TwoCitiesCapital

Was just about to post Grantham's letter myself, but see that I've been beaten to it. Is delayed consumption really a thing? Obviously, coming off a low base is always an improvement. But if we use 2018/2019 as a base - I don't think my activities in 2021 will exceed 2018/2019. Even ignoring that it will take months for vaccines to roll out, sports to readmit fans, travel restrictions to become less onerous, etc. I don't think my activity levels in 2022 will much exceed 2018/2019 by much. I'll go back to buying sporting tickets, traveling, eating out, etc. But I don't think it's going to be much more just because I didn't do it for 2 years. I think it will be front-loaded in the first quarter things are "normal", but it will decelerate back to normalized levels quickly. Because I expect it will be quick and unsustainable, I don't know what impact it will really have on profits and growth. Assuming I'm wrong, is it big and sustainable enough to offset the deceleration in stimulus? Is it enough to offset the drag that is likely from millions still working through the long-term hardship of business failures, underemployment, and unemployment? Is it enough to offset the impact of rising interest rates and debt service in a real recovery? Just seems to me that I might expect 2022 aggregate earnings/GDP to be similar to 2018 or 2019 levels in a good-case scenario. But we are ~30% and ~15% above those respective levels with another 2-years to go before we have that certainty. Even if achieved, there is more debt sitting in front of the equity and more shares outstanding to share the remaining profits with. It's not at all clear to me the delta in EPS is positive relative to 2018/2019 (at the aggregate index level). Maybe we do get bubblier from here. But I don't think it's pent-up demand, improving fundamentals, or economic growth that does it. I think it's entirely based on flows that would HAVE to come from more fiscal stimulus. All of the other stuff is 100% priced in for the next 2 years while ignoring the risks of it not happening or the likelihood of higher rates/inflation if it does happen. Maybe "pent up demand" is actually a thing https://www.npr.org/sections/money/2021/01/12/955617983/what-1919-teaches-us-about-pent-up-demand

They bought it with the expectation rule of law would be upheld in the court cases. You take that away with a negative ruling, or no ruling, and NOBODY will be buying with that hope again and everyone of us who bought with that hope will be sellers. And anyone who bought after the theft, bought securities that reflected the risk of the theft and the rights to any potential recoveries at severe discounts. It's the people who held the securities when that decision was made that really got f*cked. And there will be an even more severe discount if you remove that hope - a discount that approaches $0 for new investment.

Yes. Biden was VP when Geithner et al decided to renegotiate the 10% coupon into "all earnings and capital into perpetuity" - right after hearing Blackstone say the companies were going to be fantastically profitable. What better to then unilaterally re-negotiate the terms of the bailout with yourself to make sure you get 100% of all of that when only entitled to 80%? I think we all know that if this happened with a private company, and the renegotiation was done by the CEO holding the board members under duress, that the CEO would've gone to jail. But instead of the CEO, it was the Treasury Secretary and conservator so it's all a-ok. White-collar theft at its finest. Yes. Forward looking as in fool me once, shame on you. Fool me twice, shame on me. Forward looking says to not the gov't fool you again to steal your capital with impunity.

New investors risk the gov't, 80% owner, deciding it can sweep all profits and capital (their new capital no less!) to itself in perpetuity and do so with impunity. And seeing as the current administration was present when the Obama administration opted to steal the first time, I don't think you're going to find many takers until the lawsuits make certain that it won't happen again.

