My Frequently Traded Commodity Margins in September 2012

The major grains are all denominated with 5,000 bushels per contract which leads to pretty similar % margins:

Corn about $40,000 for 2781, 7%

Wheat $45,000 for 3767,  8.4%

Soybeans $85000 for 5616, 6.6%

(Bonds are 100k per contract at par, so price *100k to get current size:)

10 Year Treasury $133,000 for 2049, 1.5% (!!)

30 Year Treasury $149,000 for 3915, 2.6%

S&P is 250* index price or $357000 for 21875, 6.1%

Nasdaq 100 is 100*index, $282000 for 12500, 4.4%

Russell 2000 is 100*index, $82000 for 7500, 9.1%

Gold 100 * price, $170,000 for 9113, 5.3%

Copper 25,000*price $90,000 for 5508, 6.1%

Euro is 125000 euros for $156,000 for 4050, 2.5%

Crude Oil 1000 barrels, $96000 for 6886, 7.1%

A notable outlier is Cotton for 50,000*price $37000 for 7500, 20% — a legacy of the 2010 runup?

 

 

Commodity Response to Jobs Report and Barry Sternlicht on Bloomberg

Soberlook.com had a thorough review of price movements on September 7, including the notable divergence between the 30 and 10 year treasury responses and makes me consider whether ZB is the better short than ZN (the former has lower leverage).

 

Barry Sternlicht of Starwood Capital was interviewed on Bloomberg:

http://www.bloomberg.com/video/barry-sternlicht-on-real-estate-investing-election-Kw6TOw3YQAijgqtjMbV6aA.html

Just got a construction loan on a multifamily property at 2.5%.  You have to have big margins of safety, looking for high cash yields up front.  Investments being made with a notion of what interest rates will be in years (Blackstone BLK 14.19 is not a real estate bet but an interest rate bet), but Fed commitment to lower rates reduces the urgency to invest now.   Toll Brothers getting “free money.”   (TOL at 33 now) Over 10 billion in loans for Starwood itself now and 1000 lenders.  Fed definitely inducing bad behavior, people including his mom chasing yield.

Just bought a billion dollars of malls.  “Death of the mall greatly exaggerated”  Hard goods already migrated to the web.  Clothing less so?  Taxing the internet is coming, congress will “wake up.” Have to vote for Mitt.

NB: I’ve bought Blackstone in the past; maybe a great investment but you must be  true believer to go through the separate tax paperwork

Notes from Hank Greenberg’s Guest Lecture at Yale in 2010

Notes and quotes from Robert Shiller’s Econ 252: Financial Markets, guest lectured by Hank Greenberg

http://oyc.yale.edu/economics/econ-252-11/lecture-14

Corporate Culture:

“You have to surround yourself with people, who share the same values, the same aspirations that you do. You have to have a team that works hand in glove, and we did. The senior management of AIG was like a band of brothers. We saw things alike. We work well together. I mean, there wasn’t ever a palace revolution, anything like that. It was a great organization.”

“But we also had some basic principles. We would never, never be involved in a bribe. Anybody in our company that got involved in anything like that would be fired instantly. We understood what the Foreign Corrupt Practices Act meant, before they even had such a Corrupt Foreign Practices Act.”

“Our overseas people, we had what we called an MOP, Mobile Overseas Personnel. It was like our own state department. You can be working in Nigeria today as a manager, and then six months later you might be in Singapore, or some other country. And so, you have to be mobile, and you have to be prepared to move, and not be reluctant because of one thing or another. And becoming an MOP was a very high honor. Everybody couldn’t get that designation. You had to earn it. And it was a great group of people.”

“Nobody could earn more than $1 million in salary. I put that rule in. Two, nobody would have a contract. You stayed in AIG because you loved it, and you didn’t have to have a contract. And I refused a contract any number of times. But you got bonuses based on performance, and performance was fairly rigid. We tried to grow our business close to 15% a year, and for many, many years we achieved that growth.”

