oec2000

While technically accurate, all the other headlines I have seen have been very positive. Guess you haven't seen this one! :) Talk about ridiculous. NEWS FROM RealTimeTraders Fairfax Financial Q4 Profit Plunges - Update 19:04 EST Thursday, Feb 19, 2009

Earnings or book value? I prefer book value because earnings recognises investment results but not others simply based on how they are classified. Also, long term earnings power is basically driven by book which therefore makes it the better measure. FFH's quarterly earnings are too lumpy and volatile to be of much use for a long term investor. I would also ask whether we should look at tangible book or reported book. NB privatisation will result in sizeable goodwill which will reduce tangible book. Taking tangible book, the NB privatisation, and what has happened in the markets so far this year, I would guess that book has not risen very much since Q3 2008.

Thanks, Partner and Sharper for the clarifications. oec

http://online.wsj.com/article/SB123449787320481341.html?mod=testMod Slightly more detailed and clearer article.

Partner, Would appreciate some clarification. If one had a cash trading account (as opposed to a margin account), would the assets would be more secure? Or, are you saying that the only secure way would be to have the stock actually registered in your name? As for the Conservatives and bailouts, I doubt that any political party that wants to stay in power would let a major bank fail without doing anything. Besides, even if you are right that the Tories are ideologically opposed to bailouts, it does not mean that they cannot save a failing institution. They could do it by letting equity and debt holders take the first loss before recapitalising the institution. In order to preserve confidence in the entire financial system, depositors will have to be protected in any case and the best way to do it is to keep the institution as a going concern by recapitalising it. This way, govt can recover their money from future profits.

I guess a free market system is based on the fact that humans are innately self-serving, but sometimes it would be nice to see individuals put their own self-interest aside for the greater good. Couldn't agree with you more! What makes it frustrating is that the vast majority of people can and will aside their self-interest if asked. The problem is the minority of self-interested people who manipulate people to their own selfish ends - politicians, union leaders, religious leaders, etc. They are able to do so because many people decide their social/political positions virtually the same way they make their investment decisions - based on sound bites from talking heads rather than their own in-depth analysis. This is why I find investing so intriguing. It not only gives us interesting insights into the irrational human mind; the quantifiable nature of investment results makes it easy to prove and understand this irrationality. A major part of Buffett's genius is his ability to use quantitative analysis to cut through this fog of irrationality.

Another way to consider the ORH.PR.A position. One could argue that because of the relative safety of the preferreds, you could use leverage to juice up your returns. Applying 1:1 leverage at 4% borrowing cost, the return purely on a current yield basis would go up to 20%. This does not factor in capital gains resulting from either a redemption call or a reversion to normalcy in the credit markets. Of course, leverage may not be for everyone and you take the risk of rising rates and margin calls.

What if one firm bought shares and held them. Then one or two shorted the hell out of the thing. The one with the actual shares could also lend the shares out and receive considerable interest income. This would also allow the others to cover positions when the stock moves in the opposite direction. Working together by naked shorting a stock, putting out negative analyst reports and media reports, they drive the stock down until the point where the funds shorting cover and pay back the hedge fund that lent the shares out. I don't see how this would work. Assuming SAC was a conspirator, what would they have to gain from the long position? Besides, the conspirators, in total, being net neutral, would not profit from the sell down. The statement by SAC lawyer Klotz sounds quite unequivocal to me. Given that their trading positions are well documented and easily verified, it seems unilikely that a lawyer would make such a declaration without basis. Based solely on the "facts" from the article, I don't see how a case can be made for SAC's role in a conspiracy. The Chanos/Gwynn link looks more promising and points to unethical and perhaps illegal activity but whether it is enough to prove conspiracy is still questionable, imo.

Really? Because a few seconds later Pandit described what she was talking about -- the underwriting of debt related to the TARP Could you please clarify? I thought the TARP funds involved only purchases of preferred equity directly by the govt from the banks. Why would underwriting be necessary? Pandit's comment was not too clear. If he was referring to debt that had to be sold to private investors, then what does it have to do with TARP?

Ben, I know IB is legit. Just being facetious with the Madoff remark - after all, the safest time to kick a man is when he's down. :) However, I am serious about wanting to know how they can fund these margin loans. There should be some legal impediment to them using clients' cash balances to fund other clients' margin debt. If not, I would be very wary about keeping cash balances with them. What happens if there is a rash of margin debt defaults? Will client balances be impaired? Just doesn't smell right to me.

