StubbleJumper

I'm not sure that I understand why the market values for properties matters. My way of thinking about this is that if your windows are blown out from a hurricane, it costs about the same to fix the damage now as it did two years ago. If your roof gets torn off, it costs about the same to fix as two years ago. And, if your house is a complete write-off and it needs to be rebuilt from the foundation up, construction costs are about the same as two years ago (ok, maybe a shade lower). The only situation where the replacement cost would matter is if you had a policy that allowed your insurance company to purchase an alternate property for you instead of fixing yours. But my insurance contract (not in Florida!) says they'll fix my house up to $XXXXXX. SJ

Jack, A few observations: 1) I think you are seriously overstating the issue of "control." I have been associated with this board and its predecessor for many years, and I can count on one hand the number of people that Sanj turfed for behavioural reasons (although spammers and the short-and-distort crowd were turfed shortly after they appeared). This was only done after repeated warnings and it was done to maintain a civil atmosphere. It sucks that people have to be turfed on occasion, but my experience is that boards will not work if some basic restrictions on behaviour are not imposed. Yahoo boards come to mind.... 2) With respect to content, we all voluntarily participate in this board. There are no minimum posting requirements like the VIC board, so any contribution that any of us make is at our own behest. Your posting contribution can be large or small as you see fit (but personally, I would hope that you make it large as you bring excellent insight to many issues). Similarly, we all have equal benefit of the posts (including lurkers) so it's not like Sanj is getting a proprietary stream of intellectual content just for himself. 3) While the benefits of the board accrue to all of us equally, the financial burden is disproportionately on a single person. Now some people have made statements to the effect that US$500 is no big deal.....but usually we make those statements from the perspective of our own financial situation. So, sure, if somebody has a $1 million portfolio, then scraping up US$500 per year might not be a big deal. On the other hand, I know for a fact that there are people from a broad range of economic circumstances on this board, and for some of those people US$500 per year is meaningful. 4) Beyond the financial costs is the administrative burden. All of us are busy, but the requirement to register new members, maintain the site, and occasionally fulfill the role of referreeing an acrimonious thread falls upon a single person. In conclusion, I am very disappointed in the bitching and moaning on this subject. In a moment of weakness, Sanj agreed to set up this site for our use. He dedicates a significant amount of time and energy to it, and a chunk of money. If he wants to offset his costs, I say let him. But for god's sake, drop the bitching before he comes to his senses and abandons the whole effort....I've seen it happen elsewhere. SJ

What the hell is going on here? Have some of you completely lost your minds? Over the winter, Sanj stepped up to the plate and set up this great new home for the BRK/FFH community. IMO, he has achieved our collective goal of transitioning away from MSN...and I would say that this new home is even better. Nobody particularly loves ads, but we need to pay the bills in one way or another. So here's my proposal: 1) If somebody doesn't like the ads, please send Sanj a cheque for $500US or $600CDN and then Sanj will be able turn the ads off until June 2010. In June 2010, perhaps another generous anti-ad sponsor will step up to the plate with another $500US so that we can turn the ads off until June 2011. 2) If you do not send Sanj a cheque, then shut-the-f*ck-up. SJ

So, the weighted average forecast would be "normal?" Those guys at the NOAA do great work during the hurricane season to forecast the path and intensity of actual storms that have developed or storms that are imminent. However, they would do themselves a great favour to not prepare their season forecast using whatever witchcraft they have at their disposal... SJ

Personally, in February and March I passed on a couple of hanging curve balls that I might have hammered out of the park. Instead, I waited for the pitcher to groove a couple of fastballs which I hammered for doubles and triples... Looking back, it's obvious that I should have swung at the hanging curve balls, but I find it a great deal more comfortable to just sit on the fastball (and then "pull the ball" by using modest amounts of margin!! ;D ;D). Overall, I am delighted by the way the past 3-4 months has worked out...but in retrospect it could have even been better. I'm back to watching the pitches go past, and I'm waiting for the pitcher to groove another fastball.... SJ

