Viking
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Posts posted by Viking
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1 hour ago, TwoCitiesCapital said:
You can only say they were underestimated in hindsight. I'd say right now everyone has underestimated the Fed so far which is why this sell off occurred in the first place.
Whether that underestimation continues remains to be seen, but to say this is different because the severity has been correctly estimated can only be said in hindsight - seems crazy to say markets are getting it exactly right now when they got it wrong over the preceding 10 months.
And I'm also gonna guess that the severity of the earnings contraction has yet to be priced in because analysts aren't yet reflecting a contraction in their estimates - just slower earnings growth
i don’t think the Fed knows what they are going to do. Their messaging has completely flipped the past 18 months. And every meeting this year their messaging has changed in important ways. Just look at all the significant changes they just made in their forecasts.
The Fed is at the Disney part of tightening financial conditions. It is VERY easy to be a hawk on the Fed right now. Wait until the economic pain gets turned up from the current mild - to medium - to hot. If inflation is still high… the Fed will be screwed. Do we get Burns or Volker? No idea. Because the Fed doesn’t even know right now. But based on past actions, i do not have a lot of confidence they will get it ‘just right’.
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I have chosen a basket approach to investing in energy. And living in Canada i stick to Canadian names (lots of good choices outside of Canada as well). My go to are usually the following:
1.) CNQ: the gold standard. Large, growing nat gas exposure. The more i learn about the company the more i like it. If i had to buy one and hold it for 10 years this would be the one.
2.) CVE: the upstart… still digesting Husky. Not sure how good management is… better than Suncor but likely not as good as CNQ.3.) SU: poorly managed for years… but the stock price reflects that. Has some near term catalysts (asset sales) that should accelerate it getting to net debt target (the decision in Dec on divesting the retail stations will be important). After that, capital return to shareholders will be meaningful. Activist investor Elliott is chewing on its ass…
4.) For mid caps i like MEG, WCP and TVE. Each has a slightly different story. Mid caps, especially MEG, often move +20-30% more than the large caps (both directions) and i like that (for a trade). There are lots of other good choices here.
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53 minutes ago, Spekulatius said:
Energy securities are for trading not owning. I do agree they are starting to look cheap here.
My portfolio is up nicely this year. It is pretty much all due to two large energy trades. Yesterday i was happy to load up again. The volatility is crazy (driven by sentiment). It is such a bizarre set up (who in their right mind wants to own energy stocks when the global economy is rolling over). It is also pretty clear to me that oil stocks are uninvestable for the majority of investors in the Western world. Where energy investments get really interesting is when companies start hitting their net debt targets.
As an example, CVE might hit their net debt target at year end. That is 13 weeks away. The important part is they are very close. Once they have hit their net debt target they will start returning 100% of their free cash flow to investors: regular dividend, stock buybacks and special dividends. At US$80 oil the returns to investors will be significant. Their stock price is at C$20. When they start buying back shares in volume the stock price will increase meaningfully. This will be a company with next to no debt (so minimal interest cost). No exploration risk. Profitable at US$45 oil. In other words, a $20 bill laying on the ground for those willing to pick it up.
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Well energy investors were given a gift yesterday. One of many examples: MEG.TO fell from $18 to $14 in a week. Nuts.
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The Saudi Aramco CEO spoke at recently at the Schlumberger Digital Forum and succinctly laid out the reality of energy markets today. Bottom line, Western governments are in denial; their transition plan “was just a chain of sandcastles that waves of reality have washed away.” Ouch!
—————Remarks by CEO Amin H. Nasser at Schlumberger Digital Forum 2022
…This week, however, autumn begins, and the global energy crisis promises a colder, harder winter, particularly in Europe.
Unfortunately, the response so far betrays a deep misunderstanding of how we got here in the first place, and therefore little hope of ending the crisis anytime soon. So this morning I would like to focus on the real causes as they shine a bright light on a much more credible way forward.
When historians reflect on this crisis, they will see that the warning signs in global energy policies were flashing red for almost a decade. Many of us have been insisting for years that if investments in oil and gas continued to fall, global supply growth would lag behind demand, impacting markets, the global economy, and people’s lives.
