petec

I don’t think it is even an option for the EU to let the UK vote for the EU parliament, when they clearly want out. This would not even remotely make sense. No, it doesn’t. But I suspect the EU wants to wear the UK down so that it remains. I suspect that the EU will grant another extension if the UK asks for one, comes up with a plan, or calls a general election. And if they grant one, they’ve already said that the UK must participate in the elections.

The way that Parliament is ignoring what the people voted for (arguably twice, since both major parties stood on a Brexit platform at the last election) is breathtaking. If there is an extension, we may see a complete reshaping of British politics at the next election. Interestingly we may see a reshaping of EU politics before that: if the U.K. participates in the EU parliament elections in May, there’s a possibility that the multinational anti-EU bloc in that parliament will grow big enough to have a blocking minority (35%). That arguably raises the risks for the EU. My view is that a WTO Brexit might be the best thing for both sides now. They’ve both royally f***ed up the negotiations and are staring at the consequences, which include the fact that the Leave vote isn’t going to go away and might be big enough to cause chaos.

Fairfax’s two biggest positions - Eurobank (proforma for the merger) and BlackBerry (assuming conversion) are on a tear this year. Eurobank produced good results with an excellent outlook; BlackBerry produced excellent results today.

Any idea why Dundee Sustainable Technologies has collapsed over the last few months? I don't follow it closely but newsflow seems broadly positive. One reasonably smart alternative might be to swap two-thirds of the DPM shares for all outstanding prefs using current market prices to set the conversion ratio. Accretive to my base case BVPS, massively reduces risk and cash bleed, and gives both pref and common continued exposure to the continued rerating of DPM.

Part of me does hope so. Conversion caps the upside but it reduces downside and if you're aggressive about haircutting the assets it's actually accretive to BVPS. I'm sure the stock would drop but it would be a heck of an opportunity. I increasingly think aggressive haircuts are needed. The failure to make major sales worries me (unless of course they've just failed to announce them, in which case q4 will be a pleasant surprise).

The issue with that article is it assumes Jon Goodman delivered on the sale of up to $200m of assets in 2H18. Since they seem to announce major sales when they happen, and all they've announced is the sale of Dundee Securities, I am assuming that didn't happen. I hadn't thought of spinning out DPM though. That's useful.

Dazel you were bullish on the buyback - how do you feel about that now and in particular have you satisfied yourself about the options?

Put me down as a (long term) bull. I sleep like a baby with this position - although I probably wouldn't without the robust debate on here, which really makes me think, so thanks all. Unrelated but interesting: https://www.imf.org/en/News/Articles/2019/03/11/na031119-greece-economy-improves-key-reforms-still-needed I know being "among the best performers in the Eurozone" isn't saying much, but it's better than being among the worst. I think Eurobank could be an exceptional investment as the economy starts to reflate.

Totally agree with this (except that in this letter he has finally come out and simply said the equity hedges were wrong and "dangerous"). In fact to "crappy companies" I would add overlevered companies. Why the hell do you get involved with Resolute if you fear a deflationary depression? My referencing the Great Depression was simply to point out that they actually did a lot of research into what happens to insurecos in a deflation, but came to a different conclusion to the one that SJ speculated on. Ultimately both factors are at play - the overconfidence drives the market call, but there has to be a thesis to give it a veneer of respectability and dispel any cognitive dissonance. The thesis (that insurecos really suffer in a depression) was sound - the issue was they wildly overestimated their competence in calling the market/economy. Anyway, I've bored myself to death about the hedges so I will stop.

