benhacker

Scott, Welcome aboard. Some comments from me, meant to be harsh, but not that harsh, hope this comes across correctly. This is a fair thing to worry about. Many here worry about this as well. If you think the recent volatility in Berkshire has been high, I suggest you do not invest in inidividual stocks. This is a volatile profession. Volatility also tends to increase during market downturns, which means if volatility makes you sick you will continually be selling when prices are the lowest... this is what most investors do, but that should not be confused with thinking it a winning strategy. I would argue that FFH has been volatile even without the rumors. Many companies are volaitle, the average stock moves +/-35% in a given year. The market as a whole usually does +/-15%. Well, I think the bashers have mostly stopped. But that doesn' mean the stock won't go down again by a lot. Their financial positioning much nicer now though, that is true. But at the same time, they are no longer hedged, so if the market tanks, FFH will follow as we saw in February and March. Not much for me. Berkshire and Fairfax have taken rather different paths. Other than the fact they both run insurance (mostly) companies, and have honest CEOs that have investing talent, I think the comparisions are misplaced.

Yeah Packer, I think you touched on the most important part that everyone was missing. CDS are leveraged. You'll note that Munger wasn't calling for a ban on short selling which would fit his commentary in the same way (from what I've seen). Leveraged bets can create a bizarre incentize structure beyond what a normal contract / security can create. CDS are so dangerous because they are leveraged (IMO). I generally agree with Munger, but there are simpler more 'free market' solutions: Increase margin requirements for these instruments a lot, limit total outstanding CDS notional to some small fraction of the underlying, or many others. I"m not a regulatory expert, but indeed something needs to be done. Crazy times.

Transcript up: http://seekingalpha.com/article/134679-odyssey-re-holdings-q1-2009-earnings-call-transcript Good notes on rates and what's happening. More positive than usual. There is also some added clarity for those who were concerned / curious as to how the investment yield calculation works. Nice quarter overall... slow and steady and we'll make the a 1.4-1.6x book value company in the market's eyes. Ben

No, I'm with Crip. The headlines are largely driven by a few folks who feed their contacts. Those few who are feeding the machine have take a break for now on FFH it appears. I note the coincidence as well and find our system a bit questionable, but I have no idea how to solve the issue without simply making the entire world better at critical thinking. It's not illegal... Ben

I think they tend to talk about the post-quarter investment moves when they are material. I think *not* disclosing $900m in change would be inappropriate. We all *assumed* this was the case because we know their port composition... but it should be explicitly stated when it is >5% of book IMO. I agree with the idea that we should take the high road and let the results speak for themselves (and I always have) BUT, I think material changes are to be disclosed. My 2 cents. Ben

Sanjeev, While I disagree with Brown on the extent to which he seems to be taking his argument, how does comparing a very high non-deferable interest payment to a non-cumulative, fully deferable bank preferred make any sense at all? The reason bank preferred is considered Tier 1 capital is precisely because it's non-cumulative. Doesn't anybody wonder why all the bank preferred stocks look really similar... it's because all this trust preferred, deferrable crap is considered higher tier capital for banks... and that wouldn't be the case if it were cumulative. The real question people (I am) should be wondering, is Why TF these banks that are in trouble aren't just deferring their preferred dividends instead of converting their non-trust preferred to common? That is question. Tom Brown is right, if you forget about the interest payment on the preferred, there is ZERO difference between common and preferred... and the preferred specifically lets you do this!!!! I can't figure it out. It's like the entire reason banks sell deferable preferred was for EXACTLY this kind of time, and now, with the apocalypse on us, the banks aren't deferring their payments.... they are diluting thier shareholders. And I guess, that is why the G-men are stepping in to protect the country from a capital shortfall that the banks don't appear to be protecting themselves from as is. (I'm not sure of the governements motives or intentions and that makes me flippin' nervous). Converting the preferred to common does NOTHING that couldn't have been done another way. I think there must be something I'm missing here. I have sold the majority of my Wells common because I can't figure out what this whole TCE obsession is about... it really makes no sense... just defer the preferred if needed. The government can count me as a small money manager who would be providing the banks capital, but I am no longer interest because of the non-transparency of what they are doing...the rules seem to be changing in arbitrary ways. Ben Long WFC/WFCpL/WNAp... just less long than I used to be.

