StubbleJumper

Yep. Did anyone ever expect to see FFH with a 4% dividend yield? SJ

I haven't heard of that. Any sources? There are no sources, Eric. It's a back-handed accusation. You have tabled a completely legitimate strategy. Quarantine the aged and otherwise vulnerable for a number of months and let the virus go wild through the healthy population. Once you hit ~60% infection rate, your R0 goes to about 1 and this thing will peter out on its own, assuming that you can't catch the virus twice (that remains to be confirmed, but in any case we are in a world of hurt if it is recurring). Proponents of the alternatives are generally hanging their hat on one of two or three things happening: 1) A vaccine or other treatment gets concocted in reasonably short order, and this drops the R0 quickly (ie within perhaps 12 months); or 2) Social solidarity can remain in place for *years* at a time to slowly let this thing work its way through the system; or 3) A series of waves and countermeasures will be accepted by the population over a period of years (this is really a variation of #2). I am unconvinced of the sustainability of #2 and #3, but time will tell, right? Everybody is playing along just fine at the moment. When financial hardship and boredom kick in, will they still play along? Is it "just" to potentially impose these restrictions on the young for a couple of years in an effort to avoid imposing two years of additional mortality on each 80 year-old (look at the conditional life expectancy tables)? In the interest of imposing social distancing, do you close schools for two years, effectively holding 8 year-olds out of school for a couple of years because grandpa and grandma won't want to self-isolate for 4 or 5 months in 2020? There should be no arrogant declarations that one solution is unambiguously better than others. There are unhappy trade-offs amongst them all. SJ

Oh, I take more nuanced view of that. Ignoring all of the commotion of the past two months with tumbling interest rates and plunging equities, FFH had set itself up for some considerable accounting income during 2020. The Riverstone transaction will trigger US$280m of accounting gains, and then the BIAL airport transaction will result in Fairfax India marking the airport to market quite substantially, resulting in yet more accounting gains when FFH marks its investment in Fairfax India. But, wait that's not all! The BIAL airport transaction could possible trigger a large performance fee, probably in early 2021, so it's the gift that keeps on giving! If you can create $750m or $1B of paper gains over the course of a year, hitting that 15% target is not such a distant prospect. But, as a FFH shareholder, should you celebrate that when the quality of earnings are what they are? SJ

Your question might require a bit more explanation. There are a number of potentially bad/dangerous outcomes of a collapse in equity prices: 1) Reduced underwriting capacity in the subs: if equities are held in the insurance subs, lower equity prices are marked to market and that increases the premiums:statutory capital ratio. This would fall under the category of a "bad" outcome rather than dangerous. 2) Line of credit covenants: FFH holdco and several of the subs maintain lines of credit, some of which are partially drawn. Each of those revolvers likely has a lengthy list of covenants. The holdco covenants require a maximum debt:capital ratio and a minimum shareholders equity total. My rough math suggests that FFH holdco could take about a $5b haircut on its equity before violating its covenants, but what are the other covenants that have not been disclosed? What covenants are present in the subs' revolvers? It would be highly inconvenient if the credit lines were pulled...this might be a "dangerous" outcome. 3) Bond/notes indentures: FFH and the subs have floated dozens of debt instruments, all of which have indentures. Presumable these are far less restrictive than the credit line covenants? Do falling equity prices constitute a risk? This might be a "dangerous" outcome, but from the outside it's hard to estimate the risk. 4) Management fees: one of the ways that the holdco finances its operations is through management fees related to Fairfax India, Africa, and Hamblin Watsa's management of the subs' portfolios. A smaller portfolio means smaller management fees, and perhaps a cashflow challenge for the holdco. This would probably be a "bad" outcome but not dangerous. 5) Refinancing risk: either by good management or by good luck, FFH holdco doesn't have any bullet maturities during 2020. However, holdco must continuously float new debt to replace maturing debt, with about US$300m needing to be refinanced by May 2021. A collapse in the equity portfolio would not be helpful for credit availability or terms. Similarly, if the need to issue shares arises, it is virtually certain that the price that FFH could obtain for a share issuance would be considerably lower after a collapse of the equity portfolio. This is merely "bad" rather than dangerous. At this point, I'd say that equity prices are not really a "danger" for FFH, but they do constitute yet one more trip to the woodshed for shareholders. SJ

I wouldn’t get your hopes up. He was in big and/or illiquid cyclicals and won’t have been able to reduce much. The best that happens now is they do a great job picking up corporate bonds and don’t have to raise equity in the meantime. With this market disruption, let's just hope that they don't find themselves in violation of some covenant in that goddamned revolver. SJ

