The last time the Dow was here

[moore_capital54]

moore, are you out of BAC all together now?

 

also, did you ever buy any AIG?

 

I sold out of 70% of our BAC position between 11-12.30 and then bought back some when it went down at around 10.30s the position is now about 35% of its original size so were still there but MUCH smaller and with a large crystalized gain to boot.

 

AIG we own some of the warrants but have been selling.

[stahleyp]

cool. thanks for the update!

[Palantir]

Interest rates have been artificially low since 2008.. That's 5 years lol. The deflation buys are long gone buddy - if you are buying today you are buying with the herd. Hopefully you pick the right companies that can thrive in a normalized environment. You must realize this is an unprecedented macro environment - one which is manipulated to its core. A 14x PE on the DOW might seem "ok" and it really is just "ok" but you better be sure those companies can grow top-line or have liquidity to retire shares in a normalized i-rate environment. Because that 14x can just as easily turn into 18-20x while Corp bond rates will all of a sudden compete for capital again (3-5% Triple AAA rates which were historically below average).

 

My advice is simply to keep a lot of cash on the sidelines.

 

You mentioned you're staying out of the market. Are you going to sell puts, backed by the cash?

[benchmark]

I sold out of 70% of our BAC position between 11-12.30 and then bought back some when it went down at around 10.30s the position is now about 35% of its original size so were still there but MUCH smaller and with a large crystalized gain to boot.

 

AIG we own some of the warrants but have been selling.

 

I think AIG warrants still have pretty big upside, though it might take a couple of years. Is the selling results of your view that a crash is coming?

[goldfinger]

I don't believe the market is too high at all. I believe the economy is strengthening and I am happy to see a process of monetary easing that will continue to add liquidity and ensure economic growth for the long term, and I am glad to see that the US has a government that is willing to carry it out. I believe the rally has strong fundamentals, and am looking forward to profiting from it.

 

If for some reason, some idiots decide that monetary easing should not continue and rates should rise, then my thesis will be invalidated quickly. Hopefully that does not happen.

 

Despite my bullishness, I am 35% in cash. WTF?

 

That's fine, but I urge you to watch the entire 1 hour Druckenmiller interview. As he says himself hed be somewhat long into this himself but waiting and watching every morning for the inevitable reversal. This cannot go on forever (artificially low interest rates + global currency debasement + ad infinitum growth in transfer payments). Some managers/investors are happy to play the game but we made so much money in 2012 we can afford to wait for the fat pitches.

 

I sincerely look forward to under-performing the indices this year (as of now only +2% ytd)

 

Druckenmiller seemed to indicate that it is when the FED stops stimulating that we will have to deal with weak fundamentals and disbalances. It seems Ben is still at it for a while. You may have to wait a while...

[sampr01]

Moore

 

Please can you share your thoughts on MCP. Thanks

 

Here are some fat pitches: TVL (6.2x 2-yr EBITDA,  24% 2-yr avg FCF yield), NXST (6.5x 2-yr EBITDA, 22% 2-yr avg FCF yield), TPCA (3.3 x EBITDA), HCOM (3.7x EBITDA), AIQ (3.9x EBITDA, 54% FCF yield), ATSG (4.3x EBITDA, 29% FCF yeild) and that does not even include distressed areas with more risk like OPAP (4.1x EBITDA) or Mediaset (4.8x EBITDA) and Telecom Italia (3.7x EBITDA) or some modestly undervalued financials like BAC or COF.

 

Some of these have gone up but the cash flows appear to be increasing also.

 

Packer

 

We are in OPAP (as a matter of fact I started the thread) and it hasn't worked out all that great. Not familiar with the other names but will study them this weekend.

 

We like MCP Debt here and the LEAPS, but we know the asset very well.

[Cardboard]

My 2 cents for whatever it is worth...

 

I have no doubt that we are approaching a correction. Every time that I make money with such returns and so easily, it is a clear sign that the music is about to stop. Here I am not talking about making money via take-overs or one time events, but by my stocks pretty much all going up in sync with the market. My emotions right now are so different than during a bear market or correction when I do feel so dumb and stupid by always buying at the apparently wrong time and with my stocks all tumbling down.

