Openmind

BITCOIN AND OTHER - November, 2024

noreply@blogger.com (Openmind) — Tue, 26 Nov 2024 16:21:00 +0000

People are asking what I think of Bitcoin. Here is what I tell them.

Bitcoin is close to $100,000. Crypto market cap is $3.2T and slightly falling for a few days. GDP of the world was $105T in 2023. 3% "market penetration" is not material but should be watched.

In the long term, (Stephanie) Ouellette says it’s viewed as a hedge against political and financial risks, and an opt-out from devaluation of fiat currencies.

Cash is anonymous money. Bank wire is transparent money. Bitcoin is sort of anonymous bank wire. But is it?

It is interesting that SEC allowed crypto ETFs (moral hazard is material). People have social agreement (at least for now) that BTC has value and exchange this thing for real cash. It is no brainer for governments to tax the trade. It is no brainer for financial institutions to design products and start collecting the fees (I would not do this simply because it's from the problem class of mixing turds with raisins). Initially, illusion was that you can hide it from officials. Nope. After introduction of VAT it takes time to tax all sale (very long time). Similar here - you legitimize it first, then you tax it. Gradually but surely. It's not alternative to anything anymore. It becomes quite systemic.

What will happen to the state if everyone wake up one day and realize that crypto is worthless? Nothing. 3T of "wealth" will simply evaporate. It is getting material and with time tax returns should show where this wealth sits geographically and which places are at higher risk because of positive and negative wealth effects.

How can it be hedge against devaluation of fiat currencies, when it is pegged to them with value in the eye of (herd) beholder?

Lindy strengthens BTC longevity with each passing year. The best bull thesis I read came on VIC but it's main premise was "it will continue to grow" because it has no intrinsic value, therefore, bubble is impossible. Yeah, it's some kind of social agreement. More interesting is what could be a catalyst to BTC demise: a) Satoshi himself may undo it; b) herd may migrate to another better designed coin; c) significant portion of Bitcoin ownership is still unreported and the process is gradual, however, with each percentage of legitimization the demise is closer.

Random notes and thoughts that I cared to write down or copy/paste in the last few months:

R* difference between EU and US supports long term EUR underweight.
When Russians will be back to sports and culture again? It's as if they do not care but expect a harsh efforts after the deal. If they do not retreat back to their territory, Russians should stay canceled. Should is not necessarily would.
Fed and markets are confident about low oil. Trump will unleash the supply, legitimize fossils again. Oil will be cheap forever. The only worry is 2000km range of BYD car. However, oil is inflationary hedge.
Howard Lindzon: In the US though the mix of technology, money and culture make things move very fast. But I believe something changed/broke with web 2.0 and ZIRP. The mobile/social web and ZIRP sped things up to a tipping point of bad habits, bad cap tables, bad practices and bad behavior. This is a theme I have been fleshing out on our weekly ‘Trends With Friends’ podcast.
Slow rate reduction may give time to adjust, muddle through and reduce risks of serious accident like Lehman. Human error probability is lowered.
I think the market now cannot carry two opposite ideas at the same time in his head. A big chunk of the market is overvalued, while there is chunk where market is ruthless though odds are really unknown. It's probably algos.
If lower 40% begin to struggle, even if the remaining 60% is booming, situation could be declared as crisis. However, impact on stock market could be quite isolated to a few businesses working with the population under crisis.
It struck me that AI now is good at seeing 6-12 months ahead, which explains quick big moves in stocks after earnings releases (good reads recently on negative earnings trends algo trading). No the business is not going bankrupt and nobody knows anything. You simply have to be patient for 12-36 months (and 2x money expectation) when you are reasonably sure on mean reversion.

NEWSPAPER READING - September, 2024

noreply@blogger.com (Openmind) — Thu, 05 Sep 2024 10:43:00 +0000

As an intro I will post this piece. Grant's Daily Aug 22: "That’s (FED's balance sheet) down $65 billion from this time last month, and 20.4% below the March 2022 peak. 20% in 2 years. That is pace of normalization. Took few month to build and then decades to unwind. 20% in 2 years." Sounds about right - that's the pace of life. If you cut rates, effect will be felt in a few years.

How do I feel in terms of financial security?

In its August consumer survey, Mizuho found that both low- and high-income Americans alike are trying to get as thrifty as possible, which means eating out less and searching for discounts wherever they can.

I thought in previous post that thrift is coming and similar language in quarterly reports will stay for some quarters to come. Our household's annual income went up roughly twice in the last 5 years (from 6 figures). We were doing ok even before Covid, however, I feel uneasy to order a tap beer for 4-5, while 10 years ago it was 2 and 1 in plenty of places 15 years ago here. I mean normal tap beer. In Tenerife, you could still buy a glass below 2 but it's a different beer. My point is that such a rapid bout of inflation left a deep scar on psyche of 98% of consumers. The process of "frog boiling" (gradual adjustment until the effect will wear out) will take time.

In the background, AI will be eating high earning jobs. Those jobs will have the best ROI to replace first. My feeling is that "universal income" is coming and will be paid by taxing M7. I hope that BRK has nothing to do about it, while M7 should see enormous assault on multiples in the next 5 years. In the next few quarters, there should be a few material (in terms of number of layoffs) stories published. They are coming. Thrift may stay for longer. Internet was a clear enhancer for all, while AI is a replacement for human. Technology and robots replace lower skill jobs, while AI will replace middle skill jobs.

NEWSPAPER READING - August, 2024

noreply@blogger.com (Openmind) — Fri, 16 Aug 2024 12:21:00 +0000

When Covid hit, first impulse was to spend cash on home. When all opened up, first impulse was to spend on experiential. Good question (for quite some time) - what's next? Looks like (Walmart, Q2) it could be simple life or picky cash spending avoiding big outlays (which was overdone in 2020-2021) and cutting on experiential (2023). Sounds very organic, given all the recessionary (almost 2 years) background. Most of people simply balance the cashflow while Covid induced printed money cash surplus ended. People with cash may simply need a break from everything until life will continue as before the Covid.

Low expectations about the future (contrasting normal current confidence - h/t end of July, Authers) is probably an ongoing hangover from GFC, which was catalyzed/reminded by Covid and, especially, the uncertainty induced by AI, and polarization of US because of growing inequality. It is clear that internet was an obvious tailwind (1995) for all but AI put in jeopardy many higher earning professionals. [I added this after rereading the post: this sounds very bullish because people are not yet complacent, they still remember.]

On sustainability of margins: China Shock, once it started happening, lifted both the profit share of GDP and the Gini coefficient of inequality to the highest levels since the Second World War. Obvious, that current state of event are towards more inflation and smaller margins.

To grease the wheels (and feed the Skinner's pigeons), its probably 1-2 25bps cuts this year and same next year, at best. Hopefully (cheering for muddle through).

Stanley Druckenmiller used to say - cyclical stocks are the best economists he knows. Back in December 2018, he cited the sharp selloff in cyclical stocks such as autos, home builders, banks and retailers as a warning sign that the Fed has tightened interest rate too much. Shortly after, the Fed pivoted, ending the tightening cycle. Now, there are plenty of pockets with their own (relatively) good (home builders, banks) and bad (discretionary retailers) lives. Do nothing is the path of least resistance.

Thought about going long yen a year ago. Thought about it a few month ago. In hindsight, everything is obvious - once it reached 160, it took it a month or so until "blew up".

At this time it seems that majority of experts and forecast agree again, like in December.

Oil is the Jocker at the moment.

