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dartmonkey

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Everything posted by dartmonkey

  1. Ok, so 60.72% of INR 90438 crore would be $10.91b means this would be $6.6b if acquired with no premium. Seems like a very big fish for a minnow like Fairfax India (mkt cap $2b) to swallow, with or without the support of OMERS which would not be wanting to take on a lot of equity risk.
  2. Ok, I see this is true for the book value gains for Odyssey and Allied stakes sold to OMERS in 2021 to raise money for buybacks (what a spectacular trade, by the way!) I'm not sure wh OMERS would really care what price they paid, if they have a side deal that Fairfax is going to repurchase the shares at the same multiple. I'm not saying this is what motivated Fairfax to do the deal; clearly, it was great to get a billion and a half of cash and repurchase Fairfax shares, at a third of today's price. But if you are Muddy Waters and you set out to see the negative side of every trade, the OMERS sales were not really sales, they were loans (an idea that has been discussed here frequently), the price makes no difference if they are just loans, and the impact of the price on Fairfax's book value is sure to be seen as book value manipulation, even if it is only icing on the cake for Fairfax. And for Gulf Insurance in 2023, the book value gain was because the purchase price for the remaining shares was applied to the existing shares: In December, Fairfax Continues its Gonzo Mode by Buying out the Portion of Gulf Insurance it Did Not Already Own at a Very Rich Multiple of ~2.4x Book Value, Taking a ~$300 Million Gain on Existing Shares https://www.muddywatersresearch.com/wp-content/uploads/2024/02/Fairfax-Financial_FFH_MW_20240208.pdf This seems to be confirmed by Fairfax's 2023 AR: Gain on sale and consolidation of insurance subsidiaries of $549.8 in 2023 principally related to the consolidation of Gulf Insurance, which required the company’s previously held equity accounted investment in Gulf Insurance to be remeasured to fair value resulting in a pre-tax gain of $279.9 https://www.fairfax.ca/wp-content/uploads/FFH_Fairfax-Financial-2023-Annual-Report.pdf
  3. I'm not saying that anyone who sold FFH was necessarily an example of weak hands. I am saying it sounded like weak hands when one particular instance of a seller said this: With such nice gains in a very short period, and no idea of the impact of the short report, I sold. That could be an error to react quickly, because it looks like it is a good quality company. Anyway, with the proceeds I added to existing ones. I am not an expert on insurance, but it’s clear that the book value is aggressively noted, with some assets benefiting from an epic bubble in Indian equities and overvalued US real estate, as well as temporary high interest rates. It does seem that earnings are above the normal trend. The writer acknowledges that he knew little about the company, and proved this when he said that earnings seem to be above the normal trend. You, on the other hand, if your strategy involves taking up shares when they are not in demand, were probably a buyer, not a seller, when the short report came out. If so, you have done well, and it might make perfect sense to have sold back those shares with a quick gain when the share price recovered. But for me, hoping for 100-200% gains from this investment over the next 5-10 years, I would not sell because of a 10% move up or down. It is a lot easier for an investor to hang on if she knew a bit more about Fairfax, and was thus not scared off by the Muddy Waters allegations or fears about their impact.
  4. Because of Digit? By my count, US$26.2 market cap Fairfax owns the following, in India (see p.18 of the annual letter): Fairfax India: $841m (57.6m shares) T. Cook India: $540m (300.3m shares) Quess: $309m (34.5% of the company) Other: $295m (Dec 31st 2023 fair value) Digit: $2265m (ditto) Total: $4173m (my calculation; annual letter says $4247 for Dec 31st) Fairfax has a market cap of $26b, so these Indian holdings represent about 16% of the company, assuming the same degree of undervaluation from book value for Digit that applies to other Fairfax holdings. So to prefer FFH over FIH, to get a stake in India, one would have to really love Digit, Thomas Cook and Quess as investments, as opposed to the Bangalore airport (44% of FIH's fair value holdings as of Dec 31st) and the other medium sized FIH holdings (primarily IIFL Finance, CSBBank and Sanmar Chemicals, which account for another 31%.) And even so, Fairfax Financial only gets you about a 16% exposure to these. I would gladly reduce my somewhat oversized Fairfax India exposure and buy more Fairfax Financial shares (or reestablish my Berkshire position), but for the moment, I think Fairfax India is even more undervalued than Fairfax Financial and gives me a lot more exposure to India's exciting potential. Of course with FIH you get a not insignificant slippage, 1.5% plus 20% of the annual book value growth above 5%. But unless that is a deal breaker, if you really want India, I think FIH fits the bill better.
