link01
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Posts posted by link01
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7. A wish: I'm still hoping for the conditions (and level of commitment) that makes decreasing the share count a reality - either by long term open market acquisitions, or en bloc from large shareholders. The total capital size is not yet limiting for growth, but will become that at some point. A lower share count (under the right conditions) disproportionately enhances value for the long term shareholder. It would be good to see the share count back down in the low teens or even 10-12 million range.
You talked about the company doubling or tripling in a hard market, due to what is effectively an excess of capital.
Paying it out now to reduce the share count will reduce future opportunity. The company you'd have left would be more levered, so better short-term returns, but during the hard market you'd be less able to expand and thus wind up with relatively higher combined ratios (relative to the lower ones that would come with expanding business at great pricing).
That would be my take on why you aren't seeing them buying shares.
eric, i think you hit the nail on the head. all p/c insurance co's need to weigh these 2 different dynamics aginst each other when contemplating share buybacks. but i think they should also be mindful of the possibility of fat tails like 911 & katrina & thus require a larger margin of safety. this really hit home with me when i was following white mt closely & by extension montpelier re who they had a big investment in. mrh was buying back shares hand over fist at a big discount to book, increasing book val per share at a clip to make your avg dyed in the wool value investor smile, then bang! katrina (i think it was that one) hit the industry for a loop. and mrh was particularly hard hit. all those buybacks at a discount to book turned out to be a mirage after katrina, & exposed them as one of those who were swimming naked when the tide went out, tho they didnt even know it at the time.
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what a truly horrible idea, passing the costs of cust credit card usage fees onto your waitresses! ugh... biglari is turning out to embody the worst traits of unbridled capitalism run amuck. his sense of entitlement at the expense of others seems to know no bounds.
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here's another take re the end of qe2, asset prices, & the effect on the real economy:
Effect of QE2's End May Be Greatly Exaggerated
Like news of Mark Twain's death, QE2's impact on the economy, has been greatly exaggerated, contends David A. Levy, chairman of the Jerome Levy Forecasting Center.
The economy's acceleration was well under way when Fed Chairman floated the idea of QE2 in late August, he points out. Moreover, no serious economist doubts the dictum that monetary policy works with long and variable lags. Indeed, gross-domestic product growth slowed to a 1.8% annual rate in the first quarter, from 3.1% in the fourth quarter of 2010.
Treasury yields actually rose after the Fed began purchasing notes in early November. While prices of risk assets such as stocks and junk bonds increased, the value of homes, investment-grade corporate and municipal bonds and government securities fell in the fourth quarter, leaving households less well off, Levy says. That undercuts the so-called wealth effect, the presumed positive effect of QE2.
Inflation expectations did rise, as the Fed desired, but bank lending didn't, he adds. All in all, Levy likens QE2 to chicken soup — "it couldn't hurt."
The most important impact may have been psychological; because the market participants thought QE2 was affecting prices, they did. And so the dollar fell in response to the Fed's securities purchases, mainly because that's what traders, expected, he concludes.
the rest here:
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WTM sold Esurance for $700M and the sale will increase book value by $80/share. Stock is up 15% today. Cheers!
http://finance.yahoo.com/news/White-Mountains-to-Sell-prnews-4038252346.html?x=0&.v=1
they got a good price for it. they grew it very nicely from the ground up but i'm shocked at how badly operated it, & the underwriting losses they sustained (last time i checked). at 1 point i thought it would prove to be their gem in the rough.
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Thanks for posting this well written paper. For anyone who has an interest in the thesis behind FFH's deflation bet, read this.
.. Since then M2 has risen at almost a 6% annual rate. Forget the thought of a balance sheet recession if M2 continues this rate of expansion.
If The Fed, however, pulls back, run for cover because Koo is right about everything being propped up by the Fed.
twa, i thought you were more focused on growth in the monetary base (m3?) than m2. in your estimation will the monetary base follow m2 down if the fed pulls back & withdraws qe2 liquidity?
