Cigarbutt

^It seems that they have reached some kind of transition for their investment stance and IMO it is still unclear what the outcome will be. The underwriting results continue to be strong although Brit's results need to be followed. In the industry, periods of reserve releases are typically followed by periods of negative development and the last period has been particularly significant for releases. For Fairfax, the releases correspond more to a strong underwriting culture than following industry trends but, looking forward, it is reasonable to expect lower releases. In 2018, FFH released the equivalent of about 14.6 CR points in Q4 and the equivalent of about 6.8 CR points for the year. If anything at Fairfax, the trend for releases has been going up which is at least partly a sign of conservatism and may be mitigated by growth in premiums in the future when the trend goes down, but is still something to consider when evaluating future underwriting results. Business at run-off includes a lot of old lines but results there show how long it may take to see the full realization of reserve development.

This case is another example where the credit default swap instrument can give rise to an unusual set of incentives. https://www.ft.com/content/98fd33c8-b93d-11e8-94b2-17176fbf93f5 Who said that reading a bond indenture was boring?

Humble take. It is the story of an activist-type hedge fund that gets involved in distressed scenarios and who is ready to use variable strategies in order to realize large gains. The case seems to revolve around the definition of a sale-leaseback transaction done by a sub of a holding company that had issued bonds with indentures that could be interpreted in many ways. The judge had to decide if the issuing firm unfairly avoided default or if the active player in the restructuring is trying to fabricate a default. The latter won the last battle but I would say that the jury is still out.

Fair enough. However, the house (building, not the land) is both a consumer durable (shelter service) and a depreciating asset. We have lived in a house for 22 years in an area where the housing values have + or - followed income increases. The amount of money we "invested" over time to "maintain" it corresponds to the difference between today's value and the house value that would have been obtained from inflation alone. I remember reading Jim Grants' work (around 2005-6) on the decoupling that was happening between housing values and GDP (an equivalent measure of income) and then, he looked unattuned, as he often does.

^the above takes for granted that house values will keep increasing faster than inflation. A long term retrospective look indicates that this is not guaranteed. https://www.livabl.com/2017/03/canadian-house-prices-since-1921.html If interested, the full study referenced in the article is long but fascinating and includes a horrible chart, made in Japan.

There are various rent vs buy calculators available but one has to plug in the inputs. The biggest assumptions concern the after-tax return expected on investments (capital not used for a down payment and differential saved per month after) if you rent vs the expected home price appreciation over time if you buy. In Toronto, there are probably pockets of relative undervaluation for either rents or home purchases but it seems that both markets are overall expensive. An interesting feature is that homeownership rates have increased (in Toronto and Canada) but it seems that a peak has been reached. Also, millenials tend to stay home longer. https://www150.statcan.gc.ca/n1/en/daily-quotidien/171025/dq171025c-eng.pdf?st=P8xOuLu9

Some works have convincingly shown that buying the Nifty-Fifty stocks at the top would have resulted in an overall good result on a relative basis if held over the long term (assuming the investor had the mental and financial fortitude to get through some difficult years). So, the long term argument makes sense and one (or a household) has to live somewhere. If I would consider moving to Toronto today, the real estate factor (does seem crazy or is crazy) would play a significant and negative role. This is not about timing but about pricing. Taking the numbers and assumptions listed above and noting that the principles are similar to what the Bank of Canada is trying to do with their new stress tests, it seems that only 10 to 20% of households in the Toronto area would qualify for the typical average transaction. Who is buying? There has been a lot of talk about the "marginal" price-insensitive buyers who tend to push prices up but it seems that this "marginal" population would be responsible for, at the most, one month's worth of transactions. The above could be mitigated by the fact that the homeownership rate is about 2/3 (so one has to adjust the 10 to 20% up) but the above assumes that the typical home buyer carries a low level of non-housing-related credit which is probably too conservative. All that means is that the typical buyer is probably not following the "prudent" rules mentioned above and are stretching their budgets, an assessment that is confirmed by different surveys and perhaps an explanation for the negative pricing trends in 2018. So, where is the margin of safety when a small and unexpected bill could put sand in the gear?

The other two California investor-owned utilities are getting agitated and (one) raising the specter of bankruptcy, under the watch of rating agencies. So, potential pressure for some action that may mitigate the big risks. The inverse condemnation doctrine is enschrined in the Constitution and the present climate (political and popular) makes it unlikely that an amendment is ratified. However, the application of strict liability may be potentially modified using a more flexible definition to pass on the cost to ratepayers. There seems to be a potential relevant precedent (a 1997 state Supreme Court ruling that used this standard in a water-district case) and, for the 2017 fires, there seemed to be enough political will to get this through in a more sustainable way. Also, the idea of a California Wildfire Catastrophe Fund has been floated and could take the form of a partially funded pre-disaster program that could be modified according to the evolving wildfire experience. If the State starts to discuss splitting the company, PG&E may come up with a different type of split and it may get interesting. Following the playbook, the company also announced a Board restructuring, to add "a fresh perspective".

