triedtestedand

Ericopoly: I've never written a put ... can you help me with how you calculated your percentage gains/losses in the example? I presume you have to put up some collateral (which for sake of your example looks to be $50) which forms basis for determining the % gain/loss? It's late ... what am I missing? ;-) Scenario #2 -- write $70 strike 2011 put for $22 and purchase 2011 $100 strike call for $2 1) Shares remain at $67 you make 34% -> get $22 on Day 1 -> give $2 on Day 1 -> give $3 in 2011 -> Net $17 in 2011 2) Shares go to $100, you gain 40% -> get $22 on Day 1 -> give $2 on Day 1 -> give $0 in 2011 -> Net $20 in 2011 3) Shares go to $150, you gain 140% -> get $22 on Day 1 -> give $2 on Day 1 -> give $0 in 2011 -> get $50 in 2011 -> Net $70 in 2011 4) Shares drop to $48, you lose NOTHING -> get $22 on Day 1 -> give $2 on Day 1 -> give $22 in 2011 -> Net -$2 in 2011

I presume you mean Vancouver BC? (vs Vancouver Washington) ... ;-) I thought it was way overpriced when I moved here five and a half years ago, and then just watched it keep going up ... purchase-to-rent ratio and other affordability indices (e.x. % disposable income spent on housing) are consistently super high ... only thing I can think that keeps it going is continued influx of cash from retirees, oil millionaires from Alberta, expats and new canadians who (like me) read (and believe) the reports about it's global rankings as a city. I choose to rent, avoid a mortage, and mostly sleep well at night ...

And now I'm getting not only financial pointers from Ericopoly, but clothing tips as well! This is great stuff! Given the fashion gauntlet I run each day leaving the house, I think my wife and 3 daughters will be funding lunch ...

Ericopoly: As with a couple of years ago (on the '08 FFH 150 calls at <=$2 when shares were trading at <$100) ... have to commend (and thank) you for sharing your strategy with ORH ... I pursued similar, and it's worked out well with recent events ... so if I'm in Seattle area anytime soon, I'll need to get you a Sanjeev-style lunch. Now am looking for the next unpolished gem ... can't cycle thru ORH, NB, FFH anymore to see which is the more undervalued! With the recent market bounce, maybe it's just good to do nothing for a while ... although am currently playing a bit the commodity contrarian with positions in SFK.UN/SFK.DB (pulp) and PEY.UN (natural gas), and some Alcoa (aluminium) Jan '11 options

Mungerville: In isolation, I would agree with you, except the argument doesn't reflect the notion that the proceeds of what was received could be re-invested in alternative opportunities with (now) greater discount to intrinsic value.

I have the same question as Watsa_is_a_randian_hero ... I use BMO Investorline, and could not find any doing a simple search (although haven't called yet to try and do a locate) ... thanks!

Sharper: Agree wholeheartedly ... was just thinking along lines of achieving financial independence (which of course varies depending on lifestyle, etc.) and the flexibility that such can offer ...

Sharper: A bit of a friday afternoon segue ... Regarding your comment ... "We're looking forward to us all getting rich" ... it got me to thinking ... how does that translate to you, generally speaking? I read reports that "rich" in the USA is on order of having $2M to $3M of investable assets (besides your home), while "super-rich" is having on order of >$10M ... of course it's all relative, as in N. America we've won the passport lottery already. And then there's the question of if you get "there" ... then what?

The (financing) deal is done ... http://www.fairfax.ca/Assets/Downloads/Press/fpr2009-09-11.pdf Now how about that ORH deal? ;-)