About half the folks on this board. :) We shall see if we get to 3x book again. Sadly, most of us will have unloaded before then, but damn, wouldn't that be crazy? Enough crazy talk... ;-) Ben

I think it was Shah that said the demand side for insurance will contract that will not help... I agree. However, you hear a few comments muttering around now that the terms of the policies are getting better, so the effective premium may decline, but if you can the terms better you may be getting a better deal as your loss ratio will be lower. These kinds of terms in contracts tend to persist as the cycle turns too so you will end up with a lower combined as premiums start to ramp (not that I can predict the future, but this is my understanding of what is likely... the 'when' is the killer though). But I've been thinking a bit more on the supply side, and here are some helpful data points I think to understand what 'other' insurance companies will be looking at on the investment side: 1) Long T-Bond ETF --> TLT http://bigcharts.marketwatch.com/quickchart/quickchart.asp?symb=tlt&sid=0&o_symb=tlt&freq=1&time=19 -- Down ~15% 2) 7-10 Year T-Bond ETF --> IEF http://bigcharts.marketwatch.com/quickchart/quickchart.asp?symb=ief&sid=0&o_symb=ief&freq=1&time=19 -- Down ~3.3% 3) Long Muni ETF --> MLN http://bigcharts.marketwatch.com/quickchart/quickchart.asp?symb=mln&sid=0&o_symb=mln&freq=1&time=19 -- Up ~13% 4) Medium Muni ETF --> ITM http://bigcharts.marketwatch.com/quickchart/quickchart.asp?symb=itm&sid=0&o_symb=itm&freq=1&time=19 -- Up ~6% 5) US Stock Market ETF --> VTI http://bigcharts.marketwatch.com/quickchart/quickchart.asp?symb=vti&sid=0&o_symb=vti&freq=1&time=19 -- Down ~2.2% 6) US MBS ETF --> MBB http://bigcharts.marketwatch.com/quickchart/quickchart.asp?symb=mbb&sid=0&o_symb=mbb&freq=1&time=19 -- Up 1.75% I'd say that net-net, the capital positions of most insurers will be flat to down at Q1 end. The rallying has been massive, but cliff dive before it was just as big, and I think the Treasury market take down was bigger than I had realized. Given the weighting of FFH/ORH's portfolio, I would imagine this quarter would be better than average for them. Again, I"m not sure what will trigger a hard market, but with AIG winding down now I'm less inclined to believe that the irrationality will get much worse. I like the prospects for these guys at less than book... ORH is a better deal right now in my opinion, but not by a huge amount in my eyes. Ben - long both

Screenr, I think you need to take the last 10 years in context with their large and failed acquisitions in the mid/late 90's. Looks at different subsidiaries independantly will help with your overall understanding of what is the 'norm' and what is the exception. But insurance is a tough one to handicap. We'll only know if we are right 5-10 years from now. If you can't trust fully an insurance company management (even FFH) just walk away. Ben

I just checked the short interest on FFH.... only 1.58%. Almost seems wrong somehow... Ben

Huh, that's odd. I wrote this article 7-8 days ago, and it was posted on Seeking Alpha... it appears they changed the title and ran it again today. Normally I wouldn't highlight this on the board, but I wanted folks to know that I'm not trying to pump ORH, I just wrote the one article not the repeat. Thanks for the kinds words on my write-up Zarley. Ben

I think part of the issue (maybe it's just me. :)) is that it's frustrating to have a stock thesis refuted by macro. I *get* why macro can be important, especially for banks, but I'm pretty dang sure there IS a bear case for WFC... and when I hear stuff like "$2T in derivatives" from Brox it just makes me tune out because it's just grand standing. No credible analyst talks about notional exposure with derivatives. Arb, I remember those Wamu discussions too... I certainly leaned toward the side of the bulls, but I thought the head winds were bad then as well and more importantly, WaMu had bad management. Arb, to your point about trust, I'm of your persuasion their on a certain level. I beleive their is a level of opaqueness to be expected right now with the banks, and as I mentioned reflexivity may cause them to bend a little into the grey areas these days... I'm comfortable with this given my history with these guys, but I can understand if some aren't. I appreciate you summarizing your view here. Given your views, you must be short a lot of banks, how are you playing this if you don't mind sharing? Brox, you summarized what has been summed up here before... My comment on your $2T derivatives went unanswered so I'll move on. Thanks guys, I think I need some time away from here to clear my head. Ben