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http://www.searsholdings.com/invest/
Sears Holdings Reports First Quarter Results Consistent With Previously Provided Guidance
May 19, 2011
HOFFMAN ESTATES, Ill., May 19, 2011 /PRNewswire/ -- Sears Holdings Corporation ("Holdings," "we," "us," "our" or the "Company") (NASDAQ: SHLD) today reported its first quarter 2011 results. In summary, we reported:
Net loss attributable to Holdings' shareholders for the quarter of $170 million, or $1.58 per diluted share, in 2011, compared to net income of $16 million, or $0.14 per diluted share, in 2010;
Adjusted loss per diluted share for the first quarter of $1.39 in 2011 and adjusted earnings per diluted share of $0.16 in 2010; and
Adjusted EBITDA for the quarter of $63 million ($78 million domestic and $(15) million at Sears Canada) in 2011 and $304 million in 2010.
These results were within our previously announced range of net loss attributable to Holdings' shareholders of between $145 million and $195 million, or between $1.35 and $1.81 per diluted share and Adjusted EBITDA of $25 million to $105 million.
those are some ugly no.'s, no 2 ways about it. even more so on a relative basis compared to avg retailer results since the 2008 trough.
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I found this from Alphaville to be very interesting. It goes on to explain how commodity etf growth is a function of the need to offload commodity exposure by the large financials. Sort of like creation of CDOs was driven by the need to offload housing exposure and desire to short the whole thing by opportunistic hf managers. Of course the retail public ends up holding the bag yet again...
ETFs have been a useful tool to allow banks to move risk off balance sheet. When a bank takes on risk through lending to or financing a big commodity player, say for an acquisition, there is a need to hedge potentially huge commodity exposure — so as sell to lock in the commodity price, and you couldn’t sell that volume easily into the terminal market; although you could transfer a large amount of exposure to investors through an ETF more easily. The only way this used to be done is by the bank taking proprietary risk, but they now have other risk issues and aren’t prepared to carry that sort of exposure.
The rest can be found here http://ftalphaville.ft.com/blog/2011/05/11/565941/if-we-build-it-they-will-come/
wow, thats quite the eye opener, thx
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great job, those are some seriously good notes. many thanks!
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wow, that chart is almost parabolic. maybe its just the compressed scale.
i cant wait to see how the end of QE2 will affect the verticle angle of the M2 & WS base. or how the continued rabid printing of money in whatever form finally fuels the pile-on of our national debt to the point where its growth overshadows that of the monetary base & spooks sane people.
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I was watching a video with Poppy Harlow interviewing WEB that was given post-AGM. He says that he has to raise prices to keep up with rising input costs. This despite idle manufacturing capacity.
I think idle manufacturing capacity is central to the deflation argument?
inflation/deflation/stagflation? too many smart people on opposite sides of this argument, which has enough paradoxal elements to make your head spin. we're approaching the crossroads but it doesnt seem fore-ordained yet which direction we go. hence, the fence where i'm concerned.
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FFH future returns => underwriting gain + investment gains on float
yea, there's alot of leverage there as a % of equity. which is probably a major reason why they hedge out such a big amount when they deem risk assets to be genarally overvalued & vulnerable to reversion to the mean.
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lol, you guys are chasing a chimera here. but the accounting concept of goodwill is no more or less subjective or scientifically accurate that other accounting measures. what about instances of aggressively acqusitive co's that habitually take "the big accounting bath" & write off the value of their goodwill? no more intangible goodwill fluff on the balance sheet now to mess up our favorite analytical tools now, right? and, wow, look at their current ROE! for every dollar of equity employed they're earning 20 shiny cents! that's a 20% roe, what a gem!!
not!
really, tangible book value is is only a useful measure of a co's probable worth in liquidation, not as an on going concern. and with an insurance co even tangible book has serious limitations because there's so much subjectivity involved in estimating the liablities. it seems to me that value, like goodwill, is in its very essence an intangible thing.
goodwill & its amortization over x years may be imperfect at capturing the nuances & the 1000 different changing variations of reality, but so are many other accounting measures. i still we are better off with it than without it, and i dont see anything better being offered in its place.
