Parsad

Got a question for boardmembers and I thought I would tap the brains of the best, since most of the senior partners, CPA's, CA's and lawyers we've questioned haven't got a real clue: And no, this is not for us...we have no interest in doing this! If you were setting up an investment structure for Canadian residents to invest in U.S. distressed real estate, what is the best structure when considering compliance, taxes and reporting? 1) A Canadian corporation holding the property directly...seems to be very inefficient taxwise. 2) A Canadian GP that sets up a U.S. LP with Canadian investors investing directly into the U.S. LP...more tax efficient, but could have considerable compliance issues. 3) A Canadian corporation with a wholly-owned U.S. corporation that invests directly into the U.S. real estate...probably the least efficient of all structures due to double taxation 4) A Canadian GP that sets up a CDN LP with Canadian investors and then the CDN LP invests directly in the U.S. real estate...seems as efficient as #2, but has more compliance issues and tax filings issues for partners...since both a K-1 and US 1065 would have to be issued. Would be interested in hearing from you guys on these or any other alternatives! Cheers and thanks!

Inherited wealth is one of the great sins of capitalism. I think people should be incentivized to do all they can for themselves, but passing capital from one generation to the next is the antithesis of capitalism. Capital should move freely to where it is most efficiently utilized...inherited wealth does the complete opposite. I'm all for egregious estate taxes for estates over $1B that are passed onto the third generation. Cheers!

Thanks for perking up my day KFR! ;D Cheers!

I had my first experience at 5 Guys yesterday. Needless to say the bill was a little under $10 for a burger, fries, and drink. In my mind SNS is 10xs better for half the cost. Wow! That's steep. Vancouver's local burger chain that's been around for 70 years is Whitespot. You can get a Whitespot burger with their "triple-O" sauce, unlimited fries, coleslaw and a drink for about $7 CDN. Take a look below: http://imonlyhereforthefood.com/images/Food/WhiteSpot/WhiteSpot002.jpg Unfortunately Whitespot is trying to change with the times, and they have widened their menu and created more full-dining locations, while also creating more standalone type locations that focus on the core burger menu. I'm sure they've increased revenue, but they've probably done some damage to the brand. I was a die-hard Whitespot fan, but go there increasingly less for the last few years because of the widening menu and the full-dining focus. Burgers are really comfort food and companies can hurt their brand by losing focus on what got them to where they are. If Five Guys pricing in Canada is anything like what CONeal experienced, I probably won't go there that much, and I would suspect alot of people won't. By the way, for those people who have tasted a Whitespot burger and swear by it (or an In-N-Out burger for that matter), I can tell you for a fact that a Steak'n Shake steakburger is actually tastier. And that has more to do with the flavour of the patty rather than anything else. The steakburger patty while thin, is one of the most flavourful patties I've tasted in the lower-tier ($7 or less for a burger) burger market. In fact, for the price, you can't get a tastier burger...especially the double steak-burger! Cheers!

The other thing I've noticed about Five Guys from pictures is that their menu seems to be priced around Fatburger but it's well above the prices at Steak'n Shake or In-N-Out. You can get a single-patty Steakburger meal for $2.89, while a Little Burger (single-patty) with fries and a small coke would run you close to $7 at Five Guys...although they don't have a small fries and Coke, so you would get the regular sizes. Still a single-patty Steakburger with regular fries and drink would be about $4.50 or less! The same meal at In-N-Out would also be about $4.50. It's actually quite hard to spend more than $7 at Steak'n Shake. For that you could get a double-patty Steakburger, fries and a large Chocolate shake! I think Sardar's been very smart about pricing and providing value to customers. That's why traffic numbers have risen so quickly. Cheers!