  5. Yes, sorry for the sarcasm. I don't really believe that Fairfax is primarily motivated by the need to artificially boost its reported book value. On the other hand, when you sell at a high price with a guarantee that you can buy it back at the same high price, with an annual fee, it's not really a sale, it's a loan. But since it is structured as a sale, you can (or perhaps, must) revalue the book value of the shares you still own, which does boost the book value and maybe has some advantages for Fairfax vis-à-vis regulators. Unfortunately, it also opens you up to criticism that you did the deal JUST to boost your book value.
  6. A special kind of pawnshop, that gives you money for your mother's jewelry that you really don't want them to sell, because you want to come back and get it in a couple of years when your finances are better. So you pay them an annual 10% fee to keep the jewelry in a special safe. They can also sell to someone else it if you don't come back to repurchase it within a few years. Muddy Waters would add that there is another side benefit of this deal: you can 'sell' this jewelry to the pawn shop for an inflated price, because it allows you to claim that the rest of the jewelry you own is worth the same amount, reassuring other creditors. So it is a disguised loan, with a 10% interest rate, which can double as a book value adjustment, if needed. Of course, I don't believe this...
  7. Can anyone explain this in plain English? It sounds like FFH has calls allowing them to buy out the minority interests in 2026, 2027 and 2029, but then the minority interests can dump their stakes back to FFH in a variety of was once those call options have expired. Is that right? And I presume there is some formula that says what price FFH has to pay, do we know anything about that?
  8. You are being generous - I expressed myself poorly in referring to the notion that these $125 per share in after tax operating earnings could just be called 'net income' and put Fairfax at 9x earnings. Fairfax is actually a lot cheaper than that: net incoome is a lot higher than just after tax operating earnings. Operating earnings include a guess at underwriting income and interest income, but they don't account for retained earnings from mark to market stock holdings or realized and unrealized capital gains when the share price of some of those stock holdings starts reflecting their increased intrinsic value (I'm thinking particularly of Eurobank and Fairfax India.) Here's the quote from the annual letter (p.7): We can see sustaining our adjusted operating income for the next four years at $4.0 billion (no guarantees), consisting of: underwriting profit of $1.25 billion or more; interest and dividend income of at least $2.0 billion; and income from associates of $750 million, or about $125 per share after taxes, interest expense, corporate overhead and other costs. These figures are all, of course, before fluctuations in realized and unrealized gains in stocks and bonds! But what I was trying to express, awkwardly as it was, is that I think Watsa is just telegraphing that there are $4b per year in pre-tax operating earnings that already seem quite likely for the next 4 years, based on the earnings potential of present assets. Apart from gains from the stock portfolio, there are also a lot of assets piling up on the asset sheet for the next 4 years, and these will generate their own earnings. In other words, we presently have equity of $21.5b, and expect $4b annual operating in each of the next 4 years from those assets. But in just 3 years, we should have $29b in equity; those extra $7.5b in equity will produce its own return in year 4, apart from the $4b that we expect from current equity. I still don't think I've expressed this perfectly clearly, but the idea is that given the high returns on equity, 4 years of compounding should produce a lot more operating earnings than what we would get if all those earnings were being distributed...
  9. Sort of the archetype of weak hands. It looks like a good company, but who knows whether Muddy Waters is right or not? Might as well sell, even after the 10% drop, since I’m still above my September buy price. I doubt many of us felt very threatened by the MW allegations, but if you don’t know better, how can you be sure enough to hang on and recoup your 10%?