The problem was position sizing for both the equity hedges and the deflation hedges. When you "hedge" more than 100% of your equity position, it's hard to continuously roll it when the market goes against you for a prolonged period. When you buy deflation "hedges" that amount to more than 150% of the value of your assets, it's also pretty hard to continuously roll them over. If Prem had dropped his equity hedge ratio to half of the size of the equity portfolio had the deflation hedge ratio to half of FFH's assets, it might have been sustainable. There still would have been bitching from shareholders, but it probably would have been much more muted. SJ

Good post. Just wanted to add a vaccine or no vaccine is not a binary situation. we might develop a vaccine that offers * some * protection (like the flu vaccine), but not a watertight solution. Also, even if we don't develop a vaccine in a year, we will likely find better ways to treat patients (with antibodies for examples) as we learn more, causing less of them to go critical and save much needed hospital resources. Time is clearly on our side here. Also just in, Lombardy reports lowest new case number in a week. Don't want to repeat myself over and over, but remember, Lombardy went in lock-down a couple of days before Italy as a whole. Could still be a one-time fluke, but if confirmed over the next few days, would be a very positive sign for what's still to come in Italy first, and the rest of Europe later. Well, go one step further. If there is much uncertainty about the likelihood of developing a vaccine or the timeline for developing a vaccine, is the "general lockdown" the correct management strategy? If you are in the camp where you believe that herd immunity will be our avenue out, then you want to achieve that as fast as you can without drastically overwhelming medical resources. There is an argument that the optimal approach would be mandatory quarantine of the healthy older population (70+ years) and those who are otherwise immunocompromised, and then re-open all of the schools and workplaces so that the virus runs through the young population reasonably quickly. We don't want to be in a situation of social distancing for all of the next 5 years.... SJ

My guess about the 60% numbers that have been trotted out is that it relates to the R-naught. If you believe that R0 must be less than 1 for this virus to peter out, then you need to contemplate how that will happen. The first option is the miracle vaccine get developed and R0 plummets. The second option is that we keep up all of this social distancing and other restrictions indefinitely, which will drop the R0...just until the point where we let up and return to normal life, which is when wave #2 comes. The third way that R0 could drop below 1 is if there are not enough vulnerable people for the virus to infect. If you believe that all other things being equal, the R0=3 then how much of the population needs to be immune for that R0 to drop to 1? Roughly two-thirds of the population? I suspect that's the rough math that the experts are doing. So, lets go one more stage on this R-naught business. How long are we likely to be in this? If we are dreaming about the vaccine, probably a year, but maybe we'll get lucky and it'll be quicker. If we are thinking that we're in this until herd-immunity kicks in (ie, ~60% have already had it), do the math. We will need to have had 60% x 350m Americans = ~200m cases of people who have already had the virus. People are talking about flattening the curve, but if we want this to be over any time soon (ie, say in one year), we need about 4 million cases per week in the US. If we flatten that curve too much, and if the miracle vaccine doesn't present itself any time soon, for how long will we be in this? Years? SJ

Quarantine the elderly and other vulnerable groups and just let the virus run its course through the healthy population: https://nationalpost.com/opinion/why-draconian-measures-may-not-work-two-experts-say-we-should-prioritize-those-at-risk-from-covid-19-than-to-try-to-contain-the-uncontainable

So now estimating 1-1.5 years for a vaccine (the administration and more sophisticated people were saying weeks to months recently). Strange. I thought all the fat margins we'd been handing to pharma for decades would have resulted in tremendous amount of R&D infrastructure to handle something like this more rapidly. Instead, they've spent it on inversion mergers and patent defense litigation. It's ok. I am sure the 1-1.5 years is a conservative/pessimistic scenario. After all, look at what a good job we've done with rolling out testing in this country. We can't even match a recently "emerging economy" like S Korea. That's pretty consistent with the time estimates that were the subject of speculation when this was only in China. We will probably have herd immunity before vaccine immunity. Once you have 40% or 50% of people who have had this, the spread slows pretty drastically. SJ

The Province of Quebec has just requested all citizens aged 70 or higher to self-isolate until further notice: https://globalnews.ca/news/6677307/quebec-coronavirus-march14/ At least one jurisdiction is focused on the correct group. SJ

