benhacker

Treasurehunt, No, the amounts you mention are notional amounts at a certain reference price. As of the most recent S&P and RUS2k pricing, these hedges are effectively short ~$6.1B in equity value [edit: about half a billion here is individual name shorts, but I just lumped them in with the indices to capture the raw value in some way]. This is ~75-80% Russell 2k, so the math for you would be: ~$4.6B and $1.5B in new effective value (remember, as with shorting, the Total Return Swap size effectively increases as the bet goes against you). For what it's worth, I just updated my spreadsheet and I get the following: Pre-tax increase on US Listed bonds / stocks (from form 13), plus major Canadian holdings (MB, BRK, FBK, etc) = $230-240m (there is a range due to some edits I still need to clean up). Loss in non muni bond portfolio = -$41m Gain in muni bonds = $99m Loss on hedges = -$180m All of the above are estimated "not" counting dividends / interest, so I'm sure you can refine it further. I'm only looking at capital gains / losses. It's also still in need of cleaning up to make sure I'm capturing the TRS "LONG" positions properly which I haven't validated yet. So about $110m gain pre-tax overall, so maybe +$3.5 / share after tax off the top. I don't have good numbers on the CPI puts at this time. Ben

??? I have nothing to say if you think his style of investing hasn't changed. He's good, really good, and if I had to pick the top ten managers I'd like to have my money, he'd be on it, but as someone who invested with him early, it's obvious to me his assets size has changed his perspective quite a bit. Sure he still looks for "value", but everything else seems pretty different. As a disclosure, I sold in early '10 due to his refusal to shut his fund which I knew would force him to change his style... Ben

Zippy, Still has... it's every 7 years though. Just got done with mine in December... phenomenal opportunity. Ben

Stubble, (apologize for the delay, I continue to miss some messages as my RSS Reader doesn't display them all, or I'm an idiot) I guess I am quibbling with the defintion of "nominal" earnings yield for stocks. I would argue that such a figure (at least as you are thinking about it) does not exist. Stocks are comprised fo real assets, and earnings are defiined as the level of income at which (on aggregate) you should be able to remove from a business and still maintain it's earnings. Said differently, a busienss who pays out 100% of "income" should be able to grow with inflation. On the aggregate for the market, this has been true over time (the earnings yield has been approximately = to the after inflation returns for the market which in a competative society is what you would expect as a businesses incremental returns are equal to returns on equity capital (dividend vs reinvestment on aggreagate is a wash) generally (competition exists). Hope that makes sense. Basically, I'm saying that by comparing earnings yield to bond yield, you are comparing a real return (forward looking) to a nominal return (forward looking). Before we had as much of an inflationary monetary stance, this was no big deal, but now, I think it's a very important thing to realize. None of this is to say whether stocks actually do well with inflation in the short run (they don't), or does it address your (rightful) concern about yields likely increasing, but it's a piece of data that I think is misunderstood, and very very important. Thanks.

If you don't get a response here, I would ping John Hempton at Bronte Capital and see if he can point you in the right direction. John has some history with this board and Fairfax that is less than popular, but for any faults there he does actually know how to do due diligence, and for your angle, he resides in Australia and specializes in Financial companies. My 2 cents.... let us know what you find. For the record I think the Australian economy is headed for a rough patch, but bank debt will be backstopped if anything goes a wry, so I would probably choose AU government debt CDS if anything since they will be the same in the future, and gov CDS will be cheaper today (I assume). Ben

What Valuegeek said... I threw up a little in my mouth at the comparison however superficially it was intended. No offense to you Bronco, I doubt you meant it the way it came across, but we should never stray real records of value creation that have stood the test of time with the questionable actions of Mr. Biglari despite how nice his record appears today (and it does look good). Eddie does at SHLD what Sardar said he would do... profit with shareholders, not off of them. Ben

The reason why this comes up is that some brokers reserve the right to execute The OTC "F" foreign shares directly on the (local) exchange. But that usually is only if you buy a lot... I think at TDA (at least for advisors) it's 50k shares... so maybe Fido has a similar deal and if you do do that, they reserve the right to charge you, but in that case the better execution would be so much better that it would be worth it anyway. That's my best guess why Fido states the fee, but doesn't really charge it for investors here at least from what's been said. Ben

Given the fee structure, it has to be 99% manager / owner money in the fund by this time. There can't be much outside money. Ben