 

The Watsa letter is also a somber reminder that my fun may be about to end. However, I am not sure at all that what is coming could not be simply a minor 5 to 10% correction vs the apocalyptic scenario that Watsa seems to have in mind. Bears have good points while bulls do also and I see no major excesses in the stock market other than your typical tech stock of the day. The income market on the other hand is quite different and I agree with Druckenmiller when he talks about people taking crazy risks like buying Zambian bonds at 5%.

 

I will likely trim some of the fat in my portfolio and eliminate leverage (minor debt, some calls) over coming weeks which will reduce risk and give me dry powder, but I am very reluctant to sell stocks where I still see a large gap with their true intrinsic value. Makes no sense to me. Keeping their size in check percentage wise relative to my portfolio does however.

 

With May approaching and the market being high with very low volatility, things could get nasty any instant. However, despite people's fascination with the Dow at a record high and the S&P approaching, it would not surprise me to see a correction soon followed by a march higher to something like 1,700 or 1,800 in the S&P by year end. I still see a wall of worry regarding these indices and their highs and I have a feeling that we will need to build true excesses before a major correction or bear arrives.

 

Cardboard

[LC]

How do you think the fixed income market will affect the equity market? The FI market seems to be totally dependant on the Fed at this point. If the Fed raises rates and bond prices tank, the ~20x PE I'm seeing on most stocks may turn to 15x as prices fall. 

 

But the issue is, is the US healthy enough for the Fed to raise rates? I'm not going to presume to know what the Fed thinks of the US economy's health, so I guess the move is to take profits on the more liquid dividend paying stocks that the artificially low interest rates are propping up to overvalued prices.

 

I don't think the undervalued small-caps whose revenues aren't tied to interest rates will be sold as much as a large cap dividend payer.

[stahleyp]

I was thinking about this earlier.

 

Buffett talks about 17 year cycles. From 1982-1999 for instance. We'll if we go from 1999-2016 (the secular bear as many call it), then a new bull starts around that time due to low valuations. I think Parbai talks about this too. The story seems reasonable. Here's why: With all the debt we have and low interest rates, I could see how we continue to rally for a year or two, Fed starts to raise rates (or something else happens)  and we go through the March 2009 lows. People panic and prices are destroyed to such a low level that the next bull market has legs. Since people are so scarred after the the internet bubble (2000), housing bubble (2007) and interest rate? bubble (2014/15 or so), it'll drive prices down and opportunities would be abundant for long term returns. The market tanks from 2014-2016. People talk about how with all this debt, investments will be dead forever and ever, aging baby boomers, etc. Then we get a rehash of 70s style valuations. Maybe this is wishful thinking, but hey, it's kinda fun! :P

[ERICOPOLY]

 

I sold out of 70% of our BAC position between 11-12.30 and then bought back some when it went down at around 10.30s the position is now about 35% of its original size so were still there but MUCH smaller and with a large crystalized gain to boot.

 

AIG we own some of the warrants but have been selling.

 

How did you manage to buy BAC shares back around "10.30s" ?  Did you get puts assigned?

 

[Cardboard]

Interest rates always climb through a bull market and for many rate hikes the market keeps going up since the economy is also doing better along with companies earnings. It is at the end where interest rates are too high or applying too much braking power on the economy and where the equation of equity risk/earnings yield vs bond yields turns out of whack and then a bear starts.

 

It has not happened this time around because of the Fed keeping rates at zero and doing permanent QE which IMO are both big errors and unnecessary (they were positive, but are now negative longer term):

 

1- Kills savers, retirees and people looking for a short to medium term decent return or like small business owners holding onto cash before making large investments. It forces these people to spend or more likely to chase risky investments instead of GIC's.

2- Institutions, pension funds and fund managers are also forced to chase.

3- This chasing creates as large or larger of a cost to the "poor" than the savings realized from low interest rates since the cost of major goods that they are buying: cars and houses, become largely inflated. Same effect on their daily commodities since it puts pressure on the dollar. On top of that, banks have significantly tightened lending standards, so housing even if cheaper is not even available to many of them.

