Watsa on share buybacks

[hyten1]

finetrader i am a little confused

 

you bought deep ITM (in the money) puts? doesn't that cost more?

 

hy

[buylowersellhigh]

finetrader i am a little confused

 

you bought deep ITM (in the money) puts? doesn't that cost more?

 

hy

 

Yes, it does cost more to buy the deep ITM puts.  However, by doing so, you are paying less for time value, which decays faster as you get towards expiration.  This way you are essentially moving with the underlying with leverage.

[ERICOPOLY]

So I've hedged the Fairfax way. I bought deep ITM SPY put as I don't like to pay big premium and this takes much less margin than shorting SPY. I've just started my hedging program so I have only 25% of my BAC long exposure that are hedged this way. Waiting for the BOJ effect to fade before hedging more.

 

I bought $100 strike IWM puts for the same reason.  Mine is a 20% hedge versus your 25%.  I like the Russell 2000 index more because it drops harder during crashes.  Seems like the average company there is more fragile versus the mega-caps that dominate the S&P500.

 

 

[finetrader]

Yeah,

I should have been clearer.

 

Time premium I don't like to pay.

[twacowfca]

6) Valuations are high, entirely sustained by the biggest spigot of liquidity ever in the US.

 

 

Right. Did this change yesterday? No. Will it change in the near future? Very unlikely. Where will all those people who sold gold going to put the money? Yan? Yuan? Euro? Bitcoin? Commodities? Everyone starting to realize the real China story and its implications. US stocks are IT.

 

There is not going to be a real crash just yet, maybe a quick dip.

 

I'm still holding on.

 

 

Agreed.  The spigot is still wide open.  M2 and WSBASE continue the acceleration in expansion of recent quarters.  This is the big driver that has overwhelmed the tendency for an overvalued market to return to its moorings.  However, any hint of a pullback from QE in the last two years has prompted the market to decline significantly.  The S&P put we bought is merely a little insurance against being trampled in the rush to the exit when that fateful day arrives.

[Guest]

Why are you guys doing the 2014s and not 2015s? It seems like the 2015s are cheaper compared with the time value of it.  You're getting another year for $5 more or so.

[LC]

Why are you guys doing the 2014s and not 2015s? It seems like the 2015s are cheaper compared with the time value of it.  You're getting another year for $5 more or so.

 

I am curious as well. All my BAC Leaps are of the 2015 variety.

 

But my thinking is as a hedge they are more nimble. If there is a pullback this year, the 2014 options can be exercised and you haven't paid for a year of insurance which you didn't need. If there is no pullback, you can roll the puts over.

 

[ERICOPOLY]

Why are you guys doing the 2014s and not 2015s? It seems like the 2015s are cheaper compared with the time value of it.  You're getting another year for $5 more or so.

 

Because I want Obama to get ZERO of my money.  Now I'm pissed and the gloves are off.

 

As soon as the 2016 puts are out I'm going to stock up on them.  Then I'm going to wait a month and sell all of my 2014 puts for a big short term capital gains loss before the end of the year.

 

Thus, no taxes due next April for 2013  ;D ;D ;D

 

[Guest Dazel]

 

 

Has anyone looked other ways to hedge? Fairfax made an early call on the CPI index anyone looked at anything off the beaten path like that? CDS' Japan?

 

 

Dazel.

[Guest]

Fair enough, eric! ;)

[hyten1]

eric what if your strategy backfires you end up having short term capital gain from your puts :)

[ERICOPOLY]

eric what if your strategy backfires you end up having short term capital gain from your puts :)

 

I worried about that, funny as it may sound.  However I've doubled my holdings of common in my taxable account lately after selling it from my RothIRA -- so the cost basis on those new shares is close to $12.

 

There are a few strategies for what to do if BAC is down in November and the puts have not generated the needed loss:

 

A) purchase calls in November in RothIRA.  Sell the common a month later for a loss (December 2013).  Then book the gain on the puts in 2014, dump the calls, and repeat the strategy in taxable account hoping for the new round of puts to look relatively worthless in late 2014.

 

B)  Sell the FFH at a loss in Dec 2013, buy something else that is truly beaten all to hell.  I need FFH to be down to about $300 per share for this to be fully effective.  So I might have to combine it with scenario A.

 

C)  Sell 1/2 of the BAC for tax loss and buy something else,  hedge that other thing with new puts and have those puts be worthless in late 2014 so as to offset the gains from the BAC puts that would be taken in early 2014

 

So I'm sort of hoping that we don't have to go there.  I would rather just have my $12 strike BAC puts being nearly worthless in late 2013.

 

[Fairfaxnut]

Wasn't this post supposed to be about "Watsa on share buybacks"? .... never mind, I'll shut-up. :-X

[obtuse_investor]

Wasn't this post supposed to be about "Watsa on share buybacks"? .... never mind, I'll shut-up. :-X

 

I am enjoying the digression :)

 

 

[ERICOPOLY]

Only a few days after I buy my Fairfax shares I read this "Inflation Out, Deflation In" article.  Then I found another round of articles this weekend talking about the slumping materials prices, gold selloff, decline in government bonds, rise in USD, weakness in "growth" stocks relative to the rest of the market.  And a weak recent auction for TIPS.

 

http://blogs.wsj.com/moneybeat/2013/04/19/inflation-out-deflation-in-bad-news-for-euro/

 

So perhaps the Fairfax deflation hedges starting to regain some value already this quarter?

[jay21]

Only a few days after I buy my Fairfax shares I read this "Inflation Out, Deflation In" article.  Then I found another round of articles this weekend talking about the slumping materials prices, gold selloff, decline in government bonds, rise in USD, weakness in "growth" stocks relative to the rest of the market.  And a weak recent auction for TIPS.

 

http://blogs.wsj.com/moneybeat/2013/04/19/inflation-out-deflation-in-bad-news-for-euro/

 

So perhaps the Fairfax deflation hedges starting to regain some value already this quarter?

 

Is this summary of Prem's thesis on deflation accurate?:

 

The private and public sectors have very high Debt/Income (Debt/GDP) ratios and this is unsustainable.  There will need to be de-leveraging.  There is tepid growth currently and de-leveraging will exasperate the situation which could lead to deflation.

 

Also, I am re-reading the new letter.  Loved this quote: "The long term is where it’s at!"

[Valuebo]

Europe's inflation at only 1.2% now, really took a dive this last year! It's getting more and more likely that this trend continues.. Or at least that's what it looks like!

[beerbaron]

Europe's inflation at only 1.2% now, really took a dive this last year! It's getting more and more likely that this trend continues.. Or at least that's what it looks like!

 

Hurry guys print some money!!!! Wait, they can't  :-\

[obtuse_investor]

Europe's inflation at only 1.2% now, really took a dive this last year! It's getting more and more likely that this trend continues.. Or at least that's what it looks like!

 

Hurry guys print some money!!!! Wait, they can't  :-\

 

Of course they can-- they just don't have the political will, yet.