StubbleJumper

My main point is that Walmart, which I believe is a well-run company, still has the opportunity to leverage their customer base in the U.S. to provide new products and services at a value price. Certain financial products such as consumer/transactional credit and basic health care services (think walk-in clinics for simple medical problems) could be a great fit for the company, which would boost their bottom line profits apart from expanding their retail presence. So your investment thesis is driven by a bunch of "maybes" and "hopes"? The responses in this thread that you've gotten to date are stating that: 1) there is limited potential for WMT's future domestic growth in traditional retail; 2) WMT has had a varied experience in breaking into foreign markets (some good, some bad); and 3) a PE of 14-15 is too high in the context of (1) and (2). I don't think that anybody will change their view about (3) based on some far-off hope about new lines of business that may or may not be available, and would take 5-10 years to implement. Anyway, overall I don't hear too many people crapping on how WMT is run, its past growth, or its current profitability. On the contrary, most people have told you that it's a wonderful business. It just ain't cheap. SJ

Still too expensive for my tastes. When you say "p/FCF=8" what it really means to me is that YLO would have to pay out every penny of its FCF for the next 8 years as dividends just to get my money back. I'm not convinced that YLO will still be around for 8 years, and I seriously doubt that it will be able to maintain its free cash flow at current levels. The assets strike me as basically worthless from a liquidation perspective. I just cannot see how a prospective investor could buy-and-hold this without a permanent loss of capital. Are there any active shareholders here who can offer a thesis for owning this? SJ

I'm not surprised that WMT is not getting much air time. It's selling slightly north of 14X earnings. While that's relatively cheap for WalMart, it doesn't mean it's cheap-cheap. The big question about WMT revolves around future growth. At a certain point, it can no longer rack up 10% annual sales increases.....so what should we expect going forward? Perhaps 2% annual SSS growth to reflect inflation, plus maybe another 4% annual sales increase to reflect an increasing store count? I really don't know. Anyway, in 2006 or 2007, a company like WalMart would have been very attractive at 14X or 15X earnings and the prospect for steady 6% growth. However, most of us have had a spectacular opportunity to deploy capital into much better vehicles over the past year due to the wonderfully volatile markets of last winter. We are spoiled from having had so many no-brainer opportunities that WMT simply looks mediocre in comparison. SJ

I am really having a hard time imagining a cash redemption for the debentures. For the four-year period from 2005-08, SFK only generated a grand total of $70m cash from operations. Even if 2010 and 2011 are wonderful years, there will need to be a great deal of re-investment in working capital as inventories and receivables have been bled down over the past few quarters (and one would presume that discretionary capital replacement has been postponed). In this context re-paying $40m in debentures for cash from operations would seem to be a real stretch. For this very same reason, open market purchases of the debentures (at 52-cents on the dollar!) doesn't seem like a very plausible course of action either. The other possibility would be to refinance the debentures....but that too would seem to be a bit of a stretch, particularly given that senior creditors have had to waive covenants. Don't know whether there would exactly be a long line of lenders willing to step up to the plate....maybe FFH would be adequately motivated to avoid potential dilution? SJ

I looked at the debentures shortly after Christmas, but IMO there were a great many better opportunities at that time. As a result of this thread, I have taken a second look at them over the past few days. I am having a little trouble understanding the possible outcomes and their likelihood of occurring. As I understand it, there are three broad outcomes that could be anticipated: 1) Debentures are redeemed for cash sometime in 2011 (P<5%). If you buy now at 52-cents on the dollar, this would be a wonderful outcome with a YTM>40%. From what I can see, this is a highly improbable outcome as SFK does not have extra cash laying around, is unlikely to have large cash balances in 2011, and is unlikely to be able to refinance on favourable terms. 2) Debentures are redeemed for units sometime in 2011 (p>90%). At today's price, that would be about 100 million new units, which would dilute the hell out of existing unit holders. Does the current unit price reflect this impending dilution (ie, are the existing units really worth $1, but currently sell for $0.50 to reflect the fact that a stack of new units is inevitable?). If each debenture is redeemed for about 2,000 new units, at what price could debenture holders dispose of those units? 3) SKF goes bankrupt and subordinated creditors get nothing (P<5%) Obviously case#1 and case#3 are easy to figure out. However, case #2 seems to be the overwhelmingly most liekly outcome and the economic returns strike me as exceptionally uncertain. How are people valuing the units? Is case #3 as unlikely as I think? Maybe the debentures belong on the "too hard pile".... SJ