In fact, oil and gas investments crashed by more than 50% between 2014 and last year, from $700 billion to a little over $300 billion. The increases this year are too little, too late, too short-term.
Meanwhile, the energy transition plan has been undermined by unrealistic scenarios and flawed assumptions because they have been mistakenly perceived as facts. For example, one scenario led many to assume that major oil use sectors would switch to alternatives almost overnight, and therefore oil demand would never return to pre-Covid levels.
In reality, once the global economy started to emerge from lockdowns, oil demand came surging back, and so did gas.
By contrast, solar and wind still only account for 10% of global power generation, and less than 2% of global primary energy supply. Even electric vehicles comprise less than 2% of the total vehicle population and now face high electricity prices.
Perhaps most damaging of all was the idea that contingency planning could be safely ignored.
Because when you shame oil and gas investors, dismantle oil- and coal-fired power plants, fail to diversify energy supplies (especially gas), oppose LNG receiving terminals, and reject nuclear power, your transition plan had better be right.
Instead, as this crisis has shown, the plan was just a chain of sandcastles that waves of reality have washed away. And billions around the world now face the energy access and cost of living consequences that are likely to be severe and prolonged.
These are the real causes of this state of energy insecurity: under-investment in oil and gas; alternatives not ready; and no back-up plan. But you would not know that from the response so far.
For example, the conflict in Ukraine has certainly intensified the effects of the energy crisis, but it is not the root cause. Sadly, even if the conflict stopped today (as we all wish), the crisis would not end. Moreover, freezing or capping energy bills might help consumers in the short-term, but it does not address the real causes and is not the long-term solution. And taxing companies when you want them to increase production is clearly not helpful.
Meanwhile, as Europe aggressively promotes alternatives and renewables technologies to reduce one set of dependencies it may simply be replacing them with new ones. As for conventional energy buyers, who expect producers to make huge investments just to satisfy their short-term needs, they should lose those expectations fast. And diverting attention from the real causes by questioning our industry’s morality does nothing to solve the problem.
That is why the world must be clear about the real causes and face up to their consequences. For example, as investments in less carbon intensive gas have been ignored, and contingency planning disregarded, global consumption of coal is expected to rise this year to about 8 billion tonnes.
This would take it back to the record level of nearly a decade ago. Meanwhile, oil inventories are low, and effective global spare capacity is now about one and a half percent of global demand.
Equally concerning is that oil fields around the world are declining on average at about 6% each year, and more than 20% in some older fields last year. At these levels, simply keeping production steady needs a lot of capital in its own right, while increasing capacity requires a lot more.
Yet, incredibly, a fear factor is still causing the critical oil and gas investments in large, long-term projects to shrink. And this situation is not being helped by overly short-term demand factors dominating the debate. Even with strong economic headwinds, global oil demand is still fairly healthy today.
But when the global economy recovers, we can expect demand to rebound further, eliminating the little spare oil production capacity out there. And by the time the world wakes up to these blind spots, it may be too late to change course.
That is why I am seriously concerned….
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17 minutes ago, Xerxes said:
And @Viking you and others talk about self-determination and why there is a need for an empire in the 21st centuary. And i would agree with you as Westerner.
But the world does not moves as fast as the West thinks it ought to or it should to.
But just because the Western world is done squeezing its imperial subjects in Africa and Asia with their shiny imperial boots rubbing on their subject' necks does not mean that other power have the same timeline.
What if you were a Mughul aristocrat leaving in India few hundred years ago enjoying the good life, discussing investment thesis on Dutch East India company on message boards, you may have objected the Dutch and the British slowly but surely eroding and strangling the living light out of Mughul Empire. From your perspective, why is this happening ???
@Xerxes i appreciate the debate
With my comments on Russia i am not inferring anything about past imperialist actions of ‘Western’ nations. I have said numerous times that what the US/West did in Iraq was a catastrophe. The world is an imperfect place.