NEWSPAPER READING & MACRO PICTURE - Q2/2024

noreply@blogger.com (Openmind) — Mon, 08 Jul 2024 13:06:00 +0000

I will post a string of random things, which caught me in the last month or so. Highlighted the topic which attracted my attention.

Fight of fiscal vs monetary continues. It could also be called as massive market manipulation and people misinformation.

Monetary will cause internal (maturity wall?) or external shock (Japan? China?), which will cause easing. Real asset should be in demand in inflationary panic (ht Hugh Hendry), which should follow because of fiscal vulnerability, as in UK. Such thinking is probably impatient as may sound like a trade for next 6 months. It is rather for next 5, maybe more years.

I cannot forget the fact that quarterly non-financial profit after tax in US jumped to $2T in Q1/22 (and stayed there) from roughly $1T in Q4/19 (and many quarters before). Hm, maybe this somehow could be related to the $2-3T US annual fiscal deficit?

After tax and interest profit margins vs. net profit margins. Tax went down, interest also (until 2022). Fiscal problem and higher for longer will be strong headwind to markets even if multiples are sustained. More like a reminder. However, S&P is probably really different now - less leverage, better businesses, which could justify elevated margins. No doubt they benefited from low interest and reduced profit taxes but they will be harmed much less by the reverse (and could be enormously benefiting from 5% interest on cash). Profit tax is the one to watch. In some places it was increased to fund the defense spendings.

John Hussman: There’s no question that innovation should be rewarded enough to preserve incentives. But my impression is that corporate profits and extreme wealth, particularly among mega-cap companies, have become a sort of “capture” or “rent” that reflects network effects, social dynamics, and general technological efficiencies that were no part of that entrepreneur’s invention, and might be better characterized as public goods. End of quote. Another reason to watch the profit taxes. It is easy to imagine e.g. 10% public goods tax and sounds attractively in some circles.

AI: The reduction in the cost of knowledge production will transform information economics.

Bloomberg Economics did a more thorough analysis of data going back to 1969. Economists Eliza Winger and Anna Wong found that aggregate spending showed few signs of slowdown before prior recessions. “Rather, spending slows moderately only when a recession is already underway,” they wrote. And it’s precisely a slowdown in goods — durable goods — which appeared to have some signaling value ahead of downturns. Services was found to be often “insensitive to recessions.”

John Authers: In other words, the bet is on that AI has raised the profit share, or the proportion of revenues that companies can keep as profit, a number that tends to mean-revert, and has underwritten a continuing secular rise in earnings growth. That’s a big assumption. End of quote. Katsenelson had a timely reminder about price of cars in 2022 and situation now. There will always be those who want to grow at the cost of profit (which will come later, after the land grab).

Howard Marks, April 30: What does matter in this department is whether rates will stick in the range of 3.0% to 3.5% for the next 5-10 years, as I think, or return to the 0-2% range that prevailed most of the time from 2009 to 2021. If it’s the former, it should follow that equity returns will be lower than they were in that halcyon period; leveraged investment strategies will be less advantaged; and returns from credit will be markedly better than they were. That’s about all I can say, but it’s a lot. End of quote.

NEWSPAPER READING & MACRO PICTURE - Q1/2024

noreply@blogger.com (Openmind) — Fri, 15 Mar 2024 14:50:00 +0000

WEB claims that thinking about macro is waste of time. However, he spends a few hours per day reading newspapers (vaguely remember that it could be even 3-4 hours daily). Somehow I cannot force myself to pay for content when there are plenty of free quality content and I would simply have no mental processing capacity to read more if I buy additional daily readings. I spend roughly 2 hours per day on "newspapers" and X. It took me more than 20 years to figure out what is useful to read and definitely it is different for every person. Those few hours is probably 70% macro, 30% business news. A few days after reading I do not remember almost anything what I read but still hope that something is sticking to the wall. You really need only one or two good insights per year.

Times are unclear and hopefully not nuclear. So far so good. The storm is coming - since 2009. In 2020 seemed like it's here. Still, bank strategists are very afraid of 2000 and 2008.

For those with ADD, fiscal policy so far is winning:

[QT + Interest Rates] < [Budget Deficits + FED's talks]

Longer version:

QT (-$1.4T from peak, $7.5B remain) + Interest rates (net interest for non financials in Q4/24 hit Q2/99 level and going down) < $2T budget deficit (NOW, in $23T economy) + Fed's talk (vague promise to cut acts as "Powel's Put"). Mr. Market is saying that if troubles start surfacing, QT/interest induced constrains are easily removable. Major central banks are shrinking balance sheet at roughly annual 8-10% pace. With success.

Last few weeks have brought a number of very good posts on bi-polar facts, which well explains no need for rate hikes. Last week the FED/ECB "promised" something in June. My take is that June will become September. Cuts were promised and priced in, therefore, there should be - at least 1, though it's 50/50. It's the election year.. In 2007, circumstances were different but the first cut was in September, after 9 no action meetings, 15 months after maxing out. In 2023, the last increase was in June.

Essence is always in risk vs. reward and position sizing. My take is that probably now we have a similar probability of sustained 20% jump and 30% fall in S&P (even 50% would be understandable in the latter case but so far nobody came up with a bull thesis and bear is simply not working). The US health for the next 6 months seems perfectly intact.

5% risk free is a very good deal at the moment. 10%+ listed 1x leveraged senior/junior portfolios also look attractive (OCSL and similar). I also like dry powder they have for any dislocations. Leverage now simply pays for the high management fees.

I cannot do much because 2/3 of money are tied in private investments but 1/2 of the remaining 1/3 is yielding safely (almost) 7-8% weighted. It's good that I do not have to solve another 1/3 problem.

WHAT WOULD I DO IF I WAS THE FED?

noreply@blogger.com (Openmind) — Wed, 29 Oct 2014 07:37:00 +0000

This year is a reminder that Mr. Market is the Almighty. Greed. Fear. Luck. Misfortune. What is simply accident and was is a real skill? Remember Hugh Hendry and his intellectual torture. Pleasure to read but useless otherwise. At least, so far.

In such a market no stock goes down without a proper reason. I am very curious to know what Michael Burry is doing these days. Is he also a part of a survivor's bias? Such thoughts are haunting me after a few investing setbacks. I think that mainly all heroes of Free Capital are simple survivors as for each one there are hundreds or thousands of those who did not make it. On the other hand, what do I know... there are guys from Graham-and-Doddsville. I did not see any pattern in Free Capital except that almost all of them had ten baggers, which set them free, meaning those were significant positions. For every big position, which worked 10 times there are thousand times more big positions, which has not worked.

Emotions aside, what would I do if I was the FED? I would love to know what is the tolerance of the market without risking too much to create an irreversible downward trends. It is easier said than done but something must be tried. Theoretically, the Fed can backstop at any market level. Practically, it is difficult to say.

But back to the question, what would I do?

a) I would pretend that everything is fine as long as possible; (e.g. perform stress test and find out that only 30b is needed to fix it all);
b) I would not let the new reality to set in ("muddle through" is good enough but "going down" - especially risking to reach the point of no return - is not affordable);
c) I would "slightly" manage statistics in case market overreacts downwards and fine tune later - similar to how GDP numbers are being "perfected" for a number of years.

The bad reality is that muddle through is not possible for too long (think 10 years) and this is the tragedy, which will cause another can kicking moment and potentially (4% probability) a full blow up of the system later. However, I think that money are on irreversible trend of losing value and the slowness of the process will cause the system to be in manageable equilibrium to infinity. I would place 4% probability to "nuclear" scenario and 96% to slow decay of money. It is nice to imagine, read and think about this "nuclear" case but it is not very probable. External shock could be a driver and it is the biggest unknown risk but this is normal (think about Buffett's fear of nuclear attack, Ebola expands exponentially, and similar).

