StubbleJumper

I also hold Harris Preferred Capital Corp HBC-, and WFC-L (thanks OEC!!!!!).

The furniture operation loses money chronically. However, The Brick normally makes up for it through financing and extended warranties. Their target market is the middle or lower middle class who do not mind buying shoddy inferior furniture on unattractive credit terms...."Pay nothing until 2012!!!!" "Oh, by the way, do you need an overpriced extended warranty for that TV that will be obsolete in 2 years?" This market is not that competitive. There are a few other regional players like Leons or Brault et Martineau, but it ain't exactly crowded. At one point, the middle class sucker will come back to buy new crappy furniture on credit....and the Brick will probably be their ONLY option. I would expect that their credit arm will be able to extract even more ridiculous terms in the future. Can they keep the doors open long enough to last through this turbulence? The $80m term loan isn't due for another 5 years, so they just need to live off depreciation for a while..... SJ

Yeah, but you're roughly right!

Yeah, over the past two days I've been all over the WFC-L preferred shares like a fly on s&^t! Thanks OEC! SJ

Over the past year, some of us have played the game of swapping back and forth from FFH to ORH, and then back to FFH. The reason for this is that there have been some unexplainable swings in the relative value of the shares. For example, the price ratio of FFH:ORH on February 19, 2008 was 8.3:1. By September 3, the FFH:ORH ratio had plummeted to 5.5:1. A month later, on October 2, it was back up to 8.2:1. Earlier this afternoon it was waaaay back down to 5.85:1. Now, I'm not a major believer in technical analysis, and I don't believe in witchcraft. However, over the course of a single year, the relative value of FFH vis-à-vis ORH dropped 34%, increased 49%, and then dropped 29% again. For me, this is completely baffling that the relative valuation should swing like this, but I have chosen to try to exploit this rather than explain it. I sold a pile of ORH last week and used the proceeds to buy FFH. It looks like I was a bit early to make the switch, but I'm expecting the FFH:ORH ratio to head north after earnings are released later this week. Is this a fool's game, or is it a way to make a few bucks in an irrational market? SJ

prevalou, It would be simpler to state that you just have a policy against buying banks. ;) Seriously, outside of our Canadian banks, there are almost none in the world that would meet your criterion. SJ

Sure, leverage is a huge factor in what is going on at the moment. However, it is equally important (more important?) to consider what it is that you are leveraging with. If you are leveraging with NINJA loans or over-priced real estate, clearly you have a problem. However, the National Housing Act requires CMHC insurance for mortgages greater than 75% loan to value. As a result, much of the volume of bad mortgages to which our banks are exposed are either 1) insured by the federal government, or 2) less than 75% LTV. Now, things got over priced in a serious way in a few markets, but the 75% LTV cushion will significantly reduce losses from mortgage loans. All the personal loans, credit cards, and corporate loans are a completely different story! SJ

Yep, risk of financial failure below 10%... :o

Please define the word "conservative" and describe your investment horizon. A treasury bond would be 99.999999% certain that you'll get your money when and as defined in the bond terms. A CD might be 99.999% sure that you'll get all your money as planned. Is that conservative? There are corporate bonds out there that might be >90% but <100% of getting your money back as planned. Is that good enough? ORH.A probably has a risk of financial failure below 90%, but there is much uncertainty about the timing of getting your capital back.....you might end up underwater for a couple of years before the price snaps back in line. Does this fit your time horizon? Is 90% probability of getting your money back good enough? SJ

Do not forget that even the venerable Lloyds and SwissRe have been scrambling to find capital. AIG is in the process of being broken up. It might not all happen in 2009, but at one point these guys are going to need to shrink their books....

Conservative, liberal, NDP, it doesn't much matter. RBC is such a large organization that any government would have to come to the rescue if it runs into any serious trouble. What percentage of Canadians hold their primary account at the Royal? Maybe 10-15% of us? There would be all supreme hell to pay for any government that sat on its hands while the chequing accounts for 10-15% of the population were frozen. The interesting thing is that the government is also not really in a position to let just a portion of RBC fail. If I hear about trouble at RBC securities, the first thing that I'll do is move my money from my RBC chequing account as fast as possible. Same with RBC insurance -- if I hear about imminent financial failure on the part of RBC Insurance, I'll also move my chequing account as fast as possible. ANY plausible rumour of financial difficulty in one part of a big bank would trigger a run in the retail banking operations as people like me will act quickly to protect our money. In effect, the gov't has no real choice but to support the brokerage arm of the big banks. That being said, requesting the certificates for long-term holdings might be extra insurance at a reasonable cost....Will you store the certificates in your bank safe deposit box?!!! ;D ;D ;D SJ SJ