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@Xerxes yes history tends to move in very long and slowly changing arcs. Sometimes it pivots abruptly. All empires end. The Russian/Soviet empire that Putin harkens to is dead. Where is the Austro-Hungarian empire today? Where is the Ottoman empire today? These are two of many examples of empires that lasted for hundreds of years that are no more (well they are still around… just much smaller). Now when empires die they never go quietly into the night.
Putin is doing his best to channel Peter the Great. The people in Russia who support Putin are typically old - and they yearn for ‘the good old days’. The geopolitical world that existed 50 or 100 or 200 or 300 years ago no longer exists. Russia is trying to turn back the clock and live in the past. Except the countries on its borders, Europe and the world has moved on. So in trying to return to past glory (and empire) Putin is only accelerating Russia’s decline.
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Are we at the beginning of the ‘something breaks’ part of the Fed tightening cycle? Bond yields are on a one way train higher. The US$ is on a one way train higher. What is next? Is this the beginning of the panic trade? Having some cash just might be a really good thing in the coming weeks…
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1 hour ago, changegonnacome said:
And we shouldn't forget that 20 million of them that died in WWII......the bodycount far exceeding any losses by any of the Allied forces in defeating Hitler. Putin doesnt forget of course......he draws a line in history from Russia's contribution to WWII , to the fall of the Berlin wall and assurances given to Gorbachev in 1990's during German re-unification about NATO aspirations to the East...& then of course the April 2008 NATO Bucharest Summit declaration from Bush out of nowhere around Ukraine/Georgia potnetially joining NATO.........and then the invasion by Russia into Georgia a few short months later ..bit of a conincidence.........then of course the 2014 Russia Crimea invasion after further NATO saber rattling.......then of course the recent phone calls from the United States president in 2019 to the President of Ukraine telling him to investigate his US rival or the ex-Vice Presidents son sitting on the board of Ukraine largest gas company with no energy experience........I dunno its like Ukraine was getting a bit puppety on the US side, dont you think.........then you got the Feb 2022 Russian invasion.......and I guess to the uninterested outsider it seemed it like it came out of nowhere cause Putin is a "lunatic".......god forbid we might for second think about why this is happening & what to do about it in a way that strips the whole sorry affair of nonsense narratives of good guys/bad guys....democracy/autocracy.......and have a think about solutions that dial down the aggregate human misery, the death and destruction and reduce the overarching probability of total nuclear annihilation (however slight that possibility is, it can ALWAYS & should always be made lower)
I think it is really not all that complicated to understand what is going on in Ukraine. It is a good old fashioned land grab. An old, tired and failed empire disintegrated about 30 years ago. Pretty much all countries on the periphery (about 15) have been for decades pivoting to Europe and the West and away from Russia. What is the driver? These countries feel being aligned with Europe/the West provides the best opportunity to them and their kids to have a better life. Ukraine was late to pivot away from Russia. Unfortunately for Ukraine, Russia decided it needed more land. Unfortunately for Russia, Ukraine, with the blood of its citizens, has decided to fight. Simply amazing what a taste of freedom does to people. Something we should all remember.—————
Russia wants to turn back the clock. The countries it wants to subjugate disagree. And they are willing to fight. Self determination is a powerful force. Not that complicated.
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It looks to me like this war is just getting started. Putin just confirmed this. Off-ramp? Both side think they are winning. So my very uninformed guess is this will be a war that is waged until a victor emerges. And if it is Ukraine, the tail risks stop being tail risks.
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18 hours ago, longlake95 said:
2 year treasury 12 months ago: 0.207
2 year treasury today: 4.259
remarkable
@longlake95 I agree. The increase in US Treasury rates, across the curve, continues its upward march:
2022
1 Mth
1 Yr
3 Yr
5 Yr
10 Yr
Jan 1
0.05%
0.40%
1.04%
1.37%
1.63%
Mar 31
0.17%
1.63%
2.45%
2.42%
2.32%
Jun 30
1.28%
2.80%
2.99%
3.01%
2.98%
Sep23
2.67%
4.15%
4.21%
3.96%
3.69%
This is a big, big win for Fairfax. How much of a win will depend on a couple of factors:
1.) how high do rates ultimately go?
2.) how long do rates stay high?