Well, I think QE 4 and 5 is on the way but what is the level of S&P for that - this is the question? 1900? 1700? 1500? 1500 looks reasonable for me but could be too risky and too late, therefore, 1800 is probably a nice average to bear in mind. Well, I will note to myself that 2014 will be marked by indexes going nowhere, simply because all expected another 10-20% up year. Big move year will be saved for later.

THE BIGGEST LEGITIMATE INSIDER OF THE WORLD

noreply@blogger.com (Openmind) — Wed, 24 Sep 2014 13:47:00 +0000

I have been quiet for a while and traffic to the blog is just from search bots. As a coincidence, we are investing into a startup producing web robots. I (kind of) just want to write to myself that I have no intention to close this blog.

The first half of 2014 was not kind to portfolio and it is mainly my mistake in position concentration of option-like trades (they were not investments), which should be a fraction of portfolio and I confused feeling and past luck in similar situations to skill and knowledge. I let positions rise and did not liquidate in time, so since options expired worthless, portfolio is down double digits. Think of RSH, UNTK…

All these portfolio hits and my general busyness and lack of time made me rethink my current investments tactics. I have to admit that head is quite messy. Market is high and tempting to remove hedges. At least shorting small caps was a somewhat right insight. Well, I keep reminding myself that there is a price for cherry consensus and if everything would look right, there would be no upside left.

Thinking about general market perceptions is a fruitless thing, too. Who in his right mind can measure it? Do people are bearish too much or enough or not enough for the market to keep on climbing the wall of worry? Low interest rates just do not look right to me. Muddle through and new normal were very precise descriptions and predictions at their origination. At least, about the general background (I do not need even to search for evidence, it keeps coming like on a live news feed: Link).

So, who is this insider?

I am getting Daily Reckoning updates daily and sometimes read them, especially Chris Mayer and Bill Bonner. Chris is really good in giving tips to new interesting companies (whom we all tend to collect) and books, while Bill is a master of word and common sense. However, this time I read about insiders from a different author (Link).

I carry this insider idea in my head from early spring when Ukrainian situation was in its emotional Maidan stage. Such events cause stock fluctuations and Russian political decision makers do not have to report to SEC. It is trivial to make a billion dollars with a simple press release. It is redistribution of wealth in Russia when rich will get richer. But only for those who are close to the man.

It is September now and the idea does not seam so convincing anymore. The man has proven to be unpredictable and it is unclear what are his real motives, if any. Gazprom is a huge arbitrage story where a company with such proven reserves would cost probably 100x more if situated in a stable democratic country. Everything has a price. You can see my thought flow and here is the chart. The thing has started to brew between January and March.

2013 END NOTES

noreply@blogger.com (Openmind) — Mon, 30 Dec 2013 13:55:00 +0000

2013 was fast as probably each year when you get older and especially when you have small kids.

It was a mixed bag for me - stock picking was almost 1.5x better than market but excessive hedge position, obviously, materially lowered the returns. I cannot complain – mid teens with low downside risk is quite good (longs were covered with 1.5x index shorts for most of the year). I would settle for 10% pa with limited risk given the elevated valuations because of high margins and multiples.

As I wrote before, this year I have spent little time on my portfolio. Probably, it was in the spirit of Charlie Munger (documented by Value Investing World): “We use a lot of experience and do it [investment returns] in our heads. We don’t like complexity and we distrust other systems and think it many times leads to false confidence. The harder you work, the more confidence you get. But you may be working hard on something that is false. We’re so afraid of that process so we don’t do it.” Devil is in the details and footnotes but more and more I notice that the first hour of reading gives 80% of thesis. The most important is if I can build a constructive opposite thesis – if I feel that something was overdone with price movement, I act. When I see that insiders are on my side, position gets bigger.

Almost all returns came from 2 boring cellular telcos. No moat, no profit (almost no). Value investors were skeptical. However, in such cases, holding period is not forever and IRRs are quite good. I hope (a very important word) that UNTK and EZPW will be similar.

Macro is another topic hated by value investors. It is an interesting time when long-term interest rates are going up together with homebuilders. Mr. Market is saying that higher interest rates will not affect the recovering housing market. The money printing was reduced by ~10% and its annualized run rate now totals ~6% of US GDP, while interest rates went up 40-80%. That was a price discovery of roughly 7 months, which will continue.

TNX is 10Y yield, TYX is 30Y yield and XHB - homebuilders.

Many many investors think like me; therefore, it is not that contrarian and quite painful at the same time while it should be painful when alone. They think and act with hedging their portfolios and keep on fighting the last war. Understandably, perma-bears continue to capitulate. Hugh Hendry did that in kind of a funny way. He thinks it will get much much worse but it will get better before that, which is worth a try to gamble. Those who were unhedged are definitely winning, so far. WEB is among them but he is in his own long-term game (he is not exiting the market before crash like the most intend to do). Correct me if I am wrong but the last three horsemen standing are John Hussman, Gary Shilling and Hoisington. Still await for G. Shilling's 2014 outlook, which should come in the first weeks of January. It should be an interesting read because he ended his 2013 mid year views: “So here’s my “risk-off” quartet: short stocks and commodities, long the dollar and Treasuries.” So far, so bad…

I will speculate that surprisingly the world cannot withstand a higher long term interest rates and a complete stop to QE would not anyhow influence rates (I am talking about longer term as in a short term market would correct and people would fly to safety).

This year I started to practice a basket of “option” stocks (stocks, which are priced like options, usually close to $1). I will see if my stock picking instincts are worth a dime as so far the score is 0:2 (thanks to PNCL and GAXC; long DM and ABM.L). However, mathematically, I am sure I should continue. I will decide after 10 or so attempts and positions should be closer to 0.5% (now larger) for now. On the positive note, such things absorb natural inclination towards activity and gamble - modern man needs variety and to have at least some fun. Discipline is boring and painful.

After writing this, I got a little better regarding my short XHB position (hurting in the last few weeks). It is painful but feels like a right thing to do given another interest rates run up attempt, which I believe (a very important word) to be another fake. I should at least reduce it at $28, though. I am afraid for pent up demand and normal household formation, does not matter how slow it is. Something similar to what is going on with autos.

I am intrigued about NLY. LOJN is coming back to a trade-able range.

A few reminders:

> Next crash will come from something not known or too obvious.

> General trend of the market is up - roughly 3/4 of the time. White men will do everything to preserve status quo and inflation is the key element of this.

> The world has not deleveraged, yet (it is beautiful but takes very long or another 3-6 years, remember EU bank leverage ratios…).

It is getting too long, so Happy New Year!

CONFESSION ABOUT LEAP

noreply@blogger.com (Openmind) — Mon, 15 Jul 2013 14:33:00 +0000

I noticed a worrisome and clearly morbid (but easily explainable and understandable) pattern in my head - after big gains and significant victories I tend to check account more often and I want to brag. This time there is no exception. I would like to believe and promise that once I will confess a big loss, in detail.

2013 just clocked the first half and 4 of my ~10 long holdings have been taken out. In a similar settings, 2010 brought me also 4 take-outs but this year has 6 months to go.