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They write far less catastrophe insurance than Fairfax. Their combined ratio on catastrophe losses was also higher than Fairfax's. They probably don't have as comprehensive hedges either. Remember, Fairfax would have shown a net profit of a couple hundred million in the quarter if they did not have the equity hedges alone. Cheers!
yes, wtm writes much less cat insurance as a whole (combined ratio 105%), but how about their white mt re division (132 CR)? they said they intentionally wrote less cat ins in japan, tho they didnt elaborate why....could have simply been the fact that its a small, densely populated country thats prone to earthquakes & typhoons and relies heavily on nuclear plants for lights & power. so wtm's estimated cat losses were not higher,tho modelled on higher est industry losses than ffh's, either in the aggregate or in their reinsurance divisions. not this time around...
unapologetically long ffh, cheers!
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OK, back to stocks....has anyone noticed that being long a cat insurer/reinsurer is mathematically similar to being short gamma?
For reference:
i've only noticed that when there's a catastrophic loss...
actually, no. gamma is a measure of the rate of change of an options' (or other derivatives) delta. a stokcs delta is always 1 if you're long, -1 if you're short. no delta, no gamma.
care to share your own insight? maybe i'm missing something? the joke perhaps?
oh, but an insurers business is similar to being short options, yes, so in that sense they are short gamma. and by extension, i suppose, an investor in an insurance co is also short gamma...was that your slant?
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intersting to compare wtm's eanrnings with ffh. interestingly, wtm catastrophic losses were very much less than ffh's, & they were modeled on a higher industry loss estimate of 35 bil vs 30 bil.
<<HAMILTON, Bermuda, April 29, 2011 /PRNewswire/ -- White Mountains Insurance Group, Ltd. (NYSE:WTM - News) reported an adjusted book value per share of $447 at March 31, 2011, an increase of 1.6% for the first quarter of 2011, including dividends.
Ray Barrette, Chairman and CEO, commented, "It was a good quarter, as we grew adjusted book value despite big earthquakes in Japan and New Zealand. White Mountains Re's combined ratio was 132%, driven by catastrophe losses. However, the much weaker U.S. dollar boosted results, offsetting a good part of those losses. OneBeacon posted a strong 3.5% growth in book value per share and a 94% combined ratio. Esurance's adjusted combined ratio improved to 102% and premiums grew 6% on strong new policy sales at both Esurance and Answer Financial. Investment returns were good. We bought back almost 250,000 shares in the quarter, adding about $3 to adjusted book value per share."
Adjusted comprehensive income was $34 million in the first quarter of 2011 compared to an adjusted comprehensive loss of $51 million in the first quarter of last year, while net loss was $28 million compared to $40 million in the first quarter of last year.
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White Mountains Re
White Mountains Re's GAAP combined ratio for the first quarter of both 2011 and 2010 was 132%, as both periods were significantly impacted by catastrophe losses. Catastrophe losses in the first quarter of 2011 included $80 million related to the Japan earthquake and tsunami, $42 million related to the February 2011 New Zealand earthquake and $3 million related to floods and cyclone Yasi in Australia. Catastrophe losses in the first quarter of 2010 were principally from the Chilean earthquake and European windstorm Xynthia. The first quarter of 2011 also included 5 points of favorable loss reserve development compared to 3 points for the first quarter of last year.
White Mountains Re's recorded property losses from the earthquake and tsunami in Japan are currently estimated principally using third party and internal catastrophe models, applying overall estimates of industry insured losses to White Mountains Re's exposure information. The modeled portion of the property loss estimate is based upon an industry loss event of $35 billion, currently the upper end of the AIR and RMS estimates of insured losses. The overall loss estimate also includes estimated losses for marine, accident and health, aviation and contingency lines. Catastrophe exposure modeling and loss estimation is inherently uncertain, and as claims are reported and settled, White Mountains Re's estimates could change, maybe materially.
Allan Waters, CEO of White Mountains Re, said, "While the extent of the devastation in Japan makes our initial loss estimate particularly difficult to pin down at this point, the impact will remain manageable under any foreseeable scenario. We were intentionally underweighted in Japan, New Zealand and Australia. We continue to be strongly capitalized and well positioned to take advantage of underwriting opportunities in the market."