Treasury rates are already higher than I thought possible. But Powell just said rates will be going higher and staying higher well into 2023. Now I don't necessarily believe that is what will happen. Lets hope I continue to be wrong.
3.) does Fairfax increase duration? Not as of June 30 (still at 1.2 years). This will be perhaps the key piece of information I will be looking for when they report Q3 results. If they start to push the average duration out then that will give investors more certainty regarding the future path of interest income.
4.) do credit spreads blow wider? Not yet. But if the economy starts to roll over we likely will get a credit event. The Fed looks like it is going to keep raising rates until something breaks... I wonder if credit markets blowing out (and volatility soaring) will be the trigger for the Fed to stop and eventually reverse course.
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There is a short term negative to rising interest rates. And that is the significant market-to-market loss that gets booked at the end of the quarter as the fixed income portfolio gets re-valued:
- Quarter 2 = ($445 million)
- YTD 2022 = ($1.008 bilion)
- small offset: U.S. treasury bond forward contracts gain Q2 = +$32 million and YTD = +$100 million
Given the move in rates so far, it loos like the hit in Q3 will again be large: $500 million? Still, rising interest rates is a very good news story for Fairfax in 2 important ways:
1.) much higher interest income earned for years into the future
2.) potential for significant mark-to-market gains should interest rates ever come down again. Especially if Fairfax increases duration at attractive interest rates.
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It looks like India will be a big winner as companies shift production from China. Apple doing this is a very big deal.
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Apple Inc may make one out of four iPhones in India by 2025, JPMorgan analysts said on Wednesday, as the tech giant moves some production away from China, amid mounting geopolitical tensions and strict COVID-19 lockdowns in the country.
The brokerage expects Apple to move about 5% of iPhone 14 production from late 2022 to India, which is the world's second-biggest smartphone market after China.
It is also estimating about 25% of all Apple products, including Mac, iPad, Apple Watch and AirPods, to be manufactured outside China by 2025 from 5% currently.
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48 minutes ago, Dinar said:
What the West is learning the hard way is our quality of life is tied at the hip to cheap energy. The crazy part is much of society in the West is still in the denial stage of this crisis. North America will be a big winner in the near term (we have cheaper energy). Industrial production shifting from Europe. Re-shoring production from China. This will likely be inflationary. Supports higher rates for longer that some guy named Powell was talking about today… -
Fairfax India finished Q2 with about $200 million in cash. IIFL Wealth, when it closes, will bring in a little less than $200 million. If sold Fairchem Organics could bring in another +$200 million. $600 million in cash… that is a lot! What to do? Buy something big that will meaningfully grow future BV? Or do a Stelco sized dutch auction (30 million shares) at $13 (crazy low price si it is very accretive)?
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11 hours ago, Parsad said:
+1!
I don't see interest rates going down in an environment where budget deficits and large nation-state debt is abundant. What is going to prop up a falling yen, euro, yuan or rupee? Certainly not lower rates on future debt issuances if North American debt is offering much higher rates.
We are looking at rising rates on a long-term global basis...not a return to any deflationary environment...the good times for cheap debt are over! Cheers!
My base case is central banks are chicken hawks. The Fed is trying to talk down inflation. Yes, fed funds has been going up but it is still way below core inflation. It is easy to be an inflation ‘hawk’ today in the US because the economy/employment is still solid.
If US economy/employment starts to roll over my guess is Fed / global central banks will likely show their true colours and chicken out (become more dovish). But this will stimulate the economy and likely drive inflation higher.
Bottom line, we look like we are getting closer to a fork in the road…
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1 hour ago, Thrifty3000 said:
@Viking all this interest rate and inflation talk begs the question, have you factored in higher interest expense for FFH into your model going forward? Curious what interest expense per share is today and what it could look like when FFH's debt rolls over. (Actually, I think you've mentioned you assume combined ratio and interest rates will correlate in a way that allows overall earnings to remain reasonably protected.)
@Thrifty3000 For 2022 my guess is interest expense will finish the year around $450 million (adding $10 million for the recent issuance to the current run rate). 2023 = $475 million. This includes lease liabilities.