A simplistic view of how much money FFH may "have" to spend ... A) Cash (in USD) $880M as of June 30th PLUS $360M via debt offering ($400M CDn) PLUS $920M via stock offering (8% discount to CIBC via $1B bought deal) MINUS $66M for Chinese Insurer investment (assume purchased at holdco) MINUS $57M for Advent (assume purchased at holdco) TOTAL = $2040M B) Desire after ORH transaction ... "Following completion of the proposed acquisition of Odyssey Re and the proposed Fairfax new equity issuance, Fairfax expects to continue to have in excess of $1 billion in cash and marketable securities at the holding company level." C) ORH purchase - Part 1 ... Subtract the preferred shares ($32M worth outstanding) with a premium of $1 to par value (let's assume FFH want/need to simplify structure as part of the deal) MAX AVAILABLE = $2040 -$33 = $2007M DESIRED AVAILABLE = $2007M -$1000M (i.e. $1B cushion per "B" above) = $1007M (Any other significant cash sources/sinks this quarter?) - Part 2 ... 16M common shares outstanding not owned by FFH (72.6% FFH ownership with 42.4M shares currently owned) MAX AMOUNT PER SHARE = $1007M/16M = $62.93 NB: Given that fairfax just paid $80M to CIBC to help get these $1B in funds in place, and that that part of the deal will close by friday ... I think they will have a little motivation to up the ante a bit, and save face all around http://www.fairfax.ca/Assets/Downloads/Press/fpr2009-09-08b.pdf http://www.theglobeandmail.com/blogs/streetwise/cibc-steps-up-for-fairfax/article1279175/ UPDATE (1835 EDT) ... I stand corrected ... the $1B in funds was placed with $800 @ 1% commission, and $200M bought deal portion was @ 4% commission, so total commission would be $16M ... a lot less than earlier noted http://www.financialpost.com/story.html?id=1971735

"The game is psychological. You start with a low offer that makes shareholders unhappy, it sinks in, and somehow they turn happy after the offer is increased a bit. They quickly rush to sign on the dotted line forgetting about the still low price to book value or other metric. Nothing like the taste of a small victory. After getting their cash, they will likely rush to buy FFH." My sentiments exactly ...

Regarding valuation ... I would simply remind FFH/ORH management of oft-repeated messaging of recent years that ORH's business mix is much more now than simply re-insurance ... it would be more than a bit myopic now for FFH to lump ORH back into the re-insurance only mix for valuation purposes ... Further, if NB played out with an initial offer of $36 which was subsequently upped to $39 (mid-range of the valuation committee's $37 to $41 range) ... I would be disappointed if: a) Prem did not repeat similar with an (initial) bid that is lower than expected (as he should if looking out for FFH shareholders) b) ORH's independent directors and valuation committee did not counter/highlight some of the items that a non-FFH-biased shareholder would hold a little dearer and/or recognize that FFH would have interest in (100% ownership allowing greater discretion over dividending, etc.) Once the valuation committee does it's thing, $67 sounds right to me ... a) 30%+ premium to latest price b) 20% premium to highest price c) 1.3x Q2 book value d) 1.2x? (or less?) current book value e) continued growth f) value of 100% control g) valuations should reflect mix of business beyond strictly re-insurance g) as existing majority shareholder, FFH have been realizing significant value anyway over past 12-24 months just from ORH's continued buy-backs, and have been in position of control to guide such actions (which admittedly have been of long-term benefit to minority shareholders as well) By the way ... I'm not one of the holders of the $60 or $65 Feb '10 call options. ;) PS -> And woudn't that # would more than "fair" once a certain jewel-in-the-rough called ICICI (which is held by FFH principally within a certain entity called ORH, isn't it?) gets polished off and added into the valuation fold at more than a crazily discounted value ...

I'd be interested in feedback regarding: a) the timing of the announcement - after market close on friday of a long weekend? - earlier in "the process" than was the case with NB (i.e. ORH committee just being formed) -> Was there possibility of a leak in news that made them speed things up? b) the price of $60 -> Note that there are ~600K shares in Feb '10 options at strike prices of $60 and $65 that were purchased pretty cheaply recently ... I wonder who those holders are ... as would suspect they would be HIGHLY motivated to secure a higher price (as NB secured after their own valuation team got into action) Anyone one have some good long-weekend conspiracy thoughts?