Brox, Or $40B netted. But notional amounts are so much more scary sounding. I think stating that Wells is levered to the economy and is subject to deleveraging is a true enough statement, and certainly highlights their core risk. What saying "$2T" in derivatives adds to the conversation, I don't understand. It's like when everyone one pissing about Lehman and Wamu CDS exposure and when all was said and done, cash trading hands was <5% of notional contract exposure but non of the "OMG the sky is falling, JPM has $70T in notional blah blah blah" people came back and brought that up. I think the level of obfuscation on this board and the resistance to this particular idea is particularly surprising. If you think Wells is going to go down you can hedge out the systemic risk in about 100 ways... It's relative value seems compelling. Lots of ideas here are thought stupid by some, but few if I can recall are actively resisted to such an extent. I must just not get it. I clearly understand there are risks, but I just don't get the pushback. Is there a compelling bear case here? Who is short if anyone? Ben

Basl1, Thanks Basl1... feel free to shout in all caps, but I've been THE biggest bull on this board for WFC over the last while, so your comment doesn't make sense. I'm trying to save you future loss and pain by offering a suggestion to be skeptical and cautious. Read Sharper's post, understand Well's financials, and ask yourself does their announcement all jive? Feel free to not respond, following Buffett is not a bad idea, but don't get overconfident... Ben

I'm not him, but I think overconfidence and cheerleading in this sector can be particularly damaging to your wealth. Businesses don't grow magically to the sky. I think you need to really understand Wells' profit drivers and where they come from... and you also (more importantly?), as Arbitragr is refering to, need to understand the balance sheet and what it looks like under various scenarios. I'm massively long this beast, but banks should inherently make all of us nervous as equity investors. Piggy backing on Warren's comments or ideas may work but make sure you size your bet accordingly, he has the means to turn highly dilutive situations for us into boons for him, so his perspective is a little different. Just my 2cents. Ben

@ Bookie, Yeah, the Preferred comes withs warrants, my comment was that paying back *early* would not be optimal. Definately the goal for these companies is to do a capital raise (if needed) to repay. If not just pay back out of retained E. Will be interesting to see how it all plays out. Ben

It could be a possibility. Since you're so all about reflexivity, I don't see the issue with Wells doing this if that is indeed their motive... I tend to figure that these are crazy times, and if you can front load your positive results (a bit) and back load the bad news, it's probably good for you. I don't think a capital raise is in the cards... however, regarding TARP you make good points, but if I was under the shoe of the government here is what I would do (situation dependent): 1) Pay back TARP immediately while cursing the governments intervention 2) Plan to pay back TARP right when the government words become deeds, in the mean time I would say nothing bad about TARP to make the G-men angry 3) Relalize I can't pay back TARP so I'd just grin and bear it. Given that the legislation has stalled, and the G-men appear to be revisiting their lynch mob uprising... and the fact that it's COUNTERPRODUCTIVE for the government to get it's TARP capital paid back early, I see these risks decreasing. If I'm Wells, I hold the capital until the last minute, because life would be uncomfortable without it.... would I SAY THAT ON CNBC??? No fuc$#@in way. As you say, perception is reality in some times... banks need to guard their words these days, and speak vaguely. I think Wells is doing what they need to do... they likely won't need capital assuming they are allowed to play out their hand, but if the rules change like they seem to be doing lately, Wells would be foolish to repay TARP *now*. Given Wells Fargo preferred trade for a 10-15% yield today, TARP *is* cheap capital... and that is my main point. All that Government bullshit is just that... it's a risk... if you're Goldman, the risk might be bigger than Wells, or maybe their business is better hedged to the apocalypse, but I don't think the TARP decision is the same for everyone. My 2 cents... Ben

"If things are so rosy they should return the TARP back ASAP." TARP is cheap capital, no? Ben

I think stocks react VERY strongly to the difference between GDP growth and the EXPECTATION of GDP growth. I do not think stock perform better with higher GDP growth. A simple perusal of various emerging economies over the years with high growth compared to Europe would be telling. To the discussion of stock performing strongly right before the recession ends, it is simply (to me) a matter of psychological fact that when everyone is expecting (and pricing in) a -1% GDP figure and they get a +1% GDP figure then good things happen for stock investors. But don't confuse 'better than expected' with 'high growth = high stock returns' as it may happen, but is not at all guaranteed. My 2 cents, Ben

I remember when I finally convinced myself that GDP growth is not at all correlated with stock market returns that my investment life was simplified quite a bit. Grantham understands this, Buffett understands this, but it appears to be a fallacy on the surface to most people. It surprises me how many experienced investors and economists don't understand this very fundamental concept. Great chart. Ben