Stubble, I think you are making a mistake comparing a real yield with a nominal yield. I won't argue the 'realness' of the 13.3 PE which I think needs to be cyclically adjusted, but a true real yield of 7.5% is above the long run average for stocks, and needs to be compared with the real yield of bonds. It's a 500-600bps difference depending on what you think inflation will be. Not advocating the market is cheap, but by your data points I would say it's fair / decently cheap. Ben

Well, I don't think I heard anyone disagree with me, so those who are pricing fair value off of forward/current book, seemed like an opportune time to sell. I think it's a good investment because the multiple to book the market has been assigning *I* think is too low, and look forward to adding again if prices keep weakening. Ben

Sponsorship is not required for the 65... Ben

Nick is correct. If however, you aren't looking at risk related to original cost, and you are looking at what effect this could have on book value, then you need to understand that these contracts have been marketd up already, so now they can be marked down (from Q3 '10 values) much more than $200m... so it depends on what you are looking at. From a book value perspective, Fairfax's cost is irrelevant, but it is important to understand their mindset and invesetment philosophy. My 2 cents, Ben

If the Russell 2k index rallies 30% on a total return basis from 646 to 840, Fairfax is short $3.3B notional at 646 still, and is now underwater on their position by ~$1B ((3.3B / 646) * 840). As the position moves against Faifax, they are forced to post collateral and mark their position against them. To my knowledge, their is no factual difference from owning $4.3B (short) swaps at 840 than there is owning $3.3B (short) swaps at 646 as they are equivalent. And yes, if the Russell 2k drops back to 646, we mark our position UP in value, and we get a bunch of collateral back. 100% correct. Fairfax does some call buying to hedge their shorts, but strictly on the Total Return Swaps it is a completely unlimited downside bet. Your understanding is 100% correct. This is a mismatched or 'dirty' hedge. Overtime, it is hedged, in the short term this must be managed and could perform dramatically out of line with Fairfax's portfolio. Yes, we do have counterparty risk. The counterparties are JP Morgan, Citi Canada, and Wells Fargo. However, the positions are marked regularly and collateral is exchanged which reduces counterparty risk dramatically. Non-collateralized derivatives are the ones to worry about (most). This I have trouble answering, but I would imagine, even in a bad scenario, exiting this kind of contract would be the same as exiting a similarly sized investment position (short or long) in the underlying index. You may have to pay 1-2% extra as a frictional cost, but maybe a derivative expert on the board can step in and set me straight. In normal markets, these contracts are probably somewhat more liquid than the underlying. Partner, believe me when I say that anyone who could read your comments above as any sort of bashing, is a complete idiot. Your questions were valid, and are important IMO. The most shareholder friendly thing you can do as an owner of a business is to ask good questions and engage with management after doing your own homework. Ben

yeah, I think the bonds will hit the AOCI account (mostly, some are held for trading ~20% of the Munis for example). I'm not predicting earnings, I'm monitoring book value so even if Other Comprehensive Income isn't in headline earnings, we all know that book value is the most watched (and more meaningful) metric. Just some notes: 1) $6.2B in 10+ year maturity bonds. We know Munis got hit this quarter with all the BAB supply and that rates moved in a unprecidented upward direction. Long Muni, and long treasury funds (in USD) lost >10% each this quarter... let's say Fairfax was shorter duration than these, and better at bond selection, so they lost 6%. That's $360m just in the long bond container. I think they'd lose another $100m at least on the rest of the bond port this quarter. 2) Total Return Swaps - Added $3.3B last quarter (certainly hedged some of that with long calls) of Russell 2k TRS... the Russell 2k did +17% or something horrific during Q4. $560m loss, let's round to $500m. Another $200-300m on the S&P swaps lost as well. I'm getting darn close to $1B in losses here, so I think we need to see the FFH equity portfolio do maybe 15% during the quarter (assuming some small underwriting gains... which may be losses) to break even, and I'm not sure we got that. ICO is good, ABH is good, WFC was good. I'm not saying the sky is falling, but you can't talk about gains without talking about nearly $1B in losses. Oh year, and the CPI derivatives... these are hard to model so I wouldn't think these fell a lot even though rates rose, but I bet they fell some... Ben

Partner, what is the question you want answered, maybe some here will be able to help you? Thanks,

I haven't run the numbers recently, but with the equity hedge added recently I struggle to see much upside there, especially given it was a bunch of Russell 2k hedges which have been decimated in Q4 as small caps exploded (certainly ICO and ABH recap will help). But the big thing that I don't see much discussion of is just their straight long bond / rate bets. This company is fully positioned for deflation (I don't think calling the CPI derivatives hedges is appropriate since they are already making deflation bets with the bond portfolio) and for Q4 of '10 at least that was a very very bad stance. I'm still majorly long FRFHF, so don't mistake the above comments, but those looking for a near term pop are (I think) going to be very disappointed, and I'm a bit worried about downside (price wise only) here given the lack of concern I see displayed about the huge rate move during the quarter. We'll see what pans out, but I'd be hesitant even talking about a >0% book value increase this quarter. IF anyone thinks I'm out to lunch, let me know and I'll get to running the numbers here sooner or later. Ben