 

I predict that the Bernanke and Greenspan era's will go down in history as the most manipulated and mismanaged period for interest rates and money supply leading to many bubbles and great pain for the majority of citizens, especially the poor. Refusing to apply the brakes and preventing any short term pain to occur led to much bigger trouble down the road and will continue. The pain is now being moved to the government and eventually it will blow up too. QE has now been in place long enough that it is an addiction for market participants. It is just pushing up the value of investments (along with housing) with very little impact on the real economy. It is helping me and investors, but not Jack who is working on salary with a sub-college degree or the vast majority of people.

 

So right now, we have none of the original signals given by interest rates telling us where we stand in the business cycle. I would tend to agree with Marks that we are in the mid-innings based on GDP growth rate and inflation readings. So IMO, rates will go up at some point and maybe sooner than we think, but they won't go up by 4 or 5% overnight. The 10 year yield is already moving up and the market and economy can take it so far. On the other hand, it would be fair to expect them to go up quicker than a normal cycle since they have been kept artificially low for so long. I still think that there should be plenty of time to adjust based on that factor alone. By then, I suspect that very few stocks will have the value potential that we see in many today.

 

Cardboard

[Palantir]

Totally disagree. I think QE-infinity is the only option for the government and CB's to follow.

 

1- Kills savers, retirees and people looking for a short to medium term decent return or like small business owners holding onto cash before making large investments. It forces these people to spend or more likely to chase risky investments instead of GIC's.

 

This is simply collateral damage. I'm afraid savers are not a priority.

 

2- Institutions, pension funds and fund managers are also forced to chase.

 

That is the idea, they want people to plow into risky assets which drives investment.

 

3- This chasing creates as large or larger of a cost to the "poor" than the savings realized from low interest rates since the cost of major goods that they are buying: cars and houses, become largely inflated. Same effect on their daily commodities since it puts pressure on the dollar. On top of that, banks have significantly tightened lending standards, so housing even if cheaper is not even available to many of them.

 

Hardly true. Inflation is very difficult to create in a deleveraging environment. Monetary easing only increases one component of the money supply. Inflation has been low, but people simply look at one or two indicators like gas prices and talk about inflation.

 

 

The current macro environment we're in is not unprecedented nor very unusual. Deleveraging periods happen after every major credit bubble, and we see the same effects, monetary contraction, sovereign defaults, and first deflation, and then an extended period of low rates. This pattern has repeated over and over again for hundreds of years, however the "herd" looks at low interest rates and says, "this is an unprecedented event!". Not so.

 

[Packer16]

As Keynes said: The grand experiment has begun.  On one side you have the US and recently Japan with QE and on the other you have the EU.  I agree that QE is not good long term but I think the CB has no choice.  If we had gone the way of the EU, we would be in a depression-deflation spiral Irving Fisher and Prem spoke of.  So far the US and Japan are in better shape than the EU.

 

Packer

[premfan]

Interest rates always climb through a bull market and for many rate hikes the market keeps going up since the economy is also doing better along with companies earnings. It is at the end where interest rates are too high or applying too much braking power on the economy and where the equation of equity risk/earnings yield vs bond yields turns out of whack and then a bear starts.

 

It has not happened this time around because of the Fed keeping rates at zero and doing permanent QE which IMO are both big errors and unnecessary (they were positive, but are now negative longer term):

 

1- Kills savers, retirees and people looking for a short to medium term decent return or like small business owners holding onto cash before making large investments. It forces these people to spend or more likely to chase risky investments instead of GIC's.

2- Institutions, pension funds and fund managers are also forced to chase.

3- This chasing creates as large or larger of a cost to the "poor" than the savings realized from low interest rates since the cost of major goods that they are buying: cars and houses, become largely inflated. Same effect on their daily commodities since it puts pressure on the dollar. On top of that, banks have significantly tightened lending standards, so housing even if cheaper is not even available to many of them.

 

I predict that the Bernanke and Greenspan era's will go down in history as the most manipulated and mismanaged period for interest rates and money supply leading to many bubbles and great pain for the majority of citizens, especially the poor. Refusing to apply the brakes and preventing any short term pain to occur led to much bigger trouble down the road and will continue. The pain is now being moved to the government and eventually it will blow up too. QE has now been in place long enough that it is an addiction for market participants. It is just pushing up the value of investments (along with housing) with very little impact on the real economy. It is helping me and investors, but not Jack who is working on salary with a sub-college degree or the vast majority of people.