Partner, A potential option that you could consider is to hold a margin account with one of the big banks. For example, in all reasonable likelihood, RBC falls under the "too big to fail" category in Canada. Given the size of its domestic operations, I simply cannot fathom the possibility of the federal government allowing RBC to go under. It would be complete chaos in our financial system. For that reason, my working hypothesis is that RBC would be bailed out of any serious trouble that it encounters in any of its domestic divisions, be it retail banking, investment banking, wealth management, brokerage or insurance. IMO, the feds simply cannot accept the risk of a run on the Royal due to rumours of trouble somewhere in its operations. The same might be said of the other 4 big banks, but perhaps to a lesser degree. They might all be "too big to fail." CIPF is only a theoretical backstop for them if they are considered too big to fail, and the CIPF reserves are only $500m. In reality, the only value that one might reasonably ascribe to CIPF is to provide some semblance of protection to account holders of the smaller, more obscure brokerages. On a personal note, until recently I had significant (for me) holdings with E*Trade Canada. When the US parent company ran into some grief about two years ago, I had a small bit of angst about the status of my accounts. I was a very happy guy when ScotiaBank announced that they were purchasing E*Trade Canada! Going forward, I have no intention of maintaining any significant assets with a second-tier Canadian brokerage! Dealing with the brokerage arm of a big-bank can seriously suck, but when the caca hits the fan, it's probably a good place to be! SJ

Where are you getting such attractive margin rates?

Yes, ORH-A are perpetual prefs. Over the past year or so, ORH has had ridiculous amounts of excess capital and has been aggressively repurchasing its common shares for prices close to its trailing quarterly book-value. In 2010, it will have the option of either continuing with the common share repurchases or it can call its preferred shares. Depending on the market price of the common shares, it may or may not be in the interest of shareholders to continue the re-purchase program (ie, how much more than BV would they be prepared to pay? Perhaps 1.1xBV? or maybe 1.2xBV?). If a common share repurchase does not increase the intrinsic value per share for the remaining shareholders, then buying back the preferreds instead might make good sense. It is also worthy to note that you need to be careful when comparing the cost of capital for debt and preferreds. Interest is tax deductible, while preferred dividends are not. So, the preferred dividend of 8.125% would roughly be equivalent in cost to debt priced at 12% (ie, 8.125% / 1-tax rate). In that light, would it be in shareholders interest to use excess capital to repurchase the preferreds? Maybe....or maybe not. It would depend on what alternate uses are available for that capital. The wild card in all of this revolves around the FFH parent. We have seen ORH aggressively repurchasing shares, thus increasing FFH's percentage ownership. We have seen FFH make a tender offer for NB. It doesn't take a lot of imagination to envision FFH buying the remainder of ORH at some point over the next few years. If this occurs, would the preferreds be repurchased? I would guess yes. If FFH took over the remainder of ORH, they could significantly reduce their public reporting costs (annual and quarterly reports), Sarbanes-Oxley requirements and other disclosure costs by not having any publicly traded ORH securities. Would they continue to incur those reporting and compliance costs just to maintain $100m in preferreds? Dunno. In any event, it's a pretty good opportunity. If the preferreds are never called and you hold them forever, it's a nice, tidy return of about 11-12% in dividends per year. If the preferreds are never called, but corporate spreads narrow, they will probably trade meaningfully higher at some point in the future which would provide an opportunity to sell them and earn a slightly better return of 11-12% in dividends PLUS a modest capital gain. If the preferreds are actually called in 2010, the return will be spectacular! In all likelihood, a long-term hold of FFH will do better, but ORH-A has very little implementation risk..... SJ