I think the better question is whether there still remains anything to turn around. The problem with KFS is that the company never seems to have the faintest clue about whether they are profitably underwriting insurance. They have chronically reported significant adverse development. Not only can you not trust their reported income numbers, the magnitude of their reserve adjustments leaves you questioning the legitimacy of their book value number. This crap has been going on for several years. Can the new management turn it around? Maybe. If they are able to suddenly impose underwriting discipline for the 2009 accident year (lots of luck on a sudden change like that....) there might be hope. However, the Starr/Jackson legacy will likely remain on the books for a few more years as it takes a while to find all the skeletons in the closet. IMO, this will not be a quick turn-around as there needs to be a drastic shift in culture to a disciplined underwriting stance. Are you thinking something this? 30% probability of going bust within 5 years 40% probability of going sideways for 5 years 20% probability of a double over 5 years 10% probability of a 4-bagger over 5 years ? Or is that too pessimistic? SJ

I am beginning to wonder where FFH is getting the money for all of these deals? I will be curious to see if we get a bond, preferred or other issue from FFH at some point. Why do you think they would issue capital for this type of investment? I would guess that they're selling treasuries that yield 3% and using the proceeds for deals like Canadian Western Bank, H&R, the Brick, etc. Whether we ultimately do better than 3% on the aggregate of these special investments remains to be seen. Overall, if FFH had to do a debt issue, what do you think it would cost them? ORH-A yields 10% right now.... Some Canadian bank preferreds are yielding north of 6%.... So an FFH bond would cost perhaps 7.5% or 8% and a preferred would be perhaps 10%? IMO, not worth issuing capital just to reinvest at only slightly better returns.... SJ

Sanj, IMO, the volume of messages on this board is quite manageable so far. For that reason, I personally don't feel the need for a recommendation system to help me sort the wheat from the chaff. If the volume picks up drastically, then it could be helpful. FWIW, the MSN board had a recommendation feature, and it was rarely used by members....and certainly there were a great many posts that merited a rec. SJ

I would guess that the municipal bonds have probably risen drastically over recent weeks....can anyone confirm?

IIRC, WFC is scheduled to be released tomorrow. Why don't you wait a day before passing judgement? SJ

Interesting read, thanks for linking it to the board. Hoisington's article is interesting and thought-provoking. However, I wonder whether he is not just a little bit late in making proclamations about the future performance of treasuries vis-à-vis equities. The examples he provided represented time periods from shortly before the market peak all the way down to the market trough (ie, 1928 in the US and 1988 in Japan were nearly the peak). Presumably at those times, treasuries were "cheap," meaning that they had a half-decent yield. During the month of March 2009, we were down by more than 50 percent from the market peak...which either occurred in 2000 or in 2007, depending on your perspective. Treasury yields are in the toilet and have been there for several months. IMO, you cannot compare 2009 to 1928 or 1988 because much of the bad news for equities has already occurred, as has the flight to treasuries. You might, however, reasonably compare 2007 to 1928 or 1988.... In essence, I would argue that we are at least in the 2nd or 3rd inning of this game....and equities gave up a big pile of runs in that first inning. At this point, predicting that treasuries will outperform equities over the next 6 or 7 innings strikes me as a risky assumption....I'd say we should look for late inning heroics from equities, probably in 4 or 5 years. SJ

During the weekend, I had intended to ask why you bought C, but I was sidetracked by a phone call..... So belatedly, is there any particular reason why you chose to by C instead of BAC or WFC or something else? SJ

Eric, I'm in a similar situation. I bought a good pile of preferreds in late February and early March when the market was getting slaughtered. Every day the good deals became more and more ridiculous. I am now sitting on a nice stack of unrealised capital gains as most of these issues have nearly doubled from their bottom (I managed to buy some WFC-L for $325 and some HBC- for $8.55). I used a modest amount of margin as the valuations just seemed too compelling. Assuming that the bottom does not fall out for WFC and BMO, I too will be collecting dividends in the high-teens for nearly perpetuity. Historically, this would be a wonderful return, and it was just laying their available for anyone to pluck. Over the course of the past week or so, I have had several fleeting thoughts to crystallize the gains and have had to remind myself of the reason why I bought the preferreds in the first place. Ultimately, I plan to hold them for the foreseeable future....if this truly is a sucker's-rally, I'll be quite happy to have the dividend stream. SJ