 

So right now, we have none of the original signals given by interest rates telling us where we stand in the business cycle. I would tend to agree with Marks that we are in the mid-innings based on GDP growth rate and inflation readings. So IMO, rates will go up at some point and maybe sooner than we think, but they won't go up by 4 or 5% overnight. The 10 year yield is already moving up and the market and economy can take it so far. On the other hand, it would be fair to expect them to go up quicker than a normal cycle since they have been kept artificially low for so long. I still think that there should be plenty of time to adjust based on that factor alone. By then, I suspect that very few stocks will have the value potential that we see in many today.

 

Cardboard

 

Great post. I been on this board long enough to know that cardboards insights are usually early in timing, but right in the longer term. I agree with everything you have said. I'm very cautionous right now and like you i have no clue where we are in the "normal" business cycle. I do have two companies where i believe the earning power in 2 plus years is not being expressed in the market price. I'm finding some reasonable priced companies but, i'm hestiant to pull the trigger due to the bullish consenous currently in the market. I rather hold cash and add to my current positions.

[moore_capital54]

 

I sold out of 70% of our BAC position between 11-12.30 and then bought back some when it went down at around 10.30s the position is now about 35% of its original size so were still there but MUCH smaller and with a large crystalized gain to boot.

 

AIG we own some of the warrants but have been selling.

 

How did you manage to buy BAC shares back around "10.30s" ?  Did you get puts assigned?

 

Sorry that was supposed to be 11.30's.

 

Also as to Palantir - without savers capital will not flow to the productive areas of the economy If you punish this generation of savers as you have done you will end up breeding a new generation that has no savings at all afterall they can just accumulate debt and buy things they can't afford (the government/central banks will bail them out)

 

Savers should ALWAYS be the priority.

 

[moore_capital54]

Moore

 

Please can you share your thoughts on MCP. Thanks

 

Here are some fat pitches: TVL (6.2x 2-yr EBITDA,  24% 2-yr avg FCF yield), NXST (6.5x 2-yr EBITDA, 22% 2-yr avg FCF yield), TPCA (3.3 x EBITDA), HCOM (3.7x EBITDA), AIQ (3.9x EBITDA, 54% FCF yield), ATSG (4.3x EBITDA, 29% FCF yeild) and that does not even include distressed areas with more risk like OPAP (4.1x EBITDA) or Mediaset (4.8x EBITDA) and Telecom Italia (3.7x EBITDA) or some modestly undervalued financials like BAC or COF.

 

Some of these have gone up but the cash flows appear to be increasing also.

 

Packer

 

We are in OPAP (as a matter of fact I started the thread) and it hasn't worked out all that great. Not familiar with the other names but will study them this weekend.

 

We like MCP Debt here and the LEAPS, but we know the asset very well.

 

MCP - net out the cash ($500mm) and you are sitting on an EV which reflects about 50% of the value of Mountain Pass. We like the unsecured debt here (Trading at 70-90 cents on dollar) and the LEAPS. The reasoning behind the move is primarily an SEC investigation into accounting improprieties. We think the CEO will be given the boot and everyone will forget about this. A unique opportunity to buy the only rare earth producer (vertically integrated market leader) outside of China.

 

Rare earth's will have their day again. Even if they don't MCP Will produce 150-200mm in EBITDA once the mine ramps up.

[ERICOPOLY]

Regarding interest rates...  I've asked this before but nobody really knows/knew the answer, so maybe some newer board members know:

 

How can we compare interest rates of today versus 120 years ago when back then the dollar was backed by gold?

 

Shouldn't a 2% government rate be considered a higher yield back then, when backed by gold, versus today when the underlying dollars devalue at a faster pace?

 

I totally don't get these arguments about rates today versus history that goes way back.  What seems unprecedented to me about low rates today, versus say 1890s, is that back then your low yield actually beat inflation.  And your yield wasn't even taxable back in 1890 -- they brought the income tax in somewhere around 1913 or so.

