Comments and Observations about A/R

[StubbleJumper]

My only hope is that as a natural bear, he smelled it few weeks before it hit the fan. And somehow increased his bearish stand.

I vividly recall in the Q4 results from 2017, the number showed that he lost a certain amount because he shorted to early in Dec where the mini crash happened few months later in Feb 2018, when Trump went first against China on trade.

I wouldn’t get your hopes up. He was in big and/or illiquid cyclicals and won’t have been able to reduce much. The best that happens now is they do a great job picking up corporate bonds and don’t have to raise equity in the meantime.

With this market disruption, let's just hope that they don't find themselves in violation of some covenant in that goddamned revolver.


SJ

[Cigarbutt]

My only hope is that as a natural bear, he smelled it few weeks before it hit the fan. And somehow increased his bearish stand.
I vividly recall in the Q4 results from 2017, the number showed that he lost a certain amount because he shorted to early in Dec where the mini crash happened few months later in Feb 2018, when Trump went first against China on trade.

I wouldn’t get your hopes up. He was in big and/or illiquid cyclicals and won’t have been able to reduce much. The best that happens now is they do a great job picking up corporate bonds and don’t have to raise equity in the meantime.

With this market disruption, let's just hope that they don't find themselves in violation of some covenant in that goddamned revolver.
SJ

Isn't "now" a bit early in the game for corporate bonds?
https://fred.stlouisfed.org/series/BAA10Y

Related to SJ's concern, last February (before the R2000 went down by 37.5%), Moody's made some comments and listed the following risks: high common stock investments, general investment strategy, earnings volatility and added: "A material expansion of the group's investments in stressed or turnaround assets as a proportion of shareholder's equity could also lead to downward pressure on the rating".
https://www.moodys.com/research/Moodys-assigns-provisional-ratings-to-Fairfax-Financial-shelf--PR_1000002128
I just want to politely mention that, even if nobody knows the future, the posture comparison, at this point in time, between BRK and FFH, is simply mind boggling..

[TwoCitiesCapital]

My only hope is that as a natural bear, he smelled it few weeks before it hit the fan. And somehow increased his bearish stand.
I vividly recall in the Q4 results from 2017, the number showed that he lost a certain amount because he shorted to early in Dec where the mini crash happened few months later in Feb 2018, when Trump went first against China on trade.

I wouldn’t get your hopes up. He was in big and/or illiquid cyclicals and won’t have been able to reduce much. The best that happens now is they do a great job picking up corporate bonds and don’t have to raise equity in the meantime.

With this market disruption, let's just hope that they don't find themselves in violation of some covenant in that goddamned revolver.
SJ

Isn't "now" a bit early in the game for corporate bonds?
https://fred.stlouisfed.org/series/BAA10Y

Related to SJ's concern, last February (before the R2000 went down by 37.5%), Moody's made some comments and listed the following risks: high common stock investments, general investment strategy, earnings volatility and added: "A material expansion of the group's investments in stressed or turnaround assets as a proportion of shareholder's equity could also lead to downward pressure on the rating".
https://www.moodys.com/research/Moodys-assigns-provisional-ratings-to-Fairfax-Financial-shelf--PR_1000002128
I just want to politely mention that, even if nobody knows the future, the posture comparison, at this point in time, between BRK and FFH, is simply mind boggling..

Too early to go all in? Absolutely.

Too early to begin accumulating selectively? Probably a good time to get started.

Spreads are at roughly prior peaks outside of 2008/2009. You don't wanna blow the whole load in the event things get worse, but picking IG selectively @ 3-3.5% pick up or HY @ and an 8% pickup isn't a terrible place to start. Certainly a better outcome 3-4 years from now than waiting in 2-year Treasuries for the Fed to hike rates.

[Cigarbutt]

My only hope is that as a natural bear, he smelled it few weeks before it hit the fan. And somehow increased his bearish stand.
I vividly recall in the Q4 results from 2017, the number showed that he lost a certain amount because he shorted to early in Dec where the mini crash happened few months later in Feb 2018, when Trump went first against China on trade.

I wouldn’t get your hopes up. He was in big and/or illiquid cyclicals and won’t have been able to reduce much. The best that happens now is they do a great job picking up corporate bonds and don’t have to raise equity in the meantime.