For this reason, I chose one of my brokers as one the largest banks in Canada (this one is a cash account, not margin). To reinforce this, cash and securities are protected against broker insolvency by CIPF up to $1million per separate account (I believe tax-free retirement accounts and taxable accounts are considered separate). If required to rely on the CIPF coverage I expect there would be major market dislocations that I would wish to take advantage of. Rather than wait for CIPF settlement (and lack of access to my capital) in the event of insolvency; I decided to maintain two brokerage accounts with the hope that I might be able to recognize problems ahead of the crowds and transfer my securities or cash out or to the other broker before the sh#t hits the fan at an insolvent broker. If you have chosen one of the big 5 banks, then CIPF is effectively irrelevant. The fund itself is relatively small and would not even come close to making investors whole if the brokerage arm of RY, BNS, BMO, TD or CM were to fail. However, you effectively have a better guarantee through the federal government. In Canada, all of the big 5 banks fall under the "too big to fail" category. The federal government would be completely lynched if they allowed any of those big 5 to flounder. Now here's the rub: consumer confidence is key. If ANY portion of the Royal Bank runs into trouble, there will be problems in ALL parts of RY's operations. In particular, if I hear that Royal Bank Direct Investing has hit a really rough patch and might not make it, I will certainly move my chequing and savings accounts to some other institution as a preventative measure against the mess spreading to the retail operations. In effect, trouble in a big-5 brokerage is likely to trigger trouble in the retail banking division, implying that the federal government effectively cannot allow any division of a big bank to fail. However, the CIPF could potentially have value if you do business with some other smaller, more obscure brokerage (ie, IB, Qtrade, etc). SJ

Yes, it looks like the wind-shear from El Nino may have reduced the severity of the storms and pushed them off into the Atlantic Ocean rather than the US mainland. As a point of interest, in an "average" season we would expect to see the sixth named storm appear on September 12th. Today is September 10th, and Fred is the sixth storm, so in my book that would situate us as a relatively average year so far..... A typical year has 10 storms, so there still may be a few opportunities for something nasty to roll through the Gulf. SJ

I jumped on the preferreds in a big way last winter and made some good bucks out of it. There were a great many really high quality issues that were ridiculously priced, and it was obvious. My favourite was HBC- which is a wholly owned subsidiary of the Bank of Montreal which traded as low as 40¢ on the dollar (over 20% yield!) while more senior BMO debt and preferreds were somewhat more rationally priced. Then there`s WFC-L that OEC identified for us, that was just stupidly priced. That silliness in the market seems to have come and gone. I would simply suggest that it would be highly important that you know what you are buying and only make an appropriate sized investment in that context. Without having any knowledge of the potential opprtunity that you are looking at, it would appear that it is a very, very ugly cigar butt. There`s nothing wrong with that, as those types of opportunities can work out. But if that`s what it is, then you need to make an appropriately small investment. We are no longer in a world of buying wonderfully high-quality issues for super-cheap prices which enables us to allocate very large chunks of capital.... SJ

Is there anything that prevents FFH from offering a choice to ORH shareholders? Ie, your choice of either $60 cash or 0.25 FFH shares? A buyout structured in such a fashion would seemingly enable FFH to skirt around the corporate structure issue that you`ve identified, while simultaneously enabling ORH shareholders to have a tax-friendly disposition (if they so wish). It will be very interesting to see what the ultimate takeover price will be, as $60 does seem to be a little light at this point (but it would have been more than adequate in March!). Probably a few dollars north of $60, but I`d be surprised if the offer were jacked a great deal higher. Time will tell. Ultimately we should not forget that as investors, these are good problems to have! SJ

