Author Topic: Fairfax Letter March 2014  (Read 49647 times)

Cardboard

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Re: Fairfax Letter March 2014
« Reply #130 on: March 13, 2014, 04:47:59 AM »
I really like both of your posts Frommi and Ericopoly. Shorting is certainly a tough thing to do and as you said Ericopoly recently, the power of retained earnings over just a few years can make the best actual short thesis look quite foolish quickly.

While I like my holdings, I feel like I can't count on a raging bull anymore to help them reach fair value. And if we still have a raging bull, it could be a few areas doing really well while value stays flat. So I really like the way you have hedged Ericopoly, but keep in mind that some parabolic move may still form in the more frothy areas of the market while BAC stays flat.

Staying flat while everyone is partying feels actually as bad if not worse as going down with everyone else. However, at this point, the risk of staying flat after all these years of large gains may be worth accepting.

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tiddman

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Re: Fairfax Letter March 2014
« Reply #131 on: March 13, 2014, 05:20:46 AM »
Isn't the increased margin borrowing running parallel with increased stock portfolio values? Obviously there is higher margin borrowing at peaks than at lows when looking at it percentage wise but I wonder how big a piece of the complete picture it is.

Yes on one hand, people buy more aggressively in an up market and probably buy more stocks on margin.

On the other hand, when stock values are high, people borrow against their stocks more and use those funds for other purposes.  I know lots of people that use their taxable stock account as a sort of slush fund, and use margin to handle one-time expenses or other investments.

The bearish view is that increases in stock values are being driven primarily by margin debt.  I am not sure that's true but this probably contributes to it.  I am not sure what percentage of the overall market is represented by retail investors with margin accounts, I would guess a fairly small portion.


ERICOPOLY

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Re: Fairfax Letter March 2014
« Reply #133 on: March 13, 2014, 07:12:42 AM »
So you lagged into a straddle on IWM? Thats absolut brilliant! What expiration date did you use?

The IWM $120 strike call is 2015.  Now, if this market breaks significantly either way I should be able to roll it to 2016 somewhat inexpensively (due to skewness).

Had FFH done that 4 years ago when IWM was at $65, consider how inexpensively they could have been rolling the calls along with the market up so much.  It would be practically free to roll a $65 call these days.

ERICOPOLY

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Re: Fairfax Letter March 2014
« Reply #134 on: March 13, 2014, 11:14:16 AM »
Here's an analogy.

Two clydesdales are in a harness pulling a cart up a hill. A veterinarian has been blood doping them and giving them steroids, etc....  The cart is barely moving. 

One of the horses is beginning to look tired.  Do you want to be walking behind the cart?

Cardboard

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Re: Fairfax Letter March 2014
« Reply #135 on: March 13, 2014, 01:38:13 PM »
Well, that is a good one.  :)

Just don't forget that Watsa probably thought the same thing 4 or 5 years ago and back then the cart was even moving slower.

So you did the right thing by buying these protective calls against your short since who knows when the cart will go on reverse or crash down the hill!

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ERICOPOLY

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Re: Fairfax Letter March 2014
« Reply #136 on: March 13, 2014, 08:33:19 PM »
Just don't forget that Watsa probably thought the same thing 4 or 5 years ago and back then the cart was even moving slower.

I know, but there is some legitimate measurement of why he hasn't been proven correct yet:

quoting his letter:
. Since 2009, the Chinese banks have grown by the equivalent of the entire U.S. banking system or 15% of world GDP.


Since 2009, the easing by the Federal Reserve combined with the explosive
growth in China, backed by higher interest rates, has resulted in huge inflows (‘‘hot money’’) into China.
The near unanimous view that the renminbi would strengthen has resulted in a massive carry trade where
speculators have borrowed at low rates across the world and invested in China, almost always backed by real
estate. The shadow banking system in China – i.e., assets not on the books of the major Chinese banks – is
estimated by Bank of America Merrill Lynch to be approximately $4.7 trillion or 51% of Chinese GDP. Oddly
enough, prior to the credit crisis, the U.S. had $4.5 trillion in asset-backed securities outstanding or
approximately 31% of U.S. GDP. You know what happened then. When the flows reverse in China,
watch out!



It's rather staggering.  The very thing that has thus far worked against him is actually making the final chapter a doozy.  However, I don't know how many chapters so I hedge with calls.  I don't want to be like Kyle Bass and his clan that short JGBs and keep getting stymied for years and years.

goldfinger

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Re: Fairfax Letter March 2014
« Reply #137 on: March 13, 2014, 09:27:40 PM »
Can't the Chinese government fight the tape with almost 3.5T$ in reserves, given how interventionist it has been in the past?

frommi

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Re: Fairfax Letter March 2014
« Reply #138 on: March 13, 2014, 09:41:23 PM »
Yes they can but they devalue their currency with that action. I would say its happening right now.

ERICOPOLY

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Re: Fairfax Letter March 2014
« Reply #139 on: March 13, 2014, 09:45:12 PM »
Can't the Chinese government fight the tape with almost 3.5T$ in reserves, given how interventionist it has been in the past?

Very impressive.

Okay, I have no idea if the following is true given the source but...

Since Lehman Brothers collapsed in 2008, the level of private domestic credit in China has risen from $9 trillion to an astounding $23 trillion.  That is an increase of $14 trillion in just a little bit more than 5 years. 

In fact, it is being projected that Chinese companies will pay out the equivalent of approximately a trillion dollars in interest payments this year alone.  That is more than twice the amount that the U.S. government will pay in interest in 2014.


http://www.zerohedge.com/news/2014-01-21/guest-post-23-trillion-credit-bubble-china-starting-collapse-%E2%80%93-what-next


I don't know, maybe those high interest payment are on unproductive assets (like for example empty real estate developments).  There must be some source behind the low ROE.