StubbleJumper

Do you have some more information on why the Chinese are favouring Canada? In particular why Canada (as opposed to other countries) and what happened before the 10-20 years you mention in your post. (Not really familiar with this phenomenon) Thanks Well, here are a few reasons: 1) You can get a multiple entry visa valid for 10 years which allows foreigners to visit Canada as many times as they want for up to 6 months at a time. Over those 10 years, the husband comes and goes for visits to Canada to the degree that his business schedule in China permits, and the wife comes and goes for 6 months at a time as often as she wishes. For her, she virtually lives in Canada, only needing to leave once every 6 months; 2) Houses are easy to buy in Canada for foreigners, and we (and most other western countries) have an effective legal system protecting property rights, so it's a great way for the Chinese to move $1+ million of money offshore and protect it in a bricks and mortar investment away from the reach of the Chinese government; 3) Children of Chinese can get a good post-secondary education in Canada, and after completing a four year degree (er, maybe 5 or 6 years for some of them!), the kids will speak English very well. By studying in Canada, they also meet the residency requirements to become a permanent resident of Canada. Citizenship is routinely extended to permanent residents who are well educated and have a prospect of being a productive member of society; 4) Once the kids become citizens, they can sponsor their parents for Canadian citizenship under the family reunification element of our immigration program. This provides preferential access for the parents to become Canadian citizens, possibly shortly after their 10-year multiple entry visa expires. So, all in all, Canada is a great risk management tool for the wealthy Chinese. It's a way to get some of their money out of the country and invest it in western real estate protected by a western legal system, and it gets them a foothold into a western country that can culminate in citizenship. If their relationship with the Chinese government (and the party which is occasionally capricious with the rich) deteriorates, at least they have an excellent safety net. Other western countries are also popular destinations, but Canada is notorious for being an easy place to enter and Canadians are notoriously tolerant and welcoming of foreigners (after all, the country is composed of relatively recent immigrants). SJ

For our non-Canadian readers, this is the sort of thing that goes on in the Greater Vancouver Regional District: http://www.richmond-news.com/news/sports-cars-worth-2-million-impounded-from-richmond-teenagers-amid-suspected-street-racing-1.496108 The Royal Canadian Mounted Police impounded 13 high end cars and none of the drivers was over the age of 22. It's a fascinating culture that the really rich Chinese immigrants have developed, where they buy a Lamborghini or Ferrari for their teenage family members. For kids who live in that strange little world, it's a real hardship to drive a BMW 7-series or an Audi, or a Mercedes C-class when their good buddy Johnny Chan drives a $300,000 super-car. I'd say the loans made to purchase these toys will almost all end up being good loans. Image is very important in that world, and before long they'll need to replace their 2015 Lotus with something newer and more appropriate! SJ

Well, I'd say that Jack Bogle's name should be on the list as the most reliable and predictable jockey...

That's a cool thought process. Does anybody remember the opportunity that BRK exploited for financing HOG during the financial crisis? In my mind it was more or less the same situation. Harley Davidson's business was financing the purchase of its motorcycles to a bunch of 50 year-olds who like cruising around, wearing leathers, and trying to look tough. Some of those guys had money to buy a hog for cash, while others had decent income but were in debt up to their necks. It was a great business for HOG until they couldn't securitize their bike-loans and couldn't float a debt issuance. Ultimately, the loans to the 50 year-old wannabe tough-guys were a lot better than the market assessed and it all worked out well in the end (especially well for BRK). So, in Canada, we're not talking about a bunch of overweight white guys who want to buy a Harley as part of their mid-life crisis. Rather, we are talking about a large number of well-to-do Asians* who sometimes try to impress others with luxury cars for which they do not have adequate cash in Canada to purchase. My sense is that most of those loans will end up being good, with the exception of a few who might ultimately go bust and run back to China to avoid the debt collectors. Interesting opportunity that I had never considered. SJ * For those who do not live in Canada, over the past 10 to 20 years we have had an astounding inflow of money from China, and an inflow of Chinese people who effectively purchase a 10-year Canadian residency permit as a means of managing the risk of being rich in a less than democratic country. There is a demonstrable tendency to buy a large house in Vancouver or Toronto and move the wife and kids (ie, international students) there, as well as some of their money, while the husband continues to do business in China. While most of their assets are stuck in China, some of these folks are crazy rich and there is a considerable issue within the community of keeping up with the Joneses (er, I mean keeping up with the Chans). One or more high end cars is a must, irrespective of whether there is adequate cash in their Canadian bank account.

