Here is my proposed stress test that governments should do or credit rating agencies should look at in evaluating a banks risk.
Since I wanted to show off how much more intelligent I am then you. Read my pamphlet
Like look at this knowledge compared to yours. Why do I even talk to you. I have more talent coming out when I fart then you guys have in your brains.
Also I guess my required return is quite high. I kind of require 100% returns. For Fedex its a little lower. I really love Fedex. I think Fedex is just that kind of business that will just keep getting better and better and I love businesses with so low risk.
Why do you like UPS more $70 billion valuation to $25 billion. I don't get the big difference in the price. It would almost be arbitrage shorting UPS and buying fedex.
But I do like UPS I am just saying the valuation difference is puzzling. I think its because of UPS's dividend and high roe but they have similar ROIC. And I really think Fedex will benefit in 5-6 years and overtake UPS as the bigger company. Fedex seems to be investing much more while UPS has focused on dividends.
To me this is a critical time for the shipping industry as globalization ramps up with internet shopping going crazy this is an industry i really want to be in. And fedex I boguht twice now is at a very reasonable price.
Here is the difference MTW is overvalued so its stock won't move up as much in the new cycle. Its not true that all stocks move together. Osh Kosh has moved up of late because of Carl Icahn causing a fuss when it really gave much worse guidance than TEX and MTW. Anyways MTW has half the revenue of TEX and what i see is half the earnings power with a much weaker financial position. And they trade at very similar valuations. Which is why I see MTW stalling going forward.
My critique of Market was on some of his comments. For instance he says rating agencies are idiotic since one element they judge an insurers safety is premiums written to surplus. He says its "idiotic" since when premiums go up in value IE they make more profit then the number is bigger and Markel looks less safe. I mean its just such a stupid critique. The ratio would show less safety if they wrote a policy for $1 when it should have been priced at $10. But this is just 1 ratio and most insurers tend to write similar profitability over a cycle and he just goes on and on for 2 pages on something so dumb.
Buffett is my gold standard I take his ideas but I don't often buy his stocks. Buffett is in a different place than you or me. For one he can't buy common of Terex since its too small. He also needs big companies that don't have any risk since he like big bets so he doesn't want that unwelcome surprise we all get. Like in Best Buy if people owned it today. Or Cisco. So he has maybe 20 or 30 companies to put his money.
His insurance business is very overvalued compared to others. Its returning 8% on equity and maybe is worth its equity and his other businesses are worth a bit more. BRK isn't a cheap stock especially in these times.
Buffett is also not currently a buyer of BRK he says only under $108,000 or 1.1 book value. I like Buffett a lot but believe me his stock isn't a bargain I can tell you that for sure.
With all due respect, I have to call you to task on a few things that you have said:
In your critique of Markel you mentioned that they owned BRK, which is true, and you mentioned that this was dumb since anyone that owns Buffett doesn't have the accumen to make his own real calls. You are simply wrong and here is why. Buffett owns BRK, and he is a buyer of BRK, that is the fact. Don't contradict Buffett you use him as your gold standard.
Second, you have based MTW, and offered lofty expectations for TEX. If you undestood the business cycle you wouldn't feel this way, because you would argue that a rising tide lifts all boats, which it does. You like FDX, I like UPS, but in the end we are bound by the business cycle and the price we pay for the equity of a company amidst that cycle. So, you think MTW will go down and TEX will go up, but this simply won't happen if the secular trends in their respective businesses are correlated which they are.
You have a lot of confidence in your reasoning skills, figure out what is wrong with those arguement and get back to me.
james the tex spammer,
Why don't you post your non-stop, long-winded, blathering posts on the TEX message board?
Did they get tired of listening to you too?
Surprise, your new rating system, no one cares.
Also on selling CDS it interests me. Since a lot of companies like BAC don;t meet my critiera for investment. BAC has weak earnings power and its only going to get weaker if idiotic Basel is implemented. So I don't want to buy their stock.
However their balance sheet is strong $135 billion of tangible equity. I checked their exposures, little exposure to Europe. The bank is extremely safe in terms of risk. So being in a market where I can just identifiy businesses I understand and all I have to do is bet against not defaulting.
Like Terex I am betting on a 500% gain and I am sure of it, so its easy for me to also bet its not going to default. Or I wouldn't be making bet 1.
Well, I am not in the CDS Market so I don't really know what sort of collateral I would post. I am saying its something that interest me if I can sell protection on things that I know have solid balance sheets. Like I would love to sell 5 year protection on BAC at 4%. How amazing is that to get 4% a year on a company with 0% chance of defaulting. And I take the premium and invest it.