Try it and see what happens. :) The short answer is that those who are short will need to cover, and this will probably occur in the weeks leading up to the actual acquisition date. If there are enough shorts, it is possible that ORH may actually trade at a modest premium to the actual buy-out price as people are forced to cover. More broadly, even in cases where it is obvious that a company is going bankrupt (ex, Air Canada a few years ago, or Eaton`s), the shares still have a bit of value prior to de-listing due to people needing to cover. When this occurs, it is an apparent paradox that people would be prepared to pay any positive price, but the shorts don`t really have an option. SJ

I wouldn't argue with your general logic that ORH is worth more than $47. I threw out the 25% premium simply because that is a common rough magnitude in a takeover....in fact, when they bought back NB last year, it was at a 29% premium. I would be surprised if they offered much more than $60/sh, but who knows? FWIW, the "record high" for ORH was $54 in February, so $60 would be about a 10% premium over the record high. Ratcheting up the note offering to $400m is very interesting indeed. They have roughly $900m in holdco cash so adding $400m makes $1.3b. That's one hell of a war-chest. Is there any possibility that they'd be gearing up to buy a subsidiary of AIG? Seems weird, as ORH should be a no-brainer. I still like the idea of a share-exchange where they would issue FFH shares in exchange for ORH shares....but it's looking like that won't happen. SJ

Nope, I don't buy the idea that the $150m is to refinance the 2012 debt....or any other maturing debt. FFH went to great pains to indicate that C&F had $1.3b in statutory surplus AFTER paying out a $100m divvy to FFH. If you construct a rough premiums:surplus ratio, it would appear that C&F could send another dividend of perhaps $300m to FFH without remotely triggering any capital adequacy questions. As I suggested earlier in this thread, a $500m divvy from ORH would still leave that sub overcapitalized...and it looks like there may still be some dividend room in NB too. So at the end of Q2, the holdco had nearly $900m in cash...and collectively, the subs are so well capitalized that they could probably send another $900m in dividends. What the hell do they need that $150m for? Certainly not to repay a small debt that matures in 3 years. Looking at their debt maturities, there are no meaningful chunks due anytime soon -- and FFH went to great pains to flag this too. There is absolutely no need to borrow $150m for refinancing when you're already swimming in cash at the holdco and the subs are ridiculously overcapitalized. IMO, there really are only a couple of reasonable possibilities: an acquisition, or taking ORH private. SJ

There's no need to push out the 2012 debt unless there is some other capital requirement anticipated. The purchase of ORH is one possibility, an acquisition of some other company is a second possibility, or the anticipation of a hard market is the third possibility. I would say repurchasing ORH is the most likely use for this cash. At today's prices, it would take about $800 m to repurchase the outstanding float for ORH. Looking at the premium:surplus ratio, it would appear that ORH could issue a dividend of $500m without even remotely triggering any capital adequacy issues. So, if you take $150 in new debt, add a potential post-takeover dividend of $500m, and then tack on another $350m in FFH holdco cash, that would get you $1b which would be roughly enough to buy the ORH float (ie, a 25% premium over today's market). FFH held $880 in cash at the end of Q2, so my scenario above would take holdco cash down to about $500m, which was the magic number to which Prem made reference several years ago as his preferred minimum holdco cash balance. Eat you own cooking! SJ

The new management is probably an improvement over the old management, but at this point does it matter? Does anybody really have any idea just how crappy their book of business is? How much more adverse development will we see from Lincoln General. We have lived this experience with FFH and TIG. New management (*good management*) bought TIG, but it was such a dog that even good management couldn't fix it. The adverse development was a depressingly recurrent theme in several ARs. Thankfully Prem salvaged what he could by creating ORH and running off the rest. Do not underestimate the extent to which Starr and Jackson might have f*cked this company. SJ

