watsa_is_a_randian_hero

yeah - taking a look now. Looks like he has been buying a ton of mbs for pennies on the dollar

yes

I have 0 remaining free reports as well. If someone else registers - post the PDF here and I'll download the current CDS spreads.

If someone sends me a list of the 12/31 holdings I can provide updated values from bloomberg

I like that one stone. I told someone at work to buy FFH @ 260. He was happy when it went to 330. Now he no longer gives his wife portfolio updates :) !

I disagree that the CDS market is "inherently evil." I agree that it needs to be be regulated and a clearhouse would help also. Jack- I agree options market makers should not have naked short ability. However, that is a seperate problem and does not mean that CDS should be done away with. Also, with a clearhouse in place requiring the posting of cash daily (same as futures market) would solve systematic risk issues. Again, we are talking about contracts between private parties here. One should not be concerned with with what two other private parties do with their money (you can see my Randian philosophy here). BTW, if you are upset over CDS, why are you not concerned with futures? ChicagoOne allows the trading of Single stock futures. I can leverage 5x on that exchange. I can short BAC with total disregard to any uptick or share location rules. This, and equity index futures have a larger potential to influence stocks because of the leverage involved. You can be 20x leveraged with equity index futures. However, even the futures should not be a concern (as long as market makers are not naked shorting, this is the real problem). If I short BAC with single stock futures, the market maker has to locate shares to short themselves to offset the risk. The cost of borrowing will be passed on to me in the price of the futures. Again, my advocation of these markets is predicated upon no party being allowed to naked short the shares.

I said buying puts, not naked puts. Buying puts without owning the underlying stock. Naked puts is selling a put contract without having the money to purchase. Santayana - you took the words right from my mouth.

You could argue the same "moral hazard" with buying put contracts when not owning the underlying stock. Also, Packer, I disagree with you as well. The derivatives market on equities (futures, forwards, and options) is larger than the equities market. I think the problem is there is no netting and no standardization and no clearing house. If we go these problems solved, it would operate just like the futures market, or just like the options market. The problem isn't CDS, the problem is the way it is traded.

Well, while the equities could be down about $1 billion, I'm hoping we've made at least $500 million in the Muni's by now, so this mitigates to some degree.

thats the dumbest thing ever. why don't they just do away with naked options, futures, forwards, and every other derivative? It is a CONTRACT between two private parties. Who are you to say two private parties cannot contract? This is totally different from naked shorting. Naked shorting is the failure to deliver; it is the failure to fulfill a contract. Naked CDS is not. It is merely a contract, where one party is paid if a certain event occurs (credit event).

Based on my calcs, they have lost $850 million on their equities since 12/31. That is $50/ share pre tax. This is kind of ridiculous though.

No - the call spread only pays off at expiration. I paid $14.70 for the spread between $300 and $350. I am entitled in Jan 2011 to the profits on FFH between $300 and $350. My breakeven is if the stock is $314.70. The IRR on the trade, if FFH is over $350 and I get the $50, would be 90%. To get the same IRR on FFH common shares over the same period, the stock would need to be $855 in 2011. If the stock only goes to $320, I'll get $20, and have an IRR of 17%. Buying the common at $250 and holding for $320 over the same period is still a lower IRR, only 13.8%. The risk is we have something worse than Katrina or 911 and BV is only $250 or something in 2011.

I came across this today from Katten Muchin - see attached. This is a ruling on another shareholder suit alleging racketeering activity. Single Scheme Did Not Constitute Pattern of Racketeering Activity An individual investor in, as well as the corporate manager of, a Provincetown, Massachusetts, resort brought an action alleging, among other things, violations of federal and state RICO statutes against several other investors in the resort. The claims arose out of a series of disputes involving the ownership of the resort, as well as a string of settlement agreements whereby the defendants ultimately agreed to sell their interests in the resort to the individual plaintiff. The sale was never consummated, however, because the individual plaintiff was unable to obtain financing to complete the purchase, allegedly due to the defendants’ wrongful interference with a senior lender that had to consent to the financing. The District Court dismissed the complaint and the plaintiff appealed. On appeal, the 11th Circuit began its analysis by recognizing that an essential element of any RICO claim is a “pattern of racketeering activity” that must “amount to, or... otherwise constitute a threat of, continuing racketeering activity.” The court pointed out that this requirement can be met through either “closed-ended” or “open-ended” continuity. Close-ended continuity can be established by a series of related predicate acts of racketeering occurring over a significant period of time, while open-ended continuity may be demonstrated through a showing that the acts were part of a “regular way of doing business” or were likely to be repeated in the future. In affirming the dismissal of the complaint, the 11th Circuit held that the allegations could not establish closed-ended continuity because the alleged acts were part of a single scheme, occurring over a relatively short two-year time period, and involved only two purported victims. Similarly, the court explained that the alleged wrongdoing was not part of defendants’ regular way of doing business since the allegations related to the “extraordinary act of transferring ownership interests” in the resort. In addition, because the allegations were predicated on a single scheme to drive plaintiffs from the resort’s management, there was no threat of the acts being repeated. (Ferrell v. Durbin, No. 07-14878, 2009 WL 322049 (11th Cir. Feb. 9, 2009))