I don't agree with this: It doesn't settle the lawsuits which are problematic to any new capital raise It doesn't maximize the value of the taxpayer stake because it's eliminating the value of the 80% of common stock the government retains of the enterprises. For the second bullet, the reason the common would be worthless can be viewed through 2 scenarios: if we win the case or if we lose the case. If SC rules for us, external capital can be raised quickly, but then the government risks being diluted to hell if the companies have to repay the sr. preferred again AND meet capital buffers. The government's 80% is nearly $0 (even if capital is retained b/c of how long it would take to retain enough earnings to pay off sr. preferred, again, and build capital levels. If SC rules against us, capital raise is out because no one in their right mind will give money to them while they're still controlled by the government b/c now we know the gov't can steal with impunity. Only value is via retained earnings, which for several years will still accrue to sr. preferred and capital requirements. In either scenario, taxpayer asset of 80% ownership is worth nearly nothing and not maximizing return to taxpayers. Any return that does flow to taxpayers is subject to the outcome of the SC ruling which could reverse those 'returns'. Taxpayer is not protected in these scenarios but rather subject to huge variability in outcome and risking the value of the surest thing - the value of the 80% owned in the enterprises themselves. So I don't think this path is likely. Mnuchin may not be able to settle the lawsuits before he leaves, but he could certainly do a better job of setting the groundwork to get them settled than what the above would do. Marking the sr preferred as 'paid' now moves this forward in a good way - it opens optionality to maximize the value of the retained 80% of ownership AND allows for next steps like settlement negotiations and a capital plan.

I, too, am flip-flopping to try to manage both potential upside and downside. Prior rallies have gone 10-40x from the point they really took off. So let's keep the current context of the roughly 4x rally from 10k in mind. That's roughy where it traded at pre-pandemic and where it traded out before going vertical so that's the base I'm using. That being said - it's easier to 40x @ a $40 million market cap than a $400 billion, so that must also be considered. Also the unprecedented disconnect in daily supply and demand must also be considered due to institutional demand having stronger hands and buying larger $. Ultimately, I imagine this will behave similar to others and maybe 10x is about what we can expect to see out of this rally before it blows up again and drops to 20-30k all over. I've been struggling with how to manage this because it's literally unlike anything I've ever owned. Fortunately, I had foresight that this might be an issue by envisioning what I would do if it did sky rocket to 100k as I was buying it. I made the decision to DCA BTC to HODL and buy GBTC in an IRA to trade. I'd trade the GBTC around the NAV premium expansion. Buy when it was <15% and sell when it was >25%. Also decided that my total look-thru BTC exposure should be ~30% higher than my desired long-term holding of it to provide me flexibility to trade around it if it did rise without dipping into my desired end-state allocation. The rise from 15-20k provided an opportunity to exit GBTC, tax free, at 30-40% premiums. I was selling a little every day and neutralizing most sales with new purchases of BTC. Reducing risk, tax free, and making it feel like I was doing something to put my nerves at ease after such quick run. Post 25k I stopped neutralizing the GBTC sales. Still selling ~1% of the position every other day or so, but am now actually reducing BTC exposure in a tax free manner. Still holding all of my taxable BTC with limit orders put in ~15% under the market price to catch any downdrafts and consolidations. Have the confidence to do this, even at these elevated prices, because I'm still selling GBTC regularly and these would just act as partial neutralization transactions. All in all - feeling comfortable about the results. I've taken thousands off the table, tax free, still have roughly 90% of my overall BTC position and am still above my threshold of desired ownership with room to make more sales if we continue to rally. Having the system and the trade activity does relieve some of the anxiety around the position now that 15% of my entire net worth is in it after just 2 months....

I lol'd to stop myself from crying +1 +1 I have added myself. Albeit only a 3% increase. It's already my largest position and I've already been HODLing for way longer than I ever anticipated. Was hard not to add more, but have to temper myself since I've been wrong this whole time This is a but disingenuous methinks. Does the capture of FNMA resemble that? Absolutely. I can't think of much else from Obama admin that does though. There are also things from Trump's admin that are reminiscent of these governments. Like using the military against his own citizens and attempting to orchestrate a coup when he doesn't like democratic election results. Trump was never going to be a savior of anything - our political system or this investment. The latter was only SM and the SC. SM can still turn things around. The SC can still rule in our favor. Both suggest that we're not quite comparable to China or Russia yet.