There is something that is important to understand about BRK.UN. The Brick is not primarily a furniture retailer. Rather, they are primarily an originator of loans for low-to-medium income Canadians who happen to use those loans to buy crappy furniture and electronics. The Brick then preys upon those low-to-medium income Canadians by using high pressure tactics to sell them extended warranties at grossly inflated prices. If you look at their financials, you will see that even in the "good years" they basically made no money on the furniture and essentially all their income came from the financial services element. Now they have had trouble with volume and the wheels have fallen off in Q1 2009. So is this a sustainable business model? Yes, I'd say that there will still be a good supply of clients who do not manage their finances well enough to purchase with cash and who are so financially illiterate that they cannot discern whether an extended warranty is a decent deal. However, it might take until 2011 or 2012 for those consumers to resume buying crappy furniture. SJ

No! Hurricane season is NOT more than one-third over. If you look at the climatology link that I posted earlier in this thread, you will see that on average there are 10 named storms per year of which 2 typically appear by August 6th. On that basis, given that we are just past August 6th, we have simply dodged 2 bullets, with another 8 typically appearing in an average year. Further, the severe storms that actually become hurricanes normally come later in the season, with the first normally appearing around August 14...or next Thursday. I will reiterate again, it is too early to make any definitive statement about this year's tropical weather. In another 4-5 weeks, perhaps we will be able to make some meaningful inferences based on year-to-date. Reposting the climatology link: http://www.nhc.noaa.gov/pastprofile.shtml SJ

I agree on the correction. IMO, markets have become a little too frothy for my liking. I've gone from -10% cash to about +10% cash over the past 2 or 3 months. I am a great deal more comfortable at S&P 900 or S&P 800. Thankfully, FFH, ORH and BRK already have something of a margin of safety so I do not feel the need to sell them at this point. SJ

About 10 years ago I took a bit of a flyer on Air Canada. I then spent the next 3 or 4 months trying to figure out how anyone could ever make any money in the airline industry..... I came to the conclusion that there really was no sustained prospects for profits and I sold for a profit of perhaps $200! A couple of years later, AC went broke, so it was a good decision to sell! I have not bought an airline stock since. IMO, they belong on the "too hard" pile or "industry too tough" pile. SJ

IMO, it's much too early to make any conclusions about the severity of this hurricane season. In a "normal" year we would have only seen one tropical storm by July 10th, with a second tropical storm typically appearing by August 6th. So far, this year's storm activity strikes me as "roughly normal," but we'll probably have a much better idea of how it'll go in 6-7 weeks. The NOAA has a nice little chart here: http://www.nhc.noaa.gov/pastprofile.shtml SJ

Well it's really a two-staged decision: 1) Would buying the 17m ORH shares be a "good deal?" 2) How would we pay for them? For the first question, it seems that most of us concur that ORH is a splendid deal at current market prices. Obviously, FFH would not be able to buy up the entire 17m shares for current market prices, as too many of us know that they are worth far more! So what sort of premium would be required? Could FFH get the shares for $45 cash? Or would they have to pay $50 cash? Personally, I wouldn't vote yes for an offer of $45 cash as this would be lower than what I think they're worth....and then I'd have to pay a pile of capital gains tax for the privilege of having my shares "stolen". On the question of how to pay for the ORH shares, there are a few options. You could use $800m of holdco cash to buy the shares and then issue a big dividend from ORH to FFH to replace a good chunk of that $800m. This would weaken the financial strength of both the holding company and the ORH sub. Or, you could go to the market and borrow a large chunk of the $800m (let's say issue $500m in bonds), but it would probably take a 10% interest rate to attract that kind of money and you would still be burning some holdco cash (perhaps about $300m). Or you could do a share exchange by giving FFH shares in exchange for ORH shares. So here's my question to you: As an ORH shareholder, if FFH were to give you a choice of $50 in cash or $45 in FFH shares, which one would you take? As an ORH shareholder, I'd be roughly indifferent from a value perspective (actually, the FFH shares might be worth a bit more than $50...). But from a tax perspective, I might be slightly better off with the share exchange because I would have to give Revenue Canada a small chunk of the $50 in cash... From the perspective of existing FFH shareholders, which would be preferable? A $50 offer financed by debt at 10% interest? A $50 offer financed by existing cash holdings? Or a $45 offer financed by (underpriced) FFH shares? IMO, the "price" for all three options is high, but for the first two options the price is felt through increased financial risk to FFH (which we've experienced acutely in recent years). For the third option, the cost is felt through dilution of existing FFH shareholders (which we have also experienced in recent years). Personally, I'd be more comfortable with modest dilution rather than heightened financial risk during this period of market uncertainty. In any case, this is a good "problem" to have. It's nice to discuss the many ways that FFH could be opportunistic rather than discussing how they must be defensive! SJ