 

How do you make any money at all with a 2% 10 yr yield and you only keep maybe 1.3% yield after taxes?  Surely there is higher risk involved here with making a real return, whereas if it were backed by gold it might be more of a fighting chance.

 

So I can't figure out how comparing rates today versus far back in history is any kind of fair comparison whatsoever.  A 2% rate today is vastly inferior to a 2% rate in 1890 -- that's my theory and I'm sticking to it.

 

[hyten1]

this is a very stupid question :)

 

but why is 2% not the norm or shouldn't be the norm

 

or put another way, i know historically the interest rate is higher than now, but why is history the norm not now for now.

 

i guess what i am trying to get at is is there some fundamental/structural reason why interest rate was 4 to 5% historically (is that right) vs some other number let say 1, or 10, or 20?

 

this is most definitely a very dumb question.

 

i mean the rate is the risk free rate (gov debt) so is there some psychological/structural/fundamental reason why that rate is 4 to 6%, why isn't it 2% or 10%?

 

 

hy

[moore_capital54]

Regarding interest rates...  I've asked this before but nobody really knows/knew the answer, so maybe some newer board members know:

 

How can we compare interest rates of today versus 120 years ago when back then the dollar was backed by gold?

 

Shouldn't a 3% government rate be considered a higher yield back then, when backed by gold, versus today when the underlying dollars devalue at a faster pace?

 

I totally don't get these arguments about rates today versus history that goes way back.  What seems unprecedented to me about low rates today, versus say 1890s, is that back then your low yield actually beat inflation.  And your yield wasn't even taxable back in 1890 -- they brought the income tax in somewhere around 1913 or so.

 

How do you make any money at all with a 2% 10 yr yield and you only keep maybe 1.3% yield after taxes?  Surely there is higher risk involved here with making a real return, whereas if it were backed by gold it might be more of a fighting chance.

 

So I can't figure out how comparing rates today versus far back in history is any kind of fair comparison whatsoever.  A 2% rate today is vastly inferior to a 2% rate in 1890 -- that's my theory and I'm sticking to it.

 

Precisely Eric. If anything the risk-free rates should be significant higher due to the fact that every nation runs a fiat based currency. And the date is not 100 years ago but rather 1971. That is the most important date to look at. Post 1971 and Pre 1971 when trying to understand these things.

 

The crux of the matter is that since 1971, as influenced by the majority of the electorate, the politicians have been increasingly relying on the fiat money system to subsidize their lack of fiscal discipline (blaming both dems and R's here) each time PUNISHING the saver for the debtor. It has done nothing but created a long cycle in hard asset appreciation and significantly increased the real value of commodities - the essential ingredients that allow an industrial society to flourish. Did technology help soften these effects along the way? Of course it did, the most important of which was the ubiquity of the internet imho. But we have now reached the end of this experiment with all nations employing a fiat standard, all nations employing ZIRP, and all nations employing a significant transfer payment program as a percentage of global GDP.

 

It doesn't feel like socialism yet because there was in fact a major deflationary event that is still in its final innings (since 2008 lehman).

 

One of you posted a wealth video the other day. The primary reason for the asymmetric distribution is that savers have been marginalized leaving only those with large bases of capital (as a percentage of nominal GDP) to flourish and creating a situation where even respectable savers, prudent savers, find their way back to the lower quartiles when taking into account taxes, inflation, and distribution to heirs over time (splitting of the nest-egg).

 

A risk-free rate of return has been one of the cornerstones of trust in the economy since the late 1600's. It has allowed for terms such as retirement and leisure to be introduced into what our view of capitalism should be.Unfortunately for savers today unless you have 8 figures you will be hard pressed to generate a risk-free rate of return which could cover your outlays.

 

We talked about this before. I know many investors with $2-5mm that are reaching into their principal for the first time in their lives. This is a de-facto wealth redistribution. I am not sure how it will end but I have always chosen the contrarian route when making long-term investments. Right now the most contrarian route of all is to pile up unencumbered cash. Keyword: "Unencumbered". A lot of people have liquidity (cash) today but it is not absolute liqudity. They have taken on more debt in their business or have bought a more expensive house with a mortgage reflecting artificially depressed i-rates.  Same goes for corporations, even Buffett's cash situation isn't what it used to be when viewing it through the prism of future encumbrances.

