Viking

So what is going on with BB stock? It is trading today at US $13.20. It has been trading above $13 for three weeks now. Why is it not going back below $9? We are a week away from quarter end. Should BB continue to trade at current levels it would be up about $4.50 / share from March 31 = $450 million mark to market gain for FFH when they report Q2 results. This is about $17/share pre tax. Not a small number. i also continue to think the longer BB shares trade at elevated levels the greater the chance that FF will monetize the asset. The benefits of monetization are numerous; the question is what price will it take?

FFH. Happy to add to position at current prices. Q2 results should be solid. Hard market continues. Investments should add to net earnings. Shares are trading back below 0.9XBV (whole P&C sector sold off last week).

Hobbit, that is a very good summary. Thank you for taking the time to post it. So you are confident that the valuation of BIAL is roughly accurate at $1.4 billion? If so, Fairfax India is dirt cheap. The question then becomes when will sentiment change and drive the share price closer to BV? What are your thoughts on the share buyback/dutch auction? Is it a marketing exercise by Fairfax India to get the story out (how undervalued the company is)? Or is it to buy out the weak hands (shareholders who are frustrated with multi-year underperformance)? Or the first step to increase Fairfax’s ownership stake - leading to Fairfax buying Fairfax India back down the road? I especially liked your very candid explanation of why the share price is trading so far below BV. I agree with everything you said. I am not sure if time alone will fix this. I hope Fairfax India keeps aggressively buying back stock (and does another big buyback if share continue to trade so far below BV when the dutch auction is completed). Large stock buybacks appear to me the best way to reward current shareholders.

It certainly looks cheap at $13 ($12.60 yesterday). What has surprised me about India and the covid spike of recent months is how well Indian stocks are doing; most of Fairfax Indian stocks are up nicely. And Fairfax India’s publicly traded stocks are also trading up. So why is Fairfax India trading $5 below BV? I think the issue is sentiment; confidence in the parent Fairfax (not Fairfax India). If this does not change i hope Fairfax buys Fairfax India (pull a move out of BAM’s playbook). Perhaps getting more aggressive on the share buybacks (increasing Fairfax’s % ownership) is a step in this direction.

With Fairfax India trading at US$12.30 and BV around $18 this move does not surprise me. Especially with Fairfax India languishing in the $12 range for the past 4 months. It makes sense Fairfax India would want to take advantage of the situation. Fairfax India has 149.6 million shares outstanding. I think Fairfax controls 1/3 of shares so this leaves a max of 100 million available for the tender. At the midpoint of the offer ($13.75) Fairfax India would retire 7.6 million shares. Fairfax India trades about 80,000 shares per day (on TSE and US) so it would be pretty difficult for Fairfax India to buy 7.6 million shares on the open market in a reasonable amount of time (and not also spike the price significantly to well over $15). it will be interesting to see how Fairfax India shares perform in the next week PS: i think Fairfax also believes its share price is severely undervalued... it would not surprise me to see them do something as well in the coming months.

1.) historically low interest rates. It is normal in Canada to go with a 5 year fixed mortgage (amortized over 25 years); this rate was under 2% last year and is currently around 2.4%. (If US had interest rates this low for years would it result in higher house prices?) My guess is this is the single biggest reason. - another related factor is central bank policies / flush of liquidity that is spiking all asset categories (real estate, stocks, collectables, bitcoin etc). 2.) speculation. Real estate has been going up lots and pretty much every year since 2000 (20 years and counting). It is viewed as a pretty much guaranteed winner. Lots of people i know own 2 or more houses. Momentum is huge. FOMO is real. - My neighbour recently sold his 25 year old house; original owner; purchased $250,000 and sold for $1,335,000. Who wouldn’t want to get in on this money train? 3.) money flows: lots of offshore money (China, Hong Kong etc) and drug money sloshing into this market. Vancouver is such a small city it does not take much new money to spike demand and prices. No government wants to discuss this bucket; although the offshore bucket has been getting more attention. 4.) big tax advantage to own real estate: gains on primary residence is tax free 5.) people cannot walk away from their mortgage in things go bad; real estate market in Canada is VERY resilient. Canada did not experience housing bust in 2008-09. 6.) covid impacts: families/work from home want space spiking demand for single family homes.

