Deflation hedges

[TwoCitiesCapital]

http://www.bloomberg.com/news/articles/2016-01-11/bank-of-america-rail-traffic-is-saying-something-worrying-about-the-u-s-economy

 

Rail activity suggests U.S. economy is slowing down. Even outside of oil/energy/industrial volumes.

 

What happens when you have a recession with CPI already printing paltry inflation of just 0.5% YOY in November?

[petec]

http://www.bloomberg.com/news/articles/2016-01-11/bank-of-america-rail-traffic-is-saying-something-worrying-about-the-u-s-economy

 

Rail activity suggests U.S. economy is slowing down. Even outside of oil/energy/industrial volumes.

 

What happens when you have a recession with CPI already printing paltry inflation of just 0.5% YOY in November?

 

Ha ha: I was wondering how many days of red screens it would take for this thread to fire up again.  But I do agree.  WSBASE dipping, all sorts of pieces of data pointing to an economic slowdown, rates rising (although my guess is they stop here). 

 

Then again: some evidence of rising wages, and eventually commodities get low enough that people start buying things. 

 

Who knows.

 

Either way, can't be a bad time for Fairfax's derivatives book with deflation fears rising and the Russell teetering on the brink of technical bear market territory (down 195% from the highs).

[Jurgis]

(down 195% from the highs).

 

That's how my portfolio feels. /nods

 

;)

[petec]

Ha!    Oh the difference a little dot makes.

 

19.5%!

[TwoCitiesCapital]

http://www.bloomberg.com/news/articles/2016-01-11/bank-of-america-rail-traffic-is-saying-something-worrying-about-the-u-s-economy

 

Rail activity suggests U.S. economy is slowing down. Even outside of oil/energy/industrial volumes.

 

What happens when you have a recession with CPI already printing paltry inflation of just 0.5% YOY in November?

 

Ha ha: I was wondering how many days of red screens it would take for this thread to fire up again.  But I do agree.  WSBASE dipping, all sorts of pieces of data pointing to an economic slowdown, rates rising (although my guess is they stop here). 

 

Then again: some evidence of rising wages, and eventually commodities get low enough that people start buying things. 

 

Who knows.

 

Either way, can't be a bad time for Fairfax's derivatives book with deflation fears rising and the Russell teetering on the brink of technical bear market territory (down 195% from the highs).

 

I wasn't firing this thread up due to the market declines. It was prompted by the article suggesting that there's more to the slow-down than simply energy and economists can no longer hide behind winter weather that happens nearly every winter...

 

If we can only get 0.5% when times are "good", I'm pretty sure you can get sustained negative prints for a year or two minimum of you have a recession of any significance.

 

I tend to think the stock market will go down as well, but my expectations for the stock market are removed from that of the expectations for the economy which is more impactful for the deflation hedges. I think stocks are likely to go down recession or not.

[JEast]

From about this time a year ago I commented that It is still early, but I am hopeful that the Toronto office is now at least getting some calls on possible asking prices. Maybe the calls have not come in yet, but at least the trend is favorable.  Just hopeful that we get our capital back.

 

http://i67.tinypic.com/2e4dhjr.png

[TwoCitiesCapital]

http://www.cnbc.com/2016/01/20/bridgewaters-dalio-feds-next-move-toward-qe-not-tightening.html

 

The risks are asymmetric on the downside. The next move in Fed policy will be quantitative easing and not tightening.

 

 

 

 

[Cardboard]

Peter Schiff said that a long time ago  ;)

 

Cardboard

[TwoCitiesCapital]

Peter Schiff said that a long time ago  ;)

 

Cardboard

 

Sure, and Peter Schiff has been performing terribly. But Dalio has generally performed in the pure Alpha funds no matter what the market environment is so it's probably worth listening to him, no?

 

The man has been wrong before, but he didn't build a $160B hedge fund by being wrong often and letting it impair returns.

[Jurgis]

Peter Schiff said that a long time ago  ;)

 

Cardboard

 

Sure, and Peter Schiff has been performing terribly. But Dalio has generally performed in the pure Alpha funds no matter what the market environment is so it's probably worth listening to him, no?

