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FFH = Interesting.


JohnDoe700M
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Treasuries:

 

Date 1 Mo 3 Mo 6 Mo 1 Yr 2 Yr 3 Yr 5 Yr 7 Yr 10 Yr 20 Yr 30 Yr

08/01/11 0.13 0.10 0.16 0.22 0.38 0.55 1.32 2.05 2.77 3.72 4.07

08/02/11 0.05 0.06 0.13 0.17 0.33 0.50 1.23 1.94 2.66 3.59 3.93

08/03/11 0.01 0.02 0.08 0.16 0.33 0.52 1.25 1.94 2.64 3.55 3.89

08/04/11 0.01 0.02 0.05 0.12 0.27 0.44 1.12 1.78 2.47 3.37 3.70

08/05/11 0.01 0.01 0.05 0.11 0.28 0.49 1.23 1.91 2.58 3.49 3.82

08/08/11 0.02 0.05 0.07 0.12 0.27 0.45 1.11 1.75 2.40 3.31 3.68

 

http://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yield

 

Russell 2000 appears to be dropping materially faster than the Blue Chip equities book:

 

http://finance.yahoo.com/q/bc?t=5d&s=IWM&l=on&z=l&q=l&c=wfc%2C+jnj%2C+dell&c=%5EGSPC&c=%5EIXIC&c=%5EDJI

 

Interesting.

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The mad crowd of investors are buying 3 yr T-bills at a record-low interest rates these days, in the 1st government debt auction since S&P cut the U.S. credit rating to AA last Friday. The Treasury sold $32 b in 3 yr notes to yield 0.50% today.  That's a record low borrowing rate. The further the stock market drops, the easier the funding for the treasury becomes. The 10-year Treasury yield hit a low for the year of 2.32 percent, down from 2.34 percent Monday. I can't see a government funding problem. LOL  :D We rather have a mad crowd leaving equities and chasing bonds ;D What a silly human behavior ::)  Love to pick low hanging fruit at the equity trees.

 

 

 

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It's a one-two punch?

 

If 10 year treasuries, sustainably, have a 2% range yield -- this also implies *deflation* expectations, which would impact the clearing price FFH could get for its hedge if had any desire to just close the hedge and allocate the proceeds into distressed equities or vulture investing.

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It's a one-two punch?

 

If 10 year treasuries, sustainably, have a 2% range yield -- this also implies *deflation* expectations, which would impact the clearing price FFH could get for its hedge if had any desire to just close the hedge and allocate the proceeds into distressed equities or vulture investing.

 

Considering that Fairfax stands for Fair, Friendly Acquisitions, I doubt that they are going for vulture investments. That said, if they saw more value in distressed securities than in the hedge, I can see them moving in this direction.

 

-Crip

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Considering that Fairfax stands for Fair, Friendly Acquisitions, I doubt that they are going for vulture investments. That said, if they saw more value in distressed securities than in the hedge, I can see them moving in this direction.

 

-Crip

 

They probably wouldn't make unfriendly takeover bids, but it doesn't mean that they wouldn't do deep value investing on the secondary market (cigar butts). This is one way to interpret "vulture investing".

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  • 3 weeks later...

The monthly rally comes as bond investors have reduced their expectations for inflation as break-even rates on Treasury Inflation-Protected Securities, or TIPS, are hovering near the lowest since October 2010. The break-even inflation rate, calculated from yield differences on 10-year Treasury notes and inflation-indexed U.S. government bonds of similar maturity, has fallen to 2.02 percent from a high this year of 2.67 percent reached on April 11.

 

http://www.bloomberg.com/news/2011-08-31/treasuries-head-for-biggest-monthly-gain-since-2008-after-u-s-downgrade.html

 

 

It's a one-two punch?

 

If 10 year treasuries, sustainably, have a 2% range yield -- this also implies *deflation* expectations, which would impact the clearing price FFH could get for its hedge if had any desire to just close the hedge and allocate the proceeds into distressed equities or vulture investing.