I think some here should look deep within themselves and see if you are really being realistic. Possibilities and expectations are not the same thing. A 15% per annum return is not attainable over the long haul, Anyone who believes otherwise “should pursue a career in sales, but avoid one in mathematics.” -- Warren Buffett

Roundball, I have no idea, I'm in the US. In the US, 15% gets withheld, but you get it back via a special tax form. No idea about the situation for Canadian residents. Ben

Thanks TWA, So there is no withholding and reclamation as there is with Canada and Finland, etc? Thanks again, Ben

I'm familiar with the dividend withholding and tax treatment for US investors for shares in a few countries... but I can't find out the treatment of dividends from Russia. Any US investors have a link or experience to share? Thanks, Ben

Carl, Naked shorting, I believe, is illegal and wrong. I could imagine reasons for the market maker exemption in extreme markets for one or two days (locating borrows ASAP, but not before the MM shorts)... but more than that I think is very wrong, it is counterfeiting. I have no basis for how widespread it is, but even Rocker Partners in the end (when they shut down) had some who claimed Goldman was NSS in a widespread basis... so to me, it's an issue that I hope someone gets to the bottom of, maybe Prem will dig up enough dirt to get there. I think legal short selling (if there were SEC disclosures similar to longs) is perfectly ok. Without transparency it frustrates me but is still ok (like Eric is saying). I don't understand why Sanjeev wouldn't lend his shares out (legally) of FFH, but he's entitled to his views like the rest of us. :) Ben

? Eric, count me as someone who is right there with you on this topic... Ben

Eric, I think the "since 19xx" numbers are mostly irrelevant generally unless they have some grounding economic reality (such as the '15x' pe multiple for stocks), and the post-84 type numbers to be worth less than nothing. If anything, the relative rarity ratio (let's call it 20x) UNDERstates the value of silver wrt to Gold. All numbers for supply/demand that I can think of support a ratio much lower than 48x. I think we see 20x in the next 5-10 years. Sprott makes part of his case this way. The demand for silver is greater (as a %) than Gold, the relatively supply and product (again, relatively) clearly shows that the price of silver is being set in either a manipulated (again, relatively) or completely brain dead way. I'm no metal fiend, but the numbers are so in favor of silver (especially a year ago) that I just scratch my head of why anyone owns gold. The argument that I think holds the most weight is that specifically Gold is valuable because it has less "real" demand thus making it a more pure monetary metal (the extra silver industrial demand takes away from it's monetary value is the argument because Gold is a pure monetary signal). My personal belief is that this argument doesn't quite work because the monetary value of Platinum / Silver / Gold has to do with 1) density 2) durability 3) recognizability and 4) inability to artifically create new supply and 5) of course rarity. The stability of supply of metalic currency is not valuable within a reasonable band... it's the rarity. So if these metals have value for monetary reasons, if there is OTHER real demand for the metal that only makes the metal MORE valuable. I guess you could take my argument further and say that if the ratio of rarity is 20x, Silver should actually be worth an even lower (more valuable) ratio to gold. I won't push it that far as there are many factors that will start to play at the margin (cost of extraction, recycling, etc) that I don't have great handles on. As for why the ratio has been out of whack so long? Markets aren't efficient or logical for stocks over short / medium periods, and there is no natural short term catalyst to bring metal prices back to proper alignment (whereas stocks have supply / demand, buybacks, secondaries, PE firms, etc, Gold and Silver just have human nature and raw extraction costs to provide a floor, and recycling at the extreme to bring prices back down...). My 2 cents, I'm not expert, but I think that is probably helpful in this case. Ben

My biggest problem over the last several years with "Gold Bugs" have been that they weren't silver bugs... because it was a pretty obvious 'relative' trade to me to go with Silver. And it still is totally obvious today. It was so wacky back a few years that I almost put a short GLD / long SLV pair trade on last year. If Gold doesn't come down fast, silver will go up like a rocket... I don't own any mind you (outside of small personal stake in a safety deposit box) because I don't understand the absolute valuation, but relatively it's a no brainer. Ben

Some funds to research: Mairs & Powers Growth Pinnacle Value Fund