TwoCitiesCapital

24.72% Time Weighted Return 28.07% Money Weighted Return Not a bad year considering I was holding a ton of cash (0-15% throughout the year), was actively short the U.S. markets by about 30-40% notional value throughout the year, and that 10% of my portfolio is FRFHF which didn't do much this year. Basically, this was the reversion trade, led by a handful of names that did terrible in 2014/2015. Commodities and EM were my saving grace this year and I was very fortunate in my timing of adding to most names catching them near their bottoms before taking a wild ride upward. Major contributors to performance were PEFIX, CLD, CNXC, PDER, ATUSF, BSBR, SBRCY, LUKOY, FNMA, and FNMAJ.

I don't know about RE loans, but MBS spreads were about 6-7 bps wider as compared to LIBOR from 12/31/14 - 9/30/15. Maybe anywhere between 20-30 bps wider compared to Treasuries depending on which part of the curve you're looking at. I wouldn't think that Real Estate loans would be so significantly different from MBS to warrant hundreds of bps difference between the two.

Traditionally, credit spreads compress when rates rise because rates typically rise in an environment of healthy economic growth making borrowers better credits.

More PDER. Just slowly accumulating.

Can anyone share the details, in print, about this Africa fund? First I'm hearing of it. Would be excited by that opportunity though - especially if run in a fund format as opposed to Fairfax risking all of it's own capital. The asset management business is a great model and using it to leverage their exposure, but protect their downside, to place like India and Africa seems brilliant IMO.

What does Bill McBride say about the demographic shift from the first of the baby boomers turning 70 this year? That means the first of the RMDs coming from IRAs in the first quarter of every year for the next few years (structural selling pressure) and that the wave of boomers retiring is growing suggesting there may downsizing and additional housing capacity that we don't yet see. I thought it wasn't until 2020ish the next gen was expected to be hitting their stride at peak earnings and millennials hitting mid 30s to offset that?

I'm just having trouble rationalizing all of the bears throwing in the towel: It was just a few months ago that Dalio was calling monetary policy ineffectual and compared it to "pushing on a string" while suggesting we were at the end of the mother of all debt cycles. It was just a few months ago that Prem Watsa was concerned about deflation and corporate valuations and had his equity portfolio 100% hedged, a portfolio exposure that was largely cash and long duration bonds, and abundant deflation protection. It was just a few months ago that Jeremy Grantham was still thinking that equity valuations were excessive and that forward looking return would be substantially negative to achieve his outlook for 7-10 year equity returns in the low single digits. I am just having a hard time reconciling all of this to an about face in the wake of a Trump victory. I get the potential impact of tax reform, but can I really be missing how momentous of a presidency it could be if all these guys are throwing in the towel on being bearish? Or is his victory just a convenient excuse to for them to capitulate?

He sounds like a cartain manic depressive fellow I want to sell some shares to... really strange. Yea - This is getting bizarre. I don't have any issues with the acquisition in and of itself, but the 180 degree turn on the U.S. markets as the result of the election with no commentary on rising rates, falling liquidity, strengthening dollar, declining corproate profits, levered corporations, and valuations that appear excessive certainly seems strange.

I think we now have the answer. https://www.bloomberg.com/news/articles/2016-12-19/fairfax-nears-deal-to-buy-allied-world-for-4-9-billion

I enjoyed Antifragile, it wasn't life changing or anything, but made you think about things in a different way at least while reading it. I agree with you about Dan Kahneman and Sam Harris. I've never read anything by Nate Silver, a quick search only lists one book on Amazon, "The Signal and the Noise". It looks interesting. I can confirm that The Signal and the Noise was good and definitely got me thinking about forecasting differently.

That macro play makes sense in this current environment. A few questions if you don't mind answering? 1) What length contracts are you using? LEAPS or options? 2) How do you select your strike price? Do you base it off a 10%,15%,20% decline or is it a certain return you are looking for? 3) What percent of your portfolio do you attribute to this? 4) Finally, do you view this as insurance for your long portfolio or are you using a barbell approach? Thanks a lot. I'm still learning about options and it's only my first year to properly running my own portfolio. Still saving up the funds to have enough to utilise options effectively. 1) I typically shoot for a minimum of 12M maturities and roll them 6-9 months in if I'm still paranoid. 2) Once the position is a full position, I'll have multiple strike prices. Seems odd to me that I'd have options that profited at a 50% decline, but nothing that profited from a 20-30% decline on the way. I start off with strikes 10-20% below current prices and that is where about 30-50% of the options position will be. Then, there will be positions in options 10-15% below and sized a bit smaller. Then positions in ones that are 10-20% below that and a bit smaller. The idea is that once markets start dropping, I can roll high strike prices into lower strike. This allows me to take some money off the table while increasing the downside leverage of the position at the same time. Helps you survive a bit longer if you're wrong about the timing/size of the decline since at any given time you're reducing your total $ at risk but increasing your total short notional so you still make big money in a big decline. I've still lost some money over the past 2 years of hedging like this, but not as much as I would have by not actively rolling the contracts lower as markets tumbled and taking $ off the table. 3) Last time I had a "full" position I was about 6-7% straight short the IWM. The total $ amount in LEAPS was an additional 2-3%, but the delta adjusted notional was another 20-25% short - so about 30% of my portfolio was short IWM/SPY. 4) I tend to view it as a barbell approach. The long-side of my portfolio is all EM/resources/Financials/Fairfax and Fairfax isn't hedging like it used to be.