For all investments, Prem's preferred pile is the "too hard pile." At least with Greece/Ireland/Trump/Modi there's a prospect of a broad move upward. I am more disturbed by things like: 1) Toys R Us - retailers everywhere are getting stomped by Amazon, Toys went broke in the US, but an insurance holdco from Canada figures it can make a go of the Canadian operations. 2) Port of Churchill - Omnitrax had been trying to dump the rail line and port facilities for years and couldn't find a buyer. The track was not operational and hadn't had a train in over a year. But, an insurance holdco figures that it can make a go of this operation. 3) Stelco - this outfit, operating in a cyclical industry, has already gone bankrupt and the US imposed tariffs on the import of Canadian steel. But, an insurance holdco figured that this had good prospects. 4) TorStar - newspapers everywhere were getting stomped by the availability of free content over the internet, and better targetting opportunities for internet advertisers. As it happens, the newspaper shared a market with the Globe and Mail, the National Post as well as the Toronto Sun. Despite having been repeatedly taken out the woodshed, FFH was still piling capital into Torstar in November, 2017. I can understand the notion that Irish banking would eventually turn around and that Greek real estate has been valuable for the past 5,000 years. I understand the notion that India is a very populous country, does not have China's demographic head winds, and just needed a business friendly government. What I struggle with is the audacity to assume that the industry headwinds that I listed in the aforementioned investments had any reasonable prospect of being overcome after an injection of FFH money. Up until a few weeks ago, this period since the financial crisis has been the easiest period to make money in the stock market...Christ, pick a stock at random and you'd have probably made decent money off of it over the past 10 years. It takes a real special talent to have assembled a portfolio of investments that have stunk this badly. SJ

What is more encouraging, is if WEB bought 0.26% at ~$220, how much is he buying a few weeks later at $190 or $180? SJ

Yeah, sure thing. No doubt it was an American who was French-kissing a meerkat or a rattlesnake, or whatever other species this jumped from. The Chinese government is a joke. SJ They’re just following the same playbook used by Trump. Blame others for your own failures. I don't recall Trump blaming someone else for something that he did? I know he calls everything a hoax and lies like no other but I don't recall a situation like that. Here’s one. Let me know if you want more. https://www.politifact.com/factchecks/2020/mar/06/donald-trump/trump-wrongly-blames-obama-limits-coronavirus-test/ "Blame the previous guy" works really well for your first year, and maybe it even works okay for your second year. If it is a really long-term and structural issue, maybe you can even stretch it out for a third year. But at a certain point, if the previous guy has been gone for long enough it gets a little silly. SJ

The latter. The time to reach for yield is when you are paid for the risk. There's starting to be a bit more reward for risk in the market. Yea, I'd say both if they hadn't dumped all of their duration back in 2016, but short-term bonds aren't going to go up much - even if the Fed cuts rates to zero. Best case scenario is you get a few percentage points as a one time gain and that's it because yields are back to 0%. The higher credit spreads allow them to sustainably lock in higher yields for the long-term even if interest rates aren't cooperating - this was not an avenue that was available to them a month ago. A month ago? Just last Saturday when I was commenting on the AR I trotted out some silliness about "IMO, this is not the time to reach for yield..." Here I am five days later noting that maybe it's time to start looking for opportunities to reach for yield! It has been a hell of a wild week.... SJ

Yeah, sure thing. No doubt it was an American who was French-kissing a meerkat or a rattlesnake, or whatever other species this jumped from. The Chinese government is a joke. SJ

The latter. The time to reach for yield is when you are paid for the risk. There's starting to be a bit more reward for risk in the market.

I think your list is mostly correct, imo. If you think Canadian residential real estate is going to drop badly, I'd probably move BNS 2 slots down the list. They are by far the easiest to get a mortgage on a residential rental property of the big banks, and have the lowest underwriting standards in my experience. Should we really worry about residential real estate? Most of it is CMHC insured, and the rest is lower-ratio recourse debt (in almost all provinces). How much of a haircut would we need to see in real estate prices before non-insured mortgages go upside-down? SJ Rentals almost never have cmhc (as that has required 20% down for many years). BNS has by far the loosest requirements, and given these loans aren't insured I think they keep them all on their own balance sheet. I think 20% declines in many markets wouldn't necessarily be the bottom. Also, residential property isnt fungible or liquid like a share of stock. When the banks sell foreclosed property, they do a bad job and dont provide any reps or warranties. So they get prices that are less than market value, and pay fees. In a big downturn, I think that gap would widen. Yes, rentals with low equity are probably the most vulnerable part of the market, particularly those owned by small corporations because they are not recourse mortgages. But my sense is that it isn't such an enormous risk. If I own my personal residence, a rental condo, and I have a job, is it realistic that I can just mail the condo's keys in to the bank? I live in a recourse province, so if the bank cannot sell the condo for sufficient money, the bank can still come after me personally and attempt to get a judgement to garnish my wages or lien my residence. How much mortgage debt is out there, that is 1) not CMHC insured; and 2) has less than 35% equity; and 3) is non-recourse (in Alberta or a corporation)? I tend to focus on the traditional credit worries in a recession, which are credit card arrears and consumer loans arrears. But, maybe this time there will be some residential mortgage losses too.... Beyond the issues related to consumer credit quality, there will probably be a fairly considerable compression of NIM, a significant haircut to asset management fees because the value of mutual funds has just been shaved 20+%, and I can't imagine that the investment banking revenues will be very strong. Does all of this reverse by 2022, or are we in this for the medium-term? SJ

