Viking

Stubble, yes, Q3 reported results could be ugly: 1.) mark to market equities -$350 - my estimates are usually light (of whatever the trend is) 2.) mark to market bonds -$500 - i think the move in rates was larger than Q1 or Q2. In Q2 the loss from bonds was +$400 million? 3.) hit from hurricane Ian could be substantial; RBC is saying large size of losses could hit reinsurers like Fairfax hard. - this will be the big unknown going into earnings. ———-— Looking past Q3 earnings we will have BV with: 1.) equities valued at close to bear market lows 2.) bonds valued at close to 4% treasury yields across the curve 3.) hard market in reinsurance Bottom line, book value will have digested pretty momentous changes in financial markets. If Fairfax has been able extend duration the earnings power of the company will be very good. And the opportunity to grow book value will be large. ————— i think you were thinking FFH could get to US$450 during hurricane season… well done! Perhaps we see US$400 if Mr Market does not like Q3 results and the overall market continues to sell off. One can hope. I am back up to 40% cash and would love to add to my position The fly in the ointment to getting a much lower share price might be the pet insurance business closing. That could be a big catalyst for shares. When they did the deal Fairfax said 2H closure. During Q2 conference call i think Prem said ‘next quarter’.

Here is an update of Fairfax's equity holdings for Q3. Bottom line, equity holdings are up $372 million. It is a tale of 2 cities: the mark to market bucket was down a bunch and the associates equity accounted / consolidated equities are up a bunch: - mark to market/derivatives - $310 million = @ - $13/share - associates - equity accounted + $576 million - consolidated equities + $104 million Total + $372 million Movers: 1.) Atlas = + $398 million - take private (Poseiden) 2.) Resolute = + $221 - being purchased by Domtar 3.) Recipe = + $142 - take private (Fairfax) 4.) FFH Total Return Swaps = - $126 5.) CIB = - $90 Fairfax Equity Holdings Sept 30 2022.xlsx

The oil market right now resembles one of those great Ali-Fraser boxing matches. With haymakers - that are connecting - getting thrown by both sides (bulls and bears). Love the volatility… And all the back and forth rhetoric might actually give Ali a run for his money. ————— What a shocker. Oil is at $80 and OPEC is floating the idea of CUTTING output by 1 million barrels per day. Guess where OPEC wants pricing… higher than where it is today. Guess where Russia wants oil prices… yes, higher as well. OPEC and Russia are aligned on wanting higher oil prices. Guess where oil prices are going in the near term? ————— At the same time, what is the US doing? Continuing to release 1 million barrels from the SPR. Now pushed into November. WTF? ————— i continue to think oil markets are going to be wickedly volatile. I have already started lightening up on some of my oil purchases from last week (quick 10% gain). That rent, not own thing that others have mentioned. If oil spikes higher heading into the OPEC meeting on Wed i will continue to lighten up on my holdings. And then patiently wait for the next panic sending oil stocks lower… ————— Oil Jumps as OPEC+ Mulls Biggest Production Cut Since Pandemic - https://finance.yahoo.com/news/oil-jumps-open-opec-considers-221955684.html Oil surged in early Asian trading after delegates said OPEC+ was considering cutting output by more than 1 million barrels a day when the group meets this week to stem a slide in prices.

Thanks for providing the historical averages and where spreads are today. The lack of widening is quite the head scratcher. And definitely something worth monitoring moving forward. —————- I haven’t owned bonds in years. Bond substitute type stocks (my loose definition) in Canada have come down the past 2 weeks (@10%). But given the size of the increase in bond yields this year these stocks actually look expensive. People who own these stocks for yield/safety likely do not realize bonds might now offer a better risk/reward tradeoff. Utilities: Fortis 4.3% yield Pipelines: Enbridge 6.7% yield Telecom: BCE 6.35% All of these companies have massive debt levels. What happens if interest rates stay high for years (i.e. the next 5). What happens to the business model when they have to issue/roll over debt at a much higher interest rate?

@maplevalue thanks for posting. I find Ray’s mental model very appealing. I have been constantly underestimating how high interest rates have gone. But it looks to me like we are getting to the ‘something breaks’ part… so we might stop at the low end of Ray’s estimate for interest rates. Super interesting time right now…

Followed you back into LEVI. Only jeans i have ever bought (yes, i know dumb reason). Also bought a little Nike (just bought a pair of runners). Also bought GOOG today… some days my hours watching Youtube is starting to rival my time watching regular TV (if i exclude sports). This weekend i will be spending time reviewing my buy list… JPM just hit a new 52 week low and BAC is within a whisker of $30 - both are trading close to where they were 4.5 years ago.

+1. Putin is messing with everyone. Every post i see suggesting US is responsible without a shred of (demonstrable) proof is exactly what Putin was hoping for. Pretty soon it will be ‘common knowledge’ in most of the world (and a large swath of the US) that the US was responsible for blowing up the pipelines. Smart bastard.

Pretty good summary of where energy markets are at. Intelligent and unbiased commentary. What a mess. Especially Europe. My take-away: Over the medium term, oil investors will likely make a lot of money (they just need to get through the next year).

Here is the latest from Eric Nuttall - the bull case for holding energy stocks. What appeals to me the most about energy is how profitable oil companies are at even $$70-80 oil. Energy stocks look like they are discounting $60 oil (or lower). My guess is OPEC will cut production if oil gets close to $70. Russia also does not want low oil prices. My read is there is a floor price for oil that is high enough that energy producers will continue to make very good money. And the oil market is tight enough that OPEC/Russia will be able to manage the price to where they want it (even if we get a recession in Europe /US next year). My guess is OPEC/Russia does not want the oil price to fall much below $80. ————— Ninepoint Energy Fund Marketview- September 26, 2022 - https://www.ninepoint.com/commentary/commentaries/2022/092022/energy-fund-market-view-september-26/ “While the drawdown is nausea inducing and can serve to shake conviction in the absence of data, it is we believe only temporary. We have learned that the best opportunities come when fear is rampant yet fundamentals are strong. That is our assessment of things today. With the SPR ending, China signaling the potential slow return to normal, US shale growth stalling, and OPEC ready to cut production should the oil price sell off, we view valuations today as extremely attractive and potential outsized returns compensating for the additional volatility that the sector carries. With our average holding trading at an estimated 2.5X EV/CF at $80 (1.9X at $100WTI), down 37% from June highs, global oil inventories continuing to draw, and several potentially positive catalysts in the months ahead, we remain bullish.”

Stocks (S&P500) is down about 25%. The 10 year US Treasury now yields about 4% = 20% about bear markets in bonds? The time to be really worried about stock and bond markets was back in January. Now if the global economy goes into recession in 2023 then financial market averages will likely continue to struggle. Lots of good values out there today (especially for investors with a longer term holding period).

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.

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’.

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.

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.

Well energy investors were given a gift yesterday. One of many examples: MEG.TO fell from $18 to $14 in a week. Nuts. ————— 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 - https://www.aramco.com/en/news-media/speeches/2022/remarks-by-amin-h-nasser-at-schlumberger-digital-forum …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….

@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.

@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.

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…

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.

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.

@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. ---------- 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.

It looks like India will be a big winner as companies shift production from China. Apple doing this is a very big deal. ————— 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. https://www.business-standard.com/article/international/apple-may-move-a-quarter-of-iphone-production-to-india-by-2025-jpmorgan-122092100786_1.html

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)?

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…