Vinayd

Yes it does indeed Viking! Thanks for posting this article, Parsad. I was able to take advantage as well and get lots more shares at $358!

Any idea into the price drop again this morning? ...down to about $356 CDN.

Thanks all for the posts. Regardless of the decision -- I hope Fairfax communicates its intention. I'm in the camp that FFH should give shareholders an option: 1. Either a cash payment on Dec. 27th, or a DRIP payment in January. This way, individuals can decide which timeframe is beneficial for them, and won't add administrative burden (...as shareholders can easily switch to DRIP or Cash by calling their broker). And, sell their DRIP shares at a time convenient to them. Fairfax, after all, has built its shareholder base by being fair/friendly to their shareholders. If they wanted to stay away from shareholder tax issues -- then they could have simply stuck with buying back shares. Dividends attract a certain type of shareholder (...and has allowed long term shareholders with a well earned income stream), that FFH is courting. This issue is compounded by Fairfax's decision of an ANNUAL dividend (...versus quarterly), to keep administration minimal and maintain a large base of like minded longterm shareholders. Fairfax has proactively thought about issuing a dividend (..versus not), and making it an annual one (...versus quarterly). Both of these decisions came to bear from thinking about the needs of their shareholder base, and reasons for owning share of FFH. For US shareholders, 2 Dividend payments at ~15% tax treatment in 2012 versus 1 dividend at marginal rate of ~39.6% in 2013 is very significant. If FFH US shareholder base is large (i.e.: ~30% - 50% of their shares), it is a decision that they need to think about and communicate to this shareholder base. Waltmart is leading the way, although the below article seems to politicize it by indicating how this decision benefits the Walton family. I think it is a good decision, and regardless of the large international investor base in WMT, they recognized the issue and made a decision. -- Good for them! As these large US blue chip companies start announcing, it would be good to see FFH lead, versus being forced to follow. http://www.reuters.com/article/2012/11/19/walmart-dividend-idUSL4N08Z3CB20121119

True stubblejumper, I think it will come down to where the majority of FFH shares are held (US accounts vs Canadian). Regardless of their decision, I think they need to communicate a decision to the shareholder base thay they have proactively thought about it, and its consequences, and therefore are implementing the following: option 1: move it up 30 days, option 2: pay $5 in Dec, and $5 in January -- or some other combination option 3 : allow cash dividend payments by Dec. 27th, and allow DRIP payments in January, hence giving the shareholder the option to choose the timing option 4: do nothing -- leave it as January 2013. The bigger issue here is comumunicating their intention, so shareholders can do tax planning -- as the dividend only comes around once per year -- and their shareholder base tends to hold a high percentage of their wealth in FFH shares. To not send a press release, I think is somewhat irresponsible, given the heavy news flow around the fiscal cliff and its tax implications. cheers, Vinayd

Some dividend paying companies have issued news releases that they are moving up the timing of their quarterly dividend from January to Dec. 27th, in light of the uncertainty of the 'fiscal cliff' outcomes related to adjustments to dividend tax treatment. I think this is an important issue for Fairfax shareholders for 2 reasons: 1. Fairfax dividend is ANNUAL. Therefore, the impact can be more pronounced compared to companies issuing quarterly diviends 2. Fairfax shareholder base is unique in that a higher percentage of shareholders tend to hold a high percentage of their wealth in Fairfax shares. Therefore, for fairfax shareholder base; counting on a certain dividend payment is more pronounced. Whether Fairfax decided to move up their annual dividend to end-of-December, or leaves it at their regularly scheduled January timeframe -- I think they should issue a press release on their decision, as to assist in tax planning for their shareholder base. Concurrently, if you may have questions / concerns on the above issue -- it might be worthwhile to send a note to Investor relations to let them know your thoughts (...Prem, by moving up the dividend by 30-days, just this one time, will save me XXX in taxes!!) ;) As a side benefit, an updated dividend payment may force a mini short-squeeze on those front-running the MSCI mirror fund sellers over the next few weeks! cheers, Vinayd

Thank you for this info! I was able to capitalize as well with a substantial buy this morning at $345 CDN (1000+ shares). The gain appears to be fading a bit, and wondering if has a chance to drop again, as the MSCI will officially re-balance on Nov. 30th. Just trying to get an understanding when the MSCI mirror funds actually sell, as opposed to trading desks front-running the eventual sales over the next 2 weeks. thanks again for this insite!