Sure, that's the theory, but what do you make of page 59 in the AR (or for that matter, the Asia breakdown on page 115)? Did we get a fair return on the capital that FFH has deployed? Adjusting for the risk of holding assets in shit-hole countries which do not always have a strong legal system, low levels of corruption, or stable central bank policy, are you happy with what you see on page 59? What kind of return would be fair for the risks involved with shit-hole assets? SJ I agree with your reasoning, but I think it is based on faulty facts: 1) Back when they were worried about debt bubbles collapsing Fairfax looked hard at how insurers performed in the great depression. They discussed this in investor meetings (can't remember if they discussed it in letters/calls). Obviously equities collapsed (= FFH book value virtually gone). More surprisingly underwriting profits disappeared too as cash-poor insurers desperately competed to write premiums in the face of collapsing demand. The result was not that there were offsetting drivers in insureco P&Ls, but a total meltdown which most companies did not survive. I think that fear is what drove their entire hedging programme - both equity and deflation swaps. 2) As I understand it if you buy $100bn notional and CPI drops 10% below strike, you make $10bn. To make the full notional amount of $100bn, CPI would have to fall 100%, which is unlikely since it implies that the CPI basket of goods would cost nothing and the value of money would be infinite. Given that Fairfax regularly highlighted that CPI dropped 17% in both the GD and in Japan post-bubble, I assume that's the kind of thing they were worried about if things got really bad. If so, $110bn notional protected at most $20bn of assets. In fact I think it was quite a bit less because IIRC Fairfax bought the swaps below strike, meaning you needed several % deflation before you made money. In more likely scenarios, upside was never going to be more than $2-3bn. So under no realistic assumption did they exceed a 100% hedge ratio. I don't really care what they do with a $25m position, so I won't argue on that one. Haven't got to the AR yet so can't answer your last question.

Out of interest do you think Watsa's style has changed or did you not like it from the start (whenever that was, for you)? Watsa has as much right to comment on bitcoin as anyone else. Bitcoin can only be understood through two lenses: 1) crowd psychology and tulip bubbles and 2) fiat currency collapse. The first - which is the one he used - is well within his circle of competence as a value investor. My framework for the third world insurance businesses is this: if one or two of them find that sweet nexus you occasionally get in insurance where a superb manager meets a superb opportunity, then you've seeded the next ICICI Lombard or First Capital. My guess is that's the game plan, but it's only a guess. The opportunity stems from the fact that in most of these places insurance will grow faster than GDP, because it is currently underpenetrated.

If that's the case and you feel so confident then why don't you just go and buy a shitload of Brazilian bonds instead? The childish answer is: because I already have a shitload of Brazilian equities. The better answer is: because as you well know, a float-levered insureco with a sub-100% underwriting margin is going to return more than a sovereign bond even if 100% of its float is invested in that same sovereign bond. Fairfax's Brazil operation has underwriting profits, and has growth potential since insurance is underpenetrated in Brazil and the country is entering a cyclical upswing and possibly also a disinflationary boom (if the government gets its reforms done). The majority of the underwriting losses in Fairfax's Latin American operations came from Argentina, which (unlike Brazil) is a hyperinflationary basket case - but it is undergoing some very promising reforms. Time will tell.

Haven't read the letter yet, but thanks for your summary - useful. I'm not sure relating the notional to revenues or assets is useful. They'd only make the notional if absolute CPI went to zero, IIRC, and that seems unlikely! They could have made a couple of billion, maybe more in a depression, but nothing like the size of the notional. My major complaint is not that they hold this but that they should have structured their hedges this way: deep out of the money derivatives that offer outsized gains on low probability outcomes for (relatively) low absolute cost. Re the other insurance operations, no, you're not alone, although several of these are in places where you can earn high real interest rates in fixed income with relatively little risk (e.g. Brazilian sovereign bonds). That transforms the economics of a 98% CR. Also, some of these businesses will probably benefit from operating leverage as they scale.

That easy, huh? ;) I'm kinda kidding. Kinda.

Oh come on - who wouldn't lend to a "bunch of ninjas"? ;)

I always have been!

Eurobank up by about a third year to date.

Agreed. My thinking is that +ve FCF is useful if you want to a) pay down whatever debt there is, boosting net income and b) shop it to private equity which sounds like it might be on the cards. I'm not proposing that ebitda alone is enough for it to be a good long term hold.

I generally hate ebitda as a measure so I have a lot of sympathy for what you’re saying. Nonetheless it’s a guide to cash flows and it’s the only one we have. I’m not aware of a reason to assume the business is sucking up working capital (sure, it probably needs some, but it’s a mature business so it’s likely to be fairly steady - the biggest danger is actually if it’s working capital positive and revenues are shrinking). D&A, sure, there will be some cash cost in there, but POS units and software can be run for years - the bigger cost is maintaining stores and even that can be deferred if you need to prioritise paying down debt etc. My point is simply that unless it’s loaded with debt, which I sincerely hope it isn’t, if it’s generating a decent slug of ebitda there’s a decent chance it’s FCF positive. Would I care to put a number on that? No. But if the real estate covers the purchase price then the risks are probably fairly low. That’s all I’m driving at.