Oh, that's definitely how FFH profited from CDS, they definitely did not hold them until expiry. My musings about the definition of a "victory" are really a question of what kind of offer would FFH need to salvage some useful amount of capital? I was of the view that the contracts should have been sold 15 months ago when they had a market value of about $25m, but maybe that was hasty? SJ

Interesting question. Will the deflation hedges pay off, meaning, "Will they end up in-the-money" at the end of the contract? I would propose that it is not necessary for the contracts to end up in-the-money, but rather FFH could re-coup a bit of its capital if it can sell the contracts some fearful buyer who is willing to pay for a bit of deflation protection and is prepared to accept the risk that they might not end up in the money. On this one, how would we define "victory" at this point? If FFH could sell those contracts for US$50m, would that constitute a "victory" at this stage of the game? What about US$75m, would that be enough to declare victory? Frankly, if they could sell them for $75m or $100m, I would be happy to have recouped even that much capital.... Even if they could sell half of the protection for $50m, that would recoup a bit of capital and would still leave a large value of notional protection... SJ

But this is one of the most important thing we can do - to buy as much time for both research into treatment, and to ease the burden on the healthcare system. In addition to treatments and vaccines, there are a couple of things that people have not mentioned: 1) Standard of care will likely improve over time and a delay could make a difference. In each new area doctors are being quoted saying "I didn't believe the reports were accurate" or "I've never seen anything like this" or "we have no idea what to do" or "it turns out ____ is true after all". None of those are things you want to hear a doctor say when that was so easily fixed through communication and time. I'm not quite sure that I quite understand this one. Are you positing that a better treatment might be developed (eg, the use of HIV antivirals), and therefore if you are forced to choose, you'd be better to catch Covid in October rather than April because you will benefit from cumulative learnings? This is definitely a large threat. IMO, the focus should have shifted weeks ago towards developing contingency plans for temporary facilites. I am really hoping that my province has some sort of plan to close down schools and convert them into temporary Covid clinics. But is it happening? Who knows. We are banging away on the politicians about testing and travel restrictions, but I don't seem much banging being done about developing surge capacity. If you were a 70 year-old retired doctor or nurse and you took the time to pull up the morbidity and mortality numbers by age group off of the WHO's website (or other websites) would you come out of retirement? If I were 70 years old, I'd be trying desperately to dodge this one... I am guessing that, as a group, retired health professionals are not in desperate need for an extra $10,000, so it's a bit hard to imagine that they would be motivated to expose themselves to a bunch of sick people.

I think your list is mostly correct, imo. If you think Canadian residential real estate is going to drop badly, I'd probably move BNS 2 slots down the list. They are by far the easiest to get a mortgage on a residential rental property of the big banks, and have the lowest underwriting standards in my experience. Should we really worry about residential real estate? Most of it is CMHC insured, and the rest is lower-ratio recourse debt (in almost all provinces). How much of a haircut would we need to see in real estate prices before non-insured mortgages go upside-down? SJ

Yeah, there was a panic about energy loans in about '15 or '16 as I recall. CIBC was viewed as a stinker back then. But, the important thing to do is to ignore the hype and actually pull up the commercial loans by sector and see what the actual exposure is. Give a big haircut to that exposure, and usually it still isn't catastrophic. So far, I haven't dug into it. SJ

Yep, if you can't be good, you had better be lucky. SJ

Fascinating. Do Americans even eat that shit? If you have Covid-19, do you want to spend 45 minute boiling chickpeas, or do you want to throw a frozen lasagna or frozen pizza into the oven? Brown rice, lol. SJ I cook channa masala in my crockpot — need dried chickpeas for it so they draw in the flavor as they rehydrate. I don’t eat dairy so no frozen lasagna/pizza. I always eat brown rice — prefer the texture and flavor. Ahh, I just looked it up. Chana masala is made with kabulis rather than desis. Canada exports a lot of kabulis, but they are a bit more difficult to grow.