 

The man has been wrong before, but he didn't build a $160B hedge fund by being wrong often and letting it impair returns.

 

Hah, in a rare occasion I'll agree with TwoCitiesCapital: Dalio knows what he does. The only risk to listening to him is that he runs a huge huge predictive operation and what he says is (a) oversimplification of what his team and machines churn out; (b) data & results might change and he won't tell you when it does. ;)

[giofranchi]

Soros sounds more and more in Watsa's camp:

 

http://www.marketwatch.com/story/george-soros-says-too-early-to-buy-stocks-after-shorting-sp-500-2016-01-21

 

Cheers,

 

Gio

[JEast]

With tongue in cheek, hope those calls are coming in so we can at least mark-to-market for the 1st quarter :)

 

http://i64.tinypic.com/zub9f.png

[Sharad]

With tongue in cheek, hope those calls are coming in so we can at least mark-to-market for the 1st quarter :)

 

http://i64.tinypic.com/zub9f.png

 

Here are the four webpages I use to track the four major CPI indices that Prem is shorting. They may not all be 100% accurate to the indices that he has shorted via puts/swaps, but I hope this helps. Another important note is that we only know the average CPI put rates, and some may be in the money and some may not be.

 

France: http://www.insee.fr/en/bases-de-donnees/bsweb/serie.asp?idbank=000641194

UK (Retail Price Index appears to tie to 2014 Annual Report information):  https://ycharts.com/indicators/uk_retail_price_index

EU: http://www.tradingeconomics.com/euro-area/consumer-price-index-cpi

US: http://inflationdata.com/Inflation/Consumer_Price_Index/HistoricalCPI.aspx?reloaded=true

 

I hope this helps everyone in gauging the CPI indices we, as FFH shareholders, should be assessing.

[TwoCitiesCapital]

I'm pleasantly surprised that Fairfax has been totally immune to recent market weakness. I knew it was a possibility, but I thought it would be more likely that it would decline with the general market as it did in 2008.

 

I'm waiting for the rest of the quarter to play out and to get the end results of what may be a phenomenal quarter, but I actually may end up reducing my holdings a little bit after that to re-balance the portfolio more towards the names that have been absolutely trashed in the last 4-6 months.

[petec]

I'm pleasantly surprised that Fairfax has been totally immune to recent market weakness.

 

Me, too.

 

Do let us know what you're buying ;)

[giofranchi]

I'm pleasantly surprised that Fairfax has been totally immune to recent market weakness.

 

Me, too.

 

+1!

 

Cheers,

 

Gio

[giofranchi]

I'm waiting for the rest of the quarter to play out and to get the end results of what may be a phenomenal quarter, but I actually may end up reducing my holdings a little bit after that to re-balance the portfolio more towards the names that have been absolutely trashed in the last 4-6 months.

 

Instead, I think I am adding some more: it is trading at 1.31xBVPS, with a BVPS of 400USD as of last September. If Fairfax has made some money during the last three months of 2015, it is trading for a lower multiple. Moreover, the first three months of 2016 look great until now… therefore, it might actually be trading closer to 1.2xBVPS.

As cash comes in I am still cautious to invest it in faster growing businesses. And I think I’ll park it momentarily in Fairfax, waiting for more bargains to appear.

 

Cheers,

 

Gio

 

[giofranchi]

With bond yields that keep falling, Q1 2016 is getting more and more profitable for Fairfax. If Fairfax announces slightly disappointing Q4 2015 results, and consequently its stock trades lower, there might be a good opportunity to buy more.

 

Cheers,

 

Gio

[petec]

Excellent summary of China from Kyle Bass:

 

http://finance.yahoo.com/news/kyle-bass-china-running-money-202853355.html

 

Conclusion (as you might have guessed) is that China has no choice but to weaken its currency, which will be very deflationary for the US and Europe.

[TwoCitiesCapital]

With bond yields that keep falling, Q1 2016 is getting more and more profitable for Fairfax. If Fairfax announces slightly disappointing Q4 2015 results, and consequently its stock trades lower, there might be a good opportunity to buy more.

 

Cheers,

 

Gio

 

Anyone know off the top of their heads the breakout of their bond portfolio. How much in Treasuries, muni's, etc.? I know that falling yields is obviously good, but trying to figure out how much widening muni/credit spreads are going to offset that.

