TwoCitiesCapital

For U.S. shareholders - the rules have been clarified where those who own shares in PFICs in tax-free and tax-deferred accounts are exempt from the tax treatment and reporting required by taxable PFIC investors. I'm having trouble locating any official documentation on it. I can find text in a google search from PWC, but can't identify the source of the quote on their actual website or from their publications. Quote from PWC google results I did find the below on some Cohen & Steers CPA site: https://www.cohencpa.com/insights/articles/updated-pfic-rules-and-relaxed-reporting

Repurchased put positions.

Yea, I also tend to disagree. There's nothing natural about long-term negative rates. I think it's a combination of demographics and the slowing of the economy. Demographics will work itself out in the U.S. in the next 3-5 years. The slowing economy though might take longer. At some point, the inflationary impulse of additional debt is drowned out by the deflationary impulse of debt service and debt repayment. I think it's possible we might be there.

We'll see if it's a significant trend of hardening, or a blip, but from my perspective none of the issues that have caused market softness have been addressed yet and so it's unlikely for this hardening trend to persist. I certainly could be wrong - I'm no insurance analysts/expert, but the prospect of a hard market in insurance has been touted since I started holding the position back in 2011 and it hasn't happened yet - largely because the industry has been flooded with excess capital and that still hasn't changed.

Agreed. To be fair, the most I've ever had in puts, dollar-wise or % wise, were my most recent positions which varied between 1-2% of the my total portfolio value at risk. Maybe some think that is a high amount because the the proposition for losing money is high and a 2% hurdle is hard to overcome, but it's not like I'm breaking the bank with these positions. In recent years, I've become more likely to take profits quickly (as I did yesterday despite my overall bearishness) and also don't stay hedged 100% of the time to try to help mitigate the cost of the hedging program. For example, I had some puts in 2011 where I lost 100% of the investment. I had them on through most of the earnings recession in 2015 and recouped some of the principal at the end of the year in the sell-off. I had them on again in late 2016 surrounding the elections where I thought I had made a small fortune on them the night of the election and removed them as it became more likely that tax-reform wasn't just a pipe dream and I had them on again in December 2018 and again over the last few weeks. I'm not advocating for staying constantly hedged, but I think it makes sense at times to hedge when you view risks appear to be elevated and potentiall underappreciated (I'd say the 2015 earnings recession, Donald Trump's "surprising" election victory, and low vol pricing at what appears to be the turning of the economic cycle all qualify IMO).

Also, while we're talking about options, I'd add that while TWR performance on these positions has been negative for me, the money-weighted return still has a good potential of being positive - particularly if I'm right about the direction of the economy and capture it with my current position. I think we as investors get too focused up on TWR instead of $ made. Especially in our own portfolios. A 1% position for me today is significantly larger than a 1% position for me in 2015. Maybe I lost 1% of my portfolio on puts in the past, but the 1% I made yesterday would be a significantly larger sum of $. TWR would have that as a 0% return.The return from a "$ in my wallet" perspective tells a different story. I think this will be the reason why I continue to hedge and try to work out a systematic approach to options hedging. The manager who loses 50% in a major 2008-like drawdown has not only wiped out a decade of returns on a TWR basis - but chances are his fund was near its highest AUM when the crash happened meaning there's a very good chance he lost more money on the way down than he made on the way up (because the 50% is applied to a much larger base than the prior gains were applied to). Even with a negative carry proposition that occasionally holding puts portends, it can prevent you from losing more on the way down than you made on the way up in $ terms - even if it means sacrificing TWR. Maybe that doesn't matter to open-fund managers, but it matters to me with my money