Let me be the first to post it! An interesting primer on the definition of Money and use within the ecomony. still in the deflationist camp... http://www.hoisingtonmgt.com/pdf/HIM2010Q2NP.pdf -Vinay

"Although the current account will narrow and fewer funds will recycle into the U.S., it is important to review the portfolios of foreign investors. Based on the latest available figures, the foreign sector held $9.1 trillion of long-term securities (Table 2). The Treasury department considers long term securities to be those with an original maturity of more than one year. As this table indicates, equities comprise 34% of foreign holdings, the highest for any category, followed by 30% in corporate bonds, 22% in Treasury securities and 14% in Federal Agency securities. The holdings of U.S. Treasury securities are primarily in the short end, with 70% held in 5 year or less maturities, 23% in 5 -10 year maturities, and just 7% in greater than 10 year securities. Thus, the shrinking U.S. capital account surplus is likely to have its greatest funding impact on the corporate bond and equity markets. The short-term Treasury market could be adversely affected, but the Fed is able to control the short-term rates." - Hoisington Research, Q4 2008 Update. The $2.5T definately feels ominous. However, the perception of the highest quality asset for the past 3/4 century collapsing in a mere year-or-two is an overstatement. In the end, the market will find a balance of interest yield the treasury bonds need to attain to entice foreign investors (...and all investors), to start to sell their other holdings and into $US treasuries. If that equilibrium price is say 5%, or 6% on the long bond -- and the tide turns to selling other securities to buy the $US treasury, the snowball of selling of 'less secure' assets to get into treasuries starts to become self reinforcing, and another recession or debt-deflation cycle starts. If the $US Treasury bond needs to 'compete' with other lesser securities (corporate bonds, equitities, lesser government bonds, etc), it will 'compete-to-win'. The US government seems to be employing a perverse strategy of selling shorter duration $US treasuries when demand is lower, until the long end touches the equilibrium price that initiates selling other securities to buy long dated treasuries, and then 'covering' the short-end treasuries with NEW long dated treasuries at better prices will allow the US government to continue to run their budgets for some time to come. The expense will be lower prices for risk assets (e.g.: continued lower corporate bond, and stock prices) -- as US treasuries take a greater precentage of the global capital supply. cheers, Vinay

Sorry ubuy2wron , I've searching for the article/quote and cannot re-locate it (It was a good article too! - damn). I guess I'll have to retract that statement, and simply state "for a very long time" some bubble timelines to think about: 1. 1929 Stock bubble/crash. recovered to 1929 levels around 1962-64 (was still at 50% of peak around 1952-54) 2. 1980 Gold bubble. recovered to peak in 2007. (50% of peak in 2004) 3. 1989 Nikkei bubble. still at 25%-30% of peak in 2009 4. 2000 Nasdaq bubble. 40% of peak 9 years later. cheers, Vinay

I agree bargainman. The Japanese experience has asset deflation for about 20 years now, but they have experienced goods & commodity inflation just like the rest of the world during these past 20 years. Since Japan is only 90 million people, commodity deflation isn't in the cards against the world population. What happens when North America and Europe enter a similar "Japanese experience" (debt induced asset deflation)? Can China & India's population balance the commodity deflation experience by these ecomonies? I don't know either. But it is far from certain. cheers, Vinay

" 80% of the economy [the private sector] is de-leveraging. Only 20% is government stimulus. Companies are operating at 65% of capacity or utilization rate. Unemployment is rising. If in six to 12 months' time, the stimulus and bailouts don't work, and we are at zero interest rates, what then? We had 20 years of good, meaning no recession to speak of, and only one year of bad. We are not worried about inflation, just the opposite" - Prem Watsa Although the US government (20%) can print money to manage payments of their debt in the short-medium term, the private sector cannot (80%). The private sector will need $US dollars in great supply and during very acute time periods in an environment of involunatary debt liquidiation. We saw our first glimpse of this in October 2008 when a medium sized investment bank went bankrupt, even though the US government had initiated specialized stimulus programs from Jan 2008 - Oct 2008 cheers, Vinay