Gross written premiums were down 4% for the first quarter of 2011, while net written premiums were down 1%. These decreases were primarily due to property lines, where ceding companies are reducing their writings and restructuring programs to retain more net exposure. >>
http://finance.yahoo.com/news/White-Mountains-Reports-prnews-1116477800.html?x=0&.v=1
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the argument that goodwill should be written off in the valuation process argues that the company received an improper return on investment, in other words that ORH will underperform relative to the universe of companies with its risk profile.
Does the lack of the goodwill on the other 80% of ORH imply that it's inferior to the richly valued 20%?
I really don't mean to imply anything by writing off the goodwill. I just want to put apples-to-apples.
You could be accused of undervaluing the first 80% of ORH by not demanding to upvalue the goodwill by 5x.
The goodwill is just a balance sheet tombstone: "Here lies the premium to book paid for 20% of ORH. RIP." It tells me nothing of the value there... just as the lack of goodwill on the first 80% of ORH tells me nothing about the value. Only the earnings power tells me that, and insurers get their earnings power from their tangible assets. Let's put it this way -- the cash premium paid reduced potential statutory capital. Can we agree on that? When the hard market hits, intangible asset cannot be used to grow premiums. Therefore, the combined companies can write less business than they could before... so keeping that intangible asset around at full value as if it were still cash is hard for me to swallow.
do alot of value investors still pay attention to goodwill as if it were the be all & end all of valuation yardsticks. if not, this discussion is kind of like a tempest in a teapot.
if you are willing to buy a co that has a demonstarted long history of earning 20 on its stated equity, with 20% growth, would you insist on waiting until that co traded down to book val until even considering an investment in it? or should you be open to paying 2x stated book val, which gives you a 10% return on your purchase price (your purchase price goodwill), compounding at 20% a year going forward? after all, that investment earns superior returns to paying 1 x stated book val for a co earning 10% on it equity & growing at 10%, doesnt it? no one value yardstick can be applied to all investments, including book val with goodwill or without it.
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The company's estimation of its losses from the Tohoku Japan earthquake
event assumes an approximate $30 billion industry loss and ...
does anybody know what the total statutory surplus of this 'industry' is, where a 30 bil loss is estimated?
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nice summary, onyx. thx.
here's some comments on the same wrb cc from another board:
<<I just finished listening to the conference call with
William Berkley at Berkley Insurance. I like the way he thinks
about markets in that he favours behavioural economics over
nobel prize winning models and openly suggests that. He said that
he saw numerous signs of the insurance market starting to harden and
that it always happens slowly. I think he quoted something like
the industry running at a combined ratio of 115% on aggregate,
running at a huge loss on aggregate, and that it cannot
continue to do this so either prices rise or many people
go bankrupt, i.e. prices rise.
Berkley Insurance is running with a combined ratio of about 100
which is better than the majority as they have almost a mandate,
not merely preference, of preferring to shrink over accepting losing
policies. They also use a 15% after tax return on investment measure for
just about everything they do (stock has also averaged 15% since they
started).
- Manlobbi >>
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- Prem Watsa (Fairfax)
- Francis Chou (Chou Funds)
- Paul Rivett (Fairfax)
- Brian Bradstreet (Hamblin-Watsa)
- Sam Mitchell (Hamblin-Watsa)
- Peter Furlan (Hamblin-Watsa)
- Mohnish Pabrai (Pabrai Funds)
- Bill Gregson (CEO - The Brick)
- Richard Garneau (CEO – AbitibiBowater)
- Marc Bertrand (CEO - Mega Brands)
- Tom Ward (CEO – SandRidge Energy)
- Bill McMorrow (Chairman & CEO – Kennedy Wilson)
- Mary Ricks (Vice-Chairman – Kennedy Wilson)
While Fairfax’s own AGM is really a showcase of their insurance and investment executives, this was more a showcase of the great managers at Fairfax’s investee companies. I believe this was just the tip of the iceberg, as Prem now continues to build Fairfax in the Berkshire model, and will add fantastic non-insurance businesses to the portfolio.