I had some Oct SPY $285 puts. Bought it with SPY at 3000 about 2 weeks ago. In sold them yesterday when the SPY his 2850 (too early). So far, I had good luck with SPY puts but then again, I am playing with a small sum (0.15% portfolio position). It was a 2.5 bagger. One thing I look out for when I buy puts is low volatility. When volatility goes up, the put prices quickly gets prohibitive. I regard these puts as partial portfolio insurance when I consider the chance of a drawdown to be high. +1 I made the mistake of buying puts in December. Despite being early on in the drawdown, the vol premium was so high that I still lost a modest amount despite having 3-4 straight negative days in the market following their purchase. Had I held them long enough I would have turned a pretty penny, but it was too discouraging seeing the loss on the contracts even as I had the directionality of the markets correct for several days. The last thing I needed was a bounce from being oversold to crush the remaining position. That's partially why I went big this time around with vol @ 12. I think the last 18 months have shown that we're no longer in the "below average vol" phase, so it was insane to see VIX @ 12 despite trade tensions and deteriorating fundamentals coming down the pipeline. On the whole, was probably 2% of my portfolio @ cost for the whole put position and I had sold covered calls to generate the premiums to open it.

I have also had mixed results with puts. I made money in late 2015 with them, but have definitely lost more than I've made over the years when I've had them on. The puts I had purchased were the 1/2020 contracts @ 250 strike. I had been accumulating for the last few weeks between $2.50 and $2.25. My overall view is that we're on the cusp of the recession with market activity in January and December confirming a market topping process. We also have economic data confirming the forward looking concerns of stocks and bonds. I've been building cash since March or so - went from fully invested to 60/40, but when I saw the VIX was as low as 12, I couldn't help myself but to speculate buy purchasing puts. Worked out alright this time, but still figuring out the strategy to determine how best to implement in the future.

Cash. Following the sale of 20% of my S&P 500 puts. Waiting for 30+ VIX to sell more.

Most people use a TWR or an IRR calculation depending on what is most appropriate. If you have control over the inflows/outflows, an IRR (or the Dietz method mentioned) is more appropriate as it is a more accurate indicator of the $ made or lost over the time period as well as adjusting for the principal over that period of time. This is what I use to calculate my own personal returns since I do have full discretion over the inflows and outflows meaning that a 5% return on 100k invested gives me more credit than 5% return on 75k invested. If you do not have control over the inflows/outflows, a TWR methodology (as outlined by COC) is more appropriate as it removes the impact of the fluctuating principal and basically shows what your return would have been had the principal remained flat the entire time. Most portfolio managers use this because they have no control over clients adding/removing money and it's a more true representation of the portfolio managers' ability. Both of these can be accomplished in excel with a bit of familiarity with the functions and how the formulas should work.

You're not missing anything. It's been trading at a 40ish% discount for the last 3 years or more. Great opportunity to accumulate - it's one of my largest holdings. Also was glad to see they executed very favorably on buybacks with dividends from Chrysler to take advantage of that discount to NAV.

Wish they'd repurchase their own shares. In USD, they're near the bottom of the 5-year range.

Cannot argue with you but the more concerning aspect is not a buildup of balance sheet but it may signify a lack of reinvestment options. Honestly, I have a hard time with this argument. Reinvestment options are screaming in infrastructure. Obviously, I understand not every company is going to invest in that, but U.S. infrastructure could absorb a large portion of those dollars and there would still be a need for modernization. Obviously this points to a lack of incentives, or disincentives, to invest in the real economy. I wonder what thos could be.....

This really strikes me because it was so off the mark. It's so hard to predict these things. I personally worry about the next 10-years. With interest rates so low already, and the budget deficit in the US exploding, it seems like policy makers will have little ammunition to combat any broad economic weakness. To be fair, he's got two years left to be right. A 50% decline would put it back into fair territory of him being right. While they aren't supposed to happen with frequency, I think the last 20 years, generationally low interest rates and high valuations might prove instructive. Further, he's stayed invested with reasonable returns over that period unlike some of the others mentioned.

So...so far we've seen asset price inflation which will eventually spill over into CPI but we haven't seen that spill over yet? But its coming? Any eta on when you think it's coming? What do you mean exactly by "elsewhere"? Billions prices project? CPI? Are we all having skin in the game and holding massive short treasury positions for this "second coming" of inflation that is always just around the corner? 10 years and counting..... (if its only stocks and other assets that ever go up, and the price of milk and bread don't ever go up....then haven't we found nirvana and a perpetual motion machine?) In a society where a central bank does unlimited printing w/ only stocks going up and the price of milk and bread remaining flat - everyone would pay a 0% tax rate and see their net worth go sky high Its either that or we need to all start admitting (after 10 years) that "asset price inflation"/"shadow stats inflation" /"pushing on a string", etc. etc. theories are exactly wrong I think it's quite possible we've already seen it. It could be the only reason inflation has been 1-2% instead of -1 or 0%. But again, I'm not supporting the idea. Just not hard for me to believe blowing a bubble that makes everyone temporary millionaires could lead to unsustainable inflation in areas outside of stocks as people liquidate and spend their newfound riches.