My focus with my estimates/models is 12 and 24 months out. There are so many big moving parts - for me - it is pretty useless to try and go further out than that.
Fairfax has little debt maturing the next couple of years (they did a pretty good job refinancing and pushing out some maturities in 2020 and 2021).
The future path of interest rates will have a huge impact on Fairfax (to state the obvious). If fed funds goes over 4% late this year and remains over 4% for all of 2023 then Fairfax’s interest income is going to be massive (+$1.4 billion in 2023). They will have ample cash flow to pay off any debt that comes due. Or they might decide to pay a higher interest rate and refinance and push the small amount of 2024 maturing debt further out. But having to refinance a small amount of debt at a higher interest rate is a great problem to have (when you have a $35 billion fixed income portfolio with an average maturity of 1.2 years).
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From FFH Q2 report: Interest expense in the second quarter and first six months of 2022 of $108.8 and $212.7 (2021 - $117.8 and $283.9) was comprised of interest expense on borrowings of $97.2 and $188.9 (2021 - $101.6 and $252.2, inclusive of a loss on redemptions of holding company unsecured senior notes of nil and $45.7) and interest expense on accretion of lease liabilities of $11.6 and $23.8 (2021 - $16.2 and $31.7).
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Upcoming debt maturities:
2024 = $283 million
2025 = $277
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I think the most likely scenario is Fairfax India continues to buy back shares. When the ICICI Wealth sale happens they will be flush with cash. Fairfax owns a little over 40%. Is there a limit to how high Fairfax’s ownership can go before they are forced/required to take out all the shares of Fairfax India?
—————i was adding to my small position in Fairfax India on Friday at under $10. If Fairfax decided they wanted to take Fairfax India private at $15 i would do a happy dance. I would be happy to take a 35-40% gain (on my average cost) and roll the proceeds into Fairfax (my holding is in a tax free account).
—————Fairfax India is an exceptionally well run business. And it is a broken stock. This happens. The problem for Fairfax India is how does it scale? The rational thing to do today is buy back all the shares they can… the problem is this is shrinking the company. And lack of liquidity is probably one of the biggest reasons the stock is so cheap; buying back stock makes this problem worse. But how does Fairfax India get another $1 or 2 billion to scale? The management team there deserves to have more $ to manage - based on their track record.
—————We KNOW Prem wants to invest significant $ in India in the coming years (i think he said something like $5 billion). Now this will likely include partners (OMERS, CCIB ETC). The question is how does this investment happen?
—————Fairfax India reminds me of Brookfield Property Partners. Brookfield eventually did the obvious - took it private at a big discount.
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Interesting interview. First i have heard of Palantir (software company). The interview is a bit of an advertisement for the company. But there are some interesting things discussed. A few take aways:
1.) the economic model of the last 40 years is dead
- pretty much impossible to predict what China does moving forward because you have to get inside the head of one man (Xi)
2.) where the globe goes from here (economically and politically) is an open canvas
3.) the US looks well positioned (adaptability; cheap energy)
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Can we now reasonably say that the base case is that Fairfax should be able to earn about US$100/share moving forward? With the shares closing today below $500 that is a PE of 5.
Using the ‘back of the napkin’ method: With a CR of 95. And with an after tax return of 4% on $50 billion investment portfolio. $750 million + $2 billion = $2.75 billion / 23.7 million shares = $116/share. Bit of a buffer of about $350 million… enough to cover minority interests, loss from runoff, interest expense etc?
Looking out another year, if:
1.) the hard market continues (and we get another year of +15% top line growth)
2.) Fairfax is able to push duration of the bond portfolio out to +3 years at attractive yields
3.) Fairfax finds one or two assets to monetize
4.) Fairfax buys back $500 million or another $1 billion in stock
Well… $100/share will start to look low as a base case.
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1 hour ago, Spekulatius said:
You also have the strange thing going on that gluts and shortages for differnt items exists at the same time, which screws everything up.
Some of this has to supply chain managers yanking orders on and off like crazy. That‘s really bad for productivity (see the Fred’s productivity chart which has gone negative ).