Yeah, but those were OUR dates, based on assumptions that sometimes turned out wrong. The question is whether Mnuchin ever had a "date" other than last minute. We may never know, but while time is running out, the last minute has not yet arrived. What makes you believe something will happen at the last minute? That’s another one of OUR dates? These papers are like call option that on January 20, imo. At least the executive action part of the value will expire. I am not sure what the lawsuit part is worth. Even if executive action were to occur, there is a strong likelihood that it will just be reversed. Yep. Now Dems control House, Senate, and presidency. Nothing will be done in the next 4 years at least. Or Mnuchin will say, "I don't want to leave this up to Dems" and he'll sign the PSPA amendment. Investing is a probability game. What do you think is the likelihood of this? My assigned probability is 0.0005% Which is pari passu with your level of understanding the intricacy's of this investment. I think you got lost in the wrong thread again. Guys - I really appreciate your contributions to this thread, but personal attacks like this aren't necessary and take away fro the thread as a whole. If you don't like them, hit the ignore button and let the rest of us judge for ourselves or counter their opinions in a respectful manner.

https://www.bloomberg.com/news/articles/2020-11-24/u-s-bankruptcy-tracker-march-of-the-zombies-is-coming-soon Here's a Bloomberg article that discusses 2020 being the worst year since 2009 for numbers of bankruptcies for firms with greater than $50 million in liabilities. Seems like rent/mortgage deferrals, PPP loans, EIDL loans, etc really did help small businesses stay afloat temporarily. But how many can remain that way in 2021 without that ongoing support?

Interesting notes from Cuban above. Thanks for the additional context from Read the Footnotes! I generally agree that value investors do not pay enough attention to things like flows, technicals, and the structure of demand. Even I don't pay enough attention to them or have reliable sources for measuring them despite recognizing this as a short-coming in my process. Was just about to post Grantham's letter myself, but see that I've been beaten to it. Is delayed consumption really a thing? Obviously, coming off a low base is always an improvement. But if we use 2018/2019 as a base - I don't think my activities in 2021 will exceed 2018/2019. Even ignoring that it will take months for vaccines to roll out, sports to readmit fans, travel restrictions to become less onerous, etc. I don't think my activity levels in 2022 will much exceed 2018/2019 by much. I'll go back to buying sporting tickets, traveling, eating out, etc. But I don't think it's going to be much more just because I didn't do it for 2 years. I think it will be front-loaded in the first quarter things are "normal", but it will decelerate back to normalized levels quickly. Because I expect it will be quick and unsustainable, I don't know what impact it will really have on profits and growth. Assuming I'm wrong, is it big and sustainable enough to offset the deceleration in stimulus? Is it enough to offset the drag that is likely from millions still working through the long-term hardship of business failures, underemployment, and unemployment? Is it enough to offset the impact of rising interest rates and debt service in a real recovery? Just seems to me that I might expect 2022 aggregate earnings/GDP to be similar to 2018 or 2019 levels in a good-case scenario. But we are ~30% and ~15% above those respective levels with another 2-years to go before we have that certainty. Even if achieved, there is more debt sitting in front of the equity and more shares outstanding to share the remaining profits with. It's not at all clear to me the delta in EPS is positive relative to 2018/2019 (at the aggregate index level). Maybe we do get bubblier from here. But I don't think it's pent-up demand, improving fundamentals, or economic growth that does it. I think it's entirely based on flows that would HAVE to come from more fiscal stimulus. All of the other stuff is 100% priced in for the next 2 years while ignoring the risks of it not happening or the likelihood of higher rates/inflation if it does happen.