The bank preferreds have had a nice run. ORH-A is probably moving slightly in sympathy. IMO, it is still one of the more attractive preferreds out there. Would you rather own the preferred issues from RNR or ORH? It's a no-brainer for me. SJ

If you are going to invest in anything, you really should make some effort to determine whether you are buying a 60-cent dollar or a 120-cent dollar. To do this, you need to use some sort of valuation metric, be it a detailed DCF framework, or a more simple approaches like PE-normalized earnings framework, earnings yield+growth, price-to-book....whatever. I have used all of these approaches in the past, and you'll note that I still haven't gotten rich. ;) DCF is a pleasant analytical activity if you've got lots of spare time to monkey around choosing growth rates, discount rates, terminal value and all of that great stuff. However, in my experience you end up spending so much time fudging around with those parameters that you do not dedicate enough attention to thinking about the underlying business. And, as we all know, the results can be so sensitive to the selection of those parameters that you can sit there farting around with your spreadsheet until you eventually convince yourself that there is value where none truly exists. The other challenge with DCF is managing lumpy cashflows. Just try doing a spreadsheet for FFH! The folly of trying to select stable growth rates becomes immediately clear. Nope, IMO, people are better off using rough metrics to assess value and spend more time thinking about the underlying business. SJ

Just to be clear, there's nothing wrong with selling crappy furniture...and there's nothing wrong with targetting the "white trash" segment of the population that requires credit to buy a chesterfield. The Brick made money doing this in the past, and if they scrape through this recession, it's pretty sure that they'll make money from it again in the next growth period. But, let's face it....this is NOT Ethan Allen! If you go into the Brick, you'll look long and hard to find any solid hardwood furniture. It's all mediocre veneers that'll look like crap in 10 years. And the chesterfields look ok, but they'll be crap in 10 years too. If you have the means, IMO you're far better off paying a little bit more and getting a far better product that will last much longer. Anyway, that long digression is simply to say that a good product does not necessarily equal a good business....nor the converse! SJ

The GM for the Brick's furniture sales might look healthy, but it really is not. In recent years the Brick has basically broken-even on the retail sale of its furniture, and it made decent money from its financing arm. There is a large portion of the population that can be sucked in on those, "Do not pay one red cent until 2012" type sales. Once 2012 comes, those suckers can't find the money to pay off the financing and suddenly they are paying 18% interest on the refrigerator that they bought two years previous. Similarly, the Brick makes good money off extended warranties as there are a bunch of suckers that will pay $300 to have a 5 year warranty on a $1200 TV. I don't know much about Leons or Brault et Martineau, but I'm guessing that they use the same modus operandi -- sell crappy furniture on credit to uneducated consumers. It would be important to understand their exposure to credit losses as my hypothesis is that the population of suckers is probably the same population that is most vulnerable to unemployment.... It would also be important to understand the extent to which a XX% decrease in plasma TV sales would affect their income from their financing arm. SJ

Define the term "massive inflation." In a recent context, 5 or 6 percent annually might be massive. If we get 5-6 percent for 4 or 5 years, that's no biggie as the nominal yield from ORH-A is about 12%. If inflation increases and corporate spreads decrease (as I think they will), the impact might not be enormous. On the other hand, if you think that massive inflation means 10-15 percent for 4 or 5 years, you'll get killed in preferreds....but you'll also get killed in many other asset classes. In fact, if you believe that this magnitude of inflation will prevail, the best approach might be to buy real-estate with a very long term fixed mortgage..... My money is on a mildly inflationary future....but who the heck knows?!?! SJ

Well, to start with, peruse this list of preferreds: http://online.wsj.com/mdc/public/page/2_3024-Preferreds.html In there you will see a nice selection of cumulative trust preferreds for WFC, USB, or JPM...and then there are CORTs and TRUCs for GS...and then there are garden variety preferreds for RNR, ORH, Everest RE or MetLife. So, that's a nice selection of potential candidates many of which are unlikely to blow up any time soon. Yields on these tend to range from high single digits to low double digits. If you already own ORH-A, I would say that you have one of the nicer combinations of risk and yield. If your margin interest costs are 6% and you margin 2:1 then at today's prices for ORJ-A, an 18% return is conceivable.....as long as you are comfortable with ORH! SJ