Well, if the investments, debt and float are all consolidated to the FFH holdco level, but the equity is reduced by the minority interest there should be a large-ish gap. Remember, back in the day it was ~20% of both NB and ORH that were held by us minorities (to say nothing of Lindsay Morden). I wonder if it would come closer to balancing if you were to hair-cut the investments, debt, and float for ORH and NB? Also, is it possible that some of the cash/ST investments are double counted as perhaps they could appear in BOTH the net debt number and possibly the investments number? Interestingly enough, after the repurchases of NB in late 2008 and ORH in 2009(?) your calculated gap narrows rapidly. Sorry for the fuzziness, but it's been a long time since 4th year accounting where consolidations were a nightmare. SJ

Minority interest? Specifically in ORH and NB? The investments were probably consolidated, but the minority interest would be removed from book?

My take is that it's a guarantee that there won't be some sort of adverse development. But when was the last time that FFH have meaningful adverse development? Mostly we've seen large reserve releases (favourable development) over the past 5 or 6 years. SJ

I'm not sure that I understand the future relationship, but $1.6b for First Capital seems like a good deal.

IMO, it's about the same as day-trading in your RRSP. Day trading is not something that I do, but there are plenty of folks out there who have done a lot of it for a great many years. So, if you buy TD with T+3 settlement (or maybe now it's T+2?) and you sell TD a few hours later, you haven't actually created any phantom shares. The only difference with a Norbert's Gambit is that you buy on one exchange and you sell on the other. I'd be quite surprised to find that the brokers have not been in compliance for decades on this... SJ

Yes, it looks like the next one will cross pretty much right over the most populated portion of Canada. Wonder how much it would cost to observe it from the top of the CN Tower in Toronto?

IB has $4.5B in equity invested in 2 yr U.S. treasuries in its global brokerage business. You need to burn through that before you even need CIPF. The CIPF might not have enough assets if one of the big banks failed. But it would have sufficient reserves to cover the failure of multiple small brokers (including IB). And I don't know how IB could possibly lose $25K per client. The only real way for IB to lose money is for 1) Margin loans to go bad, 2) Collateral held is insufficient to cover losses, and 3) Unable to recover those loses through the courts. Keep in mind that IB monitors collateral in real-time, so you would need an event where you had great depression style crash but occurring in minutes instead of years. I guess the other disaster scenario would be the U.S. government defaulting on 2 year treasuries. But in that case, the too big to fail banks won't be any safer. Yeah, that makes sense. The $4.5b of treasuries strikes me as more useful than the Lloyds cover that was linked yesterday, which IIRC has a policy max of $150m. When I looked at that CIPF fund (and even the Lloyds cover), my quick mental short-cut was to take the $400-500m of reserves and divide it by my account holdings, and the result was that it wouldn't cover many complete wipe-outs of people like me. Then when you and RB suggest that it's mainly cash at risk, I mentally took the $400-500m and divided it by some of the dry-powder balances that I've had in the past and it provides a better result, but it still wouldn't cover many complete wipe-outs of cash balances held by people like me (and I'm not a rich guy!). So, then I tried to take the opposite tack, and ask how many clients IB has, and divide the reserves by the possible size of the clientele to get a sense of what kind of an event would be required to cause a real problem. I certainly heartily agree that the CIPF is small relative to the big banks' client base (would each of the big banks have 100,000 brokerage clients?). The too big to fail status is much better protection for the banks' clients. SJ