  10. ========= Yeah I had to read that same sentence a few times. He needed an editor there. Now that we're down to 22.891m shares as of March 7th, using 20m shares outstanding in rough calculation is not too far off, and the annual operating income expected for the next 4 years, $4.0b, would be about $200 per share (ok, it would be $175/share usiing the exact number.) So it is $50 less from the combined effects of taxes, interest expense and corporate overhead. And yes, it would have been much clearer if he had given the 2 numbers, and a name for the thing you get when you subtract taxes, interest and corporate overhead: "$4.0b ... or $175 per share, which is $125 in net earnings per share after taxes, interest expense, corporate overhead and other costs.“ Two other things that I would have liked to see there: (1) He might as well have mentioned that this means the shares, currently trading at USD$1088, are at less than 9 times the anticipated earnings in each of the next 4 years; and (2) I think Watsa is really saying that he expects $4.0b in operating income for the next 4 years based on income from current holdings. Maybe he is just putting the bar very low, but when you are expecting to earn almost $3b for 4 years, while paying out $373m in dividends (at the current $15/share rate), and you are a company that has a book value of $21.5b at the beginning, I think it is reasonable to expect that you are have at least $29b in book value after 3 years. Is Watsa really saying he expects to still be making $4.0b in operating income in the 4th year, despite starting that year with a book value that is substantially higher? I don't think so, and I think the fact that he still says he thinks he can hit the 15% return on book target means that earnings in the 4th year would be 15% of 29b, or operating income of $6b, not $4b. I believe that $4b is the income he can already see coming, but there will be other income coming from things acquired with the $7.5b or so of retained earnings in the next 3 years (without even considering compounding...) What do you guys think?
  11. Blackberry is now a $130 million position = 0.0021% of Fairfax’s $60 billion investment portfolio. Thank you so much for this summary, much appreciated. Minor quibble about a decimal place: Blackberry seems to be on the way to being 0.0021%, but it's not there yet. 130/60,000 is 0.0021 but that means it's still 0.21%. One other quibble - I would add one word to this sentence: This is another good example of Fairfax FINALLY exiting from a poorly performing legacy investment (financially and also in terms of involvement from the management team). Capital at Fairfax continues to shift to better opportunities.
  12. Looking at the respective compositions of the S&P/TSX Composite (currently 225 Canadian companies) and the S&P/TSX 60 (the large cap subset of 60 big companies), it is clear that the sector balancing of the subset is pretty good, usually within one percentage point of the Composite, except for financials, which are already over-represented in the subset (34.5%,, instead of 31.1%), this being easily the largest discrepancy. Also, minimum turnover is preferred, and companies are not generally excluded unless they are acquired, go bankrupt, are restructured, etc., size not being one of the issues. It may well be that the 20 bps minimum has been a historical minimum, but if you delete a smalll non-financial, and include a big financial, you make the composition imbalance much worse. So my bet would be that Fairfax will not be added unless another financial is acquired or goes bankrupt, even if there are a number of much smaller non-financials in there. It might be a long wait.
  13. Is there any compelling reason to believe he didn't cover almost the entire thing the day of the campaign, as he often does? Do we know for sure that they tend to cover quickly, or is this just a suspicion? As for Fairfax, before the conference call, on Feb 15 to be exact, they said they remained short, for what that's worth.
  14. How do you get a comparable AY number for recent years without the benefit of knowing what the future reserve developments will be? You seem to be assuming that adjustments will follow historical trends, for instance taking this years CR as reported from 93.2 to an AY CR of 89.0 over time, is that right? And with average AY CR's from 2017-2023 almost 10 percentage points better than published CR numbers, as opposed to 3 points lower from 2007 to 2016, we should conclude that either they are have gotten much better at underwriting, or their standards for reserving have gotten much worse recently. Hopefully the former. But might it be fair to say that part of the pessimism about how much this company is worth is based on the suspicion that their reserving standards may have slipped and that the CRs (and AY CRs) will not be as good as they look? Along with skepticism that interest rates will not hold up and that the company might return to buying Blackberries?
  15. ok, that's helpful. Your table does show that the volume of FFH.U that is traded is minimal, 0-20 trades in the last few months, with 0 and 1 being by far the most common volume in a given day. I have no idea what the columns after 'T-TSX' mean ('U-NEO-ATS', 'A-Alpha', etc.), but I probably don't need to know!
  16. Yes, you're right, and twice for good measure. Corrected now. I think I have my answer, that no real trading is done on the TSX with the FFH.U ticker, and I am guessing it's just a way of referring to the US price of Fairfax, avoiding the hard-to-remember FRFHF OTC ticker that actually gets traded, but if I'm wrong, someone please correct me.
  17. Yes, this is what I expected, except I can't find a quote for FFH.U on TD Direct Investing or Yahoo or Seeking Alpha ; well actually, yes, on TD Direct Investing there is a stale quote of $903.32 (bid $1013, ask $1019) so I suppose there are occasional trades. I am familiar with the TSX having .U shares denominated in USD, like FIH.U, which actually trades that way, and for FFH.U, I suppose this just means that the TSX will purchase FFH shares using USD funds, but given the absence of an active market on the Toronto exchange, buying or selling them that way would not seem optimal. Of course, once you have them, it makes no difference whether they are called FFH.to or FFH.U or FRFHF - a share is a share. But when people here refer to FFH.U, are they just referring to the USD value of FFH shares, usually obtained by looking at where they're trading over the counter in New York as FRFHF?
