David Enke

David Enke
Contributor since: 2008
Nice article Bill. Thanks.
I made mention in the article that ".... business and governments are already getting nervous and beginning to place ceilings on the RGGI imposed allowance costs - on the order of a $2/allowance cap." This was corrected at bullbeattrader.com, but not here. The Business & Industry Association is pushing to get the caps included, but they are not yet in place as originally written.
BTW, for additional details, check out this specific blog post at www.bullbeartrader.com.... Additional comments posted by zero beta provide clarification in two spots: 1.) "... worry of too much correlation to the event" should have been better explained as worrying about an reinsurer underwriting too many policies for the same event, making it difficult for them to cover the event, if it were to occur. 2.) in the last paragraph, "implying a low probability of catastrophic event occurring, at least the ones that are being underwritten" should not imply that the events are not occurring, but that the number of bond-defined triggering events are low. Beyond the clarifications, zero beta worked in the industry and provides some extra details and insight.
Interesting discussion and comments. I would agree that Berkshire has been a good short, and may continue to be so. I was asked off-line about the technicals. Other than referring to the October moves, I suspect and have found that Berkshire does not respond quite the same way technically given its lower volume and type of investors. Nonetheless, just looking at support and resistance, 120,000 may not provide much support, but 110,000 should. If 110,000 is broken, then the shorts definitely will have won, although again, I don't suspect this is a stock that gets pushed around like SIRI or something similar on the short side, or at least in the same way. But selling pressure is apparent. Even so, I suspect there are more strong long-term holders in this stock than most (outside of some who may have been around for a few years and are now looking for income generating stocks). It should be an interesting 6 months. Thanks for reading, and enjoy your weekend.
apawling, I have not seen anything specifically about whether they are in-, at-, or out-of-the-money options. The declared loss would imply they are most likely at-, given how one statement said they would not lose unless they fell below the value written at. Could be out- to some degree given the moves in some of the indexes, but the current losses imply at-, or just out-. In-the-money options would have also incurred a loss as well, and would give him more premium (float) to spend, but it would be out of character.
I also suspect Nate C is correct that since they are long expiration options, Buffett probably felt the risk was worth it. In fact, he is probably treating it like an insurance contract. There is always risk, but if you price it right, and properly spread the risk, you should be fine - which may explain the spread in option expiration dates. Nonetheless, if he is writing puts, then he is speculating in my opinion, but again, the risk is probably being managed more like an insurance contract. Of course, I am just speculating myself. Hope to find out more, but as you said, Buffett usually only releases what he needs to, and likes to temper expectations.
LtShinySides, no offense taken. You are correct, on each account - the notional terminology is a slip - and one I must admit I have made before. I do hear other academics use it, mainly my math/engineering colleagues, so you may be right. Hard habit to break from my math/EE days. Nonetheless, it should be corrected. Your point is also taken regarding the CDOs. Here I was really just trying to make a bigger point about the types of derivatives Buffett was probably referring to when he made his "mass destruction" comment, compare to the position and exposure he is apparently now taking.
As for speculation, I really could not find anything that would describe it otherwise, but do agree with you that it appears out of character, especially with his recent comments on the matter. Not exactly sure where he is deploying the money, or if he is offsetting the risk in any specific way. I am kind of surprised more people are not inquiring about it. I did not make it to the shareholder meeting, so I am not sure how much he was pressed on the issue. I too would be interested to know the entire story regarding the position, if there is indeed anything else to it.
Thanks for having a look, and your comments.
PT53, thanks for reading, and your comments. Some companies, like Encana recently, are forced to take write-downs on hedging losses that may be temporary, and may not ever be realized if the hedge is held until maturity. Nonetheless, they have a loss this quarter, and must report it, even without selling. Other companies, in particular the financials, have it even tougher given that they cannot even price their security gains or losses.
It is kind of like selling your house. If your next door neighbor sells for a 50% discount, just because he is in need of cash, then all of the sudden any short-term appraisal of your property that uses recent selling prices could temporarily affect the appraisal value of your home, until of course the market corrects. Fortunately, if you are not selling soon, you may not care. But some companies don't have that flexibility. Others are selling debt at distressed levels (puking them up as they say in Wall Street elegance), and all of the sudden you have issues, even though you did not plan to sell anytime soon.
While you are right that companies may not be literarily pulling prices "out of thin air", when others sell at distressed levels, and then you get marked against it, it begins to feel that way, and makes it difficult for you to justify or describe a price that you don't understand, and that seems variable. No matter how you come up with a price for shareholders - using some type of valuation, mark-to-model, or using the last bid - it begins to look somewhat arbitrary. I am sure the Bear Stearns shareholders felt that way when offered $2 initially, yet had no way to know if that was even a fair value.
I would agree that many of the financials will probably not get to claim gains on the write-downs at a later time, but some, like Merrill for instance, might, given how they seem to have thrown in the kitchen sink during the recent transfer of power. The key is we just don't know in many cases, but still have to use something, even if it appears to be out of thin air. A little hyperbole? Maybe. But I think it illustrates how many of these companies feel. Thanks again for reading.
city, BTW, while it may not have been clear in the article, I don't necessarily consider what they did with the tax, in either direction, a bad thing. Nonetheless, regardless of the view, inntervention moves do usually affect the markets, and are worth considering.
city, I could not agree more about the Fed. I was commenting specifically on the Shanghai Composite in particular (given their increase in the tax to curb speculation, and lowering of the tax back to the original level now that speculation is less). I try to use the Shanghai Composite as an example, and then speak in more general terms, but you are right, intervention comes in many forms. The recent Bear Stearns intervention is a good example. Sometimes these things hit, and there is very little we can do, good and bad. Furthermore, I wanted to make the point that increases / decreases we see in any index (I used Nasdaq and S&P 500 as additional examples), are also not always what they seem. I doubt that many investors know the impact of PetroChina on the Shanghai, or Microsoft on the Nasdaq or QQQQ. I think these things are worth thinging about. Thanks for reading.
To wouldbeguru, yes, you are correct. With a market cap of close to $14 billion, and its current footprint, it is also worth being listed. The P/E is a little high at over 63 though. There are many other smaller and mid cap companies that could be included as well. Thanks for the inclusion.