The last one came in a spectacular fashion. +100% on the takeout day and +150% in the last month. It was not an easy one because I almost sold it 2 month ago but decided to wait for long-term gain and while waiting it dropped 15%. In the time of waiting, another holding was taken out, price was low and urgency subsided. It is enigma, why I did not add :)

It was a difficult one because the multiple was high and because the leverage was high, too. Because what a guy in the other side of the world may know about intricacies of the US wireless telcos and smart people were thinking that prepaid niche is a poor business without competitive advantages. It turned out that prepaid were and are good quality assets comprising not only of multiples but also of spectrum, subscriber base (market share), and attractive cost structures. I am speaking about LEAP (and PCS).

To summarize the 2013 take-outs:

PCS – 425 days | 140% IRR

DELL – 270 days | 21% IRR (went down 25% before that)

MBND 430 days | 34% IRR (went down 30% before that)

LEAP 440 days | 155%

Interestingly, I stepped twice into the PCS river – in 2010/11, 425 days brought me 150% IRR.

Finally, last 12 month I spent only 1-2 hours per week working on my investing account. What could I do if it were a full time job? I am afraid, it could also be the opposite... Happy hunting.

RANDOM MUSSINGS (iii)

noreply@blogger.com (Openmind) — Wed, 22 May 2013 09:06:00 +0000

It seems to me that today everyone is a trend follower. In 2009, everyone was macro economist. And both without apparent reason. It is clear today that the latter was wrong. At least, so far. I think that majority of the first will be trapped, too. Buffett is talking his book and eternal perspective and obviously he is right, so those who can afford to follow his advise, should definitely do that. The rest at least has to be hedged.

I liked (let's call it) the battle of John Hussman and the Brooklyn Investor on the profit margins (a few additional dimensions on the subject - link). Frankly, after reading the Brooklyn Investor post I became hesitant, which means it is a must read. John seems like a strong statistician to me but as someone said owls are not what they seem.. Eternal perspective assumes that it is unclear what people will think when profit margins shrink, which is inevitable. In other words, multiple is uncertain. I still tend to lean towards a bias against high margins, which is now happening at the same time with a high multiple.

Graham with 50% in cash (link) is thinking in the same direction but instead of cash my hedge is a more aggressive bet (short of indexes).

A brief and eclectic stock update: INFU looks interesting below $1.40 (for a brief moment). Gazprom below $8.00, too. Gas reserves cannot cost 80x cheaper than at CHK for a long. However, Russian element brings some shiver in me. Umom Rasiju neponiatj (link - loose translation: you can't fathom Russia with mind). I do not have positions in both, yet. Of my holdings, LOJN looks cheap, trading almost at cash.

DELTA UPSET PINNACLE AIRLINES SHAREHOLDERS

noreply@blogger.com (Openmind) — Sun, 10 Feb 2013 09:48:00 +0000

It is about the right time to call the finale of the Pinnacle Airlines bankruptcy.

Delta Airlines, an iconic American brand, did not bother with shareholders of its subcontractor and took over a profitable and solvent company. What is interesting it took it over FREE OF CHARGE (yes, it provided financing, blah blah blah, and got hundreds for a few tens of millions).

Evidently, Delta follows a very strong set of guidelines as summarized in the Code of Ethics and Business Conduct:

Fair Dealing. Directors shall oversee fair dealing by employees, officers and directors with the Company's customers, suppliers, competitors and employees. "Fair dealing" means the avoidance of unfair advantage through manipulation, concealment, abuse of privileged information, misrepresentation of material facts, or any other unfair dealing practice. This Code provision will have no effect on existing legal rights and obligations of the Company and its employees, including "at will" employment arrangements.

As a shareholder, I would prefer a liquidation (without a credible attempt it was impossible to extract any shareholder value) and potentially a meaningful recovery of some shareholder money but a "greater good for society" argument in combination with questionable action of a judge (can he read the balance sheet?) and lack of shareholder coordination and financial resources to take the litigation risk negated this opportunity. What is greater good for society, though, a properly functioning and just civilization or preserved jobs in the hands of vulture iconic brands?

As written here:

If Pinnacle were to liquidate, Delta wouldn’t have many options for regional jet service, putting the bargaining power in the regional airlines’ corner. Without Pinnacle, Delta’s options would be limited to Skywest Inc. and other smaller regional providers.

I forgot to mention the leading role of management, unwilling and incompetent to extract any value in such a strong bargaining situation for those who created them jobs. But they did really well for their new employer.

Here are the heroes: Board of Directors

Donald J. Breeding
Chairman

Susan MacGregor Coughlin
Director

Ian Massey
Director

James E. McGehee Jr.
Director

Thomas S. Schreier
Director

R. Philip Shannon
Director

Alfred T. Spain
Director

Nicholas R. Tomassetti
Director

John Spanjers
Director

What are the lesson here? Anything is possible, anywhere. Even in Russia.

Debt layer of financial structure is much safer and considerably less prone for a binary outcome in similar situations.

INTERESTING FEELINGS

noreply@blogger.com (Openmind) — Sat, 02 Feb 2013 13:58:00 +0000

I have been silent for quite a long time. Do not have much to say, just to note that I remain bearish for no particular reason. It is probably nature of contrarian pretenders to think in the opposite direction than the majority.

Downtown Josh (I like his writings a lot) is pounding weekly how the tide is turning and the snowball starts rolling like a train. Even EU ongoing disaster and Chinese real estate bubble correction cannot even bump it. And nothing (known) in sight can change the situation. Josh probably wants to sound balanced and neutral but this how I feel after reading him.

I try to check my temper with John Hussman’s weekly musings. Last Monday, he once again produced the calm for me. Human beings really need to belong somewhere and to rationalize everything. In business cycles though it is crucial to synchronize ones expectations with the real pace of life.

All is not well but it is really painful to remain hedged. This pain gives me the feeling of rightness (check – do I have masochistic inclinations?). It is much much easier to go with the stream, like in March 2009 (meaning not to buy stocks at that time). There is huge assumption in the sky that economy is sustainable, the Fed will be able to stop printing and deficit will shrink; and who cares if this is not true…

Stocks are high and bonds are high. Are people taking profits? Is it smart to do that now? Most think that we will ride further up. Those who are afraid of bonds sell them and buy stocks but somebody is always on the other side of the trade. For some reason, somebody is doing the opposite: buying bond and selling stock. Or people earn money and send them to former owners of bonds and stocks, who hell knows what do with this cash. Really what matters is demand and supply – on both, general market and on the micro individual security level.

I am on the edge of initiating a significant position, 3x my normal position size, approaching 10% of net worth. It is a cable company which probably will enter reorganization and it’s debt now trades at ~2.5x EBITDA. I thought that writing about this will give me some courage, for it may be a long ride without daily quotes. In December, I almost bought it at 45, in two weeks it went up to 65 and now back to 50. YTM is >30% for the next 3 years (10% would be enough for me). What is not to like? Cable is an asset in bear or bull.

It is great to have a blog and confess to ones consciousness and others. Whoever that is.

RANDOM THOUGHTS (THE BROOKLYN INVESTOR | PZENA | APPLE)

noreply@blogger.com (Openmind) — Sun, 30 Sep 2012 13:29:00 +0000

I enjoy reading The Brooklyn Investor so much now that I endorse him by adding him to the blogger list on the right.

Pzena’s Deep Value Cycle thing is interesting. All the theory sounds neat until you try imagining yourself in Pzena’s shoes. Some HNWI may be puzzled what kind of woodoo thing one is trying to sell. That’s the difference between what can you come up with being a manager of a few billion and a fistful of dollars.