I'm not sure what you are referring to Tooskin, but is it the free peanuts they offer or no coupons on their products? I've never been to one, so I'm not sure if it is part of the greeting or something in the design of the store, if it isn't the two things I already mentioned. Surprisingly, the interior of the stores don't look entirely different than a Steak'n Shake. One of the most obvious similiarities is the three-square checkerboard pattern that adorns the interior of both restaurants. Steak'n Shake's is black, while Five Guys seems to be red. Steak'n Shake seems to be adding certain menu items that are similar to the Five Guys burgers...BBQ & A-1, as well as the Jalapeno topping and mushroom topping on the short-term specials offered by Steak'n Shake. Both companies seem to make the double-patty burger the standard as well. I'm looking forward to it when it opens. Cheers!

Well, I guess my desires for a Steakburger will have to be satisfied once a year in Chicago! Fortunately, cult-chain Five Guys Burgers is opening a Canadian store in Vancouver, and hope to have 200 open in Canada over the next decade or so. http://www.kelowna.com/2009/11/27/obamas-preferred-burger-joint-setting-up-shop-in-langley-five-guys-opens-in-january-with-further-outlets-planned-for-metro/ Are you listening Sardar? Get on it! Find a great Canadian franchisee for Vancouver...or at least Seattle...since Five Guys and In-N-Out aren't there yet. Cheers!

The amazingly astute insight that Prem, Brian et al had was much more than downside protection. Their earlier hedging strategy had been merely to buy S&P 500 puts. If that was all they had done before the recent crash, they would merely have bought protection against a decline in the value of their equity portfolio. However, they realized that CDS could be bought for an annualized cost not much different than S&P 500 puts, and that these would pay off with a much larger gain once the credit bubble popped, than the usual hedge. They may have noticed that opportunity as credit spreads continued to narrow and added to their stake, but their original investments were made purely on the premise to protect their portfolio and reinsurance recoverables. Virtually all of the swaps they purchased in the first couple of years were done solely for that purpose as Prem indicated in the 2006 Letter to Shareholders excerpt below: Just a brief overview for you on our credit default swaps, which are 5-year to 10-year fixed income derivatives, which fluctuate with credit spreads, that we have purchased from major banks. Here is an example. To purchase a 5-year $100 million credit default swap on a company that sells at a 30 basis point spread over treasuries, one has to invest 150 basis points (30 basis points/year 5 years), so $1.5 million purchases protection on an underlying $100 million of credit exposure of the chosen company over the next five years. The maximum loss to the purchaser in 5 years is $1.5 million if the credit spread stays at 30 basis points or tightens even further. On the other hand, if the credit spread on this company doubles to 60 basis points, the credit default swap can be worth as much as $3 million, and if the company goes bankrupt, that swap can be worth up to $100 million. We have a diversified list of companies, mainly financial institutions, with respect to which we have paid approximately $250 million to purchase protection on underlying credit exposures. Prem does not like to speculate, but he's happy to accept a wager if it is already included in the cost of a hedge. Thus any large profits they would make on the swaps when they initially invested, were just icing on the cake from buying protection at such extraordinarily low prices. Investors don't realize that speculating on things like bubbles often lead to frictional costs that will eat away at returns, since timing is a large part of getting a speculative bet correct. The mortgage bubble could have gone on for several more years. And Fairfax's $500M investment could have easily become a $1.5B investment as the five-year swaps expired and they had to double down on the protection. It's just fortunate (for Fairfax anyway) that the bubble collapsed when it did. Cheers!

HSBC leads the way with regards to UAE loan exposure. Cheers! http://www.cnbc.com/id/34171816

I don't agree with Tilson's assessment. He's expecting significant further downside in pricing. I don't think that will happen. I think you will continue to see pressure in pricing as more homes come onto the market and the second round of ARMS reset, but purchases of distressed properties should ease that pressure over time and banks will continue working with mortgagees. I think the recovery itself will take some time...maybe several years...but most areas have seen the worst of it, other than commercial real estate and retail services. Alot of retailers who got bailed out of the 4th Q of 2008 and 1st Q of 2009 in their debt repayments have only delayed the inevitable. Some of these guys are going to fail over the next couple of years. Cheers!