"The price effects of inflation can occur in goods, which most people recognize as relating to inflation, or in investment assets, which people do not generally recognize as relating to inflation. The inflation of the 1970s induced dramatic prices rises in gold, silver and commodities. The inflation of the 1980s and 1990s induced dramatic price rises in stock certificates and real estate." - Prechter This past decade has seen a large trading range for stocks & real estate, but as of now, stocks are 35% lower than the beginning of this decade, and the real estate bubble has burst. If we agree that US real estate was a 'bubble', -- no bubble has surpassed 50% of its peak value within a generation (Nasdaq bubble & Japanese stock bubble are still following this trend). You are correct that 'commodity' and goods have not seen deflation over this decade, but we got our first deflationary panic this past year. We'll see how this plays out in the coming years. cheers, Vinay

Yes, I don't necessarily have an opinion (...or agree with) his technical analysis side. But like many financial analysts, he has a longer term strategic view of deflation based on some sound macro fundamental analysis (which the article gives a glimps of) similar to Hoisington & Fisher. Then, like many analysts he attempts to answer when will the peaks & valleys occur during this deflationary period. This is where he uses the EWI & technical analysis -- which I don't necessarily agree with or have an opinion on. Like Hoisington, who points out that in deflation, long treasuries (...and safe US dollar demoninated bonds) may likely outperform. The $US dollar may remain strong during a debt-induced deflation cycle, is Prechter's thesis (...which has merit). The article talks more to the nature of and fundamental argument of deflation, which is an intersting read -- if you found the Hoisington/Fisher articles interesting. cheers, Vinayd

Just resurrecting this old thread, as I read an interesting article from Prechter on deflation. It echoes some of the themes from Hoisington & Fisher. This is just an excerpt from his recent book -- so it should be put in context to his whole book. Anyway, if you liked Hoisington, you may find these excerpts interesting as well. cheers, Vinayd Note: I don't have an opinion or am advocating Prechter or EWI -- I just found the attached deflation exerpt interesting.

Hi Sanj, There was a presentation I attended awhile back from a company called CBI Group from Alberta. They seem to have setup a structure similar to what your group is looking to setup. I am definately NOT recommending this company, but it may be worthwhile connecting with them to get information on the most tax efficient way to set this up. Heck, they may even have a template on how to do it. Again, I have not dealt with CBI, or have knowledge/interest in their investments/philosophy. I just went to a presentation and what they've already done seems to be similar to what your group is trying to achieve -- so they may have useful information. the website is: http://www.cbigroupinvestments.com cheers, Vinayd

HI Sanj, I'm wondering if you should add the ORH buyout by FFH onto your the 'Lead Story' page of CornerofBerkshireandFairfax.ca. I think it's an important one for this board. cheers, Vinay It looks like no matter whether you held FFH, or ORH -- everyone's a winner, as both are near their highs. Congrats all!

Congratulations to everyone who took positions on ORH or ORH options. I have a large position in ORH as well, and am pleased with the release of this announcement. I was getting a bit nervous for a pre Q3 closing, as Fairfax would need at least a month to close the deal. If it's similar to the NB deal, FFH will need 50% of the minority shareholders vote to close the deal. The 2 long term holders of significance are Marshfield (about 2.7M shares) and ORH management (about 1M shares). I'm sure FFH has these 2 shareholders on board, so they would only need another 3.5M shares voted (assuming there is only 15M shares left outstanding), which is a high probability of occuring. So, I don't see a need to raise the bid. Any minor raise in the bid would likely be accompanied by a higher price issuance of FFH stock. The quick FFH share offering also closes an issue in my mind regarding the $400M debt sale. The quick increase from $150M to $400M debt offering and the very amicble rate of 7.5% on a 10-year investment grade note seemed a little too good to be true. I'm sure there is a quid pro quo of those who purchased the notes, to also be obliged to buy up some FFH common equity from this share offering -- even if it is a tad overpriced. Congrats again to everyone, as this has made my Canadian long weekend -- and investment year! cheers, Vinay