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I have not been following FFH closely for the last year or two. I think they still hold some CDS positions... the kicker would be if they were for European banks. Does anyone have any insight?

 

According to the last Q: Credit default swaps . . . . . . . . . . . . . .not: 3,754.4  fair value: 40.8

 

The info will probably be in Odyssey's NAIC filing

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Demand for longer maturities narrowed the extra yield that investors get for buying 10-year notes instead of two-year debt to 1.71 percentage points, the least since March 2009.

 

“Treasury yields and equities can go down more,” said Yoshiyuki Suzuki, the Tokyo-based head of fixed income at Fukoku Mutual Life Insurance Co., which has the equivalent of $71.5 billion in assets. “People have a fear” that’s increasing appetite for the most secure investments, he said.

http://www.businessweek.com/news/2011-09-06/treasuries-gain-as-10-year-yield-falls-to-record-on-stock-rout.html

 

Cutting spending “right now is almost suicidal,” said Bill Gross, who as co-chief investment officer at Newport Beach, California-based Pacific Investment Management Co. runs the world’s biggest bond fund. Gross made the comments in a radio interview on “Bloomberg Surveillance” with Tom Keene and Ken Prewitt after the Sept. 2 jobs report.

http://www.businessweek.com/news/2011-09-05/swaps-on-treasuries-reach-record-low-against-bunds-in-s-p-denial.html

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Now that the 10-year is below 2%, I hope that FFH starts moving some money from its treasury position into equities, especially equities that have dividend yields that are substantially higher than 2%. 

 

It would be nice to see that 100% equity hedge come down a bit.

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Now that the 10-year is below 2%, I hope that FFH starts moving some money from its treasury position into equities, especially equities that have dividend yields that are substantially higher than 2%. 

 

It would be nice to see that 100% equity hedge come down a bit.

 

Fairfax began putting its hedges on when the SP500 was below 1100, so I do not think that they will be picking up large amounts of equity at these prices.

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Hey, I was one of the very first people on the board to give major props to Richard Koo -- I'm a big fan.  I even said a couple of months ago that we'd have problems with the economy because of austerity measures and the continued deleveraging in the private sector. 

 

So it's entirely possible that yields will stay low for a long time, especially since over the last month or so, cash has likely been building up at a crazy pace in bank accounts. 

 

But that should allow FFH to keep its equity hedge instruments in place, take some bond gains, and redeploy into equities with nice dividends, which will effectively decrease the hedge from 100% to a lower percentage.

 

We'll see what HWIC does.

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Now that the 10-year is below 2%, I hope that FFH starts moving some money from its treasury position into equities, especially equities that have dividend yields that are substantially higher than 2%. 

 

It would be nice to see that 100% equity hedge come down a bit.

 

Fairfax began putting its hedges on when the SP500 was below 1100, so I do not think that they will be picking up large amounts of equity at these prices.

 

Yeah, but remember that the bond portfolio is substantially larger than the equity portfolio, and they probably have some decent gains there compared to when they first put on the hedges. 

 

They can shift some of the bond portfolio gains to undervalued equities that will generate excess returns over the market over time. 

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Fairfax began putting its hedges on when the SP500 was below 1100, so I do not think that they will be picking up large amounts of equity at these prices.

 

Indeed, this was Watsa's sentiment as of August 10, 2011 (before the video links):

The U.S. economy appears to be heading toward a lengthy period of deflation such as the one that struck Japan, and there is little policy-makers can do to prevent it, says one of Canada’s most accomplished investors.

 

Fairfax has been selling corporate bonds in favour of U.S. Treasuries and selected municipal bonds, both of which have seen yields drop and prices rise in the past week as investors have fled to safety. Mr. Watsa has long predicted that government bonds will continue to be the best performing asset class – even though U.S. government debt loads have contributed to the economic turmoil – because investors gravitate toward risk-free securities.

 

“We have said for some time that we think this is a 1-in-50-, 1-in-100-year event,” Mr. Watsa said in an interview Wednesday. “Which means that it’s like Japan or the 1930s, because there’s too much debt in the system.”