I still don't understand how Peter Eavis, Fabrice Taylor and Herb Greenberg squirmed their ways out of the Fairfax lawsuit. I'm guessing it would have been very hard to bring them into the suit without them utilizing the first amendment to protect themselves...especially Eavis. http://www.deepcapture.com/tag/peter-eavis/ Eavis remains an employee of the WSJ and is a professional photographer. You can see his works and interviews all over the net. I'm not sure what happened to his pastoring sabbatical, but perhaps it was enough to establish a tax-shelter for his retirement fund. I'm also not sure how the hell John Hempton, one of the main culprits in this whole debacle, managed to be excluded from the lawsuit. Perhaps Hempton has become a rat like Sam Antar and is spilling the beans, or perhaps Fairfax is just going after the big guns. Cheers!

More on the biggest potential soverign default since Argentina! If it goes, I'm sure it will take a few others with it. Some European banks and Arabian banks are going to lose ALOT of money. Cheers! http://www.bloomberg.com/apps/news?pid=20601087&sid=aO.S.lkGgmb0&pos=2

Hope all our American compadres have a terrific Thanksgiving! I'll be in Seattle doing some Black Friday shopping. Cheers!

Gwynn knew exactly who he was releasing the reports to early. The only other people who probably knew were the ones receiving them, and Morgan Keegan since they found enough information to dismiss Gwynn. Cheers!

Probably because the key witness is dead! The article discusses how SAC and Kynikos have not been served Wells notices by the SEC. They note that SAC in seventeen years has never been served a Wells notice. I believe Madoff was never given one either in 30 years! Cheers! http://dealbreaker.com/2009/11/sac-not-sweating-sec-investiga.php

State-controlled Dubai World, the builders of the palm-shaped island development and a myriad of other projects, is on the verge of bankruptcy! Cheers! http://www.bloomberg.com/apps/news?pid=20601087&sid=a.LazCgxcywM&pos=1

Yes, I agree. I think Overstock has been sloppy on certain issues...some past accounting, legal and public relations. They do need to tighten the reins quite a bit. Cheers!

i am surprised people on this site are so devoted to byrne. his own father quit his board. From what I understand from various people I've spoken to, Byrne and his father are pretty much the same, and both are extremely pig-headed. I believe Byrne senior stepped down simply because his relationship with his son was worth more than any directorship at Overstock.com. who knows what the truth is but time will tell and i think the facts indicate that it is more likely than not that ostk has committed accounting fraud. this is not short seller manipulation, this is accounting manipulation. They were saying the same thing about Prem a few years ago. Suddenly all those that were accusing him, participating against him and manipulating the stock are in trouble themselves, or being investigated for related matters to other cases...Chanos, SAC, Exis, Morgan Keegan, Gwynn, etc. Byrne can be accused of a lot of things...ALOT! But unethical behavior is not one of them. Cheers!

I agree with you Eric. There are a lot of reasons to own your own home. Although, the problem for the average in-debted homeowner in the U.S.: Current Mortgage: $2800/month + $5000 a year in property taxes, maintenance, etc. Same Property Rent: $1800/month Do they want to continue paying $2800/month for the next ten-fifteen years, only to recoup the 40% drop in their nestegg? Or they can put about $1400 a month ($1000 rent & $400 in other costs) away towards savings? Alot will choose the latter. Especially if they are under the stress of delinquency, foreclosure or collection. Cheers!

Global empire expands! Cheers! http://www.fairfax.ca/Assets/Downloads/Press/fpr2009-11-24.pdf

A perfect example of those that are now underwater, with good credit histories and are now considering walking away. Cheers! http://finance.yahoo.com/loans/article/108229/distressed-homeowners-ponder-whether-to-stay-or-go;_ylt=AvwHgVFbeb8gTmluEa01Xw.7YWsA;_ylu=X3oDMTE1NzJhNzNmBHBvcwM3BHNlYwN0b3BTdG9yaWVzBHNsawNkaXN0cmVzc2VkaG8-?sec=topStories&pos=5&asset=&ccode= Seven years of bad credit or twenty years of payments for something worth half as much? I'm guessing alot of these people will be walking...especially if their work situation changes or finances become a little more distressed. Cheers!