I sincerely hope they don’t sell anything just because it hasn’t performed so far, but I do think a hard headed “why are we in this?” analysis needs to be performed on every holding. I’m more bullish on Stelco than you. It seems to me that a lot of their prior errors have been in buying junk that has debt. Stelco is junk, but it’s super cheap and debt free. If T”R”U is generating 100m of ebitda I think that’s great. I doubt much of that comes from amortising software and they can use it to pay debt before paying returns to equity. (Can you recall the size and terms of the revolver you reference, btw?). I was more worried by the wording in the call which made me wonder if it’s still generating that much ebitda.

My notes from the results and call: 97.3% CCR and prior year development continues strong. 8.7% organic premiums growth - pricing generally positive except at Zenith which is on its own cycle. Think the market might harden in 2H19, and confirm they can grow premiums materially if so. Notable that AW produced 98% after a poor 2017. Brit had a tough year but will benefit from Lloyds getting tougher and the market there rebalancing. Accounting EPS of $12 offset by non-P&L currency losses so BVPS down y/y to $432, although their equities have recouped in 2019 over half the $500m they lost in 4q18, which adds about $10/share. NB the adjustment for the market value of associates is now a negative - need to dig into why, possibly the deconsolidation of Quess but I think this is now an associate and so still not marked. Questions about solvency in a market crash. Reiterated they will not hedge wholesale again. Claim the equity portfolio outperformed in 4q and highlight $114bn in deflation swaps plus the debt+warrant deals that give downside protection. Not a full answer. They lose $190m amortising things like client lists which were written up on acquisition. I think that's daft as long as the acquired properties are profitable and growing - if anything the intangibles are appreciating in value. Adds about $4/share in pretax earnings if you exclude it, plus the fact these intangibles are being amortised needs to be taken into account when thinking about p/bv vs p/tbv. "Monetising" and "reoptimising" the equity portfolio. Evaluating the entire portfolio, which is great news, but sounds like one of the opportunities is selling unlisted equities into a hot PE market. The team (Wade, Lawrence, Prem, Roger) are "salivating a little bit" in this "stockpicker's market" but they are at the top end of what they can allocate to equities. Unlikely to sell Seaspan - Sokol is "one of the best managers we have ever seen" and "intimately involved" and they could hold it for a very long time. Also think Eurobank/Grivalia will do very well, and Toys R Us is not on the block yet - sounds like ebitda is still positive but might have contracted, so it needs some work, but the RE alone is worth more than they paid. More cash has gone into ST treasuries and corporates. Dividend & interest income run rate now $800m and they think they can get it to $1bn without adding duration. Have been buying in minorities and shares. Since 1q17 they've bought 1.1m but NB largely offset by options issuance which wasn't discussed other than they split out the 150k 4q buyback between cancellation and treasury and treasury is 2/3rds of it. YE share count was 27.24m and they've bought 0.34m in the first 6 weeks of 2019 so I put them at 26.9m today. Will continue to buy back "particularly at these levels". Doesn't fill me with joy until we know the options plans.

As a shareholder since 2010 who has no intention of selling I'm biased (!) but the ones I use (Windows, Office, Hotmail, OneDrive mainly) are just so deeply embedded in my life I find it hard to imagine bothering to switch. That's not to say they're perfect but they're bloody good and I don't even bother looking for alternatives. The only thing that gives me pause is a moderately significant company I know of that recently switched over to GSuite and claims it's transformed productivity. Having never used it I can't comment but I've followed MSFT since about 2004 and at every stage there's been someone knocking on one of their doors but none of their major businesses has been disrupted. I recall around the time I first bought that Google Docs, which was free on the web, was touted by some to be a real issue for Office; 6 years later I remember reading that in absolute terms more people were switching from GDocs to Office than the other way around, which is incredible when you think of the relative size of the user bases. Edit: I forgot OneNote and Surface. Super products.

Ha ha amazing!

Go back over the calls. I think you'll find that's not what they thought, not what they said, and not how they acted. They said Trump would kick start animal spirits in the US economy, which reduced the global depression risk for which they were hedged. So they took the hedges off. They were quite explicit that they were not bullish on equities as a whole, and they acted accordingly, keeping vast amounts of cash. Instead, they said they thought it would be a good stockpicker's market, with good individual stock opportunities. I took this to mean they expected more volatile internals. I'd argue they've been more or less spot on so far, but the point is their major action was to take off the hedges, not to go all-in on stocks generally.

Do we know the warrant exercise price?