Viking

FFH, BAC, SU

@Spekulatius makes sense. I did re-establish a small position in Suncor today (my usual go to for oil). Along with Buffett I am drinking the oil Kool-Aid. I also am going to look more closely into Potash given the wars large impact on this specific commodity. Everything else (metals, lumber, steel) i am going to just monitor given the near term outlook (not good should we get a slow down). As compared to 2 years ago lots of commodity producers have reduced debt and are sitting on substantial cash piles creating a very interesting set up should the shares continue to go lower. Crazy how quickly sentiment changes.

So does anyone have any strong views on the commodity complex these days? It is getting taken out behind the woodshed due to recession fears + parabolic move higher the past 4 months (way over owned). Is the bull market already over? Or is this just a healthy move lower before commodities make their next move higher? What parts of the commodity complex/companies are people getting interested in buying? Commodities, especially oil/energy, was the best performing sector this year. The bear market is now doing its thing. Oil: of all the sectors this is the one that looks most interesting to me in the near term. Fertilizer: not sure a mild recession changes the bull thesis all that much… perhaps time to get up to speed on this sector. Copper/metals: the supply/demand picture (due to EV transition) is very bullish for copper in the medium term. But over the next 6 months? Not sure… Lumber: i do follow this sector pretty closely and i am surprised the lumber stocks are holding up as well as they are given the near term outlook. Steel: i am watching Stelco. I hope it keeps selling off… they have so much cash on the balance sheet… Other sectors worth looking at? The question is if we get a mild recession in the coming months how low could the commodity complex go? A big commodity sell off would also be very helpful for the inflation picture in the near term (expectations of lower inflation also will reduce demand to own commodities as a hedge). Is the super cycle already dead?

i think the macro picture is very murky right now. so it is hard to know how things will evolve (or devolve) over the next 12 months. The Fed has just gotten started with its objective of tightening financial conditions… the real pain has not happened yet (20% decline in S&P from crazy high is not pain… it is just a run of the mill healthy correction). +30% decline? Ok, that would start to hit the pain threshold. Much of the easy money has been made: - shorting stocks and bonds - buying real estate - buying commodities I like Druckenmiller’s response: no strong conviction right now (as of a week ago). My solution? Carry a large cash balance and wait for the next fat pitch. Where i live (Vancouver) real estate prices are slowly turning lower and it is likely prices will continue to decline into the fall. I am looking to buy a 2 bedroom condo for my kids (graduating from university in a few years) and if prices come down 10-15-20% i will likely pull the trigger. To take advantage i need cash. I think earnings estimates for equities will be coming down for FY 2022 when companies report in a few weeks. If so we could see another 10-15% decline in equities in the coming months. To take advantage i need cash (versus trade positions). I continue to think in bear markets capital preservation is the key… so you can scoop up great bargains when most everyone else is lying in the fetal position crying. Cash. Patience. Opportunity. Action.

Hopefully this is an example of Fairfax being opportunistic. They already own 13% of JKH (185 million shares) worth around US$85 million (at todays closing price). With this financing it looks to me that Fairfax will get 208 million more shares (in 18 months) for US$75 million. Post conversion they will own 24% of JKH. I would imagine a well funded JKH may well be able to grow their market share given the crisis in Sri Lanka??? ————— Our Group - https://keells.com/our-group John Keells Holdings PLC is Sri Lanka’s premier diversified company. From managing hotels and resorts in Sri Lanka and the Maldives to providing port, marine fuel and logistics services to IT solutions, manufacturing of food and beverages to running a chain of supermarkets, tea broking to stock broking, life insurance and banking to real estate, we have made our presence felt in virtually every major sphere of the economy. Since our modest beginnings as a produce and exchange broker in the early 1870s, we have been known to constantly re-invent, re-align and reposition ourselves in exploring new avenues of growth. ————— The transaction amounts to a value of Rs.27.06 billion. The debentures will be issued at a price of Rs.130 each, resulting in the issue of 208,125,000 debentures to Fairfax with a maturity period of three years. The debentures will accrue interest at a nominal interest rate of 3 per cent per annum. Fairfax can convert each debenture to one new ordinary share of JKH after 18 months from the date of issue until maturity. The maximum post-conversion dilution as a result of the issue amounts to 13.06 per cent if all debentures are converted into new ordinary shares of JKH.

