Mephistopheles

Last week I bought some calls in my Roth IRA. The stock moved up and today I was able to sell covered calls for the same date at a strike a few bucks higher. It worked out well, I actually netted some cash from the trade. When I tried to sell the covered calls initially, the online portal didn't allow me to. I called in and was told that the system does not recognize the long calls thus it is interpreting my short call order as naked. But they understood what I was trying to do and put the trade in for me anyway by overriding the system. Now I noticed that suddenly, all of the cash I have in the account is no longer available to trade for. It is there but I cannot use it to make purchases. I called in to figure out what is going on. They were confused too and investigated. A few hours later I got a call back and was told that "bullish call spreads are not allowed in retirement accounts and whomever put in the trade should not have done so". They are telling me that a bull spread requires margin, even though it is covered by a long position. He gave me two options: 1. I can unwind the trade 2. I can move the short call to my taxable account since it is not settled yet, essentially making it a naked call The second choice makes absolutely zero sense because they are trying to reduce an apparent "risk" by going from covered to naked. And I didn't accept the first choice either because by this point I was so angry. I told him to go higher up to someone who can approve this trade as a courtesy, because if I am forced to unwind, I am moving my money out. He said he will get back to me. In the meantime, my significant cash balance in the Roth is still locked up, so I can't use it even if I wanted to until this is resolved. I've thought about it and realized that if they don't honor this trade I can get them to replicate in my taxable account. But that's bullshit because of the obvious significant tax implications. Any advice on what to do? It's such a significant amount of money involved, both in what is locked up or the tax implications if I move it, that I feel I should get a lawyer involved.

Amateur question. Can't the Fed print money by simply crediting accounts of the depositing banks?

Great news!

I have been wondering this last few days as well. Buffett mentioned during the meeting that the $140 billion cash pile seems like a lot but really is not in the worst case scenario. What was he referring to? What sort of COVID related scenario can BRK lose that much money in? The obvious one to me is this business interruption but then from my understanding BRK is not on the hook for significant damages there at least the way the contracts are currently written. Was he referring to the courts ruling against insurance cos in this matter or something else entirely?

In March, during the depths of the crash when the Dow was falling thousands of points per day, what % of investors would have predicted that we would be at or near all times highs in a matter of months? And if you guessed wrong that doesn't mean you are dumb. Assume the Fed failed to act as aggressively as they did. We would easily be in a very different scenario right now, both with the market and the economy. Imagine if the GOP and Dems couldn't agree on terms for the CARES Act? Imagine if the virus became deadlier and more transmissible. Note that the 2nd wave of the 1918 Flu Pandemic was significantly worse than the 1st wave. Buffett said at the AGM that the range of probabilities included some very nasty outcomes. It is safe to say that the 40% market rebound within less than a quarter is likely the best possible outcome in that range. People don't give the man credit for preparing for a shitstorm that didn't happen but was at a high risk of happening. The game isn't over yet, he may be proven right once again.

The consensus seems to be that the value of the float liability is less than dollar for dollar because maybe it never needs to be paid back. If you invert that, what's the value of a cash asset that earns ~0 and may never be put to productive use? Possibly less than dollar for dollar is appropriate there as well. I agree with this line of thought. Maybe the best way to discount the float liability for the IV calculation is just take out the amount in cash that we are never going to see. Buffett talks about $20 billion minimum, it's probably more realistically $40 billion. 20 minimum he refuses to spend and add another 20 that will never be spent fast enough as it is made. Add another $10 billion to be safe. So that is $50 billion cash that for shareholder purposes, we will never see. So out of $130 billion float, we can consider as free money approx (130-50) = 80 billion of it. The stock is still insanely cheap with these numbers. People tend to weigh recent trends too heavily. Would we be talking about discounting the cash balance if we didn't see this massive upswing in stock prices? Would people be questioning Buffett's judgment for not repurchasing in March if S&P was even lower today? BRK sentiment is just far too negative right now, which is part of the reason I am buying LEAPS. The option prices say it all, such a low amount of volatility priced in. But we have seen BRK move huge amounts in short periods of time in the past and we will see it again. Not to mention the ridiculously low Price/Book ratio. That cash pile will quickly look heroic if/when we have another downswing. For that reason by buying BRK you are naturally hedging against the downside. The expectations are so low right now that any sort of good news will cause a huge jump. Imagine next Q we see $10 billion in repurchase activity?