Such macro and cycle things are useful and it is not about timing the market but knowing in what type of environment you are gyrating. However, this type of discussion reminds me the following misjudgment:

Rationalizing. Tendency to rationalize leads to explain by an apparently rational story: a) whatever action, even irrelevant; b) whatever event, even of unclear origin; c) whatever possible sources of responsibility (external – negatives, self attribution – positives). Everyday media finds good explanations of why market went down or up. Truth is that nobody knows the truth – we can just guess.

Investment management is a tough job if you have to come up with such things. What is more interesting if the whole Apple vs. rest of the world story has taken too far. The Apple part of it is probably right (market cap - $625b) but the ROW is probably too much discounted.

I put it on a napkin (I know I probably left out something important and rounded a bit):

HPQ $33b + DELL $17b + MSFT $250b + NOK $10b + Samsung $55b + GOOG $250b + RIM $5b = $620b < $625b AAPL.

Intel is an important piece of the puzzle and has ~$110b market cap. In the former world 2 monopolies Intel and Microsoft made everyone happy, the entire ecosystem of leaders had an important piece of action/profit. Now this former ecosystem cannot come up with the right business model and Apple with its switching, network, whatever effects took it all almost as a single winner.

I cannot fathom that ROW would not come up with cheaper and very good tablets and phones in the nearest future (Nexus 7 is the first canary) while Apple’s winning gap may start narrowing (note a pace of a difference between iPhone 4 and 5). Sheer size and all the forces preserving status quo at all ROW is slowing the thing down but this will not happen forever. Almost all ROW is swimming in cash. For heavens sake, fire all R&D departments, start anew, reverse engineer, adopt one open, robust and cheap OS and boom, off you go.

By the way, all this rant was somewhat provoked by my research for a hardware upgrade. I want to stay in Windows for spreadsheets / word (xIRR is the most complicated function I use in Excel, track changes in Word, and sometimes I get meticulous on formatting, copy/paste between the programs, things like that), improve my reading experience (iPhone 3 > iPhone 5 and add Nexus 7 with LTE). I am scratching my head if I need 3 devices but really it’s just 2 – I will have an ultra-book on my desk and will be taking Nexus when I go out and iPhone will be serving anywhere/anytime time niche.

I just read what I have written and see how bizarre I sound: Windows, Android, and OS. It’s a complicated world and the battle has not finished, yet.

Disclosure: long DELL, RSH.

OTE BONDS (UPDATE)

noreply@blogger.com (Openmind) — Thu, 30 Aug 2012 08:35:00 +0000

3 months of summer have passed quickly. Nothing new really happened in the world except for continuous general worry and unshaken trust in central banks. We are muddling through and may continue this for many years.

Since the last time, OTE bonds were not a bad investment. As a % to par, it grew by ~25% in 3 months but stock almost doubled (in USD terms, note that numbers below are in EUR). Interestingly, the longest maturity bonds increased only 17%.

Maturity	Size, EUR	Coupon	YTM (05/30)	YTM (08/30)	Price of par (05/30)	Price of par (08/30)	Delta
2016/05	900m	4.625%	23.2%	18.9%	55.0%	64.2%	16.7%
2015/02	600m	6.000%	36.3%	23.8%	56.5%	71.5%	26.5%
2014/08	500m	7.250%	41.9%	27.6%	60.5%	76.0%	25.6%
2013/03	1,243m	5.000%	44.0%	22.5%	69.0%	86.6%	25.5%

Back in May my bond money allocation was in a much lower risk 9% return product (EUR deposit at a major Swedish bank) which is maturing soon, consequently, I will have my eyes open in September when supposedly Greek (or even EUR) “solution” will or will not be found. I do not think that odds justify betting a farm on this but a 5-15% position may have its merit.

Just for information purposes…

For convenience: Link to OTE / devaluation and Link to the original note.

Disclosure: no position.

SUSTAINABILITY OF HIGH MARGINS (CHECKLIST)

noreply@blogger.com (Openmind) — Wed, 29 Aug 2012 09:29:00 +0000

A significant part of the current bear thesis rests on the shoulders of supposedly "unsustainable profit margins". You have to seek truth in the opposite opinion (my view is that SPY should be around 1,000 rather than where it is at the moment) and I find that arguments in favor of high margins are quite hard to challenge. I decided to make a checklist and revisit it periodically to see if "argument" still sounds realistic. So, is it different this time?

==> US exported lower returning businesses (e.g. manufacturing) to other countries and kept the best pieces locally (pharmaceuticals, tech) (Mason Hawkins of Southeastern Asset Management - Link) = inflation of labor abroad is sending manufacturing jobs back (probably in yet irrelevant quantities);

==> accounting (minority stakes report just profits and no sales) (same source as above) = sounds logical;

==> effective tax rates are lower (probably partially explained by the above points) (David Bianco of Deutsche Bank - Link) = budgets are unbalanced, tax rates may go up, including foreign tax rates;

==> foreign sales and profits are higher (same source as above) = I do not know how he constructed the chart but as I understand, he is saying that the world is different outside of US; it could be simply a function of dollar depreciation;

==> interest rates are lower (same source as above) = this is clearly mean reverting.

This Link dated April 2012 gives a good illustration of how people tend to extrapolate.

I presented my views in the beginning but I want to stress that I am not pretend to anyhow time the market. I am just more cautious these days but an example of PCS shows that the crowd sometimes moves pretty fast in any environment.

I would be grateful for additional points to the checklist.

FOR BEGINNERS (PART IX)

noreply@blogger.com (Openmind) — Wed, 22 Aug 2012 13:42:00 +0000

II. c) Psychological Misjudgments (Continued)

You can find List I – Here, List II – Here, and List III - Here. This post concludes psychological misjudgment series.

List IV

It is definitely worth a further digging in Influence by Robert Cialdini (next 6 items are also covered in great detail with practical examples in his book – highly recommended).

1. Reciprocation. According to social rules we should try to repay, in kind, what another person has provided to us. This is one of the greatest mechanisms of mental shortcut triggering. It is greatly exploited in marketing, especially, in combination with some concession or gift and together with perceptual contrast known as a rejection-then-retreat technique

2. Commitment & Consistency. Once we have made a choice or taken a stand, we will encounter personal and interpersonal pressures to behave consistently with that commitment. From the Influence book: “…all of the foot-in-the-door experts seem to be excited about the same thing: You can use small commitments to manipulate a person’s self-image; you can use them to turn citizens into “public servants,” prospects into “customers,” prisoners into “collaborators.” And once you’ve got a man’s self-image where you want it, he should comply naturally with a whole range of your requests that are consistent with this view of himself.” “Lowball” sales tactic is based on this mechanism. Those carefully reading the list will notice traces of loss aversion and other misjudgments.

3. Social Proof. The more uncertain people are – and the higher the stakes involved – the more vulnerable they are to the sort of cue taking that leads to herd behavior. This explains why teenagers are more likely to succumb to a peer pressure. One of ways how to determine what is correct is to find out what other people think about it. Trends and fads begin when individuals decide to ignore their private information and focus instead on the action of others. Do not allow other people to determine the value of things for you.

4. Liking. Research has shown that we automatically assign to good-looking individuals such favorable traits as talent, kindness, honesty, and intelligence. Liking can come via physical attractiveness, similarity, and compliments.

5 Authority. Beware of uniforms, titles, and trappings (expensive watches, jewelry, and cars) and imagine how strong is in combination with clever reciprocity and compliance (restaurant waiters).