Stubble, i agree with what you are saying. I was too lazy with my comment. In 2020 Fairfax’s equity holdings (lots of cyclicals) cratered in price as profits took a big hit. This reduced the amount of dividend income Fairfax received. In 2021 the profitability of Fairfax’s equity holdings has greatly improved. My point is this should result in Fairfax receiving more dividend income year over year. Stelco re-instating their dividend and RFP with their special dividend are two examples. It would not surprise me to see something from Recipe late in 2021 or early 2022 if restaurant sales in Canada spike in the summer and fall. I see dividend income as a small tailwind for Fairfax in 2021 and 2022 versus a headwind in 2020. PS: good discussion on the Resolute thread about how the one time dividend will actually impact Fairfax from an accounting perspective....

Thanks for the corrections. I struggle with what share count to use for Fairfax’s various equity holdings. I do not understand the Riverstone transaction, what equities are included, and what the exact share numbers are. I decided to use the numbers Fairfax provided in the AR. Hopefully in 2021 Fairfax gets the Riverstone sale done and is able to repurchase the equity holdings and report shares owed in a more transparent way Bottom line, interest and dividend income is growing nicely.

Resolute just announced a $1/share special dividend. Fairfax owns 24.8 million shares = CAN $24.8 million. Stelco could also do the same thing (large one time dividend). This will help Fairfax grow interest and dividend income in 2021. Will Fairfax record the dividend in Q2 or Q3? The record date is June 28. Payment is July 7. Pretty rational and balanced use of cash by Resolute: 1.) invest additional $50 million in very profitable part of business (sawmills) 2.) pay down $180 million in debt 3.) $1 special dividend ($79 million) And the earnings from lumber looks poised to stay strong (as long as US housing starts stay strong). —————————— MONTRÉAL, June 10, 2021 /CNW Telbec/ - Resolute Forest Products Inc. (NYSE: RFP) (TSX: RFP) today declared a special cash dividend of $1.00 per share of common stock, payable on July 7 for holders of record at the close of business on June 28. The company also announced additional capital investments of $50 million in its wood products operations to support its continued growth, and it confirmed the repayment of all amounts outstanding under its revolving and term credit facilities, reducing debt by $180 million in the second quarter. - https://resolutefp.mediaroom.com/2021-06-10-Resolute-Announces-1-share-Special-Dividend-and-50-million-in-Lumber-Investments

In process of doing the deep dive on lumber i will understand if Fairfax does not sell Resolute at current prices. There is a good chance that lumber prices are going to stay higher than expected for a couple of years. Not US $1,200. But also not $250. If prices average US $500 or higher then Resolute will make very good money. The current price spike was caused by insatiable demand. (The short lived price spike in 2018 was driven by sharp contraction in supply - forest fires in BC combined with severe issues with rail delivery). Supply will increase a little each of the next couple of years. But if housing starts in the US come in at 1,600 (annualized) or higher the next couple of years then lumber prices will likely do very well. We will see crazy volatility with lumber prices so hang on to your hat as the ride will be wild; it would not surprise me to see stock prices of lumber companies swing 20 or 30% in any given month. (The silver lining about steep stock price declines is all lumber companies are swimming in cash - that they do not know what to do with - and so would be aggressive buyers of their stock on any big decline from current levels.) Resolute has also hit the ball out of the park the last 18 months when it comes to capital allocation. They purchased 3 sawmills in the US south in late 2019 for US $185 million at the bottom of the cycle. My guess is these 3 mills will generate more than $185 million in EBITDA for Resolute by end of 2021 since acquisition (so over the past 24 months). Compared to 8 years ago paper is now a much smaller part of Resolute’s total business. I think they also reduced shares outstanding over the past year by 8 or 10% at an average cost of something like $5/share (i’ll check later tonight when i get home). Total debt has come down. And the pension obligation is slowly being addressed. During the last price spike in lumber they also paid a special distribution to shareholders. Resolute has its warts. I much prefer WFG or IFP to get exposure to lumber/OSB (pure plays with cleaner balance sheets and no legacy issues like pension). However, Resolute is a much different company today than it was 8 years ago; much better positioned especially given the current demand / supply imbalance in lumber and strength in commodity markets in general.

