StubbleJumper

Jesus Christ, making election day a national holiday would be a disaster. There is a reason why Canada used to close the beer parlours on election days, and that was to encourage the working class to actually get out and vote. Just ensure that people have 4 consecutive hours available to vote during the polling hours, just like what we do in Canada. Those who are interested will come out to vote, and you can't do much about those who are not interested. SJ

Yes, on the subject of Sweden here's an article published yesterday: https://fee.org/articles/bbc-sweden-s-economy-is-doing-way-better-than-the-rest-of-the-eu-during-the-covid-19-pandemic/?utm_source=email&utm_medium=email&utm_campaign=2020_FEEDaily SJ That's really more of a blog post. And a pretty dishonest one at that. I didn't see any dishonesty about the facts. What I did see was a focus on the economic side and a glossing over of the number of fatalities, which does constitute an incomplete portrayal of the interim outcomes of the Swedish strategy. But, incomplete portrayals of the situation in Sweden are not particularly new because most articles that I've seen so far have focused almost entirely on comparing Sweden's fatalities to a selected group of its neighbouring countries, without giving much coverage to the socio-economic benefits of their approach. It will probably be a few more years before it will be possible to provide a fulsome assessments of costs and benefits of the various strategies that countries have adopted. SJ

Yes, on the subject of Sweden here's an article published yesterday: https://fee.org/articles/bbc-sweden-s-economy-is-doing-way-better-than-the-rest-of-the-eu-during-the-covid-19-pandemic/?utm_source=email&utm_medium=email&utm_campaign=2020_FEEDaily SJ

Pelagic just posted an excellent airport industry primer under the "General Discussion" forum. Since much of FIH's and some of FFH's value is driven by the Bangalore airport asset, it is worth a read for shareholders. A big thank-you to Pelagic for sharing: https://www.cornerofberkshireandfairfax.ca/forum/general-discussion/mexican-airports-pac-omab-and-asr/msg426703/#msg426703 SJ

It's the almost-G7 countries. I didn't make the list. I think it shows a pretty stark difference in success in containing the epidemic, don't you? I think I saw that the US had more daily deaths right now than Germany had daily cases (Germany is smaller, but still has 80 million people). You may not be able to vacation in France, but if I had a choice between vacationing in France or in Florida right now, I know where I'd go. Certainly there have been different approaches and different outcomes so far from one country to another. Europe had an aggressive outbreak and then countries like Italy, France and Spain locked down for 9 or 10 weeks to get things under control. Looking at the daily numbers, I question whether France and Spain won't be back in that exact situation by mid-September. Italy's numbers are bit better, but they are trending up too. So, will it be another 10 week lock-down from mid-September to mid-November across a large swath of Europe? It does call into question the sustainability of some of the management strategies if it ultimately ends up being a situation where they lock down for 10 weeks, open up for 16 weeks and then lock down for another prolonged period. If I had to guess, I'd say that we'll see a less agressive set of measures and a greater tolerance for the spread of the virus in Europe (time will tell). FWIW, my concern about vacationing in France is not about the risk of actually contracting covid. The larger concern is the risk of travel restrictions being imposed by other countries (the UK has already put in place measures against travellers from Spain), and the risk that the French could once again impose restrictions on travelling within the country (during their lock-down, the French imposed the use of a sort of self-signed ausweis for their citizens when they needed to leave their home for any reason). In short, there is a small-ish risk that it could become very difficult to find a flight home. In contrast, I would have no such concerns about getting home from Florida, but the risk of catching covid is likely considerably higher. SJ