I am on the same page as you. However, I think that SD makes a good point about buying only "quality" preferreds. There is a good range of quality issues out there with "medium" dividend rates with only a modest probability of a catastrophic outcome. If you want to "reach for yield" I would propose that using margin to buy the ORH preferreds or some other quality issue might be a better approach than buying some POS with a high yield. As others have pointed out in previous threads, margin interest rates are ridiculously low these days.... SJ

Holy sh*t! I've been mostly off-line for a couple of days, and I come back to read thread after thread of "he said she said" crap. Cut the bickering from all sides, and let's just get on with making some money....

http://online.wsj.com/mdc/public/page/2_3024-Preferreds.html This is one of the tables that I like to look at.....but you cannot beat QuantumOnline for the comprehensive information that they maintain on the terms and conditions of the various preferreds. SJ

I agree with Kiltacular. I consider WFC-L to still be a hot deal at $500 --although I still really drool about brief period that it traded at $325 a few weeks ago! Assuming that WFC does not run into serious trouble over the next couple of years, it would be a reasonable expectation that WFC-L will trade somewhere near par in the next 5-10 years. So if your purchase price is $500, you sit back and collect your 15% annual dividend while WFC-L slowly climbs up to $900 or $1000. Even from today's prices, it's hard to see how you'd have an annual return of less than 20% over the next 10 years.... So it all comes down to the question of whether WFC has as much earning power as they suggested in their Q4 release and whether they've written down loans as conservatively as they suggested in their Q4 release. I'm pretty comfortable with this. I apply the same kind of thinking to Harris Preferred Capital, HBC-. Assuming that the Bank of Montreal does not run into any serious trouble, it may be reasonable to think that HBC- could rise to somewhere near par over the next 5-10 years. So, if you buy at today's price of $13.75, you just sit back and collect a 13% dividend while HBC- creeps upwards to $22 or $23. Hard to see how you could do any worse than 16% or 18% over the next 10 years. It all comes down to whether the Bank of Montreal stays out of trouble and is prepared to prop up their US operations. I'm pretty comfortable with this. We've already discussed ORH-A at length, and concluded that the return will range somewhere between solid (like 14-15% annually over five years) if the preferreds are not called and spectacular if they are called in 2010. Heads I win big-time, tails I just win! I have also taken a medium-sized position in Co-operators Insurance preferreds, TSX:CCS.PR.C which currently yield just north of 10%. Again, assuming that the Cooperators continue to make money as they have for the past 60 years, this should work out quite nicely. An annual yield of 10% which is a qualifying dividend for Canadian tax purposes, and presumably when spreads narrow, the price of CCS-C should edge higher...but I'd guess it will permanently remain somewhat shy of par because the original dividend was not exceptionally high. I'm currently bidding on another preferred that is very illiquid, so I cannot really divulge what it is until I get my shares! The nice thing about all four of these options is that the underlying businesses seem to be strong. Even if the equity market goes sideways for 5 more years (which it has done in the past!) it is possible to have a half-decent return. These are not necessarily home runs, but they certainly appear to be singles or doubles. SJ

Agreed. The GOV IPO looks to be an equity carve-out, not a spin-off. As a result, the parent should get a nice chunk of cash, and a ready market into which they can carve-out yet more equity. In the short-term, the cash will provided greater certainty of liquidity and the GOV listing will provide flexibility going forward (just like Northbridge....). This whole exercise probably reduces the IV of the common shares, but IMO makes the preferreds more attractive (ignoring the modest impact on the embedded option for the D-series). I question whether any of this is really necessary for HRP. Cashflow numbers are impressive and debt maturities in 2009 and 2010 look pretty manageable. Do they actually need another $300m in cash? SJ

What about when your $US account is margined, and the $CDN dollar rises? Do you recognize a capital gain when you re-pay your margin (afterall, the value of the margin debt in $CDN declined)? Logically this would make sense, but does anyone actually do it? SJ