Fairfax was not allowed by SEC to sell BB last time around. And Prem said they were motivated. So this tells me they were/are open to exiting BB position. Fairfax needs the profit / cash. They need to de-lever their balance sheet. They need to buy back all the equity holdings from Riverstone. (Interesting the sale of Riverstone has not been finalized yet... which includes another sale of Brit to OMERS). Exiting BB at +/- US$15 would also be a big reputational win for Fairfax. It would allow FFH to book a decent profit off their cost base. Their biggest current dog would transform into decent investment. This sale would also be another significant step in the transition of their investment portfolio. They have slowly been dealing with their mistakes the past 3 years and a BB sale would be another significant step on that journey. My guess is given enough time with the current price spike Fairfax will pull the trigger. I am higher conviction this time on this prediction than the last time

So a week ago BB was trading at US $8.60 and today it is trading at $17.60. Fairfax owns 100 million shares so their position in BB is up $900 million. Fairfax has about 26 million shares outstanding so the increase in BB = $35/share (pre-tax). BB closed at $8.43 on March 31. The BB position is mark-to-market not equity accounted so it impacts book value each quarter end. Fairfax shares are trading at US $468 and have been flat for the past week. What is going on in BB has not been priced into FFH stock price. My view is there is a decent probability that Fairfax will sell some of its current position in BB given current prices; especially if this run up last another week or two. So buyers of FFH stock today are getting all the upside of a potential BB sale/monetization with zero downside risk (if FFH does nothing).

Prem was pretty clear that they tried to find a way to monetize their BB position in Q1 but were blocked due to SEC rules tied to debenture reset. And that restriction was no longer in place. If Blackberry continies to move higher (over US $15) - and remains there for any length of time - i will be very surprised if Fairfax does not find a way to monetize at least part of their position. They can use the $. PS: does anyone remeber the price that the Fairfax insider sold BB shares at in Q1? My guess is that price might be informative.

Yes, Resolute has been an absolute beast for Fairfax over the past year. I don’t follow the company super close but it looks like it is slowly pivoting its business, driven by lumber in 2018 and again by lumber in 2021. The purchase on the 3 lumber mills from Conifex in late 1999 looked like a mistake when covid hit in March/April on 2020 but looks well timed now. There is also a chance someone might take the paper/newsprint (shitty) businesses of its hands... we can only hope. They are also sitting on over $200 million in softwood lumber duty payments that may be returned to them if the US / Canada can come to an agreement. For me, there are much better positioned companies in the forestry segment for people who want to invest new money. Resolute has certainly improved its financial position and business over the past 5 years but not so much that i would want to own it over any of the other big Canadian players like West Fraser, Interfor or even Canfor.

Interfor (iFP.TO). Lumber companies are raining cash. Will pay a $2 special dividend (with likely more to come). Supply / demand imbalance could remain in place for years (BC is not able to ramp production like it historically has dues to mountain pine beetle - in fact it will be reducing production in the coming years). The US South will become the new swing producing region but it will take years for new mills to open. Bottom line, if lumber prices stay above $1,000 for SPF into 2022 all lumber producers are going to earn obscene amounts on money. Time to do a deeper dive this weekend...

Thank you for posting. Some take aways: 1.) current investment positioning: short US$; positioned for inflation - long commodities (oil, copper etc); long equities. Will be surprised if he has not exited equity positioning by year end. 2.) Fed is supposed to be forward looking with policy. Focussed on employment which is a lagging indicator. This makes no sense. 3.) current environment: risky, interesting as hell, will end badly just don’t know when. 4.) shorting: currently as much opportunity as he has seen in his lifetime on short side

Good question. I have no idea If we see volatility i do think they will be opportunistic. Like they were with buying corporates in March/April of last year. And my guess is we could see some serious volatility if the economy and inflation run hotter than expected (decent chance of this happening).