 

I will use 2013 as the year to pile up unencumbered cash which I will use to purchase short duration fixed income assets (less than 90 days).

 

 

[Hielko]

Another perspective about interest rates: Shouldn't interest be a function of how valuable money now is versus how valuable money in the future is? I would argue that in the past you would have a lower life expectancy and the quality of life would be lower if you would be older, so the future value of money would be lower. To compensate for the lower future value of money you would need a higher interest rate. If there isn't a big difference between the value of spending now or spending in the future a real return of zero sounds reasonable to me. Just a thought...

[ERICOPOLY]

Regarding interest rates...  I've asked this before but nobody really knows/knew the answer, so maybe some newer board members know:

 

How can we compare interest rates of today versus 120 years ago when back then the dollar was backed by gold?

 

Shouldn't a 3% government rate be considered a higher yield back then, when backed by gold, versus today when the underlying dollars devalue at a faster pace?

 

I totally don't get these arguments about rates today versus history that goes way back.  What seems unprecedented to me about low rates today, versus say 1890s, is that back then your low yield actually beat inflation.  And your yield wasn't even taxable back in 1890 -- they brought the income tax in somewhere around 1913 or so.

 

How do you make any money at all with a 2% 10 yr yield and you only keep maybe 1.3% yield after taxes?  Surely there is higher risk involved here with making a real return, whereas if it were backed by gold it might be more of a fighting chance.

 

So I can't figure out how comparing rates today versus far back in history is any kind of fair comparison whatsoever.  A 2% rate today is vastly inferior to a 2% rate in 1890 -- that's my theory and I'm sticking to it.

 

Precisely Eric. If anything the risk-free rates should be significant higher due to the fact that every nation runs a fiat based currency. And the date is not 100 years ago but rather 1971. That is the most important date to look at. Post 1971 and Pre 1971 when trying to understand these things.

 

The crux of the matter is that since 1971, as influenced by the majority of the electorate, the politicians have been increasingly relying on the fiat money system to subsidize their lack of fiscal discipline (blaming both dems and R's here) each time PUNISHING the saver for the debtor. It has done nothing but created a long cycle in hard asset appreciation and significantly increased the real value of commodities - the essential ingredients that allow an industrial society to flourish. Did technology help soften these effects along the way? Of course it did, the most important of which was the ubiquity of the internet imho. But we have now reached the end of this experiment with all nations employing a fiat standard, all nations employing ZIRP, and all nations employing a significant transfer payment program as a percentage of global GDP.

 

It doesn't feel like socialism yet because there was in fact a major deflationary event that is still in its final innings (since 2008 lehman).

 

One of you posted a wealth video the other day. The primary reason for the asymmetric distribution is that savers have been marginalized leaving only those with large bases of capital (as a percentage of nominal GDP) to flourish and creating a situation where even respectable savers, prudent savers, find their way back to the lower quartiles when taking into account taxes, inflation, and distribution to heirs over time (splitting of the nest-egg).

 

A risk-free rate of return has been one of the cornerstones of trust in the economy since the late 1600's. It has allowed for terms such as retirement and leisure to be introduced into what our view of capitalism should be.Unfortunately for savers today unless you have 8 figures you will be hard pressed to generate a risk-free rate of return which could cover your outlays.

 

We talked about this before. I know many investors with $2-5mm that are reaching into their principal for the first time in their lives. This is a de-facto wealth redistribution. I am not sure how it will end but I have always chosen the contrarian route when making long-term investments. Right now the most contrarian route of all is to pile up unencumbered cash. Keyword: "Unencumbered". A lot of people have liquidity (cash) today but it is not absolute liqudity. They have taken on more debt in their business or have bought a more expensive house with a mortgage reflecting artificially depressed i-rates.  Same goes for corporations, even Buffett's cash situation isn't what it used to be when viewing it through the prism of future encumbrances.

 

I will use 2013 as the year to pile up unencumbered cash which I will use to purchase short duration fixed income assets (less than 90 days).