  18. This FFH.U entity is new to me. I have usually bought FFH in CAD, but journalled it all over to my US account as FRFHF shares in order to avoid the automatic conversion of the USD dividend into CAD at disadvantageous exchange rates (TD Direct Investing likes to gouge its customers this way; one of these days I will get around to transferring these assets into Interactive Brokers which treats customers properly for commissions and especially forex and interest rates, but I have so far left it there because I have the same Fairfax shares there for >10 years...) Anyways, FFH.ca and FRFHF are the 2 share formats I am familiar with, and the ones I see quotes for on most financial sites. But what is FFH.U ? Is this just shorthand for the US FFH shares that trade OTC as FRFHF, or is it something else?
  19. My feelings exactly. The difference between Berkshire's 1.5x book and Fairfax's 1.1x book is not so immense, until you consider that Fairfax has a huge float position and Berkshire has a relatively small one (about 130% of Fairfax's market cap, and 20% of Berkshire's.) Siince by definition float contributes nothing to book (it is essentially future insurance liabilities, along with present cash that can be invested), book is only part of the picture for Fairfax. Because of the huge float position, Fairfax is able to obtain a much higher earnings yield, which is why Fairfax is trading at an earnings yield of about 15% and Berkshire is more like 5% (when you back out the stock holdings and their income).
  20. Float cuts both ways. Catastrophe losses will be magnified within FFH simply because of the asset to equity leverage. So good times...tons of income. Bad times...significant losses. There is no net tangible value of float other than it is a more useful version of debt. Leverage is leverage. I would say the leverage is investment leverage, not insurance leverage. Any pure insurer is at risk of having claims exceed premiums. But if you take Fairfax with its $30b of float , more than its market cap, and you compare it with Berkshire whose float is less than a quarter of its market cap, the leverage risk is on the investment side - at Fairfax, a negative return will be hugely negative because of the leverage, and a good return will be greatly amplified. But I don’t see a downside of this, if it’s mostly invested in treasuries, as it is at Fairfax. You can be pretty sure you’re not going to lose a lot of money on treasuries. I’d say that Fairfax might be safer with a lot more leverage on a bond portfolio than Berkshire with 20% of its assets in Apple.
  21. Ok, sure, but can't they do the same thing with an equivalently-sized share repurchase?
  22. It certainly makes it harder to understand what's going on than if they just bought back shares. I presume there are liquidity consequences or tax consequences (repurchases are now subject to a 2% tax in Canada) or versus taxes on gains on the TRS, or something else that motivates them to keep these positions, and I trust them to do whatever's best, but I would much appreciate some discussion of this by Fairfax management.
  23. 12. Why do they keep shamelessly manipulating book value with aggressive marks like the ones Muddy Waters has brought up? Ok, maybe we won't get that, but if they prefer, what are some marks where BV might reasonably be marked significantly HIGHER? And to what extent do the feel that BV useful for investors, anyway? 13. What's happening in some of the big holdings, like Eurobank, Digit, Atlas, Recipe, etc.? 14. What is the game plan with the TRSs, and how do they think about putting the choice between holding money in reserve against the TRSs vs using money to repurchase shares?
  24. Wow, great pick-up! With hindsight, we should have noticed that the two missing words were the two words that were underlined.
  25. Understood. Overtime, what credibility will MW have? Once they go after high profile companies and are exposed as nothing burgers, why would stocks crash on their report? I have lost most of my sympathy for Muddy Waters, whom I previously considered fairly courageous in revealing genuinely fraudulent companies. But yes, it is sad that they have squandered their reputation by firing this blank. In addition to harming lots of shareholders who will have taken fright and who will now regret selling their shares at a 10% discount, they have also squandered their future credibility for taking on the kinds of truly fraudulent firms the have targeted in the past, like Sino-Forest (a Chinese-Canadian pseudo-miner that turned out to be a complete fraud), JOYY, GSX Techedu, French retailer Casino, Luckin Coffee, etc. etc. Most of them genuine turds.
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