Also, as an investor I am saying I don't hedge. An insurance company like AHL I don't really think they do much hedging anyways. So I usually don't like companies that hedge. Buffett says most of his insurance he keeps on most of it and cedes very few policies as does AHL but i wouldn;t call that hedging either.
Anyways as an investor I am betting if Terex will go up or down. I have no interest betting on both sides of it for any period of time. If I can't get part 1 right then I should be even making the decision to do part 1.
Hedging is not a bad system if used correctly.
Hedging can amplify returns rather than detract, which is what most are fearful on when they use a hedging strategy.
If you are going to sell CDS against TEX you may want someone else to cover certain losses with you. CDS protection that you sell has a element of risk no matter how sure you are about the company, so it would be prudent to embrace at least some form of hedging. From a guy who likes insurance I thought you would appreciate hedging as a strategy to manage risk.
Mark to market was the rave when the marks were higher and higher every month. But when this trend reversed in 2007 you had all these guys in the banking system trying to figure out how to get around market the credit of their portoflio. I thought is was rediculous, these guys had to know what the credits were worth and as their capital base increased becuase their marks kept going higher and higher, the leveraged up more and more...knowing full well that the prices the crap that they were selling was completely artificial. Then when things came down, and in a big way, they looked at their captial base shrinking by the day and wondered what to do with all the leverage in the system. They issued billions of capital in 2007 and 2008 but it still wasn't enough, these guys were leveraged to the hilt and had no idea of how to replace the losses.
I am not going to argue about the AIG deal, the histroy books will say that CDS exposure took down the firm. However, Goldman and MS had plenty of CDS exposure but were able to access the discount window, thereby reducing the risk of failure. AIG was unable to access anything, not even the captial of International finance and Am Gen insurance or even Chartis. These guys had a huge hole at the holding company level and were not able to raise the capital, and when they were downgraded they were dead because that was a trigger in their CDS contracts for collateral posting on CDS contracts that were underwater....This all happened so quickly that the company was taken by surprise.
You are correct that the CEO had no clue what he was doing. Mark to market accounting is here to stay, if you don't like it they go ultra short duration and keep the credit A or above. Otherwise, if you are willing to deal with irrational pricing, then you must be able to anticipate when bonds are overvalued, like AA Corp credits or Agencies, but reall T-bills. If I had an average price of 107 on my bond porfolio I would act as if that capital could take a 7-10% hit and the mark wouldn't hurt.
One thing that I have noticed is that when the yield curve flattens out you should see banks pulling back on loan origination and stuffing higher credits in the portfolio. In other words I think the yield curve gives these guys a good indicator of how to take risk. Makes you wonder why Bernacke is trying to flatten the yield curve, if I were a banker I would be selling longer dated credits at a premium and rolling into shorter term credits, or putting the cash to work in purchasing FDIC loan porfolios. That is one of the thing that really impresses me about USB, they haven't had to buy any banks, but their loan portfolio has grown quite a bit because they have been buying loans from the FDIC.
I use the "put option" as a descriptive term, you are able to 'put' the bonds principle back to the seller of credit protection....that is why I call it a put. Also, when you buy a put you pay a premium, the same type of premium that you would pay in a CDS. Both are contracts, one is simple - the OTC put, and one is complex- the OTC CDS, but both are guided by the same protection.
I am a seller of puts and calls on a lot of stocks, so I think in those terms.
I haven't looked at CDS contracts on TEX credit, but I would say it is close to 3-4% premium, mayber higher. If you beleive in the credit, just long the credit, and don't buy protection. If you have a lot of exposure and are up on the position, you may want to contact an investment bank and see if they are willing to underwrite a swap on your bonds. The only issue is the size of the trade, I would geuss that they would like to see you pick up 10+ contracts, and that covers quite of bit of bond. You will have to post the premium and have margin with collateral, but I have never found a case where CDS protection is a sound idea if you like the credit. Most of these CDS players were piliing in, look back at HRB bonds, the premium went to 9-10% last year and I just picked up the 5 yr. bonds at 88 cents on the dollar, no need for protection if you like the credit.
Look at JEF and LUK, I wouldn't buy the equity of JEF, although it is probably a great deal, LUK equity is a cleaner trade with less upside and less downside. But those damn JEF bonds are trading at scary levels, I think JEF can weather the storm and the bonds are senior with a recovery in the high 80s by my estimate. SP has recovery in the low 90s and Egan has them in the high 70s but you are getting the bonds close to high 80s with a strong coupon. Do not take that as a recomendation to buy the bonds, just FYI.