Viking

My guess is Calgary prices will outperform Toronto moving forward - especially if the spike in oil prices is sustained. The trick is to think through the different potential outcomes so that regardless of what happens in the future you (and your spouse) are in a good place mentally (and financially) with the decisions you have made.

An important question to answer is if you ever want to buy back in Toronto (in 3 or more years time). If you sell in Toronto today there is a very good chance that prices could run away from you. Eyes wide open

My suggestion is focus on what is best fit from a lifestyle perspective first - as a couple. Financial fit second. From an investment perspective, a buddy of mine just sold a rental and proceeds just dropped into his bank account… right in the middle of a bear market. He has started scaling into S&P500 index fund. If bear market continues he will buy more. pretty good options today to redeploy the cash.

The Fed controls the Fed funds rate. The Fed took interest rates to crazy low levels and kept them there for far too long. This blew asset bubbles in bonds, stocks and real estate. The bond bubble has popped. The stock bubble is in the process of popping. Real estate? It is slow moving so we will see. Too much fiscal spending plus free money is also a factor in out of control inflation. Bottom line, the Fed messed up. But i am not complaining when i say that. It is a statement of fact. And completely predictable. Investing is not a Disney movie. The stock market takes money from those who don’t know what they are doing and gives it too those who do know what they are doing. Everybody makes money in a bull market. Most everybody loses money in a bear market. Especially the ugly bear markets that take months to play out (and decline 40%). The trick is to not lose so much that you get kicked out of the game (that capital preservation thing). A reminder… the Fed is just getting started with its tightening campaign.

This was the same guy who said a few short months ago that inflation was transitory And we all believed him then too. So, yes, the Fed has been very good at communicating their intensions… until they realize they are wrong, change their mind, and communicate the ‘new intention’. So the current intention is to hike… and they will… until something breaks… and then they will communicate the new new intention… Bottom line, i am happy to play all the volatility.

i don’t think it will be inflation that stops the Fed from Increasing rates. I think the Fed will be increasing rates until something breaks. And that is when they will stop. Just look at the turmoil in financial markets from the past two months… The Fed has only raised the Fed funds rate by 75 basis points and they haven’t even started quantitative tightening yet. I continue to think the next 3 to 6 months are going to be very volatile for financial markets.

Great discussion of where the Fed is at today. “Powell announces Fed will ONLY move 50 basis points at each of next two meetings AND will start balance sheet run off June 1” and the stock market rallies 3% in one day. Apparently because 75 basis point increase is off the table. How far we have come…??? My favourite part of Powell’s Q&A was when he admitted he has NO IDEA how balance sheet runoff will play out in financial markets. Can’t make this stuff up

Rising US interest rates are starting to have knock on impacts around the globe. One is the strength we are seeing in the US$. Emerging market currencies are getting hit hard, especially those that are not resource based. Emerging markets have lots of debt in US$ That they will need to service and roll over in a depreciating local currency. Energy and food costs have shot higher. Is this development the canary in the coal mine? The depreciation in the Japanese yen has also been nuts. The Euro is weakening. Super strong US$ is also putting China in a tough spot (their currency is pegged to the US$). Bottom line, higher rates in the US are becoming a BIG problem for the rest of the world. Hard to see how this continues much longer… before something important breaks.

S&P500 is trading today 20% HIGHER than it was trading in Feb 2020 - hardly sounds like a bear market to me. Looking under the hood and many sectors - lots of tech - have been shot and left for dead down more than 65%. Lots of other sectors/stocks are down more than 35% - big banks, DIS etc. And you have Apple trading at a 27 PE multiple and Buffett buying more. Tesla, with a $940 million market cap continues to be a head scratcher for me. And sentiment is wickedly bearish. So many significant cross currents. Probably, the best course of action is to do the obvious - buy great companies when they go on sale. But to not be in a hurry, as it may take 6 or more months for the bear to finish its mauling of bond and stock markets. Bottom line, if the Fed continues to aggressively talk down inflation - and hikes and reverses QE as fast as anticipated - and this causes interest rates to CONTINUE TO RISE then my guess is stock market averages will continue to go lower (likely driven by big tech). i am happy to trade the volatility with a chunk of my portfolio. Josh Brown has an interesting theory of how to play the market right now: buy when vix spikes to 30 (when everyone is panicking) and sell when vix gets close to 20. Rinse and repeat.