With this market disruption, let's just hope that they don't find themselves in violation of some covenant in that goddamned revolver.
SJ

Isn't "now" a bit early in the game for corporate bonds?
https://fred.stlouisfed.org/series/BAA10Y

Related to SJ's concern, last February (before the R2000 went down by 37.5%), Moody's made some comments and listed the following risks: high common stock investments, general investment strategy, earnings volatility and added: "A material expansion of the group's investments in stressed or turnaround assets as a proportion of shareholder's equity could also lead to downward pressure on the rating".
https://www.moodys.com/research/Moodys-assigns-provisional-ratings-to-Fairfax-Financial-shelf--PR_1000002128
I just want to politely mention that, even if nobody knows the future, the posture comparison, at this point in time, between BRK and FFH, is simply mind boggling..

Too early to go all in? Absolutely.
Too early to begin accumulating selectively? Probably a good time to get started.
Spreads are at roughly prior peaks outside of 2008/2009. You don't wanna blow the whole load in the event things get worse, but picking IG selectively @ 3-3.5% pick up or HY @ and an 8% pickup isn't a terrible place to start. Certainly a better outcome 3-4 years from now than waiting in 2-year Treasuries for the Fed to hike rates.

I agree with you on the concept but...
For FFH, fixed income portfolio management has a been a large driver of returns over the years. Given that a significant amount of float has to be invested in fixed income, only small relative outperformance can result in a huge difference because of the embedded leverage.
It's interesting to think of their fixed income float management from the perspective of an individual investor whose objective is to remain always fully invested. Dynamic (fellow Board member) explains this very well for equities and the following quote from Keynes is complementary:
"In the main, therefore, slumps are experiences to be lived through and survived with as much equanimity and patience as possible. Advantage can be taken of them more because individual securities fall out of their reasonable parity with other securities on such occasions, than by attempts at wholesale shifts into and out of equities as a whole. One must not allow one’s attitude to securities which have a daily market quotation to be disturbed by this fact."
Quoting others doesn't result in good returns but, from a humble perspective, this juncture appears to be one of the trickiest, by far, and I would tread very carefully along the fixed income parity curves. The wild card remains what public agents will do (or come up with).

[TwoCitiesCapital]

My only hope is that as a natural bear, he smelled it few weeks before it hit the fan. And somehow increased his bearish stand.
I vividly recall in the Q4 results from 2017, the number showed that he lost a certain amount because he shorted to early in Dec where the mini crash happened few months later in Feb 2018, when Trump went first against China on trade.

I wouldn’t get your hopes up. He was in big and/or illiquid cyclicals and won’t have been able to reduce much. The best that happens now is they do a great job picking up corporate bonds and don’t have to raise equity in the meantime.

With this market disruption, let's just hope that they don't find themselves in violation of some covenant in that goddamned revolver.
SJ

Isn't "now" a bit early in the game for corporate bonds?
https://fred.stlouisfed.org/series/BAA10Y

Related to SJ's concern, last February (before the R2000 went down by 37.5%), Moody's made some comments and listed the following risks: high common stock investments, general investment strategy, earnings volatility and added: "A material expansion of the group's investments in stressed or turnaround assets as a proportion of shareholder's equity could also lead to downward pressure on the rating".
https://www.moodys.com/research/Moodys-assigns-provisional-ratings-to-Fairfax-Financial-shelf--PR_1000002128
I just want to politely mention that, even if nobody knows the future, the posture comparison, at this point in time, between BRK and FFH, is simply mind boggling..

Too early to go all in? Absolutely.
Too early to begin accumulating selectively? Probably a good time to get started.
Spreads are at roughly prior peaks outside of 2008/2009. You don't wanna blow the whole load in the event things get worse, but picking IG selectively @ 3-3.5% pick up or HY @ and an 8% pickup isn't a terrible place to start. Certainly a better outcome 3-4 years from now than waiting in 2-year Treasuries for the Fed to hike rates.

I agree with you on the concept but...
For FFH, fixed income portfolio management has a been a large driver of returns over the years. Given that a significant amount of float has to be invested in fixed income, only small relative outperformance can result in a huge difference because of the embedded leverage.
It's interesting to think of their fixed income float management from the perspective of an individual investor whose objective is to remain always fully invested. Dynamic (fellow Board member) explains this very well for equities and the following quote from Keynes is complementary:
"In the main, therefore, slumps are experiences to be lived through and survived with as much equanimity and patience as possible. Advantage can be taken of them more because individual securities fall out of their reasonable parity with other securities on such occasions, than by attempts at wholesale shifts into and out of equities as a whole. One must not allow one’s attitude to securities which have a daily market quotation to be disturbed by this fact."
Quoting others doesn't result in good returns but, from a humble perspective, this juncture appears to be one of the trickiest, by far, and I would tread very carefully along the fixed income parity curves. The wild card remains what public agents will do (or come up with).