Our annual Fairfax Financial Shareholder's Dinner is coming up again. Last year, Francis Chou of the Chou Funds came...Francis has been at all of our dinners! Fairfax Financial sent Sam Mitchell, Brian Bradstreet & Wayne Cadwallader. It was an amazing opportunity to ask questions and listen to answers from some of the best investors in North America! Fairfax Financial Shareholder's Dinner Wednesday, April 21, 2010 Joe Badali's 156 Front Street West Toronto, Ontario Drinks: 6:30pm Dinner: 7:00pm Q & A: 8:00pm-9:30pm RSVP: [email protected] Admission: $5/head with all proceeds going to the "Crohn's Colitis Foundation of Canada" in memory of Joann Butler Corner Market Capital Corporation will match all admissions We'll also be holding our fund's annual general meeting again immediately after the Fairfax meeting. Details are below: MPIC Funds Annual General Meeting Thursday, April 22, 2010 Roy Thomson Hall Green Room/Pickering Room 60 Simcoe Street Toronto, Ontario Meet & Greet: 1:30-2:30pm Presentation: 2:30pm-3:00pm Q & A: 3:00pm-4:30pm Light Snacks & Refreshments Will Be Served RSVP: [email protected] See you in Toronto! Cheers!

Our annual Fairfax Financial Shareholder's Dinner is coming up again. Last year, Fairfax sent Sam Mitchell, Brian Bradstreet, Wayne Cadwallader & Francis Chou. It was an amazing opportunity to ask questions and listen to answers from some of the best investors in North America! Fairfax Financial Shareholder's Dinner Wednesday, April 21, 2010 Joe Badali's 156 Front Street West Toronto, Ontario Drinks: 6:30pm Dinner: 7:00pm Q & A: 8:00pm-9:30pm RSVP: [email protected] Admission: $5/head with all proceeds going to the "Crohn's Colitis Foundation of Canada" in memory of Joann Butler Corner Market Capital Corporation will match all admissions We'll also be holding our fund's annual general meeting again immediately after the Fairfax meeting. Details are below: MPIC Funds Annual General Meeting Thursday, April 22, 2010 Roy Thomson Hall Green Room/Pickering Room 60 Simcoe Street Toronto, Ontario Meet & Greet: 1:30-2:30pm Presentation: 2:30pm-3:00pm Q & A: 3:00pm-4:30pm Light Snacks & Refreshments Will Be Served RSVP: [email protected] See you in Toronto! Cheers!

The question is will inventories stay low as those houses come on the market and when the tax credits stop by June of 2010? The U.S. has spent $21B already on the tax credits before November, and then extended those benefits till April 2010...so say another $20-30B, since they expanded the range of people that can qualify for credits. Will Congress extend them again in June? Cheers!