Nice overview of the economic linkages of housing to the rest of the economy. I found interesting his explanation of why treasury yields might actually fall as the Fed gets further along the tightening cycle (he called it second order effects). It is super interesting how divergent the forecasts are today of many smart commentators… likely means volatility will stay high, until a more consensus view emerges.

We really do not have very good information in Canada on what is really going on with housing. I think it is pretty clear that lots of first time buyers are getting the down payment from parents/family members. Where are these people getting the $ from? Perhaps a home equity line of credit? Is this kind of borrowing increasing? How do rising interest rates affect those borrowers? Would this debt show up in mortgage numbers? MOST IMPORTANTLY, with mortgage rates spiking, will parents be as willing to pull $100,000 or $200,000 out of their HELOC today to help their kid out? Will the big banks start to crack down on this type of borrowing (get a little more stringent)? My guess is the first time home buyer is the key to any housing market… when this group pulls back then it will significantly impact the rest of the housing food chain. As we get the April housing data for Canada it is becoming clear that: 1.) Feb was peak pricing 2.) prices were lower in March (@4% from Feb) 3.) prices were lower again in April (@8% from Feb) 4.) housing inventory is starting to grow (still historically low) 5.) affordability is still at historic lows (given spike in interest/mortgage rates) Bottom line, looks like rising borrowing costs are having the desired impact of slowing the housing market in Canada: rising inventory and declining prices - from Feb peak. Not a panic. But the speed of the turn is surprising given housing trends usually move, and change, at a very slow speed.

Is ‘macro call’ (with attached probability) and ‘risk mitigation’ not largely different sides of the same coin? ————— In terms of re-deploying the cash and short term holdings… it appears Fairfax is redeploying to max 1 to 2 year duration for now. Why not longer duration? Prem talked about ‘70’s inflation and long interest rates that went to 16%… so Fairfax is going to be ‘very careful’… ‘protection’ is the priority. i do wonder what happens to other insurers and capital levels if interest rates do the unthinkable and keep moving higher (like even 4 to 5% across the curve). I can’t see how rates could go much higher due to international capital flows… If rates in the US spike another leg higher then would we not see historic devaluation of Yen and Euro versus US$? ————— From Q1 Conference Call Tom MacKinnon: Okay, that’s great. And then, in terms of deploying some more cash into bonds, are you kind of finished with that now or would you look at putting more of your substantial cash position in the bonds going forward? Prem Watsa: Yeah, so, Tom, we think the big risk today is the fact that people have not -- for 40 years, interest rates have gone down and you have to be in the business for a long time, like in the ‘70s, to have seen how interest rates went up, inflation went up, interest rates went up. So the big risk today, as I said, is interest rates going up, and we don’t know how high it is going to go. So what we’ve done is just one or two year bonds -- we are limiting our investments to one and two years, which by the way significant increase in interest rates have taken place in that term one to two years. And Brian Bradstreet, that’s what he’s limiting it to, two years max, and just rolling it over, as Peter told you in his presentation. Tom MacKinnon: If rates continued to rise, would you look at deploying more or what would be your thinking in terms of what you would want to see before? Prem Watsa: Tom. Yeah, if you were in the ‘70s, you’d have thought the rates were much higher than of course, what 5%, 6%, 7%, would have been good rates, 8% would have been good rates. 10%, 11%, 12% would have been good. It went to 21%. Long Canadas, that’s 30 year Canadas went to an unbelievable 16%. On the other side, in the pandemic treasury bonds went – 10-year treasuries went to 0.5%, never in the history of -- at least the modern history, including depression of the ‘30s, 10-year treasuries go to 0.5%, they did and they stayed for some time. So, you have to be just very, very careful. You can’t have preconceived ideas as to what can happen and we’re just being very, very careful. We’ve protected our company for 36 years, we want to last 100 years, we’re going to be very careful.