Would inflation go up in such a scenario? Asset inflation. Which could lead to limited, but ultimately unsustainable, amounts of inflation elsewhere.

Off topic, but why was that surprising? Seemed like everyone was on board for the "rates are heading higher" debate. Pundits were talking about the "rising rate cycle." All of our retail clients were dumping bonds, or having to be persuaded to continue holding them, into the end of 2017. Fairfax had avoided hundreds of millions in losses by repositioning the portfolio for the big economic revival Gundlach was on television talking about the massive short position in Treasury rates (showing other market participants agreed with rates -> higher) I think the dramatic reversal in rates shocked most market participants. Even myself, who had been in the "lower for longer"/fear of deflation camp for years, was considering the possibility of being wrong on rates and Fairfax minting money in that environment.

+1 This, and the surprising drop in interest rates, is what led me to sell the entire position. I still watch, but haven't missed it much in the portfolio.

While I don't disagree with the statement overall, I'd like to see flows information confirm it. It was my understanding that this was, in part, what drove the 10-year to 1.60% back in 2016, but since then I thought it had been a net negative return for most foreign buyers to buy treasuries and hedge the currency risk which has eliminated a lot of the foreign demand over the past 2 years. Is there any flow data supporting foreign buyers? If the references I looked at are correct, US government debt held by foreign entities has increased ++ after the last recession but has relatively plateaued. https://fred.stlouisfed.org/series/FDHBFIN However, the US government has issued debt at a rate much higher than GDP growth and somebody/somewhere has been piling up. In percentage terms, US government debt held by foreign entities over total US government debt (as per the Treasury Department) has risen from about 25% entering the Great Recession peaked at around 34% in 2013-6 and is now on its way down to 29% even if absolute numbers keep going up. Remember also that the Fed has recently been a net seller of government debt. Against all odds, rates have gone down despite the increased supply and demand from US individuals and institutions (including banks) seems to be the driving force. Here is official data showing what happened recently (over a year-period when public debt increased by 960B). https://ticdata.treasury.gov/Publish/mfh.txt From a bird's eye view it seems that the fear and greed spectrum looks more and more like the bimodal distribution that is becoming obvious in other segments which cannot be discussed in investment threads. The US continues to have the cleanest dirty shirt but it's getting dirtier in our beg-thy-neighbor world. I think this supports that we cannot believe that it's foreign buyers. Foreign held treasuries have increased slightly since 2016, but at a far lesser rate than the supply which results in them owning a significant % of the total supply less than their peak in 2016 (as you pointed out). If foreign buyers went from 34% ownership of the Treasury market to 29%, they certainly can't be the cause of the recent drop in rates - someone else had to absorb their 5% reduction along with the increase in new supply. home.treasury.gov/news/press-releases/sm679 Press release from May 2019. Pietrangeli is the Director of the Office of Debt Management and a member of the Treausry Borrowing Advisory Committee. I'd take what he says, and the data, over what BofA says any day. Once again, it's not foreign buyers driving U.S. rates

