll have to weather the next downturn to be sure the recent gains haven't been ephmeral. Even beyond equity risk, pensions will also likely be hit with widening credit spreads and lower rate projections in a downturn so today's funded status after a decade bull market does not mean the funding status is safe or permanent. TL;DR - Easy come/easy go regarding tax gains and that "net debt" doesn't tell the whole story with hundreds of billions in non-debt liabilities like leases and pensions (as well as the non-constant nature of the pension liability)

What is the extent of "debt" in this measurement? For instance, is the $20-30 billion that GE's pension is underfunded included as "debt" when comparing to their EBITDA? I'd also add that while tax reform is not easily reversed, it's the primary reason these numbers now look fo favorable as compared to say, 2016-2017, and CAN be reversed pending the direction of upcoming presidencies and Congress. I doubt Democrats win, and even if they do it'd be a tough battle, but a reversion in the tax rates would make these figures look a hellofalot worse and including non-debt liabilities like pension requirements probably do too. Ultimately, I think the the tax-reform and coordinated Central Bank actions of 2018-2019 has deferred the recession - but I do believe the economy is quite a bit more fragile than many think and I do believe it's like that we'll see it sooner rather than later. Not sure if corporate debt will be the catalyst, but spreads will be quite a bit wider when it happens and we'll be working off the debt hangover for a time, on average, even if individual companies Excel in that environment.

I noticed the same thing. It shows how people are starting think about it, even though it obviously has no value because it isn't printed on green paper with pictures of good (i.e. dead) politicians on it. It’s gold for millennials. It’s also a solution if you need to launder money, live in Country with Capital controls and a crappy currency (which typically go hand in hand) and want to transfer you wealth. It might have its limitations, but if you need to move money under the nose from a government, than its the way to go. It's just hype. The price change is not unusual, and just happened to coincide with the ME news this time around. Hard to make the case that ME tension was the cause. SD This is kind of what I was wondering. Did it pop on the news of Iran and then drop on the quick resolution? Or did it pop because it was massively oversold and drop because it didn't have the momentum to carry through resistance at 8k. Hard to say it Iran was causal or coincidental.

A behavior change I've noticed in myself is that I sell options closer to expiry. It used to be for options contracts that only had small premiums, that the commission would take out a huge chunk of the return if I wanted to roll a contract before expiry OR if I was selling contracts on low-$ positions. Now that commissions are zero, I trade near-expiry options way more frequently. If other market participants are doing this too, I would imagine the spread between short-dated and long-dated options might narrow.

I've been running this experiment myself for the last 2-years. Purchased a 2003 Carerra with 55k miles for about 24.5k at the end of 2017. Have had about 4.5k in basic and preventative maintenance on it (oil changes, new water pump, new clutch, IMS bearing, new air filters, new headlight bulbs, etc) so call my total all-in on ownership at 29k. Ran the regression of what I could sell it for at its current milage against the offer on about 20+ 2002-2004 Carerras recently and looks like I could probably get out of it for roughly ~24k. Depreciation has been 0 over 2 years even with 20k extra miles I've put on it. Cost has come out to about $2,500/yr in what was mostly optional/preventative maintenance and should only get better over the next year or two barring anything major breaking.

Gundlach points all of this out in a recent presentation. Basically says Japan reached it's peak in the 1990s and has yet to surpass it's prior highs. Europe reached it's peak in the early 2000s and has yet to surpass it's prior highs. Emerging markets/China reached their peak in 2008 and have yet to surpass their prior highs. His point is that U.S. equities are likely the next to peak and not reach their prior highs for 10-20 years. As far as why - I'm sure it's a combination of things. Starting valuations of the look back (European stocks ere arguably massively over valued in 2000s). On top of a negative starting point, Europe was much slower to re-act and delver the banking sector following the 2009 crisis slowing the recovery AND has a head start of a few years on the aging demographics as compared to the U.S. Lastly, Europe tends to have more onerous regulations AND hasn't participated much in the development of new industries/improvements (i.e. Facebook's, Google's, Netflix, Tesla, etc). Put it all together and you get a decade plus of underperformance but I'd say the largest factor was starting valuations - the latter stuff would have been compensated for if you bought at single-digit mutliples.

2019: 25.5% Results are consolidated across varying accounts with varying discretion (i.e. limitations on investment options in 401k and HSA and etc). Satisfied with results even with relative underperformance. I spent most of the year holding/trading long puts on the SPY which cost me ~1.5-2% in total and was also ~35-40% bonds/cash for the last half of the year reducing the impact of the Q4 rally to new highs. So lower returns, but dramatically lower risk IMO. Performance driver largely the same as prior years going back to 2015: Massively long EM, commodity producers, and non-USD stocks. Each of those positions were reduced through 2019 to realize gains, add bonds, and roll puts. Best performing positions in no particular order FMCCJ (~10% weight) Sberbank (~8% weight) Gazprom (~5% weight) Exor (~6% weight) Zillow (~2% weight) OZM/SCU (~1% weight) Sibanye Gold (~1% weight)

Yes, but they can be approximated as ETFs and Mutual funds make up a MASSIVE portion of the market. No one is saying it's an exact science down to the penny.