The traditional model of the regulated return on investment for electric utilities is transforming because 1-electric demand has basically flat-lined and decoupled from GDP growth for the last 20 years and 2-the role of the grid is being redefined. To grow in the context of a stable electricity demand, investor-owned utilities have differed in their strategies but have tended to expand their customer base, to widen their product portfolio and to develop a services component, which means that CFO is typically not enough to fund the dividend and the new ways to grow. I agree with JRM that PEs are high but that's mainly due to persistently low interest rates. Low rates have caused to increase leverage, to increase the ROE and to drive the valuations up because of the yield-chasing behavior so that there may be more cyclicality in future. Duke has a relatively higher yield and seems to be perceived as a more stable and slow growing utility (it has invested mostly in grid upgrades and NG infrastructure) but has performed relatively poorly, especially in the last few years. NextEra is more of a market darling with a lower yield but expected higher growth due to significant investments in renewable energy. So, some potential headwinds and execution risks and each utility has an increasingly different playbook. A potential advantage to look for in the future may be to have a lower cost of capital and to be able to elaborate and apply an efficient cost cutting program that does not affect reliability, customer satisfaction and safety.

Not sure which region you are in, but this is hard to believe considering that the housing investment would have been most likely leveraged...plus the tax exemption you'd get for the principal residence. I'm near Ottawa. We'd have paid for most of the house with cash, so not much leverage involved. I think the topic raises an interesting question. Leaving aside the intangible value that a "home" can have, choosing which opportunity to invest in and the leverage aspect can be handled as a two-level decision but taking the two decisions together, one could argue that it was (in 2010-2) relatively easy and cheap (leverage aspect) to buy a house using a significant amount of leverage (ie 3:1 or 4:1 debt to equity). Looking back (to the 2010-2 period) and, assuming one would sell today in Toronto, the return on the equity of the purchased home would have been quite rewarding, even taking into account the recent price decline and the return would have been tax-free assuming the principal residence exemption. CAGR of avg MLS transaction price=7-8% The interesting question is what would one do today in Toronto with a sum of money to "invest".

Interesting developments in Australia. It seems like the authorities want to look under the hood of financial institutions and monetary authorities are espousing an easing mood. Cyclical, secular or else? All real estate cycles have their own stories and are not always globally correlated. Who knows what will happen but a common theme has been that busts tend to be correlated to booms (in intensity and duration). https://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=12162132 What may be a fascinating aspect is the Sweden curve that seems to be unremarkable and whose section in the 1990-period does not stand out, although the house price to disposable income did increase by about 30% then with some uncomfortable consequences. http://archive.riksbank.se/Documents/Avdelningar/AFS/2015/Session%201%20-%20Englund.pdf Conclusion: History does not repeat itself and nobody knows the future but crises don’t arise out of thin air.

In his memo. Mr. Marks lists the reasons behind a country's preeminence in the world (page 9). I think he could have included institutional governance. https://www.transparency.org/cpi2018

Good discussion indeed. It seems that there are two sources of stress: intrinsic and extrinsic. Interesting to note that, during an era of improved standards and enlightenment (Mr. Pinker’s line of thinking), self-reported levels of stress have been growing and are reaching record levels. It may have something to do with the growing self-reported levels of anxiety and isolation at a time when we have never been more “connected” (“friends” on social media etc). The internal stress is defined mostly by your core beliefs and I guess what Ms. McGonigal describes is a method to alter those core beliefs. I would say outside input may be helpful but most of the work has to be internalized and, in my humble experience, I’ve rarely seen people change significantly after reaching adulthood (and even before), in terms of the ability to deal with stress. DooDiligence, your post reminded me of a quote (Mark Twain, The Adventures of Tom Sawyer): “Tom said to himself that it was not such a hollow world, after all. He had discovered a great law of human action, without knowing it—namely, that in order to make a man or a boy covet a thing, it is only necessary to make the thing difficult to attain. If he had been a great and wise philosopher, like the writer of this book, he would now have comprehended that Work consists of whatever a body is obliged to do, and that Play consists of whatever a body is not obliged to do.” I guess it boils down to doing the right things for the right reasons, and attitude.