Fairfax has a long history of making big macro calls. Sometimes they work out spectacularly well like the CDS bet in 2008. Fairfax could have been added as another big winner in Michael Lewis’ book The Big Short. And sometimes the macro call works out spectacularly badly like the short positioning from 2013-2020. Another big macro call was moving the massive bond portfolio to a duration of 1.2 years at the end of 2021. Given the spike in bond yields that we have seen in the past 4 months Fairfax is the best positioned of all large P&C insurers - and by far. Fairfax’s bond portfolio has an average duration of 1.2 years. WR Berkley is next at 2.4 years. Most P&C insurers are closer to 4 years. So how much money will this bet make for shareholders in the coming year? Could it be as much as $1 billion? More? (IE. What if both short and long term treasury interest rates get to 3.5% by year end?) i would love to hear how other board members are thinking about this macro bet and, importantly, what will be the financial impact and rough $ benefit to Fairfax and shareholders?

I was wondering how Mr Market would react to earnings today. - Fairfax finished +1.1% - S&P500 finished -3.6% Perhaps Mr Market is starting to understand that Fairfax will be a BIG winner in a rising interest rate environment. Perhaps record and growing operating earnings will lead to a re-rating of the stock to something closer to 1XBV. RBC just raised price target from US$675 to $750. They call Fairfax ‘best-in-class value opportunity at about 0.85x book value’ ————— From the RBC Report: Underwriting results continue to improve, a shift towards more yield in investment portfolio Our view: The hard market continues to drive strong top-line growth and improved underwriting margins and management did an excellent job of protecting book value as interest rates rose, positioning them for improved investment results going forward. While the portfolio remains complex, the value positioning seems well suited to current market conditions. With underwriting contributions improving and the balance sheet as well positioned as we've seen it in some time, we see significant room for multiple expansion and continue to view FFH shares as a best-in-class value opportunity at about 0.85x book value. Estimates: We are lowering our 2022 net income estimate to $54.95 from $67.50, which primarily reflects the results in the quarter partly offset by improving investment income. Our 2023 estimate rises to $75.00 from $73.75, also reflecting higher investment income partly offset by more conservative margin assumptions. On an operating basis, we are revising our estimate to $55.19 from $55.78 for 2022 and to $63.29 from $62.05 for 2023. Price target: We are increasing our price target to $750 from $675 (about C$950, up from C$875 at a 1.27:1 exchange rate). Our target remains based on 1.0x book value, which we now apply to ending 2023 book versus 2022 book previously. With good visibility to further book value growth together with a company generating underwriting profits in the middle of a hard market, we think 1.0x book value is a very attractive multiple.

GOOG, AMZN, added to BAC, CRM, DIS, NFLX

Some initial thoughts from Q1 earnings: 1.) CR = 93.1 (Q4 was 88.1 - suggests we might see CR below 94 for the year) 2.) interest and dividend income has clearly bottomed and is now growing again (year over year). Growth should accelerate as the year progresses. Average duration in Q1 was increased from 1.2 to 1.4 years. Given the continued spike in bond yields since March 31 it is GREAT NEWS that Fairfax is being patient to redeploy into higher yielding assets. 3.) Fairfax is on track to deliver $2 billion in operating income (underwriting + interest and dividend income) in 2022. Not sure how run-off affects this right now (subtract $100-$150 million?). 4.) top line growth was +20%. Chubb CEO said we are still in a hard market and it is still going strong. 5.) hard market (20% top line growth) + sub 94CR (and falling due to hard market) + rapidly increasing interest income (due to spiking bond yields and extremely low avg duration) = 2023 operating income of +$2.4 billion. Not sure how run off affects this ( subtract $100-$150 million?). 6.) an investor today is almost getting all of the upside from the equity investments/Digit pretty much for free. That just cracks me up. Crazy times!

@hobbit i was going over some old posts… What do you see as the trigger for Fairfax India to increase the valuation of the airport? Is it perhaps the sale of another sliver of Anchorage - at a higher price than OMERS paid? Would opening the second terminal later this year be sufficient? Or something else? The airport really is the key building block to value Fairfax India as it is the largest asset by far. If we get further confirmation that the current valuation for BIAL is indeed accurate (or even low) then that would scream that the $20 BV is real and the shares are, indeed, wicked cheap at $12.20. Regardless i bought another big slug today. Looking forward to reading the earnings report tomorrow.

