Xerxes

I must be the only one here genuinely astonished to see the $10 billion write off on the PCP. That was a $32 billion purchase and seeing a third of its value impaired was shocking. It was one thing with the airlines (which are genuinely the weakest link in the aerospace value chain) but a write off on PCP, which you cannot reverse, was surprising. Am wondering if I will see RTX write off a portion of its Rockwell Collins purchase, which had a cash component to it. Unfortunately asset bought whole or mostly by cash have the most to lose in an impairment. Unlike a stock purchase where the burden (Dilution) is shifted on shareholders. If the airline bet went sour the way Oxy bet went sour, I hope there is no parallel in the bulked up oil and gas with Diamond going sour some years from now just like PCP did today.

Folks Fairfax Africa is down 7% while Jumia is up 7% based on today. It is time to temporarily don a Robinhood hat and go triple-leverage long on Jumia, and be back before dinner to FAH.

Cigarbutt Yergin’s new book is coming out in September

Chrispy I am huge history buff. Been reading all kinds. On Ottoman Empire, a great overview of is written by Lord Kinross. It is called Ottoman Centuries. Somehow he packs 700 years of history in one book. Also I very much loved the work by Roger Crowley. It is so well written and captivating. He has 4 books, all around the theme of Mediterranean empires. 1- empires of the sea. It focuses on ottoman naval engagement with Europe during sultan suleiman reign 2 - he has a book just on the fall of Constantinople 3 - not related to Turkey, his work on the Portuguese empire in India is a must read 4- city of fortune: it covers Venice commercial empire. Lastly, Edward Gibbon’s masterpiece Decline and Fall of Roman Empire covers the early Turkish empires extensively in the latter twilight years of bizantium. I should add that I am reading a book called House of Saud by Robert Larcy. Man, that guy knows who to write. Amazing.

https://www.bnnbloomberg.ca/berkshire-hathaway-showing-signs-of-an-appetite-ahead-of-earnings-report-1.1476873 Sell side estimate is $6 billion share buyback

I ll say this. The very fact that FFH is unable to do both recap it’s insurance subs and buyback significantly at the same time is an pocket of opportunity that provides a not moving share price looking for a better day. The fact that Buffet refused to buy back it own share and significantly deploy capital in Q2 was also a pocket of opportunity. Lastly on FFH BV my sense is that with the write-offs on some of the Associates at the end of Q1, the stack that made up its BV has been de-risk of bias towards those names. Therefore as the BV is re-build it will be on strength of its better businesses. When the BV gets close to where it was in dollar terms in the coming quarters, I would prefer the post-Q2 stack of BV than the pre-pandemic stack of BV. Same dollar value, but better tilt toward less impaired names. My weird observation

I ll throw my 2 cents: I think while inflation was expected post QE in 08-09 nothing came of it (in the expected form) due to the fact that the world operated on an open trade system. Said differently globalization had a deflationary impact that capped the traditional CPI like metrics ... but you still had too much money, so as we all know that went to lift asset prices. So while inflation in its traditional since didn’t happen it happed on a different dimension. What is different this time ? We are past peak globalization. We are retrenching back to our borders and the pendulum is swinging back. It has been years in the making and has been accelerated by Trump, COVID and populism. Perhaps this time around we ll get our inflation in a more traditional sense.

Bought RTX (added) and L3 on Monday. Fascinating the RTX break up delivered good value to UTC shareholders that decided to keep Otis and Carrier. I also bought Barry Diller’s InteractiveCorp post-match spin-off. It is the only internet company that is cheap from market value vs sum of the parts AND has a low base for growth.

https://financialpost.com/financial-times/the-darth-vader-of-wall-street-on-the-trouble-brewing-in-markets-and-why-he-is-shorting-tesla/wcm/e819c713-d120-4233-8f28-6bb19e0bee68/ Interview with Chanos from FT which you can read for free on FP. Jim Chanos has been cast as the “Darth Vader of Wall Street”, the “Catastrophe Capitalist” and the “LeBron James of short selling”. The 62-year-old titan of the US$3.2 trillion global hedge fund industry predicted the downfall of U.S. energy giant Enron almost two decades ago, making a fortune in the process. But the course of true riches, it seems, never did run smooth. On the day of our encounter, Tesla, which Chanos has bet against for the past five years, overtakes Toyota as the most valuable carmaker in the world, leaving him nursing heavy losses. But more about that later. I am ensconced at Oswald’s, an elegant London members’ club for oenophiles. It’s the first time I’ve set foot in a restaurant in four months. But where more appropriate to interview the short-seller than an antique mirrored dining room in Mayfair, the heart of the European hedge fund industry? It’s three days before “Super Saturday”, when London’s restaurants and bars can reopen. I’ve been granted an exception and am the sole diner. Social distancing would not be a problem here, however. The round tables are generously spaced apart, designed with discretion in mind. I am to have early dinner — Chanos is to have lunch. He is in Miami Beach, where he has been stuck since the start of lockdown in early March. For our encounter, he has persuaded Prime 112 steakhouse, his go-to place on Friday nights, to allow him to use its private room. When he comes on screen, his air is more benevolent academic than pantomime villain, dressed in a white open-necked shirt and blazer. Chanos likes to present himself as a “real-time financial detective who is incentivised to root out fraud”. Or, more prosaically, a “forensic financial statement junkie”. To critics, short selling represents the scourge of modern capitalism. Whereas so-called value investors such as Warren Buffett try to buy shares in companies that the market is underestimating, short-sellers such as Chanos seek out overvalued companies. They borrow shares and then sell them, hoping to buy them back later for less. In short, “they are profiting when others are losing money”, says Chanos — and this makes some people uncomfortable. Chanos is buoyant. Recently, one of his largest short positions — the German payments company Wirecard — filed for bankruptcy, after admitting that €1.9 billion of its cash probably did “not exist”. This followed a five-year Financial Times investigation into its accounting practices. Chanos’s funds made almost US$100 million from the trade, according to an investor. He laughs: “It’s bittersweet, Harriet, because short-sellers put up with weeks and months of misery, and you feel good for