bizaro86, not taking a shot at your thoughts on the float liability, but rather want to see if you can poke holes in how I think about it. I'll use a hypothetical company that is 100% capitalized by float as my example. Let's assume we issue a $1.0m policy at the beginning of every year that gets paid out at the end of the year. We take that $1.0m and invest it into Treasury bills at a 10% rate (day-dreaming over here, I know). Well at the end of the year we would have $0.1m in the bank, $1.0m in a Treasury bill, receive cash inflows of $1.0m for the new policy issued, and pay out $1.0m of insurance claims/expense for the beginning of the year policy (assuming cost of float is zero). In this situation, the equity holder would be able to receive a dividend of $0.1m, unencumbered by the float liability. We can have this same situation occur forever into perpetuity, collecting $0.1m every year. My question becomes, why knock something off of the equity value if we never have to truly pay back the float and it doesn't cost anything in interest? That's $0.1m in my pocket every single year, just as if I funded the company 100% with my own money. Well, good way to think of it is- would you rather have $1 m in equity or $1 m in float, all else being equal? The real liability amount of float is less than, perhaps substantially so, then what is on the balance sheet but it is of course greater than zero.

For those mentioning precision railroading post WEB, you're assuming the BNSF management wanted to implement it but Buffett stopped them? I am having trouble believing that because Buffett is generally very hands off. So why would he get involved for this? Maybe BNSF has a better reason not to do it, or maybe they wanted to wait it out to see how it affects customers in the rest of the industry?

Sorry for the dumb mistake. It was late and I was lazy on my phone just doing some basic math. Ok so say the value of the stock portfolio is the value of the insurance operation. You're still getting the utility and everything else ex-bnsf free. BRK has options that go to 06/2022, 2 years out, and don't have much of a volatility premium. I own some $200s, but this may be a good way to play with leverage.

BRK Market Cap: $440 B - Stock Portfolio: $230 - BNSF: $100 (using UNP as a proxy) - Cash: $130 Call it even at zero. Utilities, Insurance, everything else = free How large of a COVID hit to the cash pile are we looking at in terms of insurance and operating losses? The cash and the utilities serve as a nice hedge in a recession or bear market. I'm thinking of putting a ton of money into this with leverage... So tempting

Can't read it, needs login. Mind posting the text?

BRKB calls

The unemployment report that came out Friday contained this footnote. The information was already out on Friday so you can assume Fridays price action took into account this misclassification. On a related note, I am unsure if the numbers adjust for effects of PPP. If not then the unemployment number is artificially low. When PPP expires, we will see many of those employees laid off. And what about the airline bailout? They aren't allowed to lay off until September I believe, so that's also another factor keeping the number low.

Holy shit! Everyone in the US needs to read and reflect deeply on what Mattis wrote. Mattis is a Republican, a professional soldier, a patriot and has intimate knowledge of who Donald Trump really is as a person and how he thinks and acts as President. This message is not from a partisan Democrat hack. Mattis’ is very clear in his assessment of the situation and the President. Donald Trump is clearly not fit for office (and it is not even close). How anyone with a working brain can continue to support this man completely boggles my mind. No, the alternative is NOT worse. That is a false choice. Read the underlined section below if you still do not understand why he must be defeated at the polls in November. “...Donald Trump is the first president in my lifetime who does not try to unite the American people—does not even pretend to try. Instead he tries to divide us. We are witnessing the consequences of three years of this deliberate effort. We are witnessing the consequences of three years without mature leadership. We can unite without him, drawing on the strengths inherent in our civil society. This will not be easy, as the past few days have shown, but we owe it to our fellow citizens; to past generations that bled to defend our promise; and to our children.“ What you say about Trump may be true, but don't forget that Obama wore a tan suit once.... No amount of convincing or evidence is going to get these people to change their minds. It's a cult and most of them are brainwashed beyond the point of no return. Trump can shoot their family members or friends on fifth avenue or grab their wives by the pussy and some of them still won't change their mind. It's astonishing, even on an investment board where people should focus on facts and not blind dogma.

Third sentence seems key--you say, "I would sell if tax concerns didn't matter." Seems like you are getting twisted in the wind by a host of other factors. Certainly I would argue that your other hedge proposals add incremental risk for your existing position rather than decrease it. If you hedge with a different underlying, you need to make a judgment about future correlation to your current "problem" position. The last sentence seems precisely wrong. The one thing you need is to hedge this stock specifically. Reducing exposure is the way to do this, via full sale, partial sale, long put options in that stock, collars, etc. I could have worded it better. I'm okay holding the stock for the long term even at its current price. The only reason I would sell now to raise cash for a market downturn, which I know that's blasphemy for many on this board. However, by selling and paying taxes it's stupid, so trying to think of other ways to do that. I don't think this stock is particularly overvalued (though compared to the beaten down shit out there, perhaps it's an opportunity cost holding it). You're right that buying puts on specific stocks may add incremental risk. So maybe a broad market put (like on the S&P 500) is the best thing to do? Overall volatility has come down though still higher than it was in February. Any other ideas? I just want fire power in case of a pullback, while not overpaying for the insurance to get there.