2015: ~(20) 2016: 24.7 2017: 25.9 2018: (-14.1) 2019: 25.5 2020: (4.80) Excluding holdings in BTC, my return was -4.8% for the year (what I voted). Dunno what it was including BTC as I account for that making TWR calculation difficult. Probably would've improved it to +1 or 2% for the year. My cash return was positive ~4%, but because most of the dollars were made in Q4 with a portfolio that was much larger due to consistent inflows, it didn't improve the prior losses on a TWR basis by enough to end positive. Went into 2020 roughly 50/50. Worked out well into March, but had shorted the market via SPY/QQQ puts and maintained them through May/June. Didn't think that the sell off would be so "shallow" or end so soon. Still not entirely convinced the fragility is gone :/ stubbornness isn't my best trait. Bad Moves: 1) Being heavy into EM and cyclicals going into the crisis. 2) Being heavily into mortgage REITS thinking they'd be relatively safe in a sell-off as they proved in 2008 3) Continuing to remain short the market after the bottom passed and doubling down on the way up (responsible for roughly -6% of performance) 4) remaining 50/50 on the way back up due to my skepticism Good Moves: 1) Bitcoin 2) Adding Gold/Silver call spreads in response to stimulus 3) Adding to Fairfax and Exor at ridiculous prices even AFTER the recovery was apparent 4) Substantially increasing by many fold my holdings in Rolls Royce after rights offering announced 5) sticking with, and adding to, mortgage REITS at significant discounts to NAV 6) refinancing my mortgage and converting an IRA balance to a Roth IRA. Probably more beneficial than all the positive investment decisions combined Ultimately, disappointed with the performance. I thought that the bear market was certain to be more protracted by the economic damage that was/is still obvious. Got whipsawed on some of my more volatile retail names and sold other performing names too soon. Also, while most of my stocks underperformed in the downturn, most also proved to underperform in the upturn as well - so far at least. It's only been in the last 60 days or so that they've begun to pop (up like 15-20% in the last 2 months!), but too little too late to save my year-end results. I had a plan. I stuck to it. It didn't work out as well as hoped. I know what I could've done better, but I don't know why I would've done it because I still don't really understand why what's happened... happened. Still skeptical of valuations. Still see the economy as being fragile. Still don't think the Fed is the one floating this. And still see better value in international stocks and real asset producers. Maybe one day this broken clock will be right. ***Edited to include my prior years of returns for better reference in the future

Happy New Year all Cheers nwoodman Thank you for sharing. It's interesting to eyeball the chart showing the dramatic growth of alternate capital sources and relatively slow growth of traditional sources. "Reinsurance disintermediation appears to be gaining traction as global capital pools seek higher returns and uncorrelated asset classes in a low return world." (Slide 38.) This is a narrative heard before (i.e. MKL/Nephila), but the chart really helps illuminate the drastic change over the past 10 years or so..... Isn't this the primary argument for why insurance rates have been low? Crowding out and too much capital? It's why I've been so skeptical that this hard market will last, because I don't see anything changing the trend of outside capital flooding the industry at lower rates of return. Any thoughts anyone has on this and why it's not expect led to affect this hard market would be helpful.

https://www.thehindubusinessline.com/companies/prem-watsa-led-fairfax-weighs-bid-for-shipping-corporation/article33465056.ece

+1 It is just a matter of arithmetic. The bar is MUCH lower today for Fairfax to do well by shareholders. I've done the math in several prior posts - Fairfax simply needs a very small single-digit % return on investments and very low profitability on insurance going forward for shareholders to do very well from here - even with the obvious headwind of interest rates. I'm not a "long-term Fairfax bull". I've owned it on and off over the past 9 years, but spent nearly 2 years out of the name in recent years when it was clear to me interest rates weren't going to rise and that it was going to be a very difficult hurdle for Fairfax to get much beyond $500-600/share USD. I no longer have those qualms at $350 with more favorable starting valuations on a large % of the book value.

I use GBTC in my IRA and is roughly 1/3 of my total BTC exposure. The cash was more readily available in my IRA for large purchases AND it allowed me to trade the position with no commissions or taxes. The expansion and contraction in the premium provides additional optionality. As I sell chunks in the IRA, I can buy the equivalent amount of BTC allowing me to capture the NAV spread, lower my taxable gain, reduce my cash at risk, and potentially subsidize my losses (if we go back down) all while maintaining roughly similar exposure to BTC. Have been selling GBTC in drips since ~$15,000 as premiums exceeded 25%. About 25-30% of the position sold so far pulling thousands of dollars off the table tax free while only reducing my overall BTC allocation by ~0.1 BTC. If we crater from here (possible, but unlikely), I can take the tax loss from recent taxable purchases and rebuy GBTC after the wash sale expiry to catch the next updraft tax free. Seems like a great way to swing trade this until true ETFs are released in the US. I did also consider call spreads on MSTR, but the pay off on the call spreads was very similar but the payoff on owning BTC outright - just with more strings attached (having to worry about basis risk and hitting particular strikes).