6. Scarcity. Obviously, loss aversion plays here the lead role. As a rule, if something is rare or becoming rare, it is more valuable. From Influence: “Whenever free choice is limited or threatened, the need to retain our freedoms makes us desire them (as well as the goods and services associated with them) significantly more than previously.” That is why we have limited editions, deadlines for purchases, queues in front of restaurants, and … stupid parents.

FOR BEGINNERS (PART VIII)

noreply@blogger.com (Openmind) — Mon, 18 Jun 2012 13:10:00 +0000

II. c) Psychological Misjudgments (Continued)

You can find List I – Here and List II – Here.

List III

1. Hindsight Bias. This one is about forgetting the original estimates, a memory distortion. New information becomes new reference point. Once an event has passed, we tend to believe we had better knowledge of the outcome before the event than we actually did. Who cannot remember this “I knew it (had to buy/sell)” feeling.

2. Overconfidence Bias. It is not always arrogance and often appears in the form of unrealistically high appraisal of one’s own qualities versus those of others (90% of drivers in Sweden describe themselves as above average drivers). In other words – it is overestimation of one’s abilities.

3 Familiarity (Heuristic). It is about judging events as more frequent or important because they are more familiar in memory. We place too much value on what we know from our own experience simply because it is from our own experience. People overconfidently confuse familiarity with knowledge.

4 Halo Effect. We have to recognize that products / companies / people are often not successful because of their attributes; they are endowed with attributes because they are successful. Think about the long term value of Harry Potter plot line or actors’ acting.

5. Feedback Loops. Even professional analysts get more optimistic / pessimistic after price goes up / down. In extreme positive / negative feedback cases, when the change in belief is long overdue, it results in bubbles / crashes.

6. Narrow Framing (Inside-Outside View). You focus on the problem at hand and do not see the class to which it belongs. Think about forecast for certain project success or duration. If you are raising the fund, you always underestimate the length of the process and usually forget that majority of such efforts are unsuccessful. Call it animal spirits.

OTE BONDS

noreply@blogger.com (Openmind) — Thu, 31 May 2012 09:21:00 +0000

Additional dimension to yesterday’s post.

A friend friendly reminded that bonds might be safer, which is very true. OTE has issued enough of bonds - 4 issues. One may argue that if shares look good, bonds will be whole, though Mr. Market is not voting for that at the moment.

Maturity	Size, EUR	Interest	YTM	Coupon	Price of par
2016/05	900m	Annually	23.2%	4.625%	55%
2015/02	600m	Annually	36.3%	6%	56.5%
2014/08	500m	Annually	41.9%	7.25%	60.5%
2013/03	1,243m	Annually	44%	5%	69%

Just for information purposes…

Disclosure: no position.

OTE AND GREXIT

noreply@blogger.com (Openmind) — Tue, 29 May 2012 18:21:00 +0000

I do not know much about how devaluations work exactly but recent beating of Portugal Telecom and Hellenic Telecommunications made me curious.

I simply took a napkin and this is what I got. All numbers are in EUR billions.

	Pre exit EUR	Exit impact	Post exit EUR
Net debt	3.35	100%	3.35
Market cap	0.71	50%	0.36
EV	4.06		3.71

Ebitda exGreece	0.40	75%	0.30
Ebitda Greece	1.20	50%	0.60
EBITDA	1.60		0.90
EV/EBITDA	2.54		4.12
Capex	0.6	75%	0.45
EV/(EBITDA - Capex)	4.06		8.23

Even at 4x EBITDA it does not look like the end of the world. 50% devaluation may sound too much because you can hear people speaking about 30% difference of labor competitiveness between south and north. It is true that significant part of OTE (this was the former ticker of Hellenic Telecommunications while it was listed on NYSE) is fixed telco and outside of Greece it is present in countries like Romania, Albania, Bulgaria (at least they must be more competitive than Greece itself), which may justify lower multiple but as I started, it does not smell anything terminal. Additionally, DTEGY.PK (Yahoo shows that it now trades at 4.7x EBITDA) has 40% of it and the state owns 10% and has 5% put at some insane price (20 EUR) (correct me if I am wrong). Communications are like food these days, so cash flows should not go away.

Question comes to mind if you can get it cheaper - try to imagine if you would dare buying it on the day of devaluation.

FOR BEGINNERS (PART VII)

noreply@blogger.com (Openmind) — Fri, 25 May 2012 07:44:00 +0000

II. c) Psychological Misjudgments (Continued)

You can find List I – Here.

List II

1. Direction of Comparison. When people view a decision as one of preference, they tend to focus on positive qualities. In contrast, when asked to sell stocks, people tend to focus more on the negative qualities of each option. It is a good idea to go through your stock portfolio routinely and compare holdings to each other and to potential new ones via buying / selling lenses.

2. Extremeness Aversion. Scientifically, this refers to context of choice (and is complemented with tradeoff contrast). In practice, when you have 2 phones to choose from with price tags of $200 and $300, the distribution is approximately 50/50. However, when you add the third option with a price of $500, $300 phone wins by a wide margin (2 to 1 against the cheapest one).

3. Preferential Bias. Once people develop preferences, even small ones, they tend to view information in such a way that it supports those preferences. Everybody heard of the first impression and brand loyalty. It can become very costly. Saying is, that people hear what they want to hear.

4. Anchoring. There is a tendency we all have of latching onto an idea or fact and using it as a reference point for future decisions. Those facts can be completely irrelevant as experiments linked personal code last 2 numbers to the price one is willing to pay for a chocolate. People with high numbers overbid 60-120% those with smaller numbers. Anchors could be previous stock price, price estimate or price trend.

5. Confirmation Bias. People are almost 2 times more likely to select information confirming rather than disconfirming their prior beliefs and behaviors. Defensiveness overweight desire for accuracy in driving a preference for confirming over disconfirming information. Such cognitive dissonance leads to rejecting new facts that are contrary to original investment thesis.

6. Rationalizing. Tendency to rationalize leads to explain by an apparently rational story: a) whatever action, even irrelevant; b) whatever event, even of unclear origin; c) whatever possible sources of responsibility (external – negatives, self attribution – positives). Everyday media finds good explanations of why market went down or up. Truth is that nobody knows the truth – we can just guess.

A CURIOUS CASE OF WIRELESS & AIRLINE CARRIERS

noreply@blogger.com (Openmind) — Tue, 08 May 2012 18:24:00 +0000

I started to follow a story of PCS and LEAP in 2008 and watched how they went down one from $35 to $7, another from $80 to $5. They always had a pretty good sponsorship of hedge funds, which saw value in those stocks even at now unimaginable levels. Both, of course, failed on their original projections.

The story in 2008 was based on excellent situation in “existing markets” and “true profits” masked by “new [loss making] territories”. E.g. Q2 2009 LEAP’s OIBDA (their name for EBITDA) was $192m in “existing markets” and -$54m in “new territories”. Wild imagination could have assumed that once a loss making business turns into a profit, sky is the limit and annual run rate of “OIBDA” would be $900-1,000m. Fast forward a few years and as of Q1 2012 TTM adjusted OIBDA is $582m. LEAP’s story is especially sad because it turned down merger proposal with PCS back in 2007 (1 LEAP’s share would have been equal 2.75 PCS shares or LEAP now would be worth $19.25 vs. $5 current price). Although, anecdotes float that PCS stole business plan from LEAP, in reality, based on pure numbers, it would have been much better if, in exchange, LEAP had stolen business practices of PCS (now the latter’s EBITDA is 3x larger).