I watched some of the inquisition -oops, I mean testimony - today. What a circus - with a few exceptions, the congressional reps were more interested in grandstanding and playing the finger-pointing game for the benefit of their constituents. As usual, nothing much was achieved. We did find out what the CEOs earned the past couple of years and which banks owned/leased jets. The best part was the exchange between Rep Maxine Waters and Ken Lewis (BoA). Waters asked an incoherent question about why BoA used the TARP injection to pay themselves fees for receiving the TARP funds. A dumbfounded Lewis curtly responded, "I don't know what you are talking about." I have to say, neither did I! Watching the process made me wonder whether there is sometimes too much democracy in the US. People expressed disappointment with Geithner's no-plan yesterday. Somehow, I feel that if the President and Treasury Secy did not have to overcome the hurdles of American democracy they would be able to come up with a workable bank rescue plan in no time. I reminded of the time when the pilots of Singapore Airlines threatened to go on strike. Prime Minister Lee Kuan Yew responded by threatening to shut down the airline and start a new airline. End of strike; no more labour disputes in the decades since; and SIA is today the strongest airline in the world sitting on $5b cash. This should work for Detroit. Guess I've just stirred up a hornet's nest here. Let me just say that I do not support the banning of chewing gum. (Chewing gum is banned in Singapore.)

Brokers lending at 0.73% in these credit-challenged times?! And, I thought the days of easy money were over - I guess we have not hit bottom yet. Can someone explain how these brokers can get funding so cheap when even banks are having to pay up for money? The 0.73% includes their margin so their cost would have to be virtually zero! If it sounds too good to be true,. .............. Bernie Madoff must have escaped from his penthouse and gone to Interactive. ;)

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. SJ, the high cost of the preferred is what should drive the redemption call decision. My guess is the ORH pfds were issued when they needed to bolster their capital base. Given their stronger capital position today, they should be able refinance the pfds with significantly lower cost debt (and not just because of the tax effect but also because they should be able to get tighter spreads) once we are out of this credit crunch. So, imo, the odds of an early call are pretty high. Crip, as for the relative merits of FFH or ORH pfds, the fair way to look at it is on the basis of risk-adjusted returns and not pure absolute returns. FFH will likely outperform on an absolute return basis longer term but the pfds will provide a more "guaranteed" return with very low downside risk. Depending on whether the pfds are called in Sep 2010, 2011, 2013 or 2018, the yields to call are respectively 35%, 25%, 18.5% and 14%. I would say that such high "low risk" returns are not easy to beat. My solution: Buy the FFH 2011 Jan 320 Call for $70, buy $250 worth of ORH.PR.A to get the best of both worlds. Your total cost of $320 is what it takes to buy 1 share of FFH. The advantage of the combo is that you get the same upside as buying the FFH share but no downside at all. This is because the $250 in ORH.PR.A will accumulate to $320 by Jan 2011. If the pfds get called next year, you get an extra bonus! (To be fair, you do lose one FFH dividend!)

Stubble, thanks for your feedback. Some follow-ups. FFH is already a big owner of ORH preferreds. I know FFH bought some pfds at the time of issue. Have they bought more recently? Where is this info disclosed? I have also looked at Barclays, HSBC, and BAC. I'm mostly seeing preferred yields roughly around 10%. The HSBC issues are yielding about 10% but I am seeing much higher yields on the others. A few examples: BCS.PR - $1.65625 div on $10.71 yields 15.5%. BAC.PR.L - $72.50 div on $443 yields 16.4%. And, this is a convertible too! BML.PR.I - $1.59375 div on $8.34 yields 19.1%. (Old Merrill issue which has converted to a BAC issue). WFC.PR.L - $75 div on $590 yields 12.7%. (Old WB issue.) Convertible into 33 WFC shares which would make it a better alternative to holding WFC common. I could be wrong about the conversion rate but have not been able to verify with IR yet. RBS.PR.Q - $1.6875 div on $5 yields 34%. C.PR.I - $3.25 on $13.90 yields 23%. Convertible into C. And these are based on Monday closing prices. After today's plunge, the yields are that much more juicy. Is there a problem with my data? Moreover, these are merely current yields - i.e. they do not factor in any price appreciation. Even if you assume a 5-10 year time frame for the recovery to play out, we are talking about IRRs in the 25-35% range, maybe more for the convertibles. This is why I think the risk reward profile is interesting. Btw, the WM pfds were all converted into JPM pfds. I haven't checked but presume the same happened with BS pfds. Also, there are nuances with some of the prds that effectively make them more like sub debt giving shareholders the ability to trigger an event of default if dividends are not paid for a sustained period. As for FNM and FRE pfds, I think they should be viewed purely as perpetual call options. Even if they paid no dividends for 10 years but then recover to $20, buying at $1 still gives a 35% IRR! Finally, on Harris, I just scanned the prospectus and thought you might want to know (you probably already do) that Harris Bank does not legally have to make good HPC's obligations if they default. Given that HPC's primary assets are mortgages in Arizona and Calif (??), their risk of default is high. However, I do not think that HB can afford to let HPC default. We are certainly living in interesting times (but having been involved in Asian emerging markets for 30 years, I can safely say that this is not yet the most interesting I have lived through). I believe that they will also be profitable times!