“At the end of every two years, if we hit the goals that we had established, they’d have a certain number of AIG shares [I think he means CV Starr shares here] set aside for them that they would get at retirement. So, it was golden handcuffs. If you left the company, you left behind the shares that were set-aside for you. And these were worth an awful lot of money. Very few people left the company. I can assure you that it was a great incentive to stay. The people we wanted to stay are the ones that got allocated shares obviously. It cost AIG nothing. The public shareholders of AIG had no cost allocated to that, so the shareholders of AIG benefited from that, and, obviously, the company overall benefited because they did so well. So, it was a great organization.”

Getting AIG into China:

“China, it took me from 1975, the first time I visited China, to 1992, to get the first life insurance license ever granted to a foreign company. Moreover, while other foreign companies afterwards could only get a license where they could only own 49%, we owned 100%. And to date, still, it’s the only foreign company in China, a life insurance company,that owns 100% of the company. It wasn’t easy. As I say, it took from ’75 to ’92. And I visited China every year, a couple of times a year, to make that happen. But we did a lot of things for China. At the same time, we helped China. I lobbied very hard for China’s entry into WTO, which was very important for our country and for China, and really for the world.”

Reasons for the Bubble:

Clinton admin pushing home ownership via Fannie/Freddie, “whether you could afford it or not”, increasing leverage to 40x from normal 5, and creation of products [abstracted from reality.]

Also criticized Robert Rubin as Treasury Secretary: “That was, strangely enough, during the Clinton administration, the Treasury Department, then run by Bob Rubin, turned down the question of having an exchange and regulating credit default swaps.”

Spitzer & the AIG board

“…On the other hand, when Spitzer threatened the company, many of them just folded. Not Carla Hills and not Bill Cohen, but many others.”  I remember Ken Langone coming to AIG’s defense and John Whitehead (in two editorials, April 22, 2005 and December 22, 2005) but the mention of these two board members is intriguing.

On Goldman and others v. AIG in the crisis Greenberg gives a nudge to the vampire squid theory of history:

[In addition, consider that Rubin was also ex-Goldman] “Goldman Sachs and Morgan Stanley, both of which were going to have a problem, were given a bank holding company license. That gave them access to the Fed window, and they could borrow money at virtually no costs at all, practically. The Hartford Insurance Company, here in Hartford, a medium-sized company, was also given a bank holding company license. And AIG was denied one. So, AIG was left to really find a solution. So, they went to the Fed, the New York Fed, which I had chaired, incidentally, for about seven years before. So, I knew the people in the Fed quite well.

They borrowed $85 billion from the New York Fed at 14.5% interest. And the Fed took 79.9% of the equity of the company. So, they essentially nationalized the company. Now, the money that AIG got, the $85 billion, at these terms, which is outrageous, they then had to pay the CDOs that you couldn’t tell what the real price was, because there was no price discovery. You could have negotiated the value of those at about 40 to 60 cents on the dollar, but the Fed made them pay 100 cents on the dollar.

So, AIG borrowed the money, paid Goldman Sachs and others 100 cents on the dollar, and had to pay that money back to the Fed. So, things began to unravel very quickly after that.

…The real story of what happened has not been printed yet. After all, it’s very common knowledge that Paulson, who was then Treasury Secretary, was surrounded by Goldman Sachs people. I’m not making that up. That happens to be a fact. And so, how objective were they in what they were deciding to do and not to?”

The Market Timing of Citizen Saverin

When Eduardo Saverin gave up his U.S. Citizenship in September 2011 — and subsequent discovery thereof in April 2012 — he insisted the move did not have to do with taxation.   He would owe an exit tax on the value of the holdings as of the time of the renunication however.

According to (a neat interactive graph at) Second Market, Facebook was trading at $31.66/share in September.  Assuming he was obliged for 15% of the value (his cost basis being trivial), that would put $4.75 of his stake due to be taxed (whether California would get its 10.3% cut as well is another question)

Facebook now trades at $19.  With 2.14 billion shares outstanding and Saverin’s stake in IPO documents filed with the SEC at 53 million shares he would not be a 5% owner and may have sold in the window that just opened.