There, everything you ever wanted to know about well classification. :) https://www.canadasnaturalgas.ca/en/environmental-action/land/liability https://www.aer.ca/regulating-development/project-closure/suspension-and-abandonment/how-are-wells-abandoned Interesting to remember that the remediation problem would disappear from the radar if oil prices would go up. IMO, the regulators wanted to help but are now behind the ball. You've probably heard of the path to insolvency, gradually then suddenly. The problem with bizaro's comment to require firms to maintain a LMR ratio above 2 is that, at this point, requiring weak firms to provide regulatory capital may push some into insolvency, further compounding the problem. It seems to be easier to avoid a mess than to disentangle from one.

The number of orphaned wells has gone up tremendously in the last 5 years and there are reasons for this rise (mostly smaller and weaker players) but there was already an underlying industry-wide upward trend for "inactive" wells before 2015, most of which had very little chance of going back into production, even with very optimistic "projections". There is a lot of talk about shared benefits which should be proportional to potentially shared liabilities. At a time when the industry needs to improve the public perception and at a time where pipelines going through someone else's lands are necessary to get its extracted product to the end consumer, I think that oil and gas market participants should not simply bet on a rebound but should take a pro-active stance with elected officials and regulators in order to show a balanced concern for the environmental liabilities. The environmental liabilities could be backed by partial bonding and, to avoid having a specific timeline on the growing number of "inactive" wells, should push for a mandated insurance program to be used in the interim. I'd say this would be a +NPV project when all costs and benefits are considered.

shalab, since you seem to have developed a fascination about the relative status of both countries, here's some info that you may find useful. From a per capita and PPP perspective, the US has been and continues to be wealthier, by a wide margin. The median numbers simply reflect a lower (and growing slower) level of inequality. International comparisons are often apples to oranges but the following (ends in 2012, but trends haven't really changed since then) publication uses three approaches that basically say the same thing. https://www150.statcan.gc.ca/n1/pub/11f0027m/11f0027m2014094-eng.htm The net worth value trends for the US and Canada have decoupled since the the recognition of the US housing bubble. One way to interpret this is that the US is one step ahead towards reconciliation with fundamentals. Disclosure: 75% of my net worth is in USD. Another aspect to consider is that net worth for all age groups in Canada has continued to rise significantly (mostly because of housing), even during the 2008-9 episode, which has not been the case for all age groups 64 and under on your side of the border. https://macromon.wordpress.com/2019/02/03/the-clash-of-generations-fed-china-and-the-sp500/

Thanks for the wise words. Interesting because the analogy was also nicely used by a journalist/columnist (Liam Denning, January 7th, 2019) who summarized the issue quite well: "The Gordian knot here is that the cost of the wildfires, the risk of future wildfires (which is rising) and the expense of hardening the Californian grid against that risk must ultimately be met by ratepayers. Finding the most cost-effective way to do this over the long term must be balanced against ensuring PG&E (and its shareholders) pay a price for any of the company’s shortcomings." In the 90's some commentators suggested that deregulation of the California electricity market was akin to cutting the Gordian knot, only to find out that the knot had to be reweaved after some turmoil. At the very least, this will be interesting to watch and a potential outcome is that the knot remains intact.

Hi muscleman, The surprise may be related to the two-level discussion that your thread initiated: 1-the notion of feeling good about a "method" 2-the method being technical vs value (whatever that means) FWIW, your thread triggered me to go back to The Intelligent Investor (presently re-reading the revised edition by Jason Zweig). I guess it's like when people marry a second time with the same person, to make sure they are still on the same page.

I liked it too. The tariffs section is interesting and balanced. Tariffs are not, by definition, right or wrong but are associated with first order benefits and costs as well as second order consequences. There was an active thread on tariffs. The second part deals with the populist appeal and resentment. From Mr. Marks: The government is not likely to increase aggregate benefits and is mostly involved in the distribution of costs and benefits. Recently, there was an election result in my jurisdiction (province in Canada, result=irrelevant but context=relevant) and a more business-friendly party won. However, the largest gains were obtained by a quite left-leaning party which is composed of a young, enthusiastic and committed base. A base that is likely to grow in the event the economy stumbles. Why? Building on what Mr. Marks says, I would add that the government is a net short-term negative for the economy but it can foster an inclusive environment that can maximize constructive gains coming from the private sector. IMO a certain elite that is both government-based and oligarchic in nature has become quite complacent and appears to be oblivious as to why capitalism has become so unpopular among growing circles. Recent addition to the food for thought process. https://assets.realclear.com/files/2019/01/1155_Mobility.pdf