I think it may also depend on how your account. For instance, IB won't allow me to trade FNMA in my individual account, but allows me to in my IRA. Don't really understand the reasoning there - just know I get errors in my individual account every time I've ever tried to purchase it.

TwoCitiesCapital, I'm not sure how to correctly understand the qouted part of your last post in this topic. As always, your input is highly appreciated for my part. Is this comment from you about an expectation of earnings are supposed to decline for US multinational companies - measured in USD, - that is, because of the USD going up relatively to other currencies? Yes. Corporate earnings in the U.S. have already been in their longest, unbroken downtrend in history...but no one has been concerned because it's been a pretty shallow earnings recession. I expect that a strengthening dollar, and higher rates, will BOTH contribute to a continuous reduction in corporate profitability. Foreign revenues will be worth less, we'll export less, and rates will cut into profits as companies roll into higher coupon debt. Eventually, a bunch of shallow reductions in corporate profits aggregate to a meaningful reduction. I would have thought we were already there, but I guess not. That being said, the trend of a stronger U.S. dollar doesn't look to end anytime soon - at least not while U.S. rates offer such an attractive spread to any other developed countries'. The only thing I'm concerned about is the actuality of meaningful corporate tax reform which has the potential to have a large impact on bottom line earnings, which is why I initially covered my shorts when Trump was elected. (Glad I did!) That being said, I don't think corporate tax reform is a given, even with a Republican Congress, and so I'm growing more comfortable shorting again based on my view that U.S. equities are grossly overvalued relative to historical norms and other opportunities present.

Reopened half the shorts in IWM that I closed after Trump's election. Also, reopened about 1/4 of my options position against the SPY. Still hesitant with all this talk of corporate tax reform, but there's no guarantee that it gets through (as likely as it seems) and that's still months out at a minimum giving me time to change my mind. At the present, U.S. rates have sky-rocketed in the last two months and have/will result in a stronger dollar as long as this spread continued. A stronger dollar likely means a continuation of the longest earnings recessions on the book - at some point, people are going to wonder how stocks have gone up, from already lofty levels, if earnings have been contracting for 2-3 years now...

That which cannot continue into perpetuity won't. But we also tend to only change when we're forced to. 2008 was the beginning of that "force"; but instead of dealing with it, we socialized it at a lower carrying cost to delay the day of reckoning. In response, gov't budgets went to hell and national debt figures have exploded - and are still growing. At some point, there will be a reckoning.I don't know when or what will spark that, but it seems totally unreasonable to have this exploding debt (mostly corporate and national, but some at the individual level again too) while growth has remained muted and wages have remained stagnant. At the very least, it means that all the money borrowed in the past few years was wasted on unprofitable and uneconomic endeavors given that national income growth has remained a fraction of debt stock growth.

keeping it real with glen bradford? I think he was margin called based on reported holdings Well not sure how all in to be with this thing I don't know how he borrowed his money, but I don't believe it was margin. He does hold over $2M worth, at current prices, of preferred shares. I don't know if that's all his money or if he's also managing money for others, but the 100+% rally we've seen in the last month has probably been a life altering change for him.

wow... Had no clue it moved that much.

Agreed. Berkowitz would likely take par plus unpaid dividends since 2012. Obama is in a tight spot if he wants to keep those documents from public view. 7 weeks... ticktock. Just curious as to why you think unpaid dividends are on the table? These aren't cumulative preferred shares and there's no impetus to pay a common dividend anytime soon so I am having trouble seeing that as being a reasonable ask in settlement talks.

It's going to be a rough couple of years for Europe. Even France and Germany have a majority who want to hold referendums. Just imagine the disaster it would be for the E.U. if those "surprised" and Germany and France were slated to exit.

I think that's the hope for the common shares. That the amount overpaid comes back to the company and doesn't have to be raised via share issuance or by retained earnings. There's probably going to be a share sale, but it'll be a lot more favorable if there are tens of billions flowing back into the companies. Further, as mentioned above, this would be the virtuous cycle as the common would likely pop on the news which means even fewer shares getting issued since it would be done at a higher price.

It's my understanding you can direct your broker/accountant of which to use. Some may even let you choose to customize at the position level instead of the account level. Just got to make sure it's all well documented and correct in the event you get audited.

Retire in Mississippi and, with the money you save on rent, you can travel to Manhattan once a month for an extended weekend and still save on your taxes! Disclosure: I've lived in both. "Live in low CoL place and visit high CoL place often" is certainly my retirement plan! Mine too.

+1 I've made more $$$ the last 3 weeks off of this than any idea I ever came up with....so far. It was all largely due to the confidence and understanding I gained from everyone's contributions here.

I think if Trump gave two shits about optics, his cabinet wouldn't look anything like it does now. I would have bet a hell of a lot of money that we wouldn't see another GS guy in Treasury for a generation. Lol! +1

Wouldn't it be the FHFA/Treasury driving the restructuring given that the plans will likely be laid out before they're released? And if that's the case, it's going to be the FHFA/Treasury w/ Paulson/Berkowitz/Perry driving the restructuring since they're the ones with legal cases that would need to move forward/be settled before investors can more forward with any certainty in the common. Still hoping for preferreds to be redeemed at par for common shares before the common rallies TOO much ::fingers crossed::