SHLD, UNAM, ORH, FFH

I hope this is an April Fools joke... but if it is, this is presented in a way that could be an SEC violation. He doesn't look like he is joking. I'm not impressed with what I see at the company... I do not believe they are honest, and I would not believe that Buffett would want to buy an Ameriprise esque business like this... We'll see. Ben

I can't find the reference Eric, but BB has said in the past that he doesn't like the finance sector due to leverage and will never make a highly leverage company (specifically any bank) a big holding. I'm not familiar with ACF, but much of their leverage is non recourse, and it's a samll holding. He rarely has had big financial stakes outside of insurance... and his holdings are usually low leverage varieties. I can't find the interview with him, but I own FAIRX in a small amount and I'm nearly certain he has said as much. Ben

"I don't think we are there yet....." Well, here is an anecdote for you (I'm not calling the bottom, this I just though was interesting): I sent out a request for funds / new accounts on the weekend of March 7th to all clients and potential clients. In the letter I basically said "Look, I'm not going to call the bottom, but their are some crazy deals, if you're on the sidelines, now might be a time to invest, double down, etc..." In the letter I highlighted FFH and WFC (and preferreds) as example ideas of why the market was crazy. I received an email back from a friend who is not a client but had another HF/RIA manage his money. He replied and told me that said HF manager was waiting for Wells to get to $3/share before buying.... this manager is a fundamental analyst. The thing that is curious to me about this statement is that it doesn't make sense to me. I understand people who won't touch WFC with a 10ft pole, they are the same folks who basically won't invest in banks due to leverage (B. Berkowitz, some folks on this board, etc)... I TOTALLY get it. But the statement of "I'll buy at $3" was bizarre. Yeah, I know a lot of people who will be paying 50% of annual PPTI for one of the best big banks in the nation, but I don't know ANYONE who would be 'truely' willing to do so who would not also be buying at multiples above that price.... I know some of this guys' other investments, and his MoS is not 95% or some crazy shit. When I start to hear these kinds of statements from supposedly intelligent people, I start to wonder. Just look around at the investment world: On this and other message boards everyone is talking about reflexivity like its some new concept when it is just an excuse to intellectually validate why you aren't buying stocks (or bonds) on the 50-80% off sale (I'm a big believer in reflexivity, but I find the new found belief in it hilarious...). It's all the rage now for folks to dramatically change up their investment style as well given all the 'new learnings' of the last 2 years... call me skeptical how much most people have really learned that they didn't already know but just ignored. Mainstream economists are now forecasting near 10% unemployement within 4 quarters, so many people claim that 'all big banks' are technically 'insolvent' that I've lost count. All the bearish (and correct voices) for the past two years are having their day in the sun, but their confidence of their own omnipotence is growing to a level I find disturbing and they should too (Krugman and Roubini's blanket statements astound me at times). Buffett has been deploying so much cash that he's sold holdings to fund the new purchases. Prem is fully long buying GE and WFC etc and we all sit here wondering what he sees as if it's not obvoius... they are cheap. I would estimate that roughly 50% of the employees at my work (anecdotally) are in 100% cash in their 401(k)s, or have stopped contributions to their stock accounts until 'things stabalize'. I don't know if we are at the bottom, fundamentally, I'm sure we could shave another 50-60% from here off the market... but the fact that we *could* see those levels does not imply you are prudent for 'preparing' for them by avoiding buying 50 cent dollars... I'm sure the folks who were in cash in 1982 felt pretty prudent too but it didn't make it so. The stats above make me look around and think 'now is a pretty good time to buy stocks' all things taken together. I agree with those who are a bit pessimistic on the stock market relative to bonds as the latter does seem to be puking up some crazy deals lately... HOWEVER, relative value and value are seperate concepts, and the further opportunities in individual names is much more stratified. This isn't meant to beat up anybody here, but we can all point to the past and say XYZ happened at the bottom, pessimism can always increase, P/S ratios can be lower... yes yes yes, all true. But all these discussions seem like excuses for avoiding doing what we should all focus on 1) Buy cheap stocks and 2) protect your downside and 3) make money :). Doing too much focusing on #2 at the exclusion of #3 may seem smart, but may not be wise in the long run. Just my 10 cents. Ben

"...there is no evidence that bottom has been reached." They don't ring a bell at the bottom... :)