Maybe you should strike France off your list of "good" countries (Spain too, for that matter). Daily new cases in France have tripled over the past month, and over 2k per day were reported on each of the Aug 7, 8 and 9th. France has about 20% as many people as the US, so that would be roughly equivalent to the US reporting 10-12k new cases per day (better than the US, but still not good). I just cancelled a flight for tomorrow that I scheduled for a vacation in France that I had planned. If France has one more doubling of new cases over the coming weeks, they'll be right back where they were in late-March and early-April. I cannot accept the risk that border control measures and population movement controls would be re-imposed during my vacation. It's fascinating how quickly they shifted from having everything reasonably under control in early-July to having the beginnings of a mess on their hands in mid-August. SJ I don't have a "good countries" list, and didn't say anything specific about France, I'm just reporting death figures. The rest, you read into it. Yes, I must have read something into your post. For some strange reason, I thought that you had assembled a list of "good" countries in an effort to contrast them with the "bad" country. I guess your message was not clear to me, but you could always take this opportunity to articulate the insight that you had wished to share by portraying those specific countries. SJ

Maybe you should strike France off your list of "good" countries (Spain too, for that matter). Daily new cases in France have tripled over the past month, and over 2k per day were reported on each of the Aug 7, 8 and 9th. France has about 20% as many people as the US, so that would be roughly equivalent to the US reporting 10-12k new cases per day (better than the US, but still not good). I just cancelled a flight for tomorrow that I scheduled for a vacation in France that I had planned. If France has one more doubling of new cases over the coming weeks, they'll be right back where they were in late-March and early-April. I cannot accept the risk that border control measures and population movement controls would be re-imposed during my vacation. It's fascinating how quickly they shifted from having everything reasonably under control in early-July to having the beginnings of a mess on their hands in mid-August. SJ

No, herd immunity might require that 60%, more or less, be *resistant* to the virus. That can be achieved through antibodies acquired by virtue of having already had the virus, antibodies from a vaccine, or resistance from having already had a different coronavirus. So, from what I can see, there have been ~5m cases of covid that have been officially laboratory diagnosed, and seroprevalence studies have suggested that 10x or 15x the number of official cases generally show the presence of antibodies. So, are we at 50m or 75m in the US with antibodies today? That would be 15% or 20% of the national population that might have antibodies. Strangely, at the national level, the cases appear to be on the down-swing. Anybody got any theories why the cases were 70k+/day a couple of weeks ago and ~50k/day today? That would be what level of R0? Did people suddenly adopt social distancing strategies, or is this peak virus? If it is actually peak virus, there would be a long way to go on the downside of the curve before the virus disappears, but the apocalyptic assertions seem to be on hold. SJ

FWIW, the speed of testing seems to vary a lot from state to state. In MA, my wife went to a testing station and got the results back in less than 24h. There are also CVS rapid test stations around that are even quicker. Yeah, it's a mess because there's no federal leadership and resources to help places that fall behind or get the right incentives and guidelines uniformly. I'm hearing about a lot of places where it takes 10-14 days to get a result. By the time you get a "negative" result, you've had time to get infected, and you think you're negative (oh, I'm feeling bad, but it can't be COVID..) so you're even more dangerous because you may not quarantine even when feeling some symptoms.. Pretty amazing read, to say the least. Everything can be turned into a "problem", if one wants to [in the in casu situation]. *Shaking head* [Are those citizens awaiting their test outcomes not aware about what to do while waiting for test results?] Not only are they seemingly unaware of what to do, the level of government that presumably has the authority to order them to self-isolate apparently has chosen to not impose that measure. So, apparently the state governments have no responsibility in this. Maybe I need to read the US constitution again? SJ

Q2 2020 Conference Call Transcript: https://seekingalpha.com/article/4362912-fairfax-financial-holdings-limited-frfhf-ceo-prem-watsa-on-q2-2020-results-earnings-call?part=single SJ

Did I read this right? On page 11 of the Q2, the stock investment portfolio was valued at $3.8 billion, but on page 15 the net gains on common stocks (realised and unrealised combined) was $130m. Didn't the S&P rise by like 18 or 20% during the quarter? Am I missing something obvious? SJ