Actually the CIPF is in pretty good shape. It has about half a billion in reserves. Maybe that does not sound like a big number but it's significant when you consider the actual payouts. In the past 10 years it had to pay out about 15 million for 4 broker failures. Since inception in 1969 it paid out about 69 million for 21 broker failures. In this light I think that 1/2 a billion is quite adequate. The truth is that broker failures just aren't that expensive. It's really only client cash that's at risk in a failure and in some extreme cases some stuff around securities lending. Yes. CIPF would be perfectly adequate for IB. You would need to burn through all of IB's reserves. Then CIPF. And with asset segregation, it is pretty hard to see how IB loses any significant client assets. IB invests its assets in 2 year U.S. treasuries. What's IB's Canadian client base? As a simple mental model, a loss of $50k for each of 10,000 clients would exhaust $500m of reserves...or 20,000 clients each losing $25k. What's the likelihood of a systemic event where IB and some other brokerage are both trying to tap into the CIPF at the same time? The scenario where there would be a failure would be some silly event in financial markets, or ridiculous financial malfeasance at IB> Keep in mind that what we're talking about here is that only cash balances are at risk. So IB's average equity per account is 200k. If 10% of that is in cash you're talking 20K per account. 50k is unreasonable. Also if you're talking max loss, you're talking about a malfeasance event where IB managed to burn through all of their capital and somehow managed to squander all of its customers cash which basically impossible. Then on top of that CIPF is supposed to run out of money because this should be an event of a magnitude that is 50x greater than anything that was ever experienced - as a reference MF Global cost CIPF about 2.5 million. Then on top of that Lloyd's becomes insolvent and defaults on the extra $2 million dollars per account coverage. Yea, I won't say that the scenario is impossible because risk people would always conjure something up. But at that point your securities are worth zero anyway so it doesn't really matter whether IB is alive or not. Are you following the facts or are you making up your own? Am I following facts or making up my own? What's that supposed to mean? I asked a very basic question about the adequacy of CIPF reserves because they always struck me as pretty small in the context of the assets they are intended to protect, and you are suggesting that I am inventing facts? Thanks a lot, buddy.

Actually the CIPF is in pretty good shape. It has about half a billion in reserves. Maybe that does not sound like a big number but it's significant when you consider the actual payouts. In the past 10 years it had to pay out about 15 million for 4 broker failures. Since inception in 1969 it paid out about 69 million for 21 broker failures. In this light I think that 1/2 a billion is quite adequate. The truth is that broker failures just aren't that expensive. It's really only client cash that's at risk in a failure and in some extreme cases some stuff around securities lending. Yes. CIPF would be perfectly adequate for IB. You would need to burn through all of IB's reserves. Then CIPF. And with asset segregation, it is pretty hard to see how IB loses any significant client assets. IB invests its assets in 2 year U.S. treasuries. What's IB's Canadian client base? As a simple mental model, a loss of $50k for each of 10,000 clients would exhaust $500m of reserves...or 20,000 clients each losing $25k. What's the likelihood of a systemic event where IB and some other brokerage are both trying to tap into the CIPF at the same time? The scenario where there would be a failure would be some silly event in financial markets, or ridiculous financial malfeasance at IB>

Are you a fed or something? Department of Finance maybe?

See if you trade with IB you actually can send trades simultaneously and get them executed at the same time. But as KCL said it's a moot point because at IB you can get good FX and don't need to bother with this nonsense. By the way. Do not send in market orders. A market order is just an invitation for someone to fuck with your trade. HFT boys love that. Once you send in a market order your market will dissapear if just for a split second, just long enough for you to get a shitty execution. You should always use limit orders, or if at IB they have some algos that look and feel like a market order but they're not. Honestly I don't even know what we're doing here, debating crappy brokers with crappy services and best ways to execute "gambits" pushed upon us by the aforementioned crappy service. Just get yourself a big boy broker that offers good services and know what their doing and you won't have to worry about that stuff again. Btw, for those that are worried about broker failure, as others have mentioned IB is conservatively financed, carries the standard CIPF protection and on top of it has extra insurance from Lloyds that guarantees accounts up to 3 million I believe. Thanks for the advice, but I won't hesitate to use a market order on WFC, BAC, RY, or CM. They have that enormous bid-ask spread of 1 cent. If I get screwed, it might be for $20 on a $100k trade, and I can tough that one out. I have no problem with the notion that there are benefits to "big-boy brokers" but you probably won't see me recommending a big-boy broker to most people who have $200k of assets (see original post). For small accounts like that, the big-boy benefits are modest and somewhat counterbalanced by integration of brokerage accounts with retail banking services. One size does not fit all, and this discussion is really about the relative merits of a broker for somebody with modest assets. Cheers. SJ

CIPF covers losses up to $1M. So you don't need to worry about this unless you have at least $1M. Edit to add: I wasn't aware of the Lloyd's insurance at IB: https://www.interactivebrokers.ca/en/accounts/accountsProtection.php?ib_entity=ca Very nice. CIPF is okay, but have you looked at their financials? I did actually look at them a few years back and my recollection is that their reserves were pretty modest. It's not like CDIC or CMHC which are ultimately backstopped by the federal government.