My read is there has been a lot of speculating going on with the real estate market in Canada. The stats available for housing are pretty pathetic so it is kind of a big black box. My guess is an investor buying today will rent and be cash flow negative. The investment thesis is built around continuing capital appreciation - ever higher prices. My guess is if we ever see a 10 or 20% decline in nominal prices that persists for +12 months then we might see some distress. Especially if we see higher interest rates. We know property taxes will be going up dramatically (likely at inflation). Here in Vancouver we have rent controls - the allowed increase for 2022 was 1.5%. Revenue not keeping up with expenses + falling asset price = trouble for speculators.

Peter Lynch in one of my favourite investment books (One Up On Wall Street) says the first thing a person/couple should do is buy a house - not stocks. Great advice. ————— One of my buddies bought a house when we were both still young (a few years out of university). i asked why a house? He said he and his wife were terrible with money. But they would pay their mortgage. So he knew his financial future would be secure. Smart like a fox.

The new class divide in Canada is ‘do you own assets or not’? It is no longer worker / owner. Do you own: House? average house is likely worth +$800,000. Stocks? Pension? All 3? You are rich. Rent? Don’t own stocks? No pension? None of the 3? You have just missed out on the greatest financial windfall in Canadian history - over the past 10 years. Everyone that has owned a house for the past 8-10 years in greater Vancouver or Toronto is now a millionaire (at least). Population of greater Vancouver and Toronto is what… 12 million or so? That is a lot of wealth creation. Actually, owning a house for the past 5 years was probably enough. Many people own multiple properties. Gains are tax free (principal residence). Anyone who has been renting the past 5 to 10 years has completely missed the party. That is crazy.

It looks to me like there has been a massive wealth transfer the past few years (with negative real interest rates) from savers AND debt holders to those who borrow. And the more leverage the better. Central banks normalizing interest rates will: 1.) start to pay savers and debt holders a better rate of return 2.) likely end the party for borrowers, especially those with/needing lots of leverage

High real estate prices in the US? Nope. At least not compared to Canada. As has been discussed extensively on this board, the real estate market in Canada has been a runaway train since 2000. A family member just sold a 1,400 sq foot house in a very small forestry community (with forestry shrinking) for C$500,000 (it was only a couple of years old). Community is remote and 8 hour drive from Vancouver. Nuts. The next 24 should be very interesting… ————— Double trouble: A house in Canada now costs nearly twice what it does in the US - https://nypost.com/2022/04/25/the-average-canadian-home-price-is-now-double-that-of-us/ American homebuyers can take small comfort: It’s far worse up north. The Canadian housing market is even more ludicrously expensive than the US’s, with the nation’s home prices recently reaching a new record high, which puts the average housing cost at almost double that of America’s. Since early 2020, Canadian home prices have surged 30%, an increase which is “nothing short of stunning,” economist Robert Hogue wrote for a recent Royal Bank of Canada report (via Fortune). As of February, the Canadian Real Estate Association reported that the average price of a Canadian home stood at 816,720 Canadian dollars, or $646,809 — over nine times the average household income. In contrast, the US has seen slightly lower price increases, with home prices rising 27% over the same period, Fortune previously reported. In America, the median home price last month stood at $375,000, an all-time high and a 15% rise from a year prior.

My comment was they were insanely valued. Now ‘just’ super high. I was talking about the 4 collectively (and forgot to included Tesla). Looking at Google finance, Microsoft currently has a PE of 29. Stock was up 500% in past 5 years (at its peak). Stock is still up 400% after the recent sell off. Yes, earnings is up significantly. But the biggest driver of the stock prices of all the FAANG (+ Tesla) stocks the past 5 years was multiple expansion. Especially Apple. This is sentiment. And in bear markets, sentiment can quickly turn the other way. And that is what we are seeing. FYI, if Alphabet opens lower tomorrow (it is down 6% after hours) i will be buying. Facebook as well (although i will be holding my nose with that stock). Apple and Microsoft i am going to sit tight a little longer. And Tesla i would not touch with a 10 foot pole

BAC (add), JPM, MS, VZ, SHOP, NFLX (small add), FIH (add), LNR, RECP Sold a little more Fairfax

i would add Apple, Microsoft, Alphabet and Amazon. Just like the Nifty 50. Best companies. Super bright prospects. Were insanely valued. Still super high valuation. Works for many years… until it doesn’t.