The junior oil and gas sector is a magnified boom and bust cyclical industry. Since 2015, the market environment has shown that many focused only on the boom side (bloated and too well paid execs at the top, excessive leverage and poor/unsustainable capital allocation model) but let's say you're a typical player in the field (reasonable), what do you try to do during the bust? You try to stretch the payables, stretch the lenders and you try to stretch the environmental liabilities. In 2015 and 2016, there were a few instances where Receivers would come in and flesh out the good assets and throw away the inactive (which really "deserved" to be abandoned) wells into the public backed-stopped hands. At the time, this did not smell right. So, who's at fault? I would say many parties but IMO especially the regulator (AER) and if you read the SC decision between the lines, the wise suggest to observe the rules AND to re-write some rules. I think it's not the job of the regulator to "help" the industry during downturns. When looking at what has been happening in the last few years, the AER has underestimated abandonment costs and overestimated the potential recovery of inactive wells. Firms that reached bankruptcy and price discovery levels were sometimes characterized by a very unusual switch of potentially "productive" assets becoming environmental liabilities. Despite the above comments about the judicial aspect, if the regulator brings the LMR ratio and its management to appropriate and conservative levels and if you believe, as I do, that the Canadian oil and gas sector has a role to play in the global energy transition, nothing (not even the Supreme Court) prevents the politicians (federal and provincial) from "investing" in an infrastructure-related program for environmental remediation or even a "job stimulus" program to help the industry if the downturn persists or worsens. The oil industry has to become a better (and less adversarial) political player.

For those fires currently under investigation, do you know which may be attributed to PG&E or which are suspected? Good info. Also, Camp Fire is roughly 3 .3 times the number of structures and Tubbs was estimated to be $7b of liability, so an estimate of $23b seem fair? Convert the debt with a hair cut and you're set. So I'm interested at 39c on the $. The most decisive work will come from the evaluation of major risks: 1- 2019-20 "weather" risks, 2-"nationalization" risk and 3-risk of newco. The valuation work will be work in progress. (Re)insurers may be a good starting point: https://www.munichre.com/en/media-relations/publications/press-releases/2019/2019-01-08-press-release/index.html

^Even if individual firm reckless behavior cannot be ruled out, the growing number of abandoned wells is mostly due to a very difficult realized price environment since 2015. The bankruptcy processes that resulted from the above effectively transferred the environment liabilities from the "polluter", skipping the lender, to the OWA which has required, on top on industry contribution, some form of government support (temporary). The OWA has produced a letter yesterday (see link provided by EliG). Bankruptcy is used to maximize recovery and to offer coordination guidelines. The SC ruling IMO simply helps to correct the relative temporary displacement that has occurred. Temporarily, the lender will pay if oil prices stay low but lenders have also intrinsic mechanisms to pass costs to the various customers they serve. Energy ($) can neither be created nor destroyed, but it can move around. Along the same lines, if externalities become incorporated in regulated utilities' cost+reasonable return model, it's not the utility's return that will change. Here's a nice summary of the split decision: https://www.osler.com/en/resources/regulations/2019/supreme-court-of-canada-decision-in-redwater-early-implications

^From the odds point of view, PG&E appears to be in a weak position versus certain fires especially the Camp Fire, which happened to be the straw that broke the camels back, except that it was more like a ton of bricks. http://www.fire.ca.gov/communications/downloads/fact_sheets/Top20_Destruction.pdf Most of the numbers work here is discounting the liabilities (settlement, time value etc). PG&E will have to roll with the punches (and they're likely to be good at that, absent a deadly blow) and should become a champion of security and safety but that does not appear to be printed in their DNA (Board and top exec overhaul would help). This is likely to get worse before (if) it gets better.

You seem to be mixing RNA for DNA but let's not get wrapped up in unimportant details. Right? The topic was touched in reply#25 in the HTL thread. The race is on. https://www.vox.com/science-and-health/2018/11/30/18119589/crispr-gene-editing-he-jiankui

U.S. District Judge William Alsup, who is overseeing PG&E’s probation for safety violations that led to felony convictions for the 2010 explosion of one of its gas pipelines, set the tone for oncoming (and sometimes unidirectional) discussions and continued to apply pressure to rebalance safety over profit before the 2019 fire season. "Does the judge just turn a blind eye and say, PG&E, continue business as usual, continue to kill people?” In a related and qualified as unsolicited filing from an electrical workers union who could describe a “superior, direct, first-hand knowledge of PG&E’s grid”, the group offered the following opinion: “The goal of reducing to zero the number of wildfires caused by PG&E in the 2019 season is noble but not practical,... Inspecting 2.3 million electrical distribution poles and 150,000 transmission structures across 125,000 miles of power lines by June is not a realistic or pragmatic idea.”... “In fact, it is not possible.” It seems also that relevant participants have started to embrace the idea that the problem is multi-dimensional. https://www.dailydemocrat.com/2019/01/30/california-may-trim-environmental-review-in-wildfire-fight/