http://www.ft.com/cms/s/0/19678568-f792-11dd-81f7-000077b07658.html There was a discussion on the old board about the pros and cons of the short selling ban. The jury has returned a reounding verdict. Another study of the short ban here in Canada came to the same conclusion - unfortunately, I have misplaced the article.

http://www.nytimes.com/2009/02/08/fashion/08halfmill.html?em Doesn't your heart bleed for the bank executives who just had their compensation capped at $500K? I feel sorry for them - as sorry as they must surely feel for their shareholders and employees whom they've let down. (Any emoticon to denote sarcasm?)

Interesting take on the "Buffett metric." Sounds fair. http://seekingalpha.com/article/119692-buffett-metric-doesn-t-say-it-s-time-to-buy?source=yahoo

BNA.PR.C still carries a Cdn tax-advantaged YTM of about 14% at current prices. If you think that BAM is a survivor, this is still not a bad yield to lock in for 10 years.

Do you mind giving a primer on how this retractable shares work and what are these split corp preferreds all about ? Split share corporations are usually set up to invest in specific asets (in case of BAM Split Corp, it is to invest in BAM shares). The split corp issues both capital shares and pfd shares - funds raised are used to invest in the specified asset. The pfd shares earn a fixed rate of dividend (or interest) and have a fixed redemption date. The capital shares thus have a leveraged exposure to the underlying specified asset. E.g Pfd is isuued at $25 and Capital share at $10; proceeds of $35 used to buy 1 share of Royal Bank at $35. Dividends received from this RY investment is used to first pay pfd dividend, balance goes to Cap Shs. On maturity date of Split Corp, RY shs sold, pfd shares redeemed at $25, balance goes to Cap Shs. If RY shs are $50 at maturity, Cap Shs holders make out like bandits getting $25. If RY are at $25 or below, Cap Shs holders get zero. In good times, the underlying assets appreciate and the capital shares appreciate even more and the pfd shares trade like bonds. In bad times like now, as the underlying assets fall in value, fears arise that at some point, even the pfd shares might not be adequately covered by the underlying assets. This, probably together with some forced selling in Oct/Nov, cause these pfds to trade to fairly large discounts to underlying value. For e.g., in Nov, BNA.PR.C (another BAM Split Corp pfd) traded to below $8 even though the NAV of the underlying assets (BAM shares) was $45 meaning that the Pfd shares were 1.8x covered. Many of these split corp issues come with monthly or yearly retraction features which allows shareholders to surrender their pfd or capital shs or both for redemption based on a fixed formula. I've attached the BNA.PR.B prospectus as an example - you can read the relevant section on retraction for details. Each retractible pfd has its own terms so you have to check out the prospectus each time. Lots of homework but this is why you get anomalies in the market sometimes. The market seems to have caught on to the BNA.PR.B retraction rights now, unfortunately, and the arbitrage opportunity no longer exists. However, there are other issues on which some arb opportunities still exist but because they are small and illiquid, I would prefer not to specify what they are. As mentioned previously, www.prefblog.com is a good site to go to for information.

A few points to add: 1) Eric Sprott runs only the Sprott Hedge Fund, Hedge Fund II, Bull/Bear RSP Fund (all three basically the same), the Canadian Equity Fund and the Energy Fund. The Growth Fund is run by Peter Hodson and the Small Cap Funds by Allen Jacobs. The individual managers have discretion over their funds although they may hold similar positions because they share a common analyst pool. 2) To assess Eric Sprott's performance, it's only fair to use the Hedge Fund because that's the fund that gives him the most discretion and thus reflects his true views. The Canadian Equity Fund and Energy Fund are basically long only funds and offer him only very limited ability to take short positions. The Energy Fund is also a sectoral fund which further limits his flexibility. The Hedge Fund basically holds the same long positions as the Cdn Equity Fund with the addition of an overlay of short positions. 3) The Hedge, Hedge II and the Bull/Bear Funds returned -4%, +6% and +8% respectively in 2008. 4) We should really compare these results to Watsa's hedged equity portfolio return in 2008. Most of Watsa's gains in 2008 came from CDS which the Sprott Funds are probably precluded from trading. 5) Eric Sprott's impressive documented long term track record as quoted by Frog are net of substantial fees (2+20%?) (vs Watsa's numbers which are gross). Sprott's returns before fees must be north of 30%! 6) Sprott's views on the economy, gold, commodities, financials are well documented in his monthly newsletters. He, as much as Watsa, foresaw this financial meltdown. He also got the gold and commodities trends right; he was also right on energy until the past six months but only time will tell whether he was right about the secular energy story which may not be over yet. The long only funds did not allow him to fully reflect these views. 7) The Sprott Hedge funds returned about 23% net in 2007 - I doubt that Watsa's 2007 hedged equity returns were anywhere close. In the final analysis, this is not an "either or" choice. Both of them are super-investors in their own right, imho. I am quite happy to have my money with them for the long run. I hold FFH and XHM.A (through which you get exposure to the Sprott Hedge Fund at a discount; unfortunately(?), you also get some exposure to Dynamic's Rohit Sehgal's and Front Street's funds). I also have a small position in SII - hoping to get it cheaper.