Part II... But, since 2005, the smoke has cleared from around the firm. Watsa says the period between 1998 and 2005 was tougher than the firm could have imagined. Underwriting losses wiped out $2.9bn in investment income and $2.4bn in realised gains during that period. “In those seven lean years we basically didn’t make much money,” he says. “We made two major acquisitions – TIG and Crum & Foster – and we did them in 1998 and 1999 in the throes of the soft market. It took us longer than expected to turn them around. We thought we could turn them around in three years and it took us more like five or six years. But despite what our detractors might have said, we eventually accomplished our goals.” Watsa says all the firm’s problems of that time are now behind it. He says reserves are strong at Fairfax. He is also is quick to point out that the firm has not lost a single leader from its units in that time. “I try my best to think of that time period as a character building experience for our team because we are trying to build our company over the next 20 years, over the long term. The whole group has been through these turbulent times together so our thinking is focused on the positives now and how in some ways the experience has made us stronger,” says Watsa. Some good news came in June this year, when it was revealed that Fairfax had been cleared in a Securities and Exchange Commission investigation of its use of finite reinsurance. This could help it in its fight against its detractors. In 2006, Fairfax hit back at its accusers. It filed a lawsuit against the hedge funds and the Fitch analyst that had attacked it, claiming it had been the victim of a share price manipulation scheme so that short sellers could profit. Fairfax is seeking $5bn in damages. The case is still winding its way through a New Jersey Court. Taking back control The turnaround in Fairfax’s fortunes since the hard times of 2005 is symbolised by two deals it has done this year. In February, Fairfax completed the acquisition of the 37% of Northbridge that it did not own for C$686m ($650m). It followed this up with the acquisition of the 27.4% Odyssey stake, which cost $1bn. Fairfax initially offered a price of $60 a share for Odyssey but increased it to $65. Fairfax now has complete control over its three main insurance subsidiaries: Northbridge, Crum & Forster and Odyssey Re. In 2008, these subsidiaries’ net earned premiums came to $1.01bn, $878m and $2.03bn, respectively. In the past year, Fairfax also acquired the 33.3% of Advent that it did not already own in a deal that valued the Lloyd’s insurer at around ?94m ($157m), bought all the outstanding shares of Polish reinsurer Polskie Towarzystwo Reasekuracji Spo?ka Akcyjna, and acquired a 15% interest in Alltrust Insurance Company of China for $66m. Watsa says he was eager to seize back full control of Northbridge and Odyssey Re. But the firm is maintaining a cautious approach to its insurance and reinsurance operations, given the market conditions. Fairfax’s combined ratio for the first nine months of 2009 was 99%, basically break even. Fairfax’s gross written premiums fell 3.7% in the third quarter and its net premiums fell 6%. Andy Barnard, president and chief executive officer of Odyssey Re, says the firm is not afraid to shrink premiums further. “Odyssey is a good illustration of Fairfax’s underwriting discipline in the soft market, where we are going to be less aggressive than many other companies. We are prepared to shrink our business,” he told Reactions. But he adds that the flipside of that strategy is a willingness to expand when the markets harden. “The only way you are in a position to expand like that is when you have kept your powder dry when the market is soft so that you are able to focus on the opportunities rather than [making] corrections and changes because you were too aggressive in the soft market,” says Barnard. He concedes that it is a tough market, and gives a gloomy forecast for the medium term. “We see the market today as a fairly competitive place,” he says. “The turn in the market is probably still several years away so we are maintaining a position of caution. We are preparing for several more years of very tight underwriting policy and reduction in our premiums.” Barnard says being a public company helped forge Odyssey’s identity, after being formed in the late 1990s through combining Fairfax’s acquisitions of Skandia America, Compagnie Transcontinentale de Reassurance and TIG’s reinsurance business. But he says being privatised will help Odyssey maintain its discipline, away from the short-term demands of shareholders. “We at Odyssey are very happy to come back under the Fairfax umbrella and return to a private company status within the larger Fairfax group. It helps reinforce the message throughout the company that, as long as the market remains soft, we should be prepared to cut premiums and reduce market share. That is what we have been doing and at this point what we expect to be doing throughout 2010,” he says. A contrary path Watsa and Barnard’s talk of discipline, focusing on underwriting profits and shrinking premiums when pricing is soft sounds just like that peddled by most other executives in the industry. But they believe Fairfax has a unique approach that sets it apart. “We have never focused on operating returns