Never in my life have I heard or seen such a group assemble for a third-party function such as this. Each of these CEO’s are superb talents on their own. For them to take the time to come to our dinner, simply shows how much respect they all have for Prem as a leader. And just as importantly, how much respect they hold for the smaller shareholders of Fairfax Financial!
Our normally expressive Hamblin-Watsa guests were unusually quiet, as Prem gave the floor to the investee CEO’s. Thus it seems with the quote from the annual report, and this year’s dinner, that the next 25 years of Fairfax will have an additional focus of acquiring non-insurance businesses.
thank you for the terrific summary!
as you said, it was very surprising but particularly gratifying to see so many of the top managers from ffh's investee co's show up. i'd say that that kind of support goes a long way in showing how much prem & his team inspire respect & goodwill in equal measure, a la buffett. its a pretty rare thing to behold, at least to that degree.
i hope you're right about prem being poised to adopt the brk (& now mkl) model of acquiring non insurance businesses in the next decades to come!
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think that the share price is modestly undervalued at current levels and you get the CEO for free. Although it's difficult mentally to pay 8X what I paid for the same shares 3 years ago, the facts have changed over the last several months, and so I recently bought more at $42 per share (although I had sold some recently as high as $62 per share).
i had bought a large position a bit more than a year ago at 20 & sold in dec at 46. i was making room for some other stocks at the time, most notably vrx, & it had appreciated so far so fast that it seemed like the thing to do. now i've just sold a truck load of vrx & find myself with a 35% cash holding & very few ideas.....til your thread here, which perked up my ears. i had all but forgotten about ftp but it looks interesting again at the price i just sold it for 5 months! i feel foolish, but what it is what it is :(
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This is a beauty in the annals of stupid ideas. In order to grow corn you need to provide fertilizer, primarily nitrogen. The nitrogen fertilizer - Urea - is produced from methane feedstock. Methane is of course natural gas.
In the end game the carbon footprint for ethanol from corn turns out to be at least that of gasoline.
So we take natural gas and make ethanol through a convoluted process involving planting, harvesting, and sunlight instead of just using the natural gas directly as fuel, or even better, just using the sunlight as fuel.
I came across this little gem in this weeks Businessweek.
i know munger has sounded off on this same theme more than a few times too
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'Moment of Truth' Coming Soon for 2011 Investments: CEO
"What does the economy really have when you take away the stimulus and the QE2? QE2 was obviously designed to help the economy," Jeffrey Gundlach said.
"If it [QE2] helps the economy and it helps stocks and it helps commodities, ergo when you take it away you might go in the other direction, which I think will be the case," he added.
In addition, Gundlach went on to say, if lawmakers remain serious about attacking the budget deficit you will start to see an austerity program.
"Austerity is negative for the economy. GDP [gross domestic product] in the United States is about forty-five thousand dollars per capita and what we're really doing is living like a fifty thousand dollars per capita by printing or borrowing 10 percent of GDP essentially."
"All you really need to do is cut your standard of living by about 10 percent in the United States ... we need to do this soon or the compounding curve really does kick in," Gundlach said.
rest at link:
http://www.cnbc.com/id/42589181
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There was that post asking who the best are at special situations. All you have to do is read LUK's letter and you know exactly who is the best. Did anyone know they were buying car dealerships and leasing them back for nice fat returns? These guys are brilliant. They will find every way possible to exploit inefficiencies and make a buck! Cheers!
ah yes, garcadia. leucadia has a name that marries other names so musically!
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Me - I think WS is ridiculous. A miss of a couple cents on a $500 stock. Who cares?
Revenue beat. Expenses were up b/c they are hiring to grow the business.
yea, maybe so. i remember amazon last qtr provoked the same short term reaction for similar reasons....followed by a quick re-evaluation!
Fairholme/Berkowitz
in General Discussion
Posted
yea, markel ventures invested a good chunk of change in them at the get go, btw