At this point, maintaining a liquid market for ORH is becoming an increasing concern. If the share buybacks continue, there will not be enough of a float remaining to keep a decent market for us to sell our shares.\ At this point, I would suggest that I would like FFH to do a share exchange for the remainder of the ORH float that they do not currently own. Both FFH and ORH are selling at a healthy discount to book, so there is not much of an advantage or disadvantage for current shareholders to replace their ORH shares with FFH shares....but it may have tax advantages to do a share exchange rather than a cash payout (like NB). So FFH's shares outstanding would increase by what? 2.0m shares? 2.5m shares? No biggie. SJ

Cardboard, SD makes a very important point in post #27. Under the National Housing Act, lenders require mortgage insurance (typically from CMHC) for mortgages where loan-to-value exceeds 80%. So it's the federal government that is on the hook for the losses on high LTV mortgages. The big banks are exposed to losses on LTV of 80% or less. However, the bottom would really have to fall out of the housing market for this to become a big problem for them. That group of homeowners will not become "upside down" until the market drops by more than 20%. Meanwhile, as SD suggested, they are continuously making principal payments which further reduces their risk. The real estate market needs to drop drastically before the banks really feel the pinch. The banks have experienced an uptick in their provision for credit losses over the past year or so, and IMO this will probably accelerate over the next few quarters. However, I would suggest that much of this will be their consumer credit card debt, car loans, unsecured consumer loans, and loans to businesses. My view is that there is much hurt yet to come in Canada and we will really begin feeling this recession as 2009 progresses and unemployment increases significantly. I was comfortable with the price of Canadian banks in February/March, but as others have noted the shares have really rallied a great deal over recent months. Clearly, with their expected earnings over the next couple of years, the dividends are only sustainable if they can continue to pawn off preferred shares on yield-hungry Canadians....but so far people have been greedily sucking up every preferred offering. At this point I'm not touching the banks unless they decline back to less than 10X normalized earnings....which is far lower than 2007 earnings. SJ

At this point, the question of "should he or shouldn't he" is largely academic....it's now a question of "can he safely do it?" On behalf of shareholders, Buffett has deployed a ridiculous amount of capital over the past 18 months. The cash hoard is much reduced and has been replaced by GS converts, HOG bonds, GE converts, etc. With the bargains that were available in February and March IMO, the only reason why we haven't seen more capital deployed is that WEB wants BRK to be the Rock of Gibraltar. The fact that he didn't blow off more cash in March to buy equities indicates you can be pretty sure that there ain't gonna be a dividend. SJ

As we have discussed before, FFH and BRK might be better off if 2009 had a KRW type of hurricane year, or at least a four horsemen type of year. The industry is already on wobbly legs due to a large chunk of capital having been vaporized over the past 9 months, and losing another large chunk from a bad storm season might hasten the oncoming hard market. SJ

I seem to recall that T. Boone Pickens made some declaration about moving into wind in a big way. I also wonder whether this would be economic in the absence of significant government/consumer subsidies. Or is it that places like Texas, Nebraska and Iowa are just great places to generate wind power and that consumer demand during the daytime is sufficient to absorb the extra power? Neither MidAmerican nor T. Boone Pickens are fools, so....