If a doctor treated 350 of 350 patients successfully that is a good data point. A normal person when they go to a doctor, they would be interested in how many cases the doctor treated and how many were successful. How do you know how successful he would have been without it without a control group? That, and given the doctor I'd need a lot more than her word before this even becomes and anecdote, much less a data point. The fatality rate for covid is 0.65%. (1-0.65)^350 is 10.2%. In other words there is a 10.2% chance of all 350 paitients recovering with no loss of life. Unlikely? There are a lot of covid patients and a lot of doctors treating them. Say there are 350 doctors each treating 350 patients. The likely hood of 1 doctor not losing any patients is 1-(1-0.102)^350 is essentially 100%. It's good that you are mathematically quantifying things, but I'm not sure the parameters that you have chosen are quite correct. I am guessing that your 0.65% death rate was an estimate of the IFR. However, since doctors only treat officially diagnosed cases (ie, they do not treat very many people who have no symptoms or minimal symptoms and were never diagnosed), you probably should have done the same math with a Case Fatality Rate (ie, the number of dead divided by the number of officially diagnosed cases). For India, it appears that there are 35k deaths and about 1.6m official cases, which would be a CFR of about 2%. If you redo your arithmetic as (1-.02)^350 you get a slightly different outcome. SJ

Well, FFH received a valuable OTM option with the roll, but we'll see a reduction of US$10m per year of interest income. If BB actually does turn the corner, that option could become quite valuable. The fact that BB needed to have the coupon reduced is a bit of a concern, because it really does call into question their ability to write a US$535m cheque in November 2023. I can't say that I am particularly surprised by this outcome, but I had hoped for somewhat more favourable terms. SJ So did I, but doesn’t the change in rate just reflect the change in bond yields? Hi Pete, Good to see you back in the forums, as I hadn't read even a peep from you for the past few weeks, and I was hoping that you were on vacation and not infected with covid! I would argue that there is a couple of things that have occurred since the last time the debs were negotiated at 3.75%. First, as you've noted, interest rates have broadly declined -- the risk-free rate for a US-dollar 3-year term has probably dropped about ~150 bps since the last time the debs were negotiated in Sept 2016. But, in addition, I would argue that BB's company-specific risk has changed significantly, and a considerable risk premium needs to be demanded to recognize that there is clear potential that FFH will not get return of capital in November 2023. Take a look at BB's financials the last time that the debs were negotiated back in 2016. When BB published its financials in Feb 2017, it reported cash, short-term and long-term investments of $734, $644, $269m respectively, for a total cash/investment balance of $1,637m. Effectively, BB did not really need the $605m proceeds from the debentures because it already had $1 billion of its own cash laying around. If you look at previous years, you'll see that the healthy cash position was even healthier (ie, it was $2.5B in Feb 2016). Despite the industry risks that BB faced, that large cash buffer considerably reduced the risk of FFH being unable to recuperate its capital -- or at least it did up until BB dropped $1B on Cylance. Despite that cash buffer, BB had to pay 3.75% plus offer a US$10/sh conversion privilege because lending money to tech companies can be pretty risky. Fast-forward to today. It looks like ~$500m of the debentures are getting rolled, and the other ~$100m will be repaid. So, where does BB stand? As of May 31, BB had cash, short-term and long-term investments of $907m. My understanding is that ~$100m of that is ear-marked to repay part of the debs, leaving a pro-forma cash balance of $807m, of which $300m is BB's cash and $500 is FFH's cash. My arithmetic says that for the year ended Feb 2020, BB had cash from ops of $26m and it looks like they had capex of $44m (presumably this was maintenance capex because it was so small), resulting in a small cash burn. The problem with rolling the debs is that, if BB burns cash for another three years, will it be in a position to write a $500m cheque in Nov 2023? If everything goes well, the answer is yes. But, a modest increase in the cash-burn or one small, dumb acquisition could leave BB short of cash in 2023. In short, BB's qualitative risk has increased considerably over the past year, and IMO that requires a considerably larger risk premium. Interestingly, despite the repricing of the conversion privilege, I am not convinced that the OTM option is more valuable today than it was in Sept 2016. Back in Sept 2016, FFH negotiated a conversion price of US$10/sh and the prevailing stock price was US$8/sh, which would have ended in the money if the stock had climbed ~25% over the four-year term of the debs. The roll of the debs is repricing the conversion to US$6/sh with a prevailing share price of ~US$4.80, which once again will require the shares to climb ~25% for the conversion to end in the money, but this time the term is only 3 years and 4 months (ie, July 2020 to Nov 2023). Ignoring the possibility that the stock is undervalued or has higher volatility in 2020 (sigma), an argument could be made that the new conversion privilege is less valuable now than it was in Sept 2016. Anyway, as I suggested, I'm not particularly surprised by this outcome, but I had hoped for slightly more favourable terms. SJ