in the same way that almost all other public companies do,” says Barnard. “There are many times when we have sacrificed operating earnings in order to have a superior long-term value investing strategy.” He says this means maintaining large percentages of the firms’ investment portfolios in cash when the investment markets are not offering good opportunities. This enables the companies to put that cash to work when opportunities do arrive. Watsa quotes figures for a selection of reinsurance companies to back up the claim that a total return approach is best. He says between 2002 and 2008 the reinsurers’ average investment income return was about 4% to 4.5%, which is higher than Fairfax’s figure of 3.4%. However, Fairfax did much better on realised gains. Fairfax had a return of 6.1% from realised gains, compared with the average portfolio, which had realised gains of zero to -0.5%. This means on average Fairfax produced a total return of about 9.5%. “It is very much a contrary path,” says Watsa of his strategy. “By focusing on total return using a value-oriented approach we have been able to build shareholders capital more significantly than the rest of the industry.” Barnard says other companies struggle to take a long-term view because of pressure from investors and rating agencies. “Our objective is to grow book value on a compound basis 15% a year,” says Barnard. “Most [companies in] the industry – driven by Wall Street and, to some extent, the rating agencies – struggle with capital gains as a metric that doesn’t easily fit into their formulas. There is a lot of conventional, orthodox thinking that pushes you to focus on just operating returns.” Staying cautious In stark contrast to the situation five years ago, analysts are now asking what Fairfax will do with all its money. Watsa is remaining cautious. “We have got significant amounts of cash in the holding company and we have the ability to invest the money,” says Watsa. “But what the capital in the holding company does is provide us with protection from the unexpected, because who knows what will happen in the next few years? “When we take advantage of opportunities it will not be at the expense of our financial position. So we don’t expect to take our cash down to $500m from the more than $1bn that it is today.” Watsa does not rule out more acquisitions, but says the firm does not need to make any large buys. He says Odyssey Re operates worldwide so does not have a pressing need for an acquisition, and Crum & Forster and Northbridge are already national firms. “We are open to acquisitions but only if they make sense,” he says. “So, yes, we could do another tuck-in acquisition.” Meanwhile, Watsa is confident book value will continue to grow. In the conference call for the company’s third-quarter results, he predicted that five years from now Fairfax’s book value will have soared because of the high-quality common stocks it bought in the last quarter of 2008 and first quarter of 2009. “We expect to hold them at least five years,” he says. “[Considering] the price that we bought a company like Johnson & Johnson at, we think we might hold it for a long period time because it is a compounding machine. We have looked at a lot of companies but we have not come across a company like Johnson & Johnson in terms of the number of years – literally 40, 50 years – that it has been compounding at close to 15%. Very high quality companies were available and we plan to hold them for some time.” The hedges are now back, however, with the firm hedging about 25% of its equity portfolios. This is indicative of the cautious approach that positioned Fairfax so well during the financial crisis. The benchmark worst case that Fairfax looks to protect itself against is a 50% drop in the stock market, combined with a severe natural catastrophe such as a category 5 hurricane hitting Miami or a California earthquake of magnitude 7 or 8. “We are very downside oriented. We look at the worst case,” says Watsa. “Our guiding principle is that we will never bet the company on any acquisition, project or common stock.” Watsa remains cautious about the US economy, especially the amount of public spending. He expects the recession to be prolonged and says the only comparable periods are the debt deflation seen in the US in the 1930s and Japan’s economic difficulties since 1989 that last until today. “We are very strong financially with the cash in the holding company, with our investment portfolios and with that 25% investment hedge,” he says. “But we are concerned about the economy, and we constantly monitor economic indicators, because in the US the government and government stimulus represents only about 20% of the entire US economy, and the remaining 80% of the economy is private – dependent on the spending patterns of businesses and individuals. The test is will the 80% start spending and we will not know that for some time.” But Watsa’s firm is now well set to deal with anything the market throws at it. The company’s long-term approach has paid off enormously. He says Fairfax will keep performing for investors who have a similar long-term view. “Of course anyone can buy our stock,” he says. “But the investors that gravitate to Fairfax are ones that take a long-term view and that is who we are trying to perform for.” By Michael Loney - [email protected]