Hugh Hendry clearly made some poor choices when he was a little younger. What i like about Hugh? He is a bit of a historian (he is an old guy). And he tries to step back and look at the big picture when trying to explain what is going on (that framework thing). He is flawed but entertaining (in small doses). So many really interesting things going on with the US hell bent on increasing interest rates to tame inflation. Interesting hearing Hugh’s take on the rapid depreciation of the Japanese yen. Making Japan MUCH MORE COMPETITIVE versus all other Asian economies. Especially China which is pegged to the US$. South Korea can’t be very happy. If the Yen continues to devaluate (seems likely) at what point do we see other Asian countries respond? Perhaps time to read up on ‘1997 Asian Financial Crisis’.

@Ulti most people / economists have been way, way off what is going on in the economy because they are NOT looking at it through a pandemic lense. They look at it only through traditional economic/recession models. The author is talking lots about goods. That was stage 1 of the pandemic (very high goods consumption and very low services consumption). We are now entering stage 2 of the pandemic (much lower goods consumption and very high services consumption). We will soon see deflation in goods (hello Target) and high inflation in services (check out air travel). Services are a much larger part of the economy so it will be interesting to see how this rotation plays out and its impact on inflation. Listening to economists trying to explain what is going on is like watching a dog chase their tail. Bottom line, it is likely going to take a recession and years for the economic system to re-calibrate - too many things are completely out of kilter for the ‘invisible hand’ to work its magic. And central banks/governments are not helping (likely making things worse on balance).

@Spekulatius can you shed any light what is going on in Europe? - inflation running hot at 7-8% - energy crisis (made worse by war) likely to keep inflation elevated - ECB rate still near zero - yields in Italy (southern europe) spiking - emergency ECB meeting - where they decide to have another meeting - likely already in recession ————— - or is it quite simple: 10% inflation and close to zero interest rates for a couple of years.. and poof… you partially solved your too much debt problems (via financial repression).

What to do with the proceeds from the sale to JAB will likely be the number one question from analysts during the Q2 call. Yes, instead of buying back Fairfax stock we could see Fairfax grow ownership in something they already own. I would be surprised if it is Atlas. Yes Atlas is cheap at current prices. However, Fairfax already has a way overweight position and shipping might be moving into the mother of all bear markets that could last years. Atlas could turn into a value trap. If investors were not drinking the Altas Kool-Aid during the shipping bubble why would they start drinking during the bust? (I do not follow Atlas very closely these days…) What about buying another chunk of Fairfax India? Cheaper than Atlas. More diversified. Better prospects. More control. Given the sell off in all equities Fairfax has lots of other good internal choices. Recipe at C$12.40 looks super cheap to me. (I hope not… lower quality and very poor track record.) —————- Having said all the above i hope they continue to buy back Fairfax shares, especially if they can buy under US$500. And anything under $450 back up the truck. Very accretive for shareholders. Fairfax has something around 23.9 million shares outstanding. Down significantly from 27.8 outstanding in 2017. If Fairfax takes out another 1 million (US$500 million cost at todays prices) the share count will fall to under 23 million. This would take the share count back to 2015 levels and about 18% lower than the high reached in 2017. Pretty impressive reduction in a short period of time. Can Fairfax come up with a spare $125 million per quarter for share buybacks? I think they can… chug, chug, chug…

@StubbleJumper i would not be surprised to see Fairfax trade at US$450 and if we get another big leg down in stocks (or a bad hurricane season) to $400. However, i think we can also make the case that Fairfax may not sell off aggressively (like in the past). Why not? Underwriting and Interest income. And buybacks. There is a good chance Fairfax could earn $450 million in underwriting and interest income in Q2. This will go a long way to offset the significant hit from mark to market losses in the bond and equity portfolios. My guess is BV will fall by @ $10/share. This will be far less than most insurers. i think investors in insurance companies value income from underwriting and interest MUCH MORE than gains in equities. As Fairfax demonstrates that these two buckets are increasing and that it is sustainable and growing i think we may start to see Fairfax re-rate and this will be supportive for the shares. If Fairfax can deliver a CR under 94 in Q2 that will be three quarters in a row the CR is under 94. And if interest income can grow from $157 million to something closer to $200 million in Q2 that will also be received very positively by analysts. We will also get more information on the Pet insurance sale to JAB. @Daphne ‘s Scotia report estimates the increase in BV = $35/share when it closes in 2H. Once this transaction closes Fairfax will also have significant resources to buy back stock. And if shares are trading at US$450 or below i think Fairfax will be a buyer. Fairfax did not have this option when shares cratered in 2020. So nothing will surprise me when it comes to Fairfax and its share price. I did double my position yesterday (from 10 to 20% weighting). I really like the $1.4 billion sale of the pet insurance business to JAB. Hard to see how Fairfax does not deliver minimum 15% returns for investors for the next few years (with shares priced today at US$500). If shares go lower (and the story continues to improve) i will be happy to add more.