This might help out book values some for both FFH and ORH ... http://www.telegraphindia.com/1090822/jsp/business/story_11394859.jsp

A bit more management buying in the past few days ... http://www.canadianinsider.com/coReport/allTransactions.php?ticker=sfk.un

Cardboard, Ericopoly, et al: While we're talking ORH share counts and conspiracy theories, does anyone have any more insight regarding the big block trade(s) that happened on June 26th, when volume was >2.5M shares? In quarter ending June 30th, it doesn't look like any specific institutional investors added (max +173K) or reduced (min -678K) their positions near enough to account individually for the activity. http://www.nasdaq.com/asp/holdings.asp?symbol=ORH&selected=ORH&FormType=Institutional

txlaw ... FFH couldn't have sold/transferred them to ORH without changing their ownership %, because they don't (yet?) own 100% of ORH ... it would have to have been a transfer between 100% entities to keep the 42.4M rolled up ... no?

The 13F has to be misleading ... FFH's quarterly report (p.39) affirms that they increased their relative ownership of ORH to 71.9%, this as result of ORH share buybacks. With ORH having 58,980,352 shares outstanding as of June 30th, this keeps FFH at the 42.4M shares outstanding. http://www.fairfax.ca/Assets/Downloads/2009Q2.pdf http://phx.corporate-ir.net/phoenix.zhtml?c=129394&p=irol-newsArticle&t=Regular&id=1314639&

What's it cost for FFH to buy ORH? Two scenarios ... a) Now - current BV ~ $52 - assume premium of 1.25x book ~ $65 - # shares not currently owned ~16M (~58.5M outstanding vs 42.4M owned) ... would cost them ~ $1040M (can speculate itself on how/where they would fund) b) One year later - assume BV increase of 15% = $60 (post Q2 spike in markets puts them well on that path) - assume premium of 1.25x book = $75 - assume trades at average of $50 over that period (i.e. ~ 10% discount to BV) - assume ORH buys back 4M shares in the interim, so # shares not then owned reduced to 12M ... therefore would appear to cost them $900M in cash ... but ORH would have also spent $200M cash in the interim on buybacks Buy now? Buy later? I would suspect that shaking out ORH shares for buybacks will get progressively difficult as such speculation starts to occur ... and can see Feb '10 call action correspondingly starting to heat up.

Sanjeev ... good point about cash at holdco level, the $500M # is probably outdated given they have higher equity base now than a few years ago ... but wouldn't ORH be still able to access debt markets if taken private ... and presumably the pref market as well? FFH could always access capital/debt markets as parent, and inject/distribute accordingly?

Hey ... do you think the employees at HWIC read this board and point to it in requesting annual bonuses? Seriously though, I would look to value them on a differential basis compared to some benchmark peer group vs an absolute basis ...

Here's an easier synopsis to look at: http://www.canadianinsider.com/coReport/allTransactions.php?ticker=sfk.un Buying started after the earnings report came out ... I would second notion that it's not much in dollar value (~$9KCDN), but it is a marker ... let's see if anything else transpires ... I presume SEDI would note if insiders were also buying/selling the debt?

Sharper: Agreed ... ouch is the right term. But must admit they are managing the balance sheet quite well (via www.sedar.com), as on quarter-over-quarter basis: - cash is up by 9M (to 26M) - accounts receivable are down by 2M (to 37M) - inventories are down by 34M (to 88M) - accounts payable are down by 9M (to 33M) - long-term debt down by 4.5M (to 165.5M)

Sharper et al: Looks like SFK got their waiver ... at a price. Can you decode what the different landscape might imply? Limitations to CAPEX are fairly straightforward, but some of the more technical stuff is beyond my simple reach. http://finance.yahoo.com/news/SFK-Pulp-obtains-a-waiver-cnw-3209451357.html?x=0&.v=1

Am anxious to see what sort of revised agreement SFK makes with creditors ... presume some news in the next week? With US federal government targeting to eliminate black liquor subsidy by either September 30 or December 30, I wonder just how much stress SFK's balance sheet can handle during such period ... I also wonder about timing of overall Canadian government response -> the program (which is light on details) requires parliamentary approval, which won't happen until the fall, so wonder if the announcement was intentional to simply make some noise in the press in the near term, while buying time to see if/how the US subsidy unwinds.