Thanks Cardboard for the great investigative reports. Everything you've posted continues to strengthen my view that FFH will imminently make an offer for the balance of ORH: 1. FFH is a complicated structure, with many intermediary holding companies and investment companies riddled between the actual insurance/reinsurance operating subs. 2. the $880M of cash at the FFH holdco, is likely not ALL held in one US holding company, but various amounts held in various intermediary holding companies and comprised of various international currencies (e.g.: US$, CDN$, Pounds, Euros). With the $US weakening substantially these past 4-5 months, it may be beneficial to tap into these international currencies within their holdco cash to make part of the purchase. 3. The transaction of buying out ORH will likely trigger tax implications accross at least some of the companies that are holding ORH shares -- and therefore a need to ensure the transaction is tax efficient. Therefore a movement of some ORH shares out of TIG group to perhaps NB or Advent may support this thesis (...my speculation:-)) 4. Cardboard, your posts on NB's special committee discussion reveals that like many large conglomerates -- getting internal alignment requires posturing, and some level of strong arming. In the end, these are leaders of large corporations who know how to play the politics of their internal organizations to their benefit. Moving NB shares around may have been more than just getting a tax benefit at C&F before takeover, but to ensure Prem's existing shares of NB were in the 'correct' intermediary holding companies to ensure internally his votes were lined up. 5. FFH cannot feasibly make an offer for ORH until they actually have the cash from the $400M debt offering. If this closes on Aug. 18th, then FFH can only make an offer after this date. Until then, ORH has no need to form a special committee and it's status quo on share buybacks. 6. The payment of $50M US for the balance of Advent last month aligns well with the notion of an ORH buyout, since FFH may need to gain full control of Advent's float to gain access to more foreign currencies and a strong posture of where ORH shares are held in relation to voting ability. 7. ORH bought back another 500 K shares in July, and likely more in August (...my speculation again). These share buybacks at below book, along with more mark-to-market gains in ORH's investment portfolio are putting upward pressure on the stock price. and book value -- and ultimatelya final buyout price. It is imperitive that Prem not have ORH release another Quarterly report so he can harden the $51.90 as the latest book value and as a plausible valuation metric. 8. Although Andy has done a fabulous job operationally at ORH, it is Hamblin Watsa's investment prowess that equally (...if not more so) contributed to ORH's gain in intrinsic value and book value. So, a buyout valuation of 1.15 - 1.30XBV range is very reasonable given current soft markets and historical trading range of ORH and likely be considered 'fair' by any valuation committee formed at ORH although somewhat be-grudgingly. Buying out ORH, unlike buying out NB, is a substantially larger endeavour. It requires FFH to move funds around to maximize currency translation. A need to ensure the buyout minimizes tax consequences and potentially maximizes tax gains where possible. A need to secure $400M in debt for prudent cash management -- to manage upcoming debt maturities at the holdco and ORH sub in 2012-2013 as the buyout will cost $$850M - $950M now. And finally, will require a strong posture internally so that Prem can fend off any potential internal power struggle at the sub level. An ORH buyout puts the continued ORH share buybacks, Advent purchase, $400M debt offering, large ORH share movements and even the recent renewal of Andy's contract into proper context. All of these elements are required to make a successful offer. Without an imminent ORH offer, the above moves actually create some cause for concern (e.g.: what the heck do you need $400M for now??, and why the heck are you buying the rest of Advent for such a premium??). cheers, Vinay

Thanks Cardboard, that definately helps! O.K. so let's speculate that ORH won't be taken over then... 1. Andy felt that buying another 10% of ORH public shares in 3 months (1.7M shares of approx 17.2M available) was a just a good deal and.... 2. Paul and Brad needed to shift $240M worth of ORH shares to some other subs just because they could OR they really needed to shore up some massive adverse development at one of the non-US subs, but decided not to disclose this in the Q2 or conference call and.... 3. Prem felt that $880M of holdco cash was just a bit too light, and needed to boost it to $1.3B in the worst credit environment since WWII so they can cover $180M of debt 4 years from now.... OR They've collectively decided that it's prudent to take $500M - $1B flyer of (25% of shareholder equity BTW) of their company on a Chinese acquisition OR They are buying the rest of ORH. ...c'mon!