Somehow, I tend to identify prepaid carriers with low cost airlines (e.g. SAVE, DTG.L, ALGT): they both ride the same long term wave of a newcomer against the incumbent’s high fixed cost and slow bureaucracy. LCCs (low cost carriers) are being pursued now by ULCCs (add “ultra”), which probably will be replaced by UULCCs. This sounds almost like textile 40 years ago when new ‘looms’ were coming every year and the entire progress went straight to consumer. [Deflection: Ch. Munger is also puzzled why there is pricing discipline in one industry (my guess is that it is uncoordinated cartel) and it’s absent in another]. I think that LCTelcoC is not a goner. They sell commodities and give more and more of everything for the same amount of money (or even less) but there is crucial difference in the industry structure (both are oligopolies, btw) – barriers to entry are much larger for telcos (money, license, spectrum). In any case, low cost carriers in both industries are doing ok.

Can They Remain Cheaper & Make Money?

The story goes that PCS/LEAP have (i) newer more efficient equipment without legacy cost, (ii) unlimited and prepaid model is inherently cheaper to operate, and (iii) prepaid is slowly eating into postpaid in the entire world. Their services are 2x less expensive than postpaid plans of major carriers. Of course, that service is not the same (there are plenty of horror stories about any LCC service on internet) but, for a price junkie like me, such things leave impression. Chart below provides good illustration (it is taken from PWC annual survey - Link). PCS & LEAP are both small carriers with revenue <$5b.

Back in 2010, I was fascinated by a slide from PCS presentation. That was the first time when I purchased it @ $5.61.

Can you imagine having price per minute, which is lower than your competitor’s cost? You must be killing them. I was puzzled all this time.

<$5b carriers clock almost 2x more minutes than the big guys. When denominator (number of unlimited minutes) increases, cost/revenue per minute are going down. I do not think that this leads to any new conclusions (big guys also have postpaid plans and I do not have the minutes for them). It is just an observation that some slides are not what they seem.

Another concerning data is that in 2011 cost per new cell site has leveled for big and small carriers. I do not have expertise to make any conclusions – I would be grateful if anybody could take a look and make sense of that. It could be that all cheapest sites are taken and it’s not technology cost only. On the other hand, depreciation per served population (POP) is still materially smaller at smaller carriers… but depreciation per average subscriber jumped in 2011 considerably (LTE). PCS and LEAP depreciation expense went up by 20% in 2011. I present this info fearing that this is the weakest link in the investment [bear] thesis but I think it is not terminal.

PCS was one of the first carriers to implement LTE, which contradicts the lowest cost provider’s modus operandi (they buy only proven technology and at a cheap price, they follow and not lead).

What Happened?

My understanding is that PCS/LEAP stumbled on a set of factors, all temporary in their nature: technological [transition of new technology to mainstream], airwaves [capacity issue – now most of smartphones are on CDMA and clogging up the system and will be fixed after cheap LTE smartphones arrive], competition [aggressive pricing from peers and incumbents], and delayed tax refunds [very relevant for prepaid segment].

Noteworthy, PCS is further advanced in LTE, which also could explain why it did worse than LEAP in Q1. LTE is faster, cheaper technology and has better spectral efficiency but is still very early in the adoption cycle [= expensive smartphones]. Smartphones use lots of data, which degrades user experience (on 2G and 3G networks). I would say, normal pains of growing and changing business.

Additionally, the incumbents cannot aggressively bid on the prepaid front because they fully depend on majority of postpaid subscribers paying $80-$100 [cannibalization risk].

Future Business

In 12-24 months, PCS and LEAP will merge, will be bought out or will post decent net subscriber addition numbers. In the frugal new normal, prepaid should continue taking from postpaid and low cost carriers taking from incumbents. I do not know if they can sustain providing cheaper service but odds are reasonable for people with a longer time horizon (for those who think that 10% pa is good enough [from 10 positions like this and fully hedged with IWO]). I like PCS more because of a lower multiple and better historical track record.

Miscellaneous Housekeeping Items

== LEAP is apparently losing “take over” or “merger” premium.

== current selloff means “no hope” for a quick deal or fix – shareholder base is changing from momentum to value. Since earning call on April 26, LEAP changed 39% of shareholders, PCS 19%, and since year end correspondingly 195% and 137%.

== nothing spectacular on short volume of PCS (might jump after May 1):

Settlement Date	Short Interest	Avg Daily Share Volume	Days To Cover
4/13/2012	7,113,455	3,598,927	1.976549
3/30/2012	3,958,263	3,596,369	1.100628
3/15/2012	3,304,612	6,087,233	1.000000
2/29/2012	4,412,210	9,979,631	1.000000
2/15/2012	3,978,746	4,656,915	1.000000
1/31/2012	3,184,186	3,745,916	1.000000
1/13/2012	4,334,154	6,876,245	1.000000
12/30/2011	3,097,568	2,994,850	1.034298

LEAP’s short interest is more impressing because of higher leverage:

Settlement Date	Short Interest	Avg Daily Share Volume	Days To Cover
4/13/2012	13,303,205	1,458,904	9.118629
3/30/2012	13,065,663	1,280,425	10.204161
3/15/2012	12,969,396	1,560,998	8.308400
2/29/2012	12,163,006	2,039,200	5.964597
2/15/2012	12,065,177	1,399,445	8.621401
1/31/2012	9,926,338	1,386,823	7.157610
1/13/2012	12,385,466	2,611,363	4.742912
12/30/2011	11,769,102	1,768,184	6.656039

== nothing to note on insider activity and ownership changes: CEO is 74 and owns many times more stock than his annual salary (5.6m shares vs. $2.5m salary)

== LEAP: debt 3.2b - cash 0.6b = 2.6b net debt + @$5 market cap 0.5b = 3.1b EV and EBITDA 0.55b = 5.5x

== PCS: debt 4.4b - cash 2.2b = 2.2b net debt + @$7 market cap 2.5b = 4.7b EV and EBITDA 1.3b = 3.6x

== combined: debt 7.6b – cash 2.8b = 4.8b + 3.0b market cap = 7.8b EV and 1.85b EBITDA = 4.2x

Disclaimer: long PCS and LEAP, 5% position each, ~10% in red at today’s level.

RANDOM MUSSINGS (ii)

noreply@blogger.com (Openmind) — Wed, 02 May 2012 18:32:00 +0000

Hugh Hendry issued a new piece. He is always an entertaining and highly recommended read. Especially, if his last opus was almost 2 years ago (he did not have what to say). One of the greatest contrarian thinkers at the moment.

What puzzled me is his love for “stop loss” (which also connects with my recent piece about “sell your losers and ride you winners”). I do not understand it. He gives as an example tragic death of Jesse Livermore, who was right on his macro call but market remained irrational longer than he remained solvent. Volatility killed him (by the way he was shorting the market around 1930) and his panacea could have been stop losses.

I would say that, from what I understood (disclaimer: apart of this article, I know nothing about Jesse Livermore), he was killed not by volatility but by leverage or maybe also asymmetric nature of shorting individual names.

Stop loss is a practical thing to say that I do not understand what I am doing.

If one operates with sufficient margin of safety, even considerable volatility should not scare. It is always advisable to have low expectations. You cannot time the market so that you will always buy in the lowest point. That is impossible. It should be comforting that premature accumulation is a sin of all the greatest value investors.

It takes time for intrinsic value and price to converge. I follow a general rule of 3 years (I took it from Pabrai’s “Dhandho Investor”), which should be enough for your story to play out and admit a mistake. Intrinsic value in most cases is changing slowly – definitely not like when you watch big daily plunges on the stock market.