 

They could start by throwing out property taxes once you reach the age of 65 or something (or better, entirely on your primary residence).  It's like you can't even buy a house as security that you'll always have somewhere to live.  Maybe somebody has a fantasy that once they own a home, they will be secure.  Well, that's only until you refuse/can't pay your perpetual "lease" (oh, I mean property tax) and they come with their guns and take you from your home.

 

It's nice that in California tax payments on property can't rise more than 2% a year, but in other parts of the country how do you save up risk-free money to pay a property tax that could rise at 7% annually where you might live to 110 unexpectedly?

 

[stahleyp]

moore, can you tell me a bit more about why you are selling AIG and BAC? According to Berkowitz, I believe he said that BAC should be around $40 in about 5 years and AIG around $140.

 

So, with the AIG warrants, if you buy them at $15 (assuming Berkowitz is right), those should be worth about $95 ($140-$45 strike) in a few years, right? I mean, even if we hit a correction, if Berkowitz's number are anywhere close to being right, you're looking at a 3-5x return in a few years. Plus, you still have a few years worth of time value left.

 

With BAC, if it's at $40 within 5 years, they'll be worth (not including extra shares or reduced strike), $26.70 ($40-$13.30 strike). Now these warrants don't have quite 5 years left, but it's pretty close.  I mean, the risk and reward trade off is pretty crazy.  Thanks in advance!

[moore_capital54]

Regarding interest rates...  I've asked this before but nobody really knows/knew the answer, so maybe some newer board members know:

 

How can we compare interest rates of today versus 120 years ago when back then the dollar was backed by gold?

 

Shouldn't a 3% government rate be considered a higher yield back then, when backed by gold, versus today when the underlying dollars devalue at a faster pace?

 

I totally don't get these arguments about rates today versus history that goes way back.  What seems unprecedented to me about low rates today, versus say 1890s, is that back then your low yield actually beat inflation.  And your yield wasn't even taxable back in 1890 -- they brought the income tax in somewhere around 1913 or so.

 

How do you make any money at all with a 2% 10 yr yield and you only keep maybe 1.3% yield after taxes?  Surely there is higher risk involved here with making a real return, whereas if it were backed by gold it might be more of a fighting chance.

 

So I can't figure out how comparing rates today versus far back in history is any kind of fair comparison whatsoever.  A 2% rate today is vastly inferior to a 2% rate in 1890 -- that's my theory and I'm sticking to it.

 

Precisely Eric. If anything the risk-free rates should be significant higher due to the fact that every nation runs a fiat based currency. And the date is not 100 years ago but rather 1971. That is the most important date to look at. Post 1971 and Pre 1971 when trying to understand these things.

 

The crux of the matter is that since 1971, as influenced by the majority of the electorate, the politicians have been increasingly relying on the fiat money system to subsidize their lack of fiscal discipline (blaming both dems and R's here) each time PUNISHING the saver for the debtor. It has done nothing but created a long cycle in hard asset appreciation and significantly increased the real value of commodities - the essential ingredients that allow an industrial society to flourish. Did technology help soften these effects along the way? Of course it did, the most important of which was the ubiquity of the internet imho. But we have now reached the end of this experiment with all nations employing a fiat standard, all nations employing ZIRP, and all nations employing a significant transfer payment program as a percentage of global GDP.

 

It doesn't feel like socialism yet because there was in fact a major deflationary event that is still in its final innings (since 2008 lehman).

 

One of you posted a wealth video the other day. The primary reason for the asymmetric distribution is that savers have been marginalized leaving only those with large bases of capital (as a percentage of nominal GDP) to flourish and creating a situation where even respectable savers, prudent savers, find their way back to the lower quartiles when taking into account taxes, inflation, and distribution to heirs over time (splitting of the nest-egg).

 

A risk-free rate of return has been one of the cornerstones of trust in the economy since the late 1600's. It has allowed for terms such as retirement and leisure to be introduced into what our view of capitalism should be.Unfortunately for savers today unless you have 8 figures you will be hard pressed to generate a risk-free rate of return which could cover your outlays.