oec, I don't know whether FFH has bought any additional ORH preferreds. Intuitively, it does make some sense as it would be a solid short-term investment for the holding company...and with their controlling interest, it would be pretty low risk. More broadly, I think it will be very interesting to see how Prem and Co have deployed cash over the past three months. I am very much looking forward to the Q4 release! It is true that the preferred yields are a great deal higher for issues like RBS or C.....but, that's just the problem. I'm not really sure that I want to take a preferred equity position in banks that might be very sick (or is C in the "too big to fail" category?). While the yields are juicy, there is a significant risk of permanent loss of capital, and I have a great deal of difficulty in assessing the probability of such a loss. If C is nationalized, what does that do for the existing preferreds? I'm more comfortable sticking to something a little easier! Thanks for the tip on WFC.PR.L -- it looks like it has some potential as a preferred in one of the stronger banks. I am working on the assumption that WFC will come through this period fully intact, so a ~13% perpetual yield looks pretty good. My superficial examination of the security has left me with some confusion about the conversion feature -- the perferreds are convertible into roughly 32 Wachovia common shares. When the companies merged, a Wachovia share was worth 0.1991 WFC common shares. So, does that mean that the preferreds would now convert into 32 * 0.1991 = ~6 WFC common shares? If so, the conversion feature will likely remain virtually worthless for the next 20 or 30 years. If you get some additional feedback from WFC investor relations on the conversion feature, please do share it! On Harris, yes, I took a careful (and painful!) read through the prospectus. It it a somewhat unusual arrangement between Harris Bank and Harris Preferred Capital Corp. The upshot is that there are no guarantees anywhere that the dividend will not be cut, and they are non-cumulative. However, it is not really unusual for financials to be non-cumulative. Given that the parent company is Bank of Montreal, if Harris runs into trouble there are three broad possibilities: 1) BMO sucks up Harris Bank's losses into the parent company and recapitalizes the sub. 2) BMO tries to sell Harris Bank to some other sucker. 3) BMO lets Harris fail. In my view, #1 would be the most probable outcome as Harris is a small part of BMO's operations, and financial support from the parent is quite feasible. It is possible that BMO could try #2, but that would require finding a buyer...in today's environment, only the strongest banks are buying which implies that this likely would be an acceptable outcome for preferred holders. IMO, #3 is not a realistic option because it may seriously damage BMO's reputation, and may even impede access to equity capital for the parent. Again, there is no guarantee with Harris, but as long as BMO stays out of trouble, the cards are stacked in favour of not cutting the Harris dividend. IMO, you are thinking the right way about the FNM and FRE preferreds. They really are a very long term call option that will either pay off handsomely or result in a loss of capital. I can't tell you which outcome will ultimately occur or how long it will take before we'll know! So many opportunities, so little capital to deploy! SJ

OEC, I have no derision for your hypothesis of US bank preferreds being cheap. The truth is, I don't really know. I own a few common shares of WFC, and quite frankly I am not in a position to do more than state that it is stronger than other banks. But frankly, the mess in the US is soooooo bad that I really could not imagine dropping a large part of my portfolio into US banks. I have looked at some US (and other) bank preferreds. Wells Fargo/Wachovia might be the best of breed. I have also looked at Barclays, HSBC, and BAC. I'm mostly seeing preferred yields roughly around 10%. I am really unsure of whether this yield is sufficient to compensate me for the risk that the dividends might be suspended or the bank might go under (like WM or Bear Stearns, etc). There are so many good opportunities available that I am hesitant to allocate capital to an investment that yields 10% but is accompanied by such uncertainty. They may eventually go back to par, which would juice the return, but I can't imagine this happening in the next three or four years (but I can easily imagine ORH calling their preferreds in the next 3 or 4 years!!!). The Harris Bank preferreds are a somewhat unique opportunity to buy a very obscure security of a Bank of Montreal subsidiary that has a solid yield. I have a much greater level of comfort with BMO than with most US banks, as Canada's National Housing Act basically kept our banks on the straight and narrow. There will be more hurt coming down the pipe for our banks, but it will be manageable. With respect to the FRE and FNM preferreds, is this low risk and high uncertainty, or is it just plain old high risk? I could easily imagine a scenario where no dividend is paid for the next 6 or 8 years. There are so many good opportunities out there, why take the risk of permanent impairment of capital? Even if they're not called, in 6-8 years ORH-A will be a double! I do worry a bit about buying perpetual preferred shares due to the potential impact of inflation. You are correct that buying the floaters is an excellent way to manage that risk. However, with ORH, I do not think that any of this will ultimately be relevant as the preferreds will likely be be called before inflation is ever an issue. With Harris, it is potentially an issue but I must simply hope that the return that I have locked in is high enough to offset a few years of elevated inflation. Anyway, looking around today, I see so many truly solid companies selling at attractive valuations that I am being very selective about what I buy. Heavens, you could even buy KO today with a reasonable prospect of a modest return from a very predictable business! Never before in my investing career could I have said that! May you live in interesting times! SJ