One of my buddies working on the semiconductor equipment industry told me that they cancelled all their for supplier that are out more than 6 month because they are no concerned about demand, That’s after years of shortages and double ordering. now imaging these suppliers doing the same thing in Panik and you have another shock way running though and other value manufacturing value chain. Those things are happening now all over the place.As for @Gregmal assertion that inflation is on the retreat, i think partly it is as it pertains to volatile raw material and perhaps energy, gas etc, but it’s not true for core inflation. Core inflation is around 6% and I think it’s higher for producer prices. I know my company targets high single digits and that after years of 2% or less increases. The lousy productivity means that unit costs are higher and manufacturers try to pass those on. Those things have entrenched themselves and won’t go away easily.
I am in the process of shopping for a new car and if you want to have fun check what car manufacturers are doing as far as MSRP prices are concerned for their 2023 models. There might be something going on here that car manufacturer are miffed about dealers selling cars for thousands above MSRP and now trying to grab some extras margins raising the prices. The new Honda CRV is a case in point, even when you look past the point that the base model won’t even offered any more for the 2023 model, they raised the price for a like to like car by the high single digits for their 2023 model. Does anyone really believe that this is going to be reversed? I think that’s what entrenched inflation is looking like. and it’s just one example amongst many here.
Ironically the only countries immune from inflation seem to be China and Japan. China has seems heavy dose of inflation but they are back to 2% and change.
The problem with inflation is it will give you lots of head fakes along the way… looks like it is turning down and then… BOOM ! (as my favourite football announcer John Madden used to say) it turns higher again. What do people think will be happening to commodity prices in another 12-18 months when the global economy is back in growth mode? And China is stimulating their economy? Oil? +$100 (perhaps much higher). Steel? +$1,000. Lumber? +$1,000. And if we actually get around to electric vehicles…. Copper? Other metals? Much higher. Inflation will rip again. And if the shortage of workers in the US is structural… more inflation. Ukraine war and then rebuild of their economy? Gonna need lots of materials…
Please note, i am not doom and gloom. I think North America is going to outperform the rest of the world the next couple of years. And i really have no idea where inflation goes… but if it stays high (5%) i will not be surprised. And if you have a debt bubble isn’t the way to fix it to let inflation rip for 4 or 5 years (kind of what we have been doing the last 18 months) to bring debt levels down in real terms? That was the playbook governments and central banks used after WWII and it worked… looks to me like the same thing is happening in US and Europe today (especially Europe).
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4 hours ago, Gregmal said:
Yup. Across the board it seems. What happens with easily producible commodity products….well you get as much of them as you want.
It seems to be getting clearer that no one really believes the inflation story, except maybe the Fed….look at price action in everything inflation protected/related…especially gold, instead it’s the R word.
Ask any family if they think inflation is a problem. Food? Gas? Rent? I think +90% of families will say crazy high inflation is their top worry today.
My guess is most businesses are building in inflation expectations of 4-5% when building budgets for 2023. (Those on the board with day jobs please correct me if i am wrong.)
I think gold is most highly correlated with the US$ not inflation. When the US$ stops rising my guess is then you will see gold pop higher. (I think gold has been rising nicely when priced in euros or yen.)
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4 hours ago, Spekulatius said:
Interesting story about Scott's Miracle gro but there are some general things you can learn from this. The COVID-19 epidemic pretty much screwed up every manufacturing value chain I am aware of. How exactly depends but in all cases it's either a huge boom or bust in demand followed by the opposite.
I have seen this in the company I work for, where demand for certain components went from hero to zero in mid 2021 all of a sudden. Be it toilet paper ,energy, lumber ,semiconductors, cars or even gasoline and crude or lawn fertilizer in this case - we are seeing ripples that originate from the epidemic and that are still moving though the economic value chains to this day.
I think every boom will be followed by an equally severe bust and vice versa. Fun times.
@Spekulatius i think a number of things are happening at the same time. One thing by itself would be hard enough for companies/the economy to deal with. And they are all of different duration (some cyclical; some secular). Weave them all together and you have the reality of today. What is an investor to do? Be inquisitive. Open minded. And rational.