how do you think collins is decided? 1) remand (win) on APA and no backwards relief on constitutional 2) immediate relief on constitutional 3) loss on both then I would think about 80% of par (+-), less a 1-2 year discount at your preferred time value of money I thought the question is what are they worth on January 21 with SCOTUS still up in the air and no administrative action. I would guess about 25% of par. no my answer is directed to what are they "worth", not what they will be priced at by market Yes I am wondering about both... immediate valuation drop and subsequent eventual value, with the latter being far more important of course. Thanks for the thoughts. In my humble opinion I'm staying in for the long term for the reasons and opinions already stated. I do worry the Fannie Gate crowd is setting up for failure by expecting action by Jan 20th, thus when it doesn't happen there will be a huge selloff, but whatevs... Good luck and Merry Christmas (and Chanukah and Kwanzaa) I feel like we shook out a lot of those week hands with the hit pieces saying Mnuchin wasn't gonna do anything before leaving office and the subsequent 20-30% drop. Maybe I'm wrong though

Following up on this - GBTC premium has traded up around 35-40% for the last few days before closing today ~30%. Too soon to say if this is the reversion in sentiment starting, but going to guess that the shirt term top is in for BTC @ 24k and we'll see some profit taking and consolidation for the next few weeks. Maybe I'm wrong as I recognize stimulus checks of $600-$2000 might still be coming and used to speculate - but the expansion/contraction in GBTC premium has been pretty predictive of overall sentiment and price direction in the past. Has also provided wonderful trading opportunities (buying @ a 10% premium and selling between 25-40% premiums gave me an extra 100% return on top of the underlying BTC price), but I'd probably going away ina few months with Vanguard pushing for a BTC ETF.

While I agree with others that low interest rates are an impediment to earnings - this isn't any different than in 2016-2018 when interest rates were also near zero and Fairfax traded much higher. The primary difference is just expectations - in 2016/2017 everyone expected rates to go higher and Fairfax to roll debt at higher rates (which mostly proved wrong after a very short period of rising rates). So I don't think low interest rates is in itself an argument not to own them or value the company at book. In 2017/2018, the outlook for Fairfax is as described below 1) Insurance was doing reasonably well - but not booming, 2) float growth was doing reasonably well, but not accelerating 3) people thought interest rates were going sustainably higher, but ended up being wrong 4) equity performance expectations were a toss up. With all of that, Fairfax traded at $400-600 USD over that time. Now insurance IS booming, float growth IS accelerating, interest rates are still 0%, and equity performance is still a toss up - but could be better with valuations on many holdings being lower today than back in 2017. I'm supposed to believe Fairfax deserves to trade 15-20% below the low-end of its range from 2016-2018 while being significantly better positioned? Even if you're still in the camp of low interest rates hurting Fairfax after all of the above, $840 of float @ 2% is a 5% return to shareholders at today's prices - without consideration for insurance profitability, float growth, or any positive returns to equity or associates. At $600 USD, you needed interest rates to cooperate. At $350 USD, who cares if they don't?