I bought a call spread yesterday. Bought the Jan 11 $300's, sold the $350's. Total cost of $14.70 for a payoff of $50 if the stock is over $350 two years from now.

Ericopoly- I commented the following on the CR & currency- "Yeah, when the CAD went beyond parity with the USD we never heard of any huge gain on the CR. Whats up with that?" -I meant by this not that there was no disclosure, it just seems the magnitude of the gain was different.

You can search municipal debt insured by Berkshire in Bloomberg. It doesn't look like its a whole lot that they insure; just a handful of issues.

Doing L III this year. The CFA practice exams were the most representative of the actual tests for I and II. Make sure you do these, and the practice questions at the end of each chapter. I felt Schweser's were not realistic, and they would ask irrelevant questions just for the sake of making their practice exams hard.

I have been buy the wells j's like crazy

There has been some discussion on the underwriting. I failed to remember this myself when first analyzing their CR's this year. Lets not forget that FFH keeps its policyholder liabilities undiscounted on its books unlike most. I'm sure this affects the CR. Maybe someone with more industry expertise could comment/confirm.

Call BV $300 after adding in ICICI but subtracting out current losses on equities at 12/31/08. Lets say the equity portfolio is undervalued by $1.5 billion at that point, and the current market were not as a result of changes in the intrinsic value of any of the holdings. And lets assume FFH could grow the stock portfolio at 15% from its current intrinsic value (significantly less than long run average of 25%). On the bond side, lets assume the current market value is the current intrinsic value, and assume hamblin watsa can achieve a 10% return (long run bond average of Hablin-Watsa). That means FFH's portfolio has a current intrinsic value of $20 billion, or $1000 per share after accounting for minority interests. The average return above translates into an 11.1% return on the portfolio. This means 111 in earnings, pre tax $72 after tax. As for underwriting, assume their insurance operations have a CR of 102, and that means after tax the eps affect is $5.37. However, given FFH carries its policy holder liabilities undiscounted, the present value of this is probably $4 per share. Finally, you must subtract the cost of debt capital. The interest expense on debt and dividends on preferreds will be around $6.00 per share annual cost, after accounting for tax effect & minority interest impact on debt interest. This results in long run, normalized EPS levels of $72 (investment revenue) - $4 (underwriting loss) – $6 (debt and preferred cost). This means FFH has normalized earnings capacity of $62 per share. Apply a 15% required rate of return to that, or a 6.66x multiple, and you get to a fair value of $413. Add in ICICI Lombard and you get to $430. Holding every other assumption constant, the current share price of 300 implies that FFH will only return 8.5% on average for the portfolio going forward. This is well below their long run average of 10% on bonds and 25% on stocks. Looking at it another way, holding every other assumption except the require rate of return constant, the current share price implies expected returns of 20%.

Yeah, when the CAD went beyond parity with the USD we never heard of any huge gain on the CR. Whats up with that? Either way, great quarter over all. My favorite part is they fully sold the treasuries. I was afraid they were going to be burned on that and the common stocks this quarter. The muni's is a huge plus too. The tax equivalent yield is 8.5%+. On $4 billion, the 5% spread between that and the 3.5% treasuries is $200 million per year, or another $6-$7 per share approximately in earnings.

comprehensive earnings including OCI

it all depends. if we still have a ton of long bonds, then theres a huge loss there too. If he closed a lot of that (I'm thinking he closed at least some, to free of cash, given hes buying other stuff), then the loss won't be as bad.

I'm gonna say under. Given all of the additional equity exposure, I bet that drags down earnings. I'm hoping I'm wrong and they bought at the very bottom and closed their treasuries. Either way, WFC is priced right now at almost 1/3 of what it was.

This quarter is tough to predict. We know they closed their hedges, but don't know at what price. We now know they bought a ton of equities, but again don't know at what price. Who knows what they did with their long bond portfolio or the rest of their CDS.