1.) covid - still not close to being over- largest economic impact today is general shift from goods to services
- zero covid policy in China
2.) Into year 2 of high inflation in Western countries; currently at 8%
- Fed policy has shifted from extreme QE (caused bubbles in financial assets: stocks, bonds and real estate) to extreme QT (burst bond and stock bubbles and is deflating real estate bubble).
- inflation is starting to get entrenched into expectations.
3.) underinvestment for past 7 years/ESG/government policy has created a supply problem for energy. Result will be higher prices moving forward. Europe had an energy crisis well before Russia invaded Ukraine (yes, invasion made it worse…). This secular trend is inflationary. (Commodities are generally all in the same bucket here.)
4.) Russia invasion of Ukraine has created the greatest geopolitical crisis since the Second World War. Russia being one of worlds largest producers this is rippling through all commodity markets. And lots of other things.
5.) China has decided to come out. World is splintering into two blocks: West and authoritarian blocks.6.) globalization is dead. Production is shifting from Asia back to North America and Europe. This secular trend is inflationary.
7.) others? -
Added to Fairfax India at under $10. The only unknown is how much money i am going to make… and the timing. Like shooting fish in a barrel.
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3 hours ago, glider3834 said:
as well as treasuries, US corporate bond market is starting to look more interesting - effective yield at 5% (was around 2.5% at start of 2022)
'The Bloomberg US Corporate Bond Index of investment-grade securities now has a yield of around 4.95%, close to the highest since 2009.'
@glider3834 it certainly would be interesting to know what is rattling around in Brian Bradstreet’s head these days - and the bond department at Fairfax. We have seen government bond yields spike much higher than anyone expected 6 months ago. I wonder if Fairfax is waiting for credit spreads to blow wider before loading up on corporates. One would think locking in a yield north of 5% for 3 to 4 years (for a portion of the portfolio) would make sense. Europe looks headed for a recession (if its not already there). And growth in the US will be slowing (it takes 12 months or so for rate hikes to work their ‘magic’). If we get a recession in the US in 2023 then it makes sense corporate spreads should widen but we may see Treasury yields fall at the same time as the market starts to price in interest rate cuts by the Fed. Just like with great comedy, the key will be timing. Sept/Oct tend to be very volatile for financial markets so hopefully Fairfax gets a pitch they like.—————
If Fairfax is able to lock in a yield north of 4% on its bond portfolio - adding duration - that will do wonders to its operating earnings outlook (the interest & dividend income bucket) for the near term. That would deliver interest income alone of $1.4 billion per year (on $35 billion fixed income portfolio).
—————Here are details of the corporates they started to buy in March of 2020: the interest rate was 4.25% and the average maturity was 4 years.
“Since mid-March 2020, the company has been reinvesting its cash and short term investments at its insurance and reinsurance operations into higher yielding investment grade U.S. corporate bonds with an average maturity date of 4 years and average interest rates of 4.25%, that will benefit interest income in the future. Up to March 31, 2020, taking advantage of the increase in corporate spreads, the company had purchased approximately $2.9 billion of such bonds.”
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Yes, the current set up for Fairfax looks pretty compelling. Near term catalysts?
1.) pet insurance sale: given its size ($1.4 billion and $950 million realized gain) and impact on BV ((increase of $40/share) the closing of this deal should be positive for the stock. Timing? Sometime in 2H. It should be noted, Fairfax tends to be aggressive with the timelines it usually provides (deals often take longer, and sometimes much longer, to close).
- the secondary benefit of this deal is what does Fairfax do with a large portion of the cash? Is it:a.) left at C&F to allow them to grow in the late innings of a hard market?
b.) Or is a large chunk dividended to the hold co? If it is sent to the hold co, is it used to:i.) buy out minority partner(s) in Allied World?
ii..) Or is it used for another dutch auction?2.) Q3 earnings when they are reported end of October: could we see record operating earnings in Q3 (underwriting income + interest and dividend income) of around $500 million? (I think that would be a record?)
a.) underwriting income: hurricane season in US so far in 2022 has been much milder than expected.
https://en.wikipedia.org/wiki/2022_Atlantic_hurricane_seasonCould we see a sub 95CR from Fairfax in Q3? Could we see a sub 94CR for all of 2022? That would put $1 billion in underwriting income for the year in play.