 

“The worry is this,” Mr. Watsa said. “You have interest rates at zero per cent, you have had deficits coming down, meaning reduced government spending, which means there’s no ammo left for the governments of the world, particularly the United States. So what do you do next to get the economy going?”

http://www.theglobeandmail.com/report-on-business/economy/fairfaxs-watsa-sees-dirty-thirties-pain-ahead/article2125759/

 

As early as 2006 (perhaps prior?), FFH had been studying the Japanese experience.  The equity hedge and deflation derivative likely reflects a viewpoint far larger and longer than a few quarters.  When strip away all the media sensationalism, the S&P500 volatility has simply back-tracked markets to quotational levels from November 2010. 

 

  • 1.  Did Fairfax think November 2010 pricing was mouthwatering?
  • 2.  Was November 2010 fairly priced, but the "X number of days, thrown in for free" makes the present quotational levels mouthwatering?

 

Otherwise: FFH has been quietly building an ark against a possible probable Japanese structural outcome.  Meaning, we're seeing something from Watsa beyond a simple trading position. 

Apologies for what's turned into a rant.  One final point of trivia for perspective and comparison:

 

Topix Performance

 

The Topix has lost about 16 percent this year as concerns about an economic slowdown in the U.S. and Europe’s debt crisis damped demand in two of Japan’s biggest export markets. The decline has cut the price of shares on the index to 0.89 times book value, the lowest since March 2009. Gross dividend yields on the index were 2.44 percent, near the highest since April 2009.

http://www.bloomberg.com/news/2011-09-05/japanese-stocks-drop-for-second-day-after-u-s-jobs-report-shows-no-growth.html

 

(Next phase: Watsa sells Treasuries, buys Japanese equities?) ;)

 

I am concerned that Slide 25 might be what FFH is concerned about and what FFH is really hedging against.

 

(And, by extension, FFH's deflation derivative would make billions.)

 

Txlaw, I sincerely hope you are roughly right and that everything above is precisely wrong. 

 

If FFH stands to make billions... then, trillions of retirement worth will be decimated and forget about capital gains as a source of revenue to the Federal Reserve.  Which, among other things, likely explains why Helicopter Ben is printing so early and often.  Twice, so far.  Three's a charm?

2006_AGM_Slide_Presentation.pdf

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txlaw, point well taken. 

 

You gave major props to Richard Koo.  I owe major props to you. 

 

Love your posts, and always appreciate your insights. 

 

 

Hey, I was one of the very first people on the board to give major props to Richard Koo -- I'm a big fan.  I even said a couple of months ago that we'd have problems with the economy because of austerity measures and the continued deleveraging in the private sector. 

 

So it's entirely possible that yields will stay low for a long time, especially since over the last month or so, cash has likely been building up at a crazy pace in bank accounts. 

 

But that should allow FFH to keep its equity hedge instruments in place, take some bond gains, and redeploy into equities with nice dividends, which will effectively decrease the hedge from 100% to a lower percentage.

 

We'll see what HWIC does.

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This is the dreadful Slide 25, from 2006 Fairfax Presentation.

 

http://oi55.tinypic.com/4h426a.jpg

 

I love this slide, actually.

 

It shows that in a Japanese situation, when long term bond yields go really, really low, that's the best time to buy equities in terms of market pricing. 

 

Now, whether US equities will stay at this low level for the next five years is another question.  That's one reason why I like the idea of purchasing equities with high dividend yields.  You get a return of intrinsic value that can be used to cover underwriting losses in the P&L.  It's even better if the underlying businesses earn in a basket of currencies other than the US dollar, although the US dollar may very well be undervalued at the moment.

 

I am also part of the camp that believes that the US is different than Japan because M&A, our sophisticated bankruptcy system, and the adaptability of US business will cause realization of intrinsic value in equities in a more expedited manner than with Japan.

 

I should also note that my style of equity investing in my own portfolio is way different than what HWIC is practicing.  I am very concentrated and don't mind if my portfolio is well in the red at any given time, so long as I believe the intrinsic value is far in excess of my purchase price. 

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