We shall agree to disagree. I don't think your extreme example makes any difference. All that happened is that you transferred $1M to someone else so the net inflows are zero. Just as a thought experiment, let us say that in your "extreme" example, you sold your stock for $1 to someone else the day after you bought for $1M. So now we are supposed to think there are massive outflows the next day after having massive inflows the previous day? I don't think so. Yes. Which is how you end up in the same place you started - it would take a net "out flow" of $1 million to get you back to the same place truly neutralize.

Seems neutral to me. In your example when you buy stock for $1000 you sent $1000 to someone else. Your inflow to the market is balanced by the outflow to counter-party. The same thing in reverse happens when you sell for $900. I don't see why supply/demand for a certain stock affects the net inflows or outflows. In private markets (for example) such as real estate, you could have a freeze in the market (similar to very wide blown out bid/ask spreads in public markets) with very few transactions taking place as we had in 2007-2011. Even in that scenario, outflows = inflows = approximately $0. Maybe we need an extreme example to illustrate. There's a single share of stock outstanding that was purchased for $1. That individual now wants to sell. I buy it from that individual for $1 million. Now the market capitalization of that company has shot through the roof from $1 to $1 million dollars - but it's not a net inflow to equities because my $1 million flowed to an individual who now took it "out"? How do we explain the massive gap in market capitalization from the before scenario to the after scenario if flows were '"neutral"? The flows are positive because I was willing to pay X percentage more for the share than the prior buyer. So as long as the combination of volumes of shares multiplied by average prices is rising you've got net inlows. If that same product is contracting, either due to falling prices OR falling average volumes, you've got net outflows.

If you redeem a mutual fund shares and there is no offsetting inflow and no cash buffer at the fund, the mutual fund sells the underlying portfolio stock to raise cash to satisfy the redemption. So there is no net outflow out of equities because (as others pointed out) for every seller there is a buyer unless a company bought back shares and retired them. We're agreed that every buy has a sell and vice versa. But I don't think that means you can't have net inflows and outflows. Consider buying $1000 of stock. 3 years later you need the money and are forced to sell all your shares for $900. What's the impact? Is that an inflow? And outflow? Net neutral? I'd argue that it's an outflow of value/money and could be measured by the value of the sale. I.e. mutual funds selling shares to meet redemptions and reducing share count. Maybe you can also use $ volume traded and market capitalization changes to further hone in on the activity, but just because every sale is met with a but doesn't mean you don't have periods of inordinate demand or supply. That's why the price has to fluctuate to meet it.

It is more important to focus on data than anecdotal. I am bullish because I like what I see here. how are outflows calculated? if I sell equity there is no outflow because someone bought my equity. then I could take my cash and put it into bond market, which is an outflow, but how does anyone know what I did with my cash on the second step of the chain? I think this is a bogus stat, but correct me if I am wrong My guess is they look at the net creation/destruction of fund shares. If a mutual fund experiences more withdrawals then deposits, assets are sold and the share count is reduced. If that cash doesn't flow into another equity mutual fund increasing the share count, then you've ended up with a pretty clear net reduction in equities via a net reduced share count of equity mutual funds. Not a perfect system for measurement as it overlooks individual security contributions, but probably a reasonably good measure to take it a step further, I take my equity redemption and invest in a bond fund....oooh, that is a net equity reduction, net bond addition....except it isn't since on the either side of my equity sale is an equity buy, and on the other side of my bond buy is a bond sale I suppose as you suggest there are metrics as to mutual fund/etf size that an be tracked but fund flows seems a slippery data point to follow...especially when compared to good old pricing data...and pricing data would indicate that equities are attractive. Right. But if you redeem, it's not necessarily a buy. If there is an inflow into the equity fund offsetting your redemption, net shares are unchanged. If you redeem and there isn't an offsetting inflow the mutual fund has to sell assets to find your withdrawal and that mutual fund share is destroyed. A clear net outflow. This can be measured across the system, but not sure if this is how they're doing it.

It is more important to focus on data than anecdotal. I am bullish because I like what I see here. how are outflows calculated? if I sell equity there is no outflow because someone bought my equity. then I could take my cash and put it into bond market, which is an outflow, but how does anyone know what I did with my cash on the second step of the chain? I think this is a bogus stat, but correct me if I am wrong My guess is they look at the net creation/destruction of fund shares. If a mutual fund experiences more withdrawals then deposits, assets are sold and the share count is reduced. If that cash doesn't flow into another equity mutual fund increasing the share count, then you've ended up with a pretty clear net reduction in equities via a net reduced share count of equity mutual funds. Not a perfect system for measurement as it overlooks individual security contributions, but probably a reasonably good measure

Why wouldn't we assume that? They charge fees for performance and deserve to be paid them if they perform. In this case, they performed, but the accounting nature prevented that performance from being realized for fee calculations. This transaction changes that. I'm certainly not saying it's a bad thing or an immoral thing - they deserve to be paid. Only that us investors we're getting a free ride before, and we're not now and the stock is up on that news.

if you compare BIAL with other publiclty traded airports around the world , it still seems quite a bit undervalued even more so with a second terminal coming up soon. Absolutely agree. That is, in part, why I was a buyer at $13, and $12, and $11. All I'm saying is this transaction is just an accounting entry - it's the same BIAL it was 2-days ago, but the shares are 10% higher and Fairfax can now charge fees again as this pushes NAV substantially higher. I get why Fairfax did it. I just don't understand why this would pop the stock or why the people buying it today weren't aware of the value of BIAL two days ago.