Basically yes, you have to wait 3 days for the initial trade to settle. Otherwise what you're doing is effectively naked shorting on the second trade. However I do know that you can get away with it at certain bank brokers. Not because it's ok, but because their systems are so bad that they don't pick up on it. By the way, doing this in a registered account is double bad since you'd also be breaking a shitload of statutes. I do it with my RRSP all the time. You buy in one market and then sell in the other, and your net position is zero. T+3 comes along, and RBCDI journals it out on settlement day. I've never received any static from RBCDI or the federal government. SJ

Unless one of the firms is the market maker, you shouldn't see a different execution price. If the firm that you are dealing with happens to be the market maker, then you can sometimes get screwed by a few cents. For an illiquid trade, If you look at Level II quotes to get a sense of market depth, you should have a fair idea of how how your trade will execute (ie, for a large trade you'll definitely end up with an outcome that is worse than the basic bid-ask spread. But, you should know this in advance if you've looked at the Level II quotes. And that's one area where RBCDI particularly sucks, because it does not provide Level II quotes. Options are an interesting beast. That's another area where IB probably has a large advantage because options commissions with the big banks have a per contract fee (ie, $XX per trade + $Y/contract). Those commissions add up pretty quickly when you trade 20 or 30 contracts or more. Okay, so I would say that you are definitely doing something wrong. If you want to do a Norbert's Gambit, you need to pick a very liquid interlisted security. Choose one that isn't reporting earnings that day, doesn't go X-D that day, and isn't involved in some sort of large merger/acquisition/corporate control process. RBC, TD, CM, BAM or something like that will work, but some people prefer to use DLR. They are highly liquid on both the TSX and the NYSE, so don't bother screwing around with limit orders, just use a plain vanilla market order because there's plenty of market depth and the bid-ask spreads are usually very small. You will definitely be exposed to movements in the market for the 4 or 5 minutes between your buy and sell trades, but a liquid stock usually will only move a couple of pennies in 5 minutes (favourable or unfavourable). You will get a "fair" exchange rate, plus or minus the couple of pennies and minus the $20 of commissions. If you are exchanging $20k or $30k, your net cost of conversion should almost always be less than 20bps, and if you are moving $50k or $100k it's even lower. I haven't looked at IB's spread on FX, but I'd be surprised if it were lower than what you can achieve with an NG. SJ

Now, this is something that I don't quite get (you're not the first person to complain about order execution). People who fuss about order execution are normally folks who are trying to time the market (day traders are the extreme example). For the rest of us who are not trying to time the market or day-trade, it really should make no difference whether our order is executed at 09:55 or 10:01 in the morning. On average, the price movement over those 6 minutes will be zero, and you have an approximately equal likelihood of experiencing a favourable or unfavourable price movement due to slow execution. Am I missing something here? Is this just a real life application of loss aversion theory where people acutely feel the pain of the occurrences of "bad luck" on order execution and gloss over the instances of "good luck"? Or is there something else that I have not grasped? Same thing for conducting a Norbert's Gambit. For a retail investor it's impossible to simultaneously buy and sell in two different markets because it takes 3 or 4 minutes to fill out the on-line order form. So, for those 3, 4 or 5 minutes, you are exposed to market fluctuations. But, the average price fluctuation over <5 minutes is zero, with small favourable movements being roughly offset by small unfavourable movements. If you lost $1,000 while conducting a Norbert's Gambit you were either playing with really big dollars, you got really unlucky (ie, the flash crash happened to hit in the 4 or 5 minutes between your two trades), or you were doing something very wrong. A price movement of 0.25% for a liquid stock would be a huge move over 5 minutes, and to lose $1,000 you'd need to be converting $400,000....but even if you were converting $400,000 a cost of $1,020 (the commission plus the loss) would still be a really good FX charge... SJ