In 2023 Fairfax could earn US$2.3 billion from just underwriting and interest income = @$100/share. Shares are trading at US$500 today. Something is not adding up…

Interest income at Fairfax is going to be moving materially higher in the coming quarters for 2 very important reasons: 1.) interest rates have moved materially higher across the curve 2.) because of significant growth in net premiums earned the investment portfolio of Fairfax has been spiking higher the past 2 years (thank you, hard market). I think the second point is very under appreciated by investors. I thought it would be instructive to look at the past 4 years to better understand the trends and where Fairfax is today. 1.) 'Total Fixed Income' below is defined as: cash and cash equivalents + short term investments + bonds (Holding Company + Portfolio Investments from Cash and Investments) 2.) Total Interest Income = all insurance units at Fairfax including runoff + corporate 3.) Yield = Interest / Total Fixed Income Total FI Interest Yield 2018 $26.7 bill $744 mill 2.78% 2019 $26.3 $826 3.13% 2020 $29.8 $717 2.40% 2021 $36.8 $568 1.54% 2022 Q1 $36.5 $153 (Q) 0.42% (Q) = 1.68% (annualized) The 'Total Fixed Income' bucket increased by 38% over the past 3 years. 'Interest Income' has decreased by 24%. Yield has decreased by 38%. What does the future hold? Much higher Interest Income. Why? 1.) 'Cash and cash equivalents' yields are up significantly. 1 month T-bill yield has increased from 0.05% (Jan 1) to 0.17% (March 31) to 1.15% (June 17). 2 month T-bill yield has increased from 0.06% (Jan 1) to 0.35% (March 31) to 1.5% (June 17). Fairfax had $11 billion in cash at March 31. 2.) In Q1 $7.6 billion was re-invested at much higher yields (from cash and cash equivalents to 1 and 2 year gov bonds). My guess is the bump in yield was likely around 1.75% = $133 million annual = $33/quarter 3.) given the continued increase in interest rates in Q2 we can expect Fairfax will have continued to re-deploy a meaningful amount of their holdings into higher yielding securities. What will Fairfax earn in Interest Income in 2022? I am going to go out on a bit of a limb... My guess is Fairfax will earn 2.25% yield in Q2 = $200 million. This is a significant increase from the $153 million earned in Q1. This will increase further in Q3 to 2.5% = $230 million. Looking ahead to 2023 I think @glider3834's prediction of $1 billion in interest income will be in the bag by the end of Q4 (=+$40/share). And $1 billion estimate could be low Total FI Yield Interest 2022E $36.5 bill 2.0% $730 mill $182 mill/Q 2022E $36.5 2.25% $821 $205 2022E $36.5 2.5% $912 $228 2022E $36.5 2.75% $1,003 $251

i can see three. Others? Digit is the obvious example. It is in plain sight but little of its value is reflected in Fairfax’s current share price. Gulf Insurance Group, although much smaller than Digit, would be another. The AXA purchase looks very good. The business now has scale with strong growth potential as a consolidator. On the equity side: EXCO: should nat gas prices stay elevated into 2023 and their hedges roll off… we could get a nice surprise.