Disclosure #1: stock picking is the way to go, if you can. So, this is likely a waste of time. Disclosure #2: i've been 'communicating' with various 'friends' and acquaintances for holiday greetings and when the discussion superficially touches investments, i feel relatively stupid and got to watch out for envy and maybe accept the real possibility of stupidity (relative or absolute). ----- I never thought Mr. Mandelbrot would be mentioned here and there you go. When i graduated in 1996 (mostly science-related), i decided to 'manage' household investments and had to learn what an asset was. For a year or two, went through 'economics' and came across Mr. Mandelbrot's writings. Fascinating. He was a remarkable individual, perhaps from the same multi-dimensional mold as Mr. Charlie Munger. Three things stuck from the unique thinker. First, contrarianism. From the source: "As I allowed myself to drift, I soon came to view the normal unpredictability in life as contributing layers or strata of experience that are valuable, demand no apology, and add up to a unique combination." Second, conceptual tools when i met annual reports from Mr. Prem Watsa somewhere in early 1997. That's when 'value investing' came to view. Understanding FFH then meant to understand the value of reserves (wild euphemism in this case) and i realized that not many people really looked at reserve triangles. Mr. Mandelbrot's ideas of mixing deterministic and stochastic models were very helpful then, and periodically after. Third, how to deal with physics envy in softer fields or how to mix chaos to models (tensile strength and fractures, weather 'prediction', inverting yield curves etc). Of course, the inverting yield curves and ultra-low interest rates are saying something. And the wildness of the message lies in wait. It feels like the whole covid thing was simply an interlude. ----- Still, by using a variety of historical measures, this market (valuation, spreads etc) is the most optimistic it has ever been. Of course, the market could be right and it's really a great time to be alive. The "market" can't be right because there are multiple markets predicting different outcomes. US Debt markets? Pricing in incredibly low growth and low inflation for the foreseeable future. US Equities? Incredibly optimistic about US growth Markets can't be right when they're predicting the opposite outcomes.

The cost of production matters assuming that there is demand for the product. Demand is the ultimate concern, but once you ascertain that there is demand, it can't be supplied unless prices provide the incentive to provide it. The price creates/incentives the supply. Who cares if it costs $800/oz to take gold out of the ground if no one wants to own it. Nobody But it matters a lot if people do want to own it, because the price can't stay below $800/oz in order to provide it.

Made this very point, but about 30 seconds after you ;D went ahead and deleted the redundant comment I'd also add, in addition to making the bet payable to either of you in the event of loss, it's probably not the money that he's making the bet for. If I'm in his shoes, and think the US is going to collapse into nothingness and bet a friend $100 that it's going to happen - it's worth it to me to accept that worthless $100 in 15-years just to say that I was right and that he knows it. Sometimes, it's not about the monetary reward.

Remember that we're dealing with a business partner that has a mood disorder, most likely bipolar disorder. "Mr. Market who is your partner in a private business... the poor fellow has incurable emotional problems... At other times he is depressed and can see nothing but trouble ahead for both the business and the world." -The Intelligent Investor That emotional mania paired with the fact that this has been a massive disappointment for most people in it for the past 7-8 years means it's a very tall hill of despondency to climb even when the news is getting to be positive again.

The premium on GBTC surpassed 35% early this morning. 30-35% has signalled short-term tops in sentiment in recent months, but that doesn't mean it couldn't go higher in a frenzy like 2017 OR that you'd lose money buying it today if BTC keeps on keeping on. Just the first indicator I watch for overly bullish sentiment. I noted back around ~18k that even after the 80% rally we'd seen, that its NAV was still within reasonable bounds of recent history and not bubbly - now we're getting there. Mayer multiple is 1.88 (multiple to 200 day moving average). 2.4 is the typical sell signal in a euphoric rise - though it has gone much higher (like 3x+ in 2017) before they bust. Keeping in mind that the 200 day moving average is rising every day, 2.4x sell signal will likely be triggered around ~30-35k if it happens in the next 2-3 months. It's better for all of us if it takes its sweet time in getting there though - makes the stock to flow forecast of 100k by the end of 2021 a more reasonable topping point if the 200 DMA is given time to rise to 25-30k instead of trying to make it there when its currently at 12k. Happy trading all

Yes. Transaction fees can be charged to compensate miners. It will likely be less lucrative than the bitcoin awards, but maybe more like utility type returns. Definitely will be cheaper than comparable swipe fees on credit cards to support their networks and etc.

Lolz