So, for the benefit of a broader readership who may not be aware, the colloquial term for cross border FX arbitrage is a "Norbert's Gambit, the details of which can be read here: http://www.finiki.org/wiki/Norbert%27s_gambit I would agree that it's a minor pain in the ass because you need to buy an interlisted stock on one exchange and immediately sell it on the other exchange, but, it's not too bad with RBC Direct Investing because they auto-journal offsetting positions withing the same account (c-a-d., if you have a short position in a security in the Canadian side of your account and a long position in the US side of your account, they offset the positions by automatically journalling shares across your account). So, in essence, a currency exchange may be conducted through two simple trades at a cost of $10 each. If you are trying to convert $50k, the effective cost is 4 bps, which is trivial. The waiving of fees is pretty common for all brokers in Canada if you maintain a certain, modest balance. Usually it's about Cdn$25k to have the maintenance fee waived. There's not much cool about RBCDI. It's a basic, crappy trading platform with a website that looks like it was developed by a 15 year-old in his mother's basement. But, it gets the job done. A few considerations about IB vs RBCDI: 1) Data is free with RBCDI, but you don't get Level II quotes. This doesn't much matter if you are trading a high volume issue like a major bank or some other really high volume security, but if you plan to invest in some smaller-caps or low volume equities then level 2 is quite helpful to understand market depth. 2) Trades at RBCDI are $10, and in most cases the fee is lower at IB. If you are a very active trader, this can become significant, but if you subscribe to Buffet's 20 ticket punch card theory and you make few trades per year then it doesn't really matter. 3) Margin debt at RBCDI (and the other major brokerages) is not competitively priced. My rough recollection is that it's about 4.25% right now, which is ridiculous for secured debt. If you chronically use margin, this can become a big deal quickly. On the other hand, most Canadians who want to use leveraged investing would at least consider using the Smith Manœuvre to get a better rate and to completely avoid the risk of margin calls. 4) Moving money back and forth from your chequing account to your investment account is a snap with the big banks. I've never tried it with IB, but I'm guessing that it would take a couple of days to transfer funds. 5) RBCDI does not give you on line access to any market other than Canada and the US. If you want to buy securities in a European or Japanese company, you're pretty much stuck with NYSE listings or ABDs. Not a big deal for me, but some guys like to invest in obscure markets, which is probably easier to do with IB. 6) RBCDI gives you access to a very narrow range of bonds on-line. Good luck trying to buy notes from KO or WMT. Sometimes the distressed debt market is the best place to exploit a market over-reaction and for this, IB is probably much better. 7) All of the big Canadian banks are too big to fail. Your money is likely safer in them compared to IB. There's not a chance in hell that the Government of Canada would allow BMO Investorline or RBCDI to go broke because it would likely cause a spill-over into Canada's retail banking space (ie, if RBCDI went broke and it made the headlines, what customer wouldn't rush to withdraw all of his money from RBC?). The CIPF provides some minimal protection to investors, but the too big to fail protection is probably better. Anyway, just a few thoughts. SJ

Okay, that was a thoughtful piece. I would observe a few things: 1) For KO, there is already some degree of market segmentation enabling the KO supply chain to engage in some degree of price discrimination and capture a portion of the consumer surplus. They do this by selling coke through different retail outlets. I can go to WalMart or a well known Canadian pharmacy chain and buy about 4.2 litres of Coke for roughly US$2. Or, while inside Walmart or the pharmacy, I can buy a 500ml bottle of Coke for about US$2. Or, I can go to the Coke machine outside the store and pay roughly the same US$2 for a 355ml can of Coke. Or I can go to a restaurant and pay US2.50 for a glass of Coke. Don't even get me started on the near-criminal price of Coke at the hockey arena! In each circumstance, it's the same product that I am buying, but with drastically different pricing depending in which market that I am electing to make the purchase. The supply chain captures more of my consumer surplus on the basis of the location where I buy the product. 2) The subject line of your post includes references to both KO and PG. Interestingly, the Amazon distribution model makes a great deal more sense to me for PG than it does for KO, in large part due to the varied markets in which I buy KO's products (see above; I will not be ordering a Coke through an Amazon-type supplier when I am at the hockey arena, nor when I am at a restaurant). However, most of PG's products that I buy are from either WalMart, CostCo or a large grocery store. Rarely is there much urgency to my PG purchases because I don't wait until I am down to my last square of toilet paper before buying more, nor do I wait until I am completely out of Tide before I buy more. If the pricing were right and the delivery was rapid, I could imagine myself no longer buying PG's products at WalMart. I might even buy some of my bulk Coke purchases through an Amazon type of arrangement, but it would be the minority of my Coke purchases because I don't consume all of it at home. I would say that KO's distribution model is tenable for the specific type of product that it markets, which is to say, a product with place-based consumption (ie, restaurants, or convenience purchases). But, I say that you are right about the consumer staples that are consumed almost entirely at home. That's a supply chain that is ripe for disruption if somebody can figure out a cheap way to ship 12 rolls of toilet paper or a 3 kg box of Tide. SJ