Lehman produced many stories of 50% plunges and 200-300% recoveries in less than 3 years. I do not know how to be that smart and sell it after e.g. 20% drop, then buy back after 50% down (total) and ride it up 3 or 4x. I do not know people who bet the entire farm back in March of 2009. You are fooling yourself if you think that you will dare to move in the darkest hour.

RANDOM MUSSINGS (i)

noreply@blogger.com (Openmind) — Mon, 30 Apr 2012 17:30:00 +0000

“Sell your losers and ride your winners” – that’s what James Montier was proposing in 2002 and probably now would recommend, too. (This is, by the way, a great place of his highly recommended writings – Link).

This dilemma tortured me for a long time and I wanted to share my thoughts. Losers are not always bad investments. Actually, they are one of the best. Nobody likes them, i.e. there are clear willing sellers and for all kind of reasons, psychological and economic.

As it’s written, it has a very absolute meaning, very undemocratic.

Averaging down is a good thing and I am doing it routinely. As per his most recent annual review, Prem Watsa also likes it and calls it “long term value investing approach”. (Link, btw, his liking of RIM still puzzles me – I admit that I do not understand the odds in this particular case). You just have to practice it deliberately. Know the misjudgment and make conscious decision.

New facts (not emotion, not mood, not liking/disliking) and intrinsic value should guide you and not your brain’s asymmetric treatment of pains of loss and pleasures of gain. Each stock has a price and value. When discrepancy is big enough, you can strike.

TRADING UPDATE (i)

noreply@blogger.com (Openmind) — Tue, 24 Apr 2012 13:27:00 +0000

I initiated a small 2.5% position @ $0.31 in a bankrupt airline on the last day (April 10) of its trading on Nasdaq, so it was reasonable to assume that there will be some forced sellers. In a funny hindsight, I could have made it a 10% position and a quick double in 2 weeks. In any case, it was my fastest double so far, if only for a brief moment yesterday, and I wanted to feel a little genius for a minute.

Date	Open	High	Low	Close	Volume	Adj Close*
Apr 23, 2012	0.51	0.67	0.48	0.53	506,200	0.53
Apr 20, 2012	0.41	0.49	0.41	0.47	195,800	0.47
Apr 19, 2012	0.44	0.44	0.41	0.42	182,100	0.42
Apr 18, 2012	0.40	0.44	0.40	0.44	99,400	0.44
Apr 17, 2012	0.38	0.41	0.38	0.40	118,800	0.40
Apr 16, 2012	0.40	0.40	0.39	0.40	205,600	0.40
Apr 13, 2012	0.41	0.42	0.39	0.40	172,200	0.40
Apr 12, 2012	0.42	0.44	0.30	0.43	1,063,700	0.43
Apr 11, 2012	0.33	0.45	0.32	0.44	764,300	0.44
Apr 10, 2012	0.32	0.34	0.28	0.30	1,487,200	0.30

Growing volume is a concern but most likely it is normal for normal people to run away after such a quick double.

Obviously to some, it is Pinnacle Airlines, a long time holding of Mohnish Pabrai. It is bankruptcy #2, if I remember correctly, from his recent portfolio names and #2 with the name Delta attached to it (Delta Financial was #1). Delta is the only client of Pinnacle. Delta is its death and life at the same time, future and past, profit and loss. Whatever… I like that it is doing not bad at the moment (EBITDA $3.7b and net debt of $10b) and PNCLQ is only a few percentage points of its operations.

In summary, my full of naivete investment thesis is:

== book tangible equity is +$200m (deferred revenue of ~$150m is accounting fiction)

== there are activists involved (Meson, Nantahala)

== Delta damages unsecured claim size is unclear but should be below $100m

== management is in the pocket of Delta and does not have any skin in the game

== bankruptcy fees will not exceed $50m

== as a result of confluence of all observations, Delta will have to maintain some face and will not cancel the entire equity (now valued at $10m) – my wild guess is $40m or 4x from today but in 18 months

And @$0.6 odds reflect the following: 30% probability of $2.0 ($40m) and 70% of $0. Or 15% - $4 (80m) and 85% - $0. Only with money I can afford to lose.

What's next: Pursuant to section 341 of the Bankruptcy Code, the United States Trustee for the Southern District of New York (the “United States Trustee”) has scheduled a meeting of creditors to be held on Thursday, May 3, 2012 at 3:30

Some Links

This is not recommendation to buy or sell this stock. Please perform your own due diligence. I may sell or buy at any time in the future without any notice.

FOR BEGINNERS (PART VI)

noreply@blogger.com (Openmind) — Tue, 24 Apr 2012 12:16:00 +0000

II. c) Psychological Misjudgments

Human brain was designed to work in a wild world. Not that the present world is not wild but what was useful then may ruin you in the present day. You cannot rewire the brain, which seeks to help itself and regularly make shortcuts or automatic decisions without thinking (judgmental heuristics). That is what really useful for savvy sellers and very important to be aware of for investors.

Charlie Munger recommends knowing them by heart because the list is not long and this way the study would become applicable in practice (help to avoid problems).

I prepared a list of the most common and recurring misjudgments. The list really works for me - I memorized it and reread regularly. I know that I have similar points but with different framing – I thought that certain situations are easier to memorize as compared to dry theory.

In order to facilitate memorizing, I divided the list into 4 manageable sub-lists and I recommend devoting 15 minutes per day for each and in a week you will see the difference.

Before we go into the details, I would highly recommend the following links and books on the subject.

Charlie Munger’s Article on Psychology of Human Misjudgment - Link

Online Behavioral Finance Resource (very technical) - Link

Influence by Robert Cialdini - Link

Why Smart People Make Big Money Mistakes by Gary Belsky and Thomas Gilovich - Link

The Little Book of Behavioral Investing by James Montier - Link

List I

1. Mental Accounting. The key principle to remember: all money is equal. People tend to spent some money differently, e.g. inheritance, credit card or lottery winnings. If you play roulette and start with $1, then reach $100,000 and then lose it all. How much did you lose – most people will say that they lost a dollar.

2. Integrate Losses. Would you drive 4 blocks to get a lamp for $75 while at a store you are in it goes for $100? What if prices are $1,500 and $1,525? When you have a loss you prefer to hide it from yourself inside a bigger loss.

3. Asymmetry in Loss & Gain Treatment. A lost dollar is twice as painful as a gained dollar. That is how you avoid to get rid of your portfolio losers because until you sold it, it feels less painful. You start gambling with losers but are ultra conservative with winners. Scientifically, it is a part of a prospect theory and is called loss aversion and sunk cost fallacy.

4. Status Quo Bias. A variation of loss aversion. It may paralyze you, especially in the most important perceptively moment (decision paralysis). You are simply avoiding a feeling of regret. This also explains why loss aversion can lead us to avoid or delay action. Addition of second good deal makes people less likely to take advantage of either opportunity. Remember March of 2009, when all had to invest while terrified and opportunities were plentiful (Link). How many dared to catch a falling knife?

5. Endowment Effect. People tend to overvalue what belongs to them - another manifestation of loss aversion and that is how trial periods and money back guarantees work. This explains why most people would demand at least twice as much to sell than they would to buy it.

6. Weber’s Law. The impact of change in the intensity of a stimulus is proportional to the absolute level of the original stimulus. When dealing about gain, difference between 0 and 500 is greater than between 500 and 1,000. When dealing about loss, difference between losing 500 and nothing is greater psychologically than that between losing 500 and losing 1,000.