I have a position trading at an all time high, with massive unrealized gains, in this market. I don't want to sell and pay a huge tax bill. Ideally, if it was my retirement portfolio, I'd just sell and have cash as a hedge. So in this case I guess I can buy puts on the stock. But it's not like I need to hedge this stock specifically. I don't mind betting against anything, like the Bill Ackman trade for instance, but that's for professionals only. I just want to ensure that I have cash in case things cheapen, while taking risk off the table. Puts on the obvious targets (airlines, cruises, hotels) are likely too expensive since the volatility is priced in. So what would you do? I was thinking of buying them on the least obvious targets - FAANG. Short to medium term, fairly out of the money, in order to minimize cost. Is this the right way to do it? Other then equity puts any other ideas?

Best of luck on the new job! I learned a lot from your posts. Out of curiosity, what asset class will you be covering?

One of my favorite posters, Kraven, has been MIA in forever. Loved reading his posts, they were educational and humorous

Is WFC fundamentally broken? For him to unload WFC and not BAC means it must be WFC specific. Yes WFC is like toxic waste right now in the banking world, but it is also like half of TBV and very well capitalized. He bought into BAC when not only was it toxic but also had tens of billions of legal liabilities. Is he saying it was possible to turn around BAC but not WFC? Did he like the odds of BAC in 2011 more than WFC today? BofA was not too much lower in total market cap then what WFC is today, and capital levels at all these banks are much better now. Or does he think it's an industry wide problem, interest rates, great depression? In that case he should be selling both off.

Call me crazy but I think Buffett premium is non-existant at this point given all the impatience over him not spending that cash. The stock may even go up once he steps down because the new managers may be perceived as more willing and energetic towards spending that money on deals or buybacks or both.

What a dumbass. Doesn't make me feel good that a leader during a pandemic can be so dumb.

I dunno - I think everyone is saying that rates will go lower because they've been tired of being wrong for the last 12-years. It was just as recently as 2018 when no one wanted to own bonds and were sure that rates were headed higher. Basically, since 2008 people have been saying rates can't get any lower. And despite certain bounces off local-lows like the taper tantrum and post-Brexit moves, the general trend for the last 10-years has been lower with new lows in rates set every few years...because the economic environment demands lower rates. I don't see that changing just because people are finally throwing in the towel after 12-years of being underweight duration and wrong. They're only beginning to see the light and that may change 6-months from now when people may, once again, be clamoring for higher rates saying the bottoms are in and there is no way rates can go lower. Rates will fluctuate in the short-term, but my guess is the 10-year doesn't go anywhere near 2% for the next few years. As a point of reference, the recent high was ~3.25% in 2018 at the middle of the rate hiking cycle. Will we have zero interest rates in 10 years? Maybe. But what does that mean for income for banks and their valuation? NIM will suffer of course, but I suspect non-interest income will play more of a role in banking profits. Secondly even if interest income and net income suffers, valuations should hold up or expand right? At zero interest rates, normalized valuations could be 20+. Willing to bet on WFC is at like 10x 2010 earnings.

Buffett is known to undersell and this may be another such instance. He also stated that given the range of outcomes, brk isn't necessarily cheap. If it turns out the virus behaves like the Spanish flu (second wave deadlier) or worse, or if it starts mutating more aggressively, or if we remain status quo and no vaccine for 18 months and not administered to everyone for another year after - you can assume the travel, entertainment, dining, and related industries will for sure be in a Great Depression, and most likely a recession in broad economy. Because as Bill Gates said, you can't force people to go out and ignore a pile of dead bodies. What if government free money dries up? Then it's time for the old man to bring out his elephant gun. If any of the above happens than Buffett will look like a hero and probably outperform s&p500. Lots of paths for this to happen.

Are these Jan 21, 2022 expiry? Yes, I'll edit Mephistopheles - Do you mind sharing your thoughts on the size of this position and how you allocate? Sure. I have a mix of common and options. Bulk of it is common with some options at strikes 25, 27.5, 30. Options like <1% of portfolio. I bought today because WFC is near the lows from March, and cost of leverage was only about 10% + dividends. Meanwhile the stock is at like 75% of TBV. Depends on how this crisis plays out, I thing the banks are very well capitalized. Govt will never let them fail. Zero or negative rates for long would hurt. Everyone says we will have same rates or lower for long. People act like we will never see high rates again but I don't think we can ever be so sure.

Are these Jan 21, 2022 expiry? Yes, I'll edit