I thought that this 13-F focused only on the US insurance subs and holding companies. If FFH Holdings swapped the 4.6M ORH shares to a non-US insurance sub/holding company (e.g.: NB, Advent, FFH Asia companies, etc), then the 13-F wouldn't show the holding. Similar to the notion that this 13-F doesn't show Torstar, Brick, and other companies as they are likely held within NB. cheers, Vinayd

" because reducing 42.4M to 35.8M shares doesn't equal 17.8%" sorry, I made a typo. I meant to say: because reducing 42.4M to 37.8M shares doesn't equal 17.8%. cheers, Vinay

Well, I'm quite confident FFH didn't sell any ORH! So my speculation is a couple of ideas: 1. I remember ericopoly posting that the 2008 FFH AR stated that runnoff (...within TIG) owned 17.8% of ORH. Perhaps FFH had to properly document this, and therefore changed the 13-F to show the lower holding (...as TIG owns the rest). The problem with this thesis is that the numbers still don't jive, because reducing 42.4M to 35.8M shares doesn't equal 17.8%. OR 2. FFH Holdings swapped about 4.6M shares to another subsidary for cash (i.e.: book value of ORH shares for cash). This will boost the cash at holding company by approx $240M. So, the additional $240M from the ORH share swap plus the $400M from the pending debt securities sale and another $300M of existing holdco cash should be enough to buy the balance of the 15.5M shares of ORH between $60-$65 at FFH holdco. This will still leave approx $500M cash at holdco through Q3 and Q4, and holdco then can receive dividends from the subs in the New Year to replenish their holdco cash values back to $800M to $1B. The end result will be FFH would own a large portion of the ORH shares, TIG would own some, and another sub (..or two) would own some ORH. ....It's all coming together :-) cheers, Vinay

OK, for those who believe FFH will take ORH private imminently, this expansion to $400M (...from $150M) makes good sense. FFH has $180M due 2012, and some more due in 2015. ORH has $225M due 2013 and another $125M due 2015. When I saw the original $150M, it strengthened the ORH privitization thesis, but it wasn't enough in my mind. The $489M of ORH debt wil essentially become FFH's obligation when they take ORH private -- and it is this debt that is maturing sooner. So, if FFH used the sub's surplus to fund the privitization it would leave ORH exposed to a lot of debt maturing in 3-5 years. If ORH had a bad year-or-two, they might struggle to cover the debt or be required to extend at even higher rates. So, this $400M should be enough to pay off the $150M FFH and the $225M ORH within 3 years, and leave FFH free to take the subs' dividend capacity to takeout ORH -- and leave a cushion for any adverse development over the next 3 years. This debt extension also opens the door of making an ORH takeout announcement before December 1st. Again, if FFH needed dividend capacity to fund the privitization, they would need to wait for the regulators to validate their reserves, and only be able to announce any privitization transaction on or after Dec 1st. Buy issuing debt now, they may be able to offer a lower privitization value (e.g.: $60-$65 per share) versus waiting to Dec 1st. and possibly needing to pay $65 - $75 range. Another support point to the ORH privitization thesis that I'm watching for is the announcement that ORH has used up the balance of their Normal Course Issuer Bid allowance. I think they had about $75M left after the Q2 and july buybacks. I don't know if this announcement would coincide with FFH privitization or precede it. My speculation is that ORH won't make it to the Q3 announcement :-). cheers, Vinay

Whew! Thanks, JEast. I didn't see the reverse stock split. The high price was troubling me, as I didn't see a strong reason to purchase at 10X the price they issued shares in 2005/06.

Well, this is interesting in many respects. FFH is paying $50M to buy the rest of Advent for 220pence/share. In reading the 2008 Annual, Advent had issued a lot of shares in 2005 in the 20 and 25 pence range. So, quite a price jump to buy them back! I'm guessing FFH is trying to access Advents reserves, as there may be substantial gains there. The big question is was paing $50M for the rest of Advent a better deal than buying either more FFH shares back or committing the $50M towards the purchase of ORH. Unlike many of the Asian and eastern European insurance purchases, it doesn't look that Advent is a growth business. Also, their CR doesn't look stellar either. So, I'm guessing FFH has made a strong gain on their reserves, and are looking to annex them for dividend capacity back to FFH holding. Hopefully, this dividend capacity is equal or greater than the $50M spent.