JAB tightens grip on US pet care market despite FTC warning - https://www.ft.com/content/3e3c37ea-5643-44f1-8912-2dc09a2dceb9?ftcamp=traffic/partner/feed_headline/us_yahoo/auddev JAB Holding has tightened its grip on the booming US pet care industry with a $1.4bn investment in Fairfax Financial Holdings’ pet insurance business, a move that will fuel regulators’ concerns about the European private equity firm’s growing influence in the American veterinary market. JAB has acquired stakes in two companies from Fairfax… The investment comes a week after regulators at the US Federal Trade Commission intervened in JAB Consumer Partners’ acquisition of SAGE Veterinary Partners, forcing the JAB investment vehicle to divest its veterinary clinics in Texas and California to prevent it from forming local monopolies. JAB must also give notice to the agency for future clinic acquisitions. JAB began acquiring US veterinary clinics in 2019 and has since moved into the $2.8bn North American pet insurance market, challenging rivals such as Mars and Nestlé. In-force premiums in the sector more than doubled between 2018 to 2021, according to the North American Pet Health Insurance Association (Naphia). Stuck at home during lockdowns, Americans increased spending on pets, with ownership growing from 67 per cent to 70 per cent of US households between 2019 and 2021, according to the National Pet Owners Survey. Of 175mn North American pets. only 4.4mn are insured, according to Naphia, providing substantial room for growth.

It will be interesting to learn more about the investment/partnership with JAB (the private investment company of Germany's Reimann family). Looks like a pretty solid company (just looking at the brands they manage). - https://www.jabholco.com Fairfax will have $450 million invested with JAB. That is a large investment. - $250 million in notes - $200 million in JCP V, JAB’s latest consumer fund ————— “As a result of the transaction, in which Fairfax will receive $1.4 billion in the form of $1.15 billion cash and $250 million in seller notes. As part of the transaction, Fairfax will also make a $200 million1 investment in JCP V, JAB’s latest consumer fund. ————— ”About JAB JAB Holding Company invests in consumer-focused industries with attractive long-term dynamics, including strong growth prospects, attractive margin and cash flow characteristics, and proven resiliency. Together with JAB Consumer Partners, JAB Holding Company is: - the largest shareholder of Keurig Dr Pepper, a leader in the North American beverage market - has controlling stakes in: 1.) JDE Peet’s, the largest pure-play fast-moving consumer goods coffee company in the world 2.) NVA, one of the world’s largest animal care services platforms 3.) Independence Pet Group, a leading provider of pet insurance 4.) Krispy Kreme Doughnut, a global leader in doughnuts and other premium-quality sweet treats 5.) Panera Brands, one of the world’s largest fast casual restaurant companies, which includes Panera Bread, Caribou Coffee and Einstein Bagels 6.) Pret A Manger, a leading company in the ready-to-eat food market 7.) Espresso House, the largest branded coffee shop chain in Scandinavia. JAB Holding Company is also the largest shareholder in Coty Inc., a global leader in beauty, and owns luxury goods company Bally.” - https://www.businesswire.com/news/home/20220620005108/en/JAB’s-Pet-Insurance-Business-to-Acquire-Global-Pet-Insurance-Operations-of-Fairfax-Financial-Expanding-Its-Presence-in-the-Fast-Growing-Industry

Well i was late to the party this morning. So Fairfax sells a non core insurance asset for $1.4 billion and the shares are up… 2%? Sweet! Gotta love efficient markets. The timing of this sale looks very opportunistic. The business of pets went bonkers during covid. What does selling this asset do to Fairfax’s earnings power moving forward? Not sure, but it probably doesn’t change it a great deal. How valuable is it to Fairfax to pick up $900 million in cash when financial markets are in a bear market? VERY. (Yes, the money will need to be accessed from C&F). What will Fairfax likely do with all the cash (deal will close in 2H)? 1.) continue to grow insurance business in hard market 2.) no need to pay down debt - did that last year (and refinanced outstanding debt at very low interest rates) 3.) buy back stock My guess is Fairfax will carry a higher cash balance given we are in a bear market (for financial assets) that may get much uglier and may take another 6-12 months to fully play out. We also should see the insurance subs maximize top line growth (+20% in Q1). Stock buybacks are also likely… perhaps $100-$150 million per quarter (beginning after the deal closes)? And we could also see new sizeable equity purchases at bear market prices. Lots of great options. - https://www.fairfax.ca/news/press-releases/press-release-details/2022/JABs-Pet-Insurance-Business-to-Acquire-Global-Pet-Insurance-Operations-of-Fairfax-Financial-Expanding-Its-Presence-in-the-Fast-Growing-Industry/default.aspx

@Gregmal I am playing devils advocate (sort of). Yes, BRK is down 27% in the last 3 months. That is one data point. i presented a few other data points that simply suggest BRK might not be so cheap (i.e. it is trading today about where it was trading 12 months ago). The truth… probably somewhere in between. ————— BRK is trading today - 50% HIGHER than the low it hit in 2020 (the last bear market). - 15% HIGHER than is was trading pre pandemic. - flat to 1 year ago.