 

Thanks!

[giofranchi]

I know that falling yields is obviously good, but trying to figure out how much widening muni/credit spreads are going to offset that.

 

Hard to tell… I was only suggesting that in a very difficult environment a bad earnings report could cause the stock to fall, even if Q1 2016 looks very profitable until now… How much profitable is anyone's guess!

 

Cheers,

 

Gio

 

[biaggio]

http://business.financialpost.com/investing/investing-pro/will-prem-watsas-650-million-bet-pay-off-if-it-does-fairfax-makes-109-billion

 

"Will Prem Watsa’s $650-million bet pay off? If it does, Fairfax makes $109 BILLION"

 

 

[TwoCitiesCapital]

http://business.financialpost.com/investing/investing-pro/will-prem-watsas-650-million-bet-pay-off-if-it-does-fairfax-makes-109-billion

 

"Will Prem Watsa’s $650-million bet pay off? If it does, Fairfax makes $109 BILLION"

 

I hate these articles. I saw this exact same thing in Motley fool Canada that suggested Fairfax could make 109B too - the only way that happens is if the world ends and money means nothing....

 

Realistically, even in a very, very favorable scenario for Fairfax, they'd only make 15-20B over the course of several years. That's assuming we get the same amount of deflation that was seen over the decade following the Great Depression. No way he makes anywhere near $109B... I think what we'll see is that he makes WAY more money from the TRS hedges than he does from the deflation swaps, but the deflation swaps could still turn out to be great investments even if they only return 1-2B given the cost basis being $650M and a current carrying value half of that.

 

It just blows my mind how clear and open he's been with the details of these swaps and yet the media still misunderstands them years and years later.

 

 

[Uccmal]

http://business.financialpost.com/investing/investing-pro/will-prem-watsas-650-million-bet-pay-off-if-it-does-fairfax-makes-109-billion

 

"Will Prem Watsa’s $650-million bet pay off? If it does, Fairfax makes $109 BILLION"

 

I hate these articles. I saw this exact same thing in Motley fool Canada that suggested Fairfax could make 109B too - the only way that happens is if the world ends and money means nothing....

 

Realistically, even in a very, very favorable scenario for Fairfax, they'd only make 15-20B over the course of several years. That's assuming we get the same amount of deflation that was seen over the decade following the Great Depression. No way he makes anywhere near $109B... I think what we'll see is that he makes WAY more money from the TRS hedges than he does from the deflation swaps, but the deflation swaps could still turn out to be great investments even if they only return 1-2B given the cost basis being $650M and a current carrying value half of that.

 

It just blows my mind how clear and open he's been with the details of these swaps and yet the media still misunderstands them years and years later.

 

The financial post article is the same article as Motley Fool.  The Financial Post is a shadow of its former self, years ago.  Mostly regurgitated hooey from Bloomberg these days. 

[TwoCitiesCapital]

http://business.financialpost.com/investing/investing-pro/will-prem-watsas-650-million-bet-pay-off-if-it-does-fairfax-makes-109-billion

 

"Will Prem Watsa’s $650-million bet pay off? If it does, Fairfax makes $109 BILLION"

 

I hate these articles. I saw this exact same thing in Motley fool Canada that suggested Fairfax could make 109B too - the only way that happens is if the world ends and money means nothing....

 

Realistically, even in a very, very favorable scenario for Fairfax, they'd only make 15-20B over the course of several years. That's assuming we get the same amount of deflation that was seen over the decade following the Great Depression. No way he makes anywhere near $109B... I think what we'll see is that he makes WAY more money from the TRS hedges than he does from the deflation swaps, but the deflation swaps could still turn out to be great investments even if they only return 1-2B given the cost basis being $650M and a current carrying value half of that.

 

It just blows my mind how clear and open he's been with the details of these swaps and yet the media still misunderstands them years and years later.

 

The financial post article is the same article as Motley Fool.  The Financial Post is a shadow of its former self, years ago.  Mostly regurgitated hooey from Bloomberg these days.

 

I sent the dude an e-mail. Maybe we can get this corrected :/