If the move to higher 10 year treasury yields is somewhat orderly i agree with you. But if the move in yields is a spike i think the stock market will sell off aggressively and this will hit Fairfax in the short run. The other risk is if inflation moves much higher than the Fed expects. This will also likely hit equities hard. Bottom line, inflation looks like it will cause volatility to hit financial markets in the coming months. As we learned last year, Fairfax has been very opportunistic in volatile markets. Their recent selling of 1/2 of their corporate bond portfolio at yields under 1% is looking very well timed.

It looks to me like higher inflation in the coming months is now being confirmed by the data. As a result bond yields are once again moving higher. There are three key buckets to understanding Fairfax and its ability to grow BV: 1.) insurance: we are in the middle of a hard market 2.) equity holdings: have been on fire the past 6 months 3.) bond portfolio: this is the bucket that has been the biggest question mark the past 6 months. Fairfax is positioned very conservatively (with very low duration). They have positioned their portfolio to benefit from higher interest rates, which we are now starting to see. The question is now how fast will interest rates move higher and how high will they go? Higher rates will also impact the insurance and equity buckets. Higher rates will hit earnings and book value of insurance companies (as they take losses on their bond portfolio) and this likely will extend the hard market. I think the key for equity markets is the speed with which rates move higher: if rates (10 year US treasury) move quickly to 2% then equity markets could sell off aggressively. So my take is higher rates will benefit Fairfax in two buckets (insurance and bonds) and be a headwind for their stock portfolio.

Pedro, Fairfax’s long equity investments have been purchased with the objective to earn Fairfax a better return than bonds over time. These long equity investments will do well if they go up in price over time. The equity investments are volatile: as we learned last year, they can go way way down, and as we learned the past 6 months, they can go way up. I view the TRS as another equity type investment; and yes, it will be volatile. Shorting, either individual names or indexes, are a very different animal. Fairfax has proven to be spectacularly bad at shorting over the past 8 years; it is THE biggest driver of their underperformance. Fairfax has committed to no longer short individual companies or indexes moving forward. Given their track record the past 8 years or so i like this decision.

Right now Fairfax continues to be ‘cash poor’ (example: selling 14% of Brit to further delever balance sheet). Nothing that is a concern. They will have lots of good options in the future as more cash becomes available. 1.) deleveraging 2.) FFH buybacks - with stock trading below .95 x BV 3.) buy back minority stakes in insurance subs (Allied and Brit) My assumption is the insurance subs do not need cash to grow in current hard market (given positive earnings and their equity portfolio rising significantly)

The Covid situation in India is looking like Italy back in March of 2020 (a tragedy). I have sold my Fairfax India and purchased more Fairfax. For Fairfax, the Covid situation in India (and its impact on the economy in the short term) is the one negative i see right now.

On Friday RBC released its Q1 report on Fairfax RBC and raised its target price for Fairfax to US $550 (from $500). Fairfax has a very strong presence in specialty insurance and large account. These are the segments of the market that are experiencing the best rate increases and there is little sign that rates won’t continue higher throughout 2021 and likely into 2022. Equally, there is ample evidence that the rate increases achieved over the last 12-18 months are finding their way into accident year margins. For the quarter the accident year combined ratio was 90.9% we don’t the company has ever posted an accident year combined ratio that low... Bottom line, the P&C businesses have he best earnings visibility they have ever had and we don’t see any signs this will let up near-term.

If Fairfax had a strategic reason for taking Fairfax India private then i think they could worry less about the optics of purchase below BV. The immediate problem for Fairfax is where do they find the cash? They are selling 14% of Brit because they need cash to delever. And if they have some extra cash why not buy back FFH stock trading at 0.9XBV.

What Fairfax does with Resolute and Stelco will really depend on their assessment of whether we are beginning a commodity super cycle. If lumber and steel prices stay elevated for the year (as futures prices currently forecast) both stocks should trade much higher later in the year. And likely pay large special dividends. Resolute has a carrying value of US $134 million. The current run up in the stock price is not impacting BV. A sale would drive a nice increase both EPS and BV in the quarter it is booked. Stelco is mark to market so the impact on FFH EPS and BV is updated each quarter.