While I don't disagree with the statement overall, I'd like to see flows information confirm it. It was my understanding that this was, in part, what drove the 10-year to 1.60% back in 2016, but since then I thought it had been a net negative return for most foreign buyers to buy treasuries and hedge the currency risk which has eliminated a lot of the foreign demand over the past 2 years. Is there any flow data supporting foreign buyers? If the references I looked at are correct, US government debt held by foreign entities has increased ++ after the last recession but has relatively plateaued. https://fred.stlouisfed.org/series/FDHBFIN However, the US government has issued debt at a rate much higher than GDP growth and somebody/somewhere has been piling up. In percentage terms, US government debt held by foreign entities over total US government debt (as per the Treasury Department) has risen from about 25% entering the Great Recession peaked at around 34% in 2013-6 and is now on its way down to 29% even if absolute numbers keep going up. Remember also that the Fed has recently been a net seller of government debt. Against all odds, rates have gone down despite the increased supply and demand from US individuals and institutions (including banks) seems to be the driving force. Here is official data showing what happened recently (over a year-period when public debt increased by 960B). https://ticdata.treasury.gov/Publish/mfh.txt From a bird's eye view it seems that the fear and greed spectrum looks more and more like the bimodal distribution that is becoming obvious in other segments which cannot be discussed in investment threads. The US continues to have the cleanest dirty shirt but it's getting dirtier in our beg-thy-neighbor world. I think this supports that we cannot believe that it's foreign buyers. Foreign held treasuries have increased slightly since 2016, but at a far lesser rate than the supply which results in them owning a significant % of the total supply less than their peak in 2016 (as you pointed out). If foreign buyers went from 34% ownership of the Treasury market to 29%, they certainly can't be the cause of the recent drop in rates - someone else had to absorb their 5% reduction along with the increase in new supply.

Once again, I'm terrible at reducing the position before the big drop, but was diligent in buying more shares at 31%-32% of par today Seems like progress is delayed, but it keeps moving the right direction. We're now talking a timeline for recapitalization and release and have officials on record supporting the concept. A far cry from where we were at in 2013 when I started this position.

Potentially, but most institutional investors aren't going to buy Treasuries without hedging. Currencies are seriously volatile and you can lose several years of interest payments on a single move in the currency over a 12-24 month period. Why escape negative rates of a fixed amount to open yourself up to loss of an unknown amount if currencies shift? In 2016, most foreign buyers in developed countries could buy the Treasury, hedge the currency, and still come out ahead of their local bonds. I don't think that's been the case since 2017 or so, but am less certain since I don't follow currency swaps as part of my job any more. I would be curious to see data support the talking point instead of everyone parroting the same line that's been parroted since 2016, because it wasn't true in 2017 or early 2018 and people were still saying the same things.

While I don't disagree with the statement overall, I'd like to see flows information confirm it. It was my understanding that this was, in part, what drove the 10-year to 1.60% back in 2016, but since then I thought it had been a net negative return for most foreign buyers to buy treasuries and hedge the currency risk which has eliminated a lot of the foreign demand over the past 2 years. Is there any flow data supporting foreign buyers?

I probably need to revise this. It's becoming increasingly clear that the Fed is going to cut rates as a "pre-emptive" measure, even though the US economy seems to be doing just fine at the moment. I don't understand why they think that's a good idea, but it looks like there's been a regime/paradigm shift in their thinking. Other things equal, I think this makes a stock market melt up similar to the one in the mid-late 1990s a lot more likely. I imagine speculators are bidding up stocks in anticipation of that as we speak... We'll see. I'm currently of the belief that while you might see stocks bid a day or two after the cut, it's basically priced in at this point and any cut will be seen as concession that things aren't as rosy as equity investors are pricing in. Any cut simply means that weakness that used to be "transitory" is not necessarily. We're still seeing broad deterioration/deceleration in a lot of respects - for example the Conference Board's Leading Indicators index turned negative for the first time since December in the June release this morning. The only thing that's held up is employment and employment is largely a lagging indicator IMO. I think a cut could be the confirmation of the next down cycle more than a continuation of the current one.

Greg, I think you live in the burbs. 4 hours without AC in NYC in 90 degree weather can kill people. There is no grass and you can just chill in the backyard. You lose power and everyone's apartment becomes an oven. People also get stuck in elevators, the elderly have to walk up and down 30 floors to get home, etc. I used to live in NYC on the 26th floor of a 30 floor building. I remember a morning when 2 of the 3 elevators were out. After waiting 15 minutes for an elevator that I could get on (every time it came to my floor it was already full and I'm sure it was hitting every floor on the way down and again on the way up), I decided it was just easier to take the stairs down 26 flights so I could get to work. I was 28 and able to do that fairly easily. Not sure how I would have felt about it at 82 or what the stairs would have looked like if ALL traffic, up and down, were diverted to them.