Great discussion of where we are at today. The host is too pessimistic. I think the money manager has a pretty balanced perspective. I think corporate earnings are the next shoe to drop. Current earnings estimates are for growth in 2022 and 2023. if earnings estimates come down over the next 6 weeks i think the stock market makes its next move lower. (Or something breaks first… perhaps in credit or currency markets.) Druckenmiller said corporate profits always come under pressure when the three horsemen show up at the same time: 1.) rising interest rates 2.) rising oil prices 3.) rising US$

I want to buy BRK… but not yet. Why not? BRK is trading today - 50% HIGHER than the low it hit in 2020 (the last bear market). - 15% HIGHER than is was trading pre pandemic. - flat to 1 year ago. Looks to me like bear market in stocks has not hit BRK particularly hard yet. Its equity portfolio is getting crushed (the OXY purchase looks like he might have timed the short term top of the oil market perfectly). Apple is still trading at 21x earnings (and earnings are likely going to struggle in the near term)… so does it keep its super high growth multiple when super high growth is no longer happening? The global and US economy is rolling over… BRK’s 100% owned businesses are highly levered to US economic activity and would not do well if we see a recession. My guess is we will get a lower entry point in the next 3 months…

Bank of America has consistently been saying US consumers have record amounts of savings in their bank accounts (generally 4 or 5 TIMES historical levels). Crazy amounts. How can this be? +20% house appreciation = biggest mortgage equity withdrawals since GFC. $63 billion and 1.1 million households in just one quarter (Q2 2021 for example). Cha ching… ————— Red-Hot Housing Market Drives Biggest Home-Equity Drawdown Since 2007 - https://www.fa-mag.com/news/red-hot-housing-market-drives-biggest-home-equity-drawdown-since-2007-64781.html Homeowners are taking advantage of a global housing boom by pulling equity out of their homes at the highest volume since the financial crisis. In the U.S., homeowners withdrew $63 billion in equity from their properties through more than 1.1 million cash-out refinances in the second quarter of the year (2021)—the largest quarterly volume since mid-2007, according to data company Black Knight. Just under one in five American homeowners say they have pulled money out of their properties in the last year, according to a survey in late October by market research firm Harris Poll, with another 18% saying they are considering it.

If this trend is real and plays out in scale it will be a great development for the economies of North America (US, Canada and Mexico). And this will be benefit many North American companies (equities) and workers. Steel is an obvious example. Losers? Regions that lose production. And it will likely add an inflation impulse to North American economies.

I have been saying this for a while…. All of the ‘wealth creation’ the past 2 years was fiction. A desert mirage. It was not real. The problem is people get mentally anchored to the highs. So house goes up from $800,000 to $1,200,000 million over 2 years. People are giddy… their net worth is through the roof. And then a year or two later the house falls to $1,000,000 and they fell like a thief has robbed them. They feel much poorer. And they look for someone to blame. Meanwhile, their net worth is still up significantly over a couple of years. Anchoring is a big, big problem for most people. It stops them from thinking and acting rationally about lots of financial things.

JPM, BAM, GOOG, AMZN, CRM, PYPL, DIS, LEVI, UA Cash is down to 45% (from 55%) Edit: added a little DOCU, SHOP at the close

My guess is real estate was likely the biggest wealth creator the past 2.5 years. In the US we could see some wealth destruction in that sector before it is all said and done. It is already happening in Canada (house prices are off 8-10% from the bubble top in Feb/March).

I do think the inflation will come down. And it will be a recession that does the trick (just like past inflations). What will cause the recession? Not sure. Perhaps the bond market continues to push rates higher until something breaks (a credit event). Who in their right mind wants to own a bond today with inflation running 8.6%? Apparently no one… given the relentless spike in bond yields over the past 6 months. When? Not sure. But probably in the next 6-12 months.