Assuming the entire stake was sold around $20 it’s hard to have “hard feelings” about netting 1.5 billion or so after tax (given earlier sales) but certainly isn’t the citizenship-dumping haul he may have been hoping for with the appreciation he had expected and looked to benefit from by Singapore citizenship.  The haul from Facebook may appreciate with other securities, in a zero capital gain environment but surely not what he hoped for.

The IPO debacle that has been Facebook is probably overstated — had they gone public as a midcap, then surged and then had a 50% retracement it would be akin to many other large cap tech stocks.  But Saverin’s renunciation was the original sin of the IPO process.

There remains the intriguing schadenfreude, that Saverin did not sell, and sits with the looming tax bill waiting for the stock to “bounce back” but it does not.  Are his shares among the 1.2 billion looming in December instead?  Clearly one of the most transformative companies of our era, Facebook doesn’t deserve a single digit stock price to punish one disloyal citizen, but if it were to happen and hold there it would be a deliciously cold revenge to see both the gains and his citizenship wiped out.

Three Cash Rich Video Game Stocks

The video game industry is cyclical, and leadership within sectors is cyclical as well.  A proverbial “buy when the blood is running in the streets” opportunity I think has emerged with three very cash-rich companies.  I wrote puts (ZNGA) or bought outright the following three video game stocks.

Zynga @ 2.90

Nintendo @ 13.82

Perfect World @ 11.14

At Interactive Brokers you need to pay $3/month for real time quotes on pink sheet foreign stocks like Nintendo which is ironically hard for me to stomach but then the transaction cost was the same as any other stock — much different than what I remember from the Fidelity desk to buy a foreign OTC stock.  I haven’t checked the margin implications.

Margins of safety are hard to come by in technology whose rate of change makes persistent advantages hard to find.  But when there are firms that do have some moat — Nintendo’s franchises might be among the deepest in gaming — with nearly 2/3rds of the market capitalization in cash in the first two cases and half for PWRD (offset by some debt) then it is time to back up the truck.

 

Barron’s Predictions and other weekend notes September 8 2012

Favorable recaps of FDX, TSO, INTC, Housing Stocks (in three different articles), PFE, WYNN.  Tesoro has had such a run from the mid teens to over 40 that I feel for such a cyclical stock the gains may already have been had — Barron’s said another 40% gain could be on tap.  PFE & INTC got the usual treatment of being appealing for p/es around 10 and dividend yields near 4%.

Here Come Super Options by Steven Sears was the only noteworthy article, describing the attempts of the CBOE to get approval for 10-15 year exchange traded options to match specialized markets made for insurance companies.   The article did not note SPX “super options” of up to 5 years are already available, notably with European exercise rules so as to not be manipulable to large dividends.  Volume and open interest look very light however.

SunTrust STI has been covered numerous places (Forbes) about selling the remaining stake in Coca Cola (KO, $38) after a 2,000,000% return from 1919.  This historical anomaly was something that first fascinated me when I started looking at stocks in the mid 90s.  STI looks a touch ahead of itself but could be a beneficiary of the ongoing housing revival.  I think there are probably better buys out there.

Chart forSunTrust Banks, Inc. (STI)

Hogs Wallow Near Two Year Low in the WSJ was also of note for future commodities plays;

Slaughter-ready hogs have been streaming into meatpacking plants since July. Their shipments have included thousands of sows, or mature females, that farmers normally would keep for breeding litters of piglets. The move eventually will tighten pork supplies. Meanwhile, many farmers are only willing to feed expensive food rations to their most-productive sows.