What have you been eating recently? My portfolio needs that you go out for lunch! SJ

Yep, the BB shareholders are up in arms. I guess their underlying assumption was that either BB doesn't need the liquidity or that there is a long line-up of potential lenders who would be prepared to lend a half-billion at 3.75% with no conversion privilege. I am from the school of thought that FFH's last note flotation was at 4 5/8%, so if that's what FFH pays for debt, what should a riskier outfit like BB pay? Maybe 7%? Seriously, a 15 minute walk through their financials for the past 3 or 4 years is enough to make a guy want to puke. Maybe there is a long line-up of outfits wanting to lend money to companies that have drastically transformed their business and are cashflow negative? I don't see it, but I've been wrong plenty of times before... SJ

Well, FFH received a valuable OTM option with the roll, but we'll see a reduction of US$10m per year of interest income. If BB actually does turn the corner, that option could become quite valuable. The fact that BB needed to have the coupon reduced is a bit of a concern, because it really does call into question their ability to write a US$535m cheque in November 2023. I can't say that I am particularly surprised by this outcome, but I had hoped for somewhat more favourable terms. SJ

i disagree with this comment specifically. I think 9-10% ownership is a huge incentive. Sure, this is not BRK level of ownership with Buffet. But if i compare to many other companies their CEO ownership is as low as 1%, it is really high. More so, what else is in Watsa's portfolio. Is it >90% FFH stock, if yes, than i think proper economics incentive is there on both dimensions. Personally, i would preferred no dividends as it gives the optics of cash-cow that all it does is to ensure the cash inflows is just enough to cover the cash outflows + $10 per share for dividends. But that is me. Yes, the key difference is that the typical CEO with a 1% ownership stake is not entrenched by virtue of multiple-voting shares and is at risk of being turfed if he pursues too many visible pet projects. That is possibly one reason why you will not see the CEO of Bank of America hive off $50m for his son to manage. It is probably also the reason why the CEO of BAC will not nominate his son and daughter to sit on the Board. If you are going to make use of multiple voting shares to retain control with a relatively small economic interest, you need to always be more Catholic than the Pope when it comes to using the firm's funds. SJ I think Berkshire and Fairfax shareholders know the difference between how these two companies are managed and the typical corporate structure of most corporations. You get what you get with Berkshire and Fairfax...that you will be treated equal to management, and that management has interests that are aligned with shareholders long-term. That some family influence or atypical culture will exist...be it Howard Buffett on the board of Berkshire or Ben Watsa on the board of Fairfax. Otherwise investors are welcome to invest in other companies where the culture is more agreeable to them. Cheers! When Howie was appointed to the BoD back in what, 92 or 93, what was WEB's economic interest in percentage terms in BRK? After donating shitloads of his shares, what is WEB's economic interest in 2020? It's not even close to comparable. SJ