FFH is already a big owner of ORH preferreds. So even if ORH is not in a position to do a re-purchase, the holding company can certainly do it. SJ

I disagree about FFH needing to make investments in oil and gas. Prem and his team have demonstrated that they are completely comfortable in making large investments in non-Canadian markets. Do not forget that they made a pile of money for us in Indian equities about 3 or 4 years ago. Do not forget that they have made enormous investments in JNJ, Overstock, Level 3, etc. There is NO demonstrated need to get involved in Canada's oil and gas sector. I do agree, however, that Canadian Western Bank probably will not be allowed to fail....and they probably will make good on their preferred shares. IMO, if push comes to shove, the Alberta Treasury Branch would step in and expand their operations by acquiring CWB. Overall, I would anticipate that the CWB preferreds will work out very nicely..... SJ

Looks like you beat me to the punch by 10 seconds!

Sanj, I think you've got roughly the right format. There is a fine balance between having too few fora with an enormous number of unrelated posts, and having too many fora that each have a very precise subject and nearly no activity. From my perspective, the MSN board was occasionally too broad. People who really only cared about BRK couldn't find the BRK posts among all the other excellent discussions that we had. I really like the current format of providing separate areas for FFH and BRK, and a general discussion. My expectation is that the general discussion will will be the most active and interesting of the three fora. It's exactly this sort of free-for-all that enables the sharing of ideas. If we find that there is too much noise, you could always create additional fora in the future?

Question: any other Preferreds out there, in Canada or U.S., that present real value and opportunity in this environment? Gosh, that's a tough question. There were many opportunities in November and December, but I have not seen too many 50 cent dollars in the preferred market. There are, however, a few issues that provide an opportunity to earn a solid (but not spectacular) return. ORH.A is one of these. Assuming that they are never called and the company never runs into any serious trouble, a purchase of ORH.A today would have provided the purchaser with a perpetual dividend of about 11.75%. You're not going to get rich quickly by investing in something like this, but historically it is a reasonable return on capital for a long-term hold. If ORH should elect to call their preferreds, then the return will be spectacular! On the other board, I made reference to having established a position in Harris Preferred Capital Corp (HBC-), which is a wholly owned subsidiary of Harris Bank, which itself is a wholly owned subsidiary of the Bank of Montreal. Assuming that BMO maintains its ownership of Harris and that BMO itself does not run into any trouble, a purchase of Harris Preferreds today would have provided the purchaser with a perpetual dividend of about 13%. Again, it's not a moonshot, but historically it would be a nice, tidy return for an investment in a Canadian bank! Again, if it should get called the return is better. I have also taken a small preferred position in the Co-operators (TSX:CCS-C) when prices were lower than what they are today. The Cooperators are a small company that have been selling P&C insurance in Canada for 50 or 60 years. I was able to purchase their preferreds in December at CDN$11/share which provides a dividend yield just north of 11%. For a Canadian investor, these dividends are treated very favourably for income tax purposes. I'm not going to get rich off this, but it is a healthy return from a simple, well established business. Prices have since risen, and yields today were roughly 9 percent. Again, if the shares get called (as previous issues have in the past) then returns will be better. None of these are home runs, and I certainly would not put a large percentage of my portfolio into them. However, assuming that we don't have rampant inflation, 5 or 10 years from now I anticipate that I will be quite satisfied with the results from them. I have one more security of this type that I am currently considering, but as it is thinly traded I will withhold disclosure until I have made a final purchase decision.....and then I will probably post something to the board for feedback or derision! SJ

At these prices, I wonder whether ORH is buying on the open market? They bought piles and piles of their common shares at 0.9-1.0 X BV over the course of 2008. It would seem like a no-brainer to me for ORH to be scooping up their preferreds at current prices. ??? ??? ??? Heavens!

ORH.A dropped like a stone today, for no apparent reason.... I picked up another nice chunk at $17.25. ;D ;D ;D ;D ;D Anybody else get in on this action today?

Sanj, Do you have a "drop dead" date for signing up for the supper? I have been mulling the possibility of attending, but finding time is always problematic. Maybe I'll know better in late March.... ???