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A Fun/Dangerous Hypothetical from David Swensen

Robert Shiller’s survey course on finance at Yale is available from both 2008 and 2011.  These lectures while sometimes basic for the experienced investor are chock full of gems and I should get around to putting my notes online.  Meanwhile one fun/dangerous note I feel like playing with from David Swensen’s guest lecture in the Spring of 2011:

I could take Yale’s $17 or $18 billion dollars and put it all in Google stock. If I did that, I’m not sure how long I’d keep my job. It might be fun for a while, but that would probably be damaging to my employment prospects. But if I did that, asset allocation would have almost nothing to say about Yale’s returns. It would be the idiosyncratic return associated with Google that would determine whether the endowment went up or down or stayed flat.

This comes from his elucidation to investment returns could come from stock selection but basically that is a very hard game.  Well, what if he HAD put $17 billion into GOOG on February 2, 2011 (assuming no market move from building in a Larry or Sergei-sized stake in GOOG)?

GOOG was $612 on Feb 2 2011 and $699 now; a 14.2% return just over 17 months.   Yale’s endowment report for 2011 (up to June 2011) had a 21% return that year (announced late September); but no fiscal 2012 results have been announced yet; will be fun to see and compare.

Chart forGoogle Inc. (GOOG)

 

China gooses Dr. Copper (or CAT?), position update

I’m wary of global economic growth but stimulus is stimulus and I’m not going to Fight the Chinese Fed.   According to Bloomberg a stimulus of the kind that actually builds roads and infrastructure is on its way.

I’m awfully tempted to play this right now…week’s positions have been ho hum; exited soybeans at 1772, got back in at 1738 but losses on S&P Futures (just 7 points, missed getting whacked by the huge rally) evened that out.  My tight stop on Gold hit, which I’m looking to get back into, but slightly ahead on long Corn and short Treasury trades.  Sold APPL for slight profit but it was underperforming S&P on big move today so thought the money would be better put to work elsewhere.

Copper is just over the highs hit twice in July, but employment report looms tomorrow morning.  Close correlation between corn & soybeans means I may lighten either (or both) positions to establish one in Copper.  May also halve position on Treasuries given the risks of a rebound there.

Shorting Copper was one of the great trades I had in August 2011: am I emotionally obscured by it, even if going long?  I’ve bought one contract of Copper at 3.567 which is a way to implement strategies to see how I feel being in the position and brings the contract to various screens of my Interactive Brokers account.

Going long CAT might also be a decent play here but haven’t given it much thought beyond initial feelings about CAT at low valuation and weak arguments to the contrary.

Chart forCaterpillar Inc. (CAT)

FWIW, CAT Jan 2014 120s & 125 calls in the low $2 range…82.5 strike at 13.10 if one feels more cautious.  I’m not sure I have the patience to let that play out.

Small other position update…Selling ZNGA Jan 13 & 14 calls at 2.5 & 3 strike prices is slightly ahead and I’m feeling good about that position.

UPDATE: did swap out of ZN at 132 ‘100 for copper at 3.575 – ZN is still in a range with a big unknown coming up in a few hours; HG is breaking out; Soybeans and Corn feel the risk/reward is better than ZN short term to swap out of them.  Set HG stop at 3.5245; HG & ZN are probably decently correlated in short term so the one breaking out of range right now is more appealing.

Notable Barron’s Predictions September 1

The market strategist survey was as usual effectively worthless with most of the analysts predicting a market very close to where we are today, Treasury bills at 1.75 give or take, and without decisive opinions about whether the “fiscal cliff” will be avoided.  Only Goldman Sachs stood out with an end of year S&P prediction of 1250.

Steven Auth of Federated recommended CAT at 84.47, QCOM at 61.20 and Daimler DDAIF at 48.85 (“luxury goods”).  Robert Doll of Blackrock recommended Chevron CVX @ 110.93, ConocoPhillips COP at 56.11, and UnitedHealth UNH at 54.69, Adam Parker of Morgan Stanley concurred on Chevron, Bristol Myers BMY at 32.8, AmerisourceBergen ABC at 38.1

I like the CAT call — 8 p/e also favorably ranked at Valueline — and this is on my watchlist after any market drop but low priced enough perhaps just to jump in.  Continue reading

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