I really think somebody should be identified as Hillbilly Jim. Don't go messin' with a country-boy... SJ

i disagree with this comment specifically. I think 9-10% ownership is a huge incentive. Sure, this is not BRK level of ownership with Buffet. But if i compare to many other companies their CEO ownership is as low as 1%, it is really high. More so, what else is in Watsa's portfolio. Is it >90% FFH stock, if yes, than i think proper economics incentive is there on both dimensions. Personally, i would preferred no dividends as it gives the optics of cash-cow that all it does is to ensure the cash inflows is just enough to cover the cash outflows + $10 per share for dividends. But that is me. Yes, the key difference is that the typical CEO with a 1% ownership stake is not entrenched by virtue of multiple-voting shares and is at risk of being turfed if he pursues too many visible pet projects. That is possibly one reason why you will not see the CEO of Bank of America hive off $50m for his son to manage. It is probably also the reason why the CEO of BAC will not nominate his son and daughter to sit on the Board. If you are going to make use of multiple voting shares to retain control with a relatively small economic interest, you need to always be more Catholic than the Pope when it comes to using the firm's funds. SJ

For both masks and a potential vaccination, the "best interest" for certain demographic groups might be to simply abstain. If you are in the 25 year-old group, the mask is merely a nuisance for you and only really serves to protect others from virus-laden droplets that you might unknowingly spread. It might end up being the same deal with a vaccine, where a 25 year-old might rightly conclude that it doesn't offer much value on a personal level but only serves to protect others by furthering herd immunity. Some people in the US are behaving irrationally, while some might be behaving in quite a rational, predictable manner. What might be needed is a cultural change to encourage low-risk people to view masks and a potential vaccination as a duty rather than a nuisance. SJ

Well, yes, that is one potentially valid conclusion, and I generally view it as solid, sound advice. But, there is yet one more problem with an outfit that sometimes does not seem to respect its partners. That problem is that the controlling shareholder has, until recently, only owned 7% of the economic interest in FFH but is likely now up to 9% ownership of the economic interest. That arrangement once again creates incentive problems because it creates a situation where every dollar of FFH's money that the controlling shareholder channels to his pet projects only costs him personally 9-cents. This might be a potential explanation for seemingly strange decisions like hiving off $50m of FFH's investment portfolio to be managed by Ben Watsa. What is FFH paying Ben's firm to manage that $50m? Is it 200 bps per year? More? Less? Nobody on the outside knows. But, what we do know is that if it is 200 bps, that makes $1 million per year, and of that sum Prem would pay $90k to guarantee his son a job while the minority (majority) shareholders would pay the other $910k. Prem could have allowed his son to manage $50m of his personal assets, which would also have guaranteed Ben a job, but then Prem alone would be paying the freight on that. Is it the same type of situation with TS? As others have noted, the TS controversy amounts to chicken-feed in the context of FFH's operations. Giving Paul Rivett a sweet-heart deal on TS would only potentially cost a few million of FFH's dollars. But, is this a case where Prem is happily spending 9-cent dollars for the benefit of his friends? Who really knows at this point. I would hope that Prem provides an explanation at the next quarterly call. The problem with this type of personal conduct that gives the appearance of a potential conflict of interest is that it casts suspicion on both good and bad decisions. The charitable gifts that FFH makes are the same sort of thing where Prem is effectively spending 9-cent dollars. We like to believe that all of these donations are made with the most altruistic and best intentions. But, now, when an expenditure is made that is not perfectly obviously aligned with the duty of a fiduciary, it is hard to not have a niggling concern in the back of one's head that the expenditure might not really be in the interest of shareholders. SJ