i.) what is top line growth across company? Close to 20%?
ii.) what is outlook for P&C hard market?
iii.) what is growth of re-insurance? Sounds like re-insurance is now in a hard market. Growth here at Odyssey and Allied World could surprise to the upside.b.) interest and dividend income: At the end of Q2 Fairfax said current annual run rate was $950 million. Bond yields continue to move much higher in Q3.
i.) does consolidated interest and dividend income (including runoff) come in around $230 million? It grew about $35 million from Q1 ($169 million) to Q2 ($203 million).
ii.) do we get an update to the annual run rate? To something north of $1.1 billion?iii.) has Fairfax started to extend duration of fixed income portfolio beyond 1.2 years?
iv.) as interest rates spike, P&C insurers with much longer average duration in their fixed income holdings (pretty much everyone else) will be taking a third large consecutive hit to book value in Q3. Do regulators care? Will the significant hit to BV impact other insurers ability to grow their business in the current hard market? Does this reality extend the current hard market out another year?- on the Q2 call Prem mentioned European insurers as being especially hard hit by rising bond yields (big hit to BV). I wonder how BV at the big European reinsurers is being impacted by rising interest rates?
- as with pet insurance sale, what does Fairfax do with $500 million in operating earnings in Q3? And another $500 million in Q4? Many of us on this board have long complained about Fairfax hold co being chronically cash poor, especially during down turns. Is it really different this time? It certainly looks like it could be.
—————When Q3 results are reported we will also get further details of just how much of Allied World was bought back from OMERS. Does Fairfax buy back only a portion? Sounds like it. If so, that would allow proceeds from pet insurance sale and Q3 operating earnings to be used for something else (another big stock buyback in Q4).
- “Fairfax intends to use substantially all of the net proceeds of this offering to purchase a portion of the non-controlling interests in Allied World Assurance Company Holdings, Ltd (“Allied World”), and use any remainder for general corporate purposes.”
—————Another smaller catalyst could be closing of the Resolute deal. I think this is expected to close in Q1, 2023 (i have read different dates so i am not sure… perhaps Q4). The sooner the better. Fairfax will book a nice gain. And the proceeds ($600 million) can get recycled into other opportunities… we are in a bear market.
—————Digit, and its IPO, is another potential catalyst. The question is timing. Financial markets will likely remain pretty volatile the next 12 months - not sure how this impacts a Digit IPO. The important thing is that Digit keeps executing well (continuing its growth). Bottom line, i am not expecting a Digit IPO in 2022 or perhaps even 1H 2023… but this is simply an uninformed guess.
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Is Fairfax done monetizing assets for 2022? EXCO Resources (nat gas producer) is the private holding that i find most interesting today… i wonder what it would fetch if put up for sale? Or IPO?
Energy Sector
in General Discussion
Posted · Edited by Viking
My guess is each energy company will approach capital return in slightly different ways. Each establishing a base dividend at a +5% yield looks pretty much in the bag (if they are not already there).
1.) CNQ: it looks to me like they will prioritize special dividends over share buybacks. They recently did a $1.50 special dividend when their share price was lowish. They are reducing net debt but not as aggressively as CVE.
2.) CVE: capital return will be a bit of an open canvas here. The clear focus continues to be net debt reduction. Get the base dividend higher is the first easy decision after net debt target is achieved. My read is management will be very tactical and opportunistic with capital return: if the stock is cheap they will plow it all into that. If stock isn’t cheap they will also do big special dividends. I also think CVE might make some large acquisitions (if they are a great strategic fit and accretive over the medium term) and this might piss people off. Bottom line, i think CVE might be the most unpredictable.
3.) SU: already has a large regular dividend. Priority this year has been stock buybacks (regardless of price), even over paying down debt. So i expect SU to be the least rational of the big players with respect to capital return - they will hold their finger to the wind to sense what they think the market wants them to do and do that. Not a terrible outcome for investors.
So if an investor wants a big dividend payout (regular + special) i would go with CNQ. My focus is total return so i am good holding a basket.