Yeah, make every Gov't employee drive around in a Mini Cooper. Might be a tight fit for Stephen Harper!

I share UCP's reservations about KFS. After a cursory look at their fundamentals I initiated a small position in KFS in late 2007. Intending to build up my postion, I started digging deeper as the stock got cheaper. The more I investigated the less comfortable I became. Firstly, it appeared to me that mgmt were being serially dishonest about the extent of the problem at Lincoln. "The problems relate to past years' business; we've taken action; the problems are behind us now." The same message was repeated over several quarters. Secondly, the reserve development triangles gave clues that their reserving practices were suspect. Thirdly, I can't remember the specifics now but mgmt did not give a very convincing answer to a question of why they suddenly realised that the Lincoln reserves were inadequate. KFS may look cheap but mgmt has failed the honesty test, and I don't think you want to place too much faith in their numbers. There are better alternatives out there - why scrape the bottom of the barrel? Btw, check out Shaun Jackson's interview on BNN today - maybe I'm biased but I thought the body language spoke volumes. Incidentally, I took my loss (33%) in Q2 08 and moved on.

Do his investors bear some reponsibility. Black box investing, oh dear. I hope you are not also of the view that victims of sexual assault who dress provocatively share responsibility for the crime. What Madoff did is unconscionable and inexcusable. It's a shame he didn't do this in S'pore. The authorities there would deal with him appropriately - but Crip, even there they don't nail people's nuts to the wall. ;) An aside - do you know that in Dubai (and many of the Gulf states) people get thrown in jail for issuing cheques that they know will bounce?

ING Groep sells controlling stake in ING Canada: http://www.ingcanada.com/en/pr-ing-canada-public-float-to-increase.html Curious why they were not able to sell to a strategic buyer for a control premium. I would have thought that FFH would have been interested.

Question: any other Preferreds out there, in Canada or U.S., that present real value and opportunity in this environment? Stubble's Harris Bank idea makes a lot of sense. (Thanks for bringing it to our attention!) Like Stubble, I saw many opportunities in Nov/Dec in Canada. The best opportunities were mainly in the Split Corp preferreds with monthly retraction features. Case in point: BAM Split Corp B (BNA.PR.B). For 3 consecutive months (Oct, Nov & Dec), I was able to buy the B preferreds and surrender them for retraction at the end of each month for 20%, 20% and 45% returns respectively - actual returns, not annualised - giving a compounded return of 100% (not annualised!) over 3 months. Not bad when everything else was tanking. (Paid for my loss on BCE!) A related pfd, BNA.PR.C, also traded to levels where you could lock in a 20+% yield to 2019 maturity. Other BAM pfds also traded to very attractive levels in Nov/Dec but have since rebounded sharply. I had pointed this out then on the old message board although I was not specific about issues because I was still buying. Unfortunately, after the rebound in Jan Cdn pfds are no longer super-cheap (except for one I am still accumulating so can't disclose) so I would wait for another market dislocation before buying. Cdn pfds are underfollowed and information is hard to get - this gives the diligent investor a huge edge. Right now, my focus is on US bank preferreds. WFC has a convertible pfd with 13% yield; BAC pfds carry high teens yields; C in the 20s; RBS in the 30s. This does not take into account potential capital gains since they are trading at about only 50%, 25%, 30%, and 20% respectively of par. True, these are not for widows and orphans and certainly the risk of suspension of dividends is high. But, if you believe that in this post-Lehman world, govts will not let any major bank go under, the pfds of survivor banks will eventually trade back much closer to par. This is where I disagree with Stubble's comment that there are no home runs in the pfd mkt. My turn to ask for your feedback or derision, Stubble. :) On my to-review list - Fannie and Freddie pfds. Assuming their par values have not been written down permanently, could one possibly look at these as no-expiry calls on FNM and FRE? If the govt keeps them afloat until the housing mkt recovers, they should eventually get back to health and possibly reinstate their pfd dividends. Am I delusional? Stubble, as to your concern about inflation, this can be taken care of by buying floating rate issues , issues with short fixed maturities or retraction rights, or fixed/float convertibles.