My dick only measures 11"...flaccid, of course.

What a strange news story. Since when does losing $60m on derivatives become a story for a major financial institution? "...and in other news, this month Bank of America paid out more than $1 billion of interest to depositors."

Gio, So you have been trading in and out between 1.1 and 1.4 book? I have never been in FFH, nor have I tracked the P/BV ratio. How often does in hit the top and bottom ranges? once per year? Do you trade around 20%-30% of your position? I have done that with other names myself. (Speaking out loud, mostly to myself, but I know that some would really pooh, pooh this as a strategy, as in if you like the name then you should just buy and hold it, I am inclined your way, that is to trade a portion of the holding, which really would work when you are trading off of a set variable, like P/BV.) Back in the good old days when Odyssey Re was listed on the NYSE, some of us made good money by swapping back and forth from ORH to FFH depending on the relative valuation. In retrospect, ORH offered a number of opportunities for easy money...

I suspect the interest rates are the main reason. It's both...the number of shares that will need to be issued for Allied and the fed raising rates slightly. Funny thing is that Fairfax has over $10B cash in the portfolio which is sitting in 75% cash and bonds. It doesn't matter what Fairfax's price does as stocks fall or rates rise...they will be able to buy when everyone else is selling and looking for cash. As PI said, you are essentially buying Fairfax at nominally higher than book value now. Their insurance businesses are now world-class and fully profitable across the board. The number of non-insurance businesses has increased dramatically and by region. Like Berkshire, as they add better and better insurance and non-insurance businesses, intrinsic value will start to increase faster than book value due to GAAP and IFRS. It is already a business that should be valued at 1.5 times book based on the cash flow of the underlying businesses and return on the investments per share. The one area that I think they should remain cautious is their debt load. While still very manageable and staggered well, I hope they remain conscious and vigilant on this front. One of Berkshire's advantages is that they are beholden to none. I really would like Prem and Fairfax to follow that culture and model. Cheers! Would Watsa consider a share buyback? If FFH has >$10B in cash, is looking for opportunity to deploy and it's own stock is trading at a substantial discount to where Parsad says it should be trading at (1.5x BV), does it make sense to do a buyback/set a floor on the stock price? It is important not to confuse the FFH holdco cash with the operating subsidiary cash balances. FFH holdco doesn't have $10B cash. The cash is at the operating insurance subsidiary (ie. C&F, Northbridge, Odyssey Re, etc.) and those funds are part of the insurance reserves. It's not like FFH has that $10B of their reserves (future claims) to buyback their own stock for investment purposes. Holdco usually has about $1B which is what FFH basically considers as their minimum desired amt of Holdco cash set aside for financial emergencies/flexibility. So they basically have minimal liquidity that they want to readily part with unless they continue to lever up. More likely $20M here and $20M there, as they flow excess reserves from operating subs to holdco. In the past, they have said they generally leave excess funds at the operating subs so they can write additional premiums when the time is right (a hard market). What's to stop the subs from buying FFH's stock on the open market? As far as I can tell, the major subs are all overcapitalized and could buy holdco shares without drawing down their reserves excessively. Presumably the regulators have authorized far more dividend capacity for those subs than FFH has actually used? SJ