Stop defending him....this one is not even close.... The revised Rivett/Bitove bid works out for something like $60 million in total to acquire a company that has $70 million CASH on its books and NO DEBT and no unfunded pension liability plus it has various minority investments that conservatively will raise a further $100 million when they are sold. You're asking some shareholders to stop defending him, but have you or anyone asked Prem why he is supporting the Bitove/Rivett deal? You guys always talk about self-dealing at Fairfax...show me some frickin' examples. The only things you guys point to is Resolute and now this. Resolute was to the benefit of Fairfax shareholders. If the Bitove/Rivett deal wins, do you think there might be some long-term opportunity for Fairfax? And why are you pissed off at the investor and not Torstar management...they are the ones who should be explaining why they are supporting a specific deal to all shareholders. Cheers! Do we get to count the time where they sold a piece of FIH's best asset in a way that guarantees OMERS (the buyer) a profit and allowed them to book huge management fees? Seems like the only loser there is FIH shareholders. How about the time FAH shareholders sold one of their best assets to the mothership for way lower than a recent outside bid as part of a low-disclosure deal? Just two more examples from this year, to go along with Resolute, Torstar and the multi-voting shares. Actually, the one that I liked best was when FFH proposed to buy out the minority shareholders of ORH for US$60/share back in September 2009. Presumably FFH made that offer with the intimate knowledge of ORH's financial situation. When ORH eventually filed it's 10Q for September 2009, you know what it's book value was? Yep, it BV at the end of Q3 2009 was a shade under $62/share. That's right, FFH proposed to buy out its partners for less than book. Eventually they bumped up their offer to $65/share, which was a princely multiple of 1.05x book, for a highly profitable reinsurer that had grown its book value by 25% during the year. Fair and friendly? Not so much. SJ

Yes, the seller of an asset can sell to whomever he wants. But, in this case, we have a number of management teams involved who are supposed to be acting as fiduciaries for the actual owners (shareholders) of their firm. The first such management team is Torstar management who should be recommending that its shareholders adopt the objectively most favourable offer, and then holding a shareholder vote to approve or deny the takeover. During that vote, the *actual owners* of TS can make their individual decision of whether they view the offer as desirable. The families can vote against the best financial offer if they want, but to fulfill its fiduciary responsibility, TS should be recommending the better offer and should organize a vote. The second such management team is FFH management, who should be pursuing the best financial offer on behalf of its shareholders (including those of us in this forum). If the FFH management team is knowingly accepting an inferior financial offer for those TS shares which *we* own, they have some explaining to do. If the decision was actually taken or if it appears to have been taken simply to help their buddy, Paul Rivett, then they really have some explaining to do. I have nothing against Paul Rivett, but I do not at all want any portion of my financial interest in FFH to be expropriated just because he's a nice guy. In the case of FFH, the company has had recurring governance failures. This looks like it might just be one more abuse of minority (majority!) shareholders. SJ

There was an article in today's Globe which was even more disturbing. https://www.theglobeandmail.com/business/article-nordstar-ups-torstar-offer-in-what-could-end-bidding-war/ It would seem that the alternate bid might be superior because the proponents are suggesting that they are prepared to both bid higher in a cash-up-front perspective PLUS they have suggested that they would include contingent value rights to Torstar shareholders. Despite that, it seems like Prem has locked up our Torstar shares for the lower valued bid. I think that Prem might have a bit of explaining to do during the next quarterly teleconference if he is truly accepting an inferior bid from a former FFH executive. It's looking more and more like BearProwler called this one correctly... SJ https://www.bnnbloomberg.ca/torstar-bid-raises-shareholders-ire-sparking-calls-for-osc-probe-1.1466294 From the BNNBloomberg article: "It's hard to understand the [families’] actions," said Groia, who worked at the OSC as associate general counsel and director of enforcement from 1985 to 1990. "My experience as a former regulator is any time you can't understand why people are reacting the way they are, the general answer is that there's something motivating them that we don't know about. That's what an investigation is for." Fair and friendly....hardly..... It's puzzling how often FFH ends up being involved in transactions that have a bad smell to them. SJ

We might not find out at Q2 either. The article appears as if it covers OMERS requirement to mark down its investment in BIAL. If OMERS does it, likely FIH will need to conduct an impairment assessment to evaluate whether the value of the airport is permanently impaired and ought to be marked down. I am guessing that Fairfax would prefer to not take an impairment, and in fairness, for such a long-lived asset, it may be a bit pre-mature to decide that its value is permanently impaired. S