Honestly this fall out is the best thing to happen to Fairfax. The 15% goal was laughable as recent as January 2020.

Interest rates were too low and equity multiples too high to have any reasonably foreseeable and sustainable path to it. Sure, insurance may be hardening but it's not going to pick up the slack and is also unstable and unpredictable.

Just two months later and interest rates are still trash, but there are some reasonably good alternatives to invest for a reasonable long-term rate of return.

Not to mention that Fairfax's stock price was falling @ the same time. It's 1000x easier for me to make a case for 15% annualized going forward from here.

[StubbleJumper]

Honestly this fall out is the best thing to happen to Fairfax. The 15% goal was laughable as recent as January 2020.

Oh, I take more nuanced view of that.  Ignoring all of the commotion of the past two months with tumbling interest rates and plunging equities, FFH had set itself up for some considerable accounting income during 2020.  The Riverstone transaction will trigger US$280m of accounting gains, and then the BIAL airport transaction will result in Fairfax India marking the airport to market quite substantially, resulting in yet more accounting gains when FFH marks its investment in Fairfax India.  But, wait that's not all!  The BIAL airport transaction could possible trigger a large performance fee, probably in early 2021, so it's the gift that keeps on giving!

If you can create $750m or $1B of paper gains over the course of a year, hitting that 15% target is not such a distant prospect.  But, as a FFH shareholder, should you celebrate that when the quality of earnings are what they are?


SJ

[petec]

My only hope is that as a natural bear, he smelled it few weeks before it hit the fan. And somehow increased his bearish stand.
I vividly recall in the Q4 results from 2017, the number showed that he lost a certain amount because he shorted to early in Dec where the mini crash happened few months later in Feb 2018, when Trump went first against China on trade.

I wouldn’t get your hopes up. He was in big and/or illiquid cyclicals and won’t have been able to reduce much. The best that happens now is they do a great job picking up corporate bonds and don’t have to raise equity in the meantime.

With this market disruption, let's just hope that they don't find themselves in violation of some covenant in that goddamned revolver.
SJ

Isn't "now" a bit early in the game for corporate bonds?
https://fred.stlouisfed.org/series/BAA10Y

Related to SJ's concern, last February (before the R2000 went down by 37.5%), Moody's made some comments and listed the following risks: high common stock investments, general investment strategy, earnings volatility and added: "A material expansion of the group's investments in stressed or turnaround assets as a proportion of shareholder's equity could also lead to downward pressure on the rating".
https://www.moodys.com/research/Moodys-assigns-provisional-ratings-to-Fairfax-Financial-shelf--PR_1000002128
I just want to politely mention that, even if nobody knows the future, the posture comparison, at this point in time, between BRK and FFH, is simply mind boggling..

Too early to go all in? Absolutely.
Too early to begin accumulating selectively? Probably a good time to get started.
Spreads are at roughly prior peaks outside of 2008/2009. You don't wanna blow the whole load in the event things get worse, but picking IG selectively @ 3-3.5% pick up or HY @ and an 8% pickup isn't a terrible place to start. Certainly a better outcome 3-4 years from now than waiting in 2-year Treasuries for the Fed to hike rates.

I agree with you on the concept but...
For FFH, fixed income portfolio management has a been a large driver of returns over the years. Given that a significant amount of float has to be invested in fixed income, only small relative outperformance can result in a huge difference because of the embedded leverage.
It's interesting to think of their fixed income float management from the perspective of an individual investor whose objective is to remain always fully invested. Dynamic (fellow Board member) explains this very well for equities and the following quote from Keynes is complementary:
"In the main, therefore, slumps are experiences to be lived through and survived with as much equanimity and patience as possible. Advantage can be taken of them more because individual securities fall out of their reasonable parity with other securities on such occasions, than by attempts at wholesale shifts into and out of equities as a whole. One must not allow one’s attitude to securities which have a daily market quotation to be disturbed by this fact."
Quoting others doesn't result in good returns but, from a humble perspective, this juncture appears to be one of the trickiest, by far, and I would tread very carefully along the fixed income parity curves. The wild card remains what public agents will do (or come up with).

Agreed. But I think there is probably an opportunity to increase yields over those available in ST treasuries without taking real credit risk. If Fairfax’s interest income doesn’t rise over the next few weeks I’ll be disappointed. If spreads then compress and you get a levered impact on equity, great.