 

We talked about this before. I know many investors with $2-5mm that are reaching into their principal for the first time in their lives. This is a de-facto wealth redistribution. I am not sure how it will end but I have always chosen the contrarian route when making long-term investments. Right now the most contrarian route of all is to pile up unencumbered cash. Keyword: "Unencumbered". A lot of people have liquidity (cash) today but it is not absolute liqudity. They have taken on more debt in their business or have bought a more expensive house with a mortgage reflecting artificially depressed i-rates.  Same goes for corporations, even Buffett's cash situation isn't what it used to be when viewing it through the prism of future encumbrances.

 

I will use 2013 as the year to pile up unencumbered cash which I will use to purchase short duration fixed income assets (less than 90 days).

 

They could start by throwing out property taxes once you reach the age of 65 or something (or better, entirely on your primary residence).  It's like you can't even buy a house as security that you'll always have somewhere to live.  Maybe somebody has a fantasy that once they own a home, they will be secure.  Well, that's only until you refuse/can't pay your perpetual "lease" (oh, I mean property tax) and they come with their guns and take you from your home.

 

It's nice that in California tax payments on property can't rise more than 2% a year, but in other parts of the country how do you save up risk-free money to pay a property tax that could rise at 7% annually where you might live to 110 unexpectedly?

 

One more thing I forgot to mention which coincidentally answers Hytem question. It's funny to see how everyone forgets what a risk-free rate is.

 

Risk free rates simply, are the rate at which the savers are WILLING to lend out their most precarious of capital (the capital the view as forming the bottom of the pyramid). Historically that rate WAS NOT decided by the central banks but rather the SAVERS. Commercial Banks would grow deposits when their risk free rates (CD's in US GIC's in Canada) were attractive and shrink their deposits when that rate was insufficient. How far we have come where savers have no patience and purchase CD's regardless of their yield. It is this shift in phsycology that has helped/allowed the Keynesian doctrine to flourish.

 

But it is not so simple either because the Central banks now purchase government securities outright and account for such a large part of that market which produces a gain for previous owners "Softening" the pain of purchasing low yielding risk-free instruments. It has become a sort of cycle of madness.

 

The reason the risk-free rate was always 3-5% was because that was historically the rate at which savers were willing to pile in their savings. That has historically been the magic number that provided almost every level of net worth with sufficient return to cover expenses (avoiding the need to dig into principal). It also ensured that the riskier capital was plowed into higher risk but on he margin productive/necessary ventures which led to growth.

 

Today's saver plows money into low yielding rates cause he thinks he has to and then takes a punt on high risk (non productive) securities because he believes he can sell before the music stops.

[ERICOPOLY]

A risk-free rate of return has been one of the cornerstones of trust in the economy since the late 1600's. It has allowed for terms such as retirement and leisure to be introduced into what our view of capitalism should be.Unfortunately for savers today unless you have 8 figures you will be hard pressed to generate a risk-free rate of return which could cover your outlays.

 

TIPS are probably the best of the options the govt is issuing, but I haven't looked at how they are priced today.  I totally don't get the logic between taxing us on the CPI adjustment -- isn't the purpose to return us the real value of our principle (suspend your disbelief in the CPI as measure of real value for a minute just for this exercise)?

[moore_capital54]

moore, can you tell me a bit more about why you are selling AIG and BAC? According to Berkowitz, I believe he said that BAC should be around $40 in about 5 years and AIG around $140.

 

So, with the AIG warrants, if you buy them at $15 (assuming Berkowitz is right), those should be worth about $95 ($140-$45 strike) in a few years, right? I mean, even if we hit a correction, if Berkowitz's number are anywhere close to being right, you're looking at a 3-5x return in a few years. Plus, you still have a few years worth of time value left.

 

With BAC, if it's at $40 within 5 years, they'll be worth (not including extra shares or reduced strike), $26.70 ($40-$13.30 strike). Now these warrants don't have quite 5 years left, but it's pretty close.  I mean, the risk and reward trade off is pretty crazy.  Thanks in advance!

 

We are selling because we like to make money, and we are up a lot of money. On the AIG's almost 100% on the average purchase price. On BAC we will end up making more than 100% (probably 130% when its all said and done). For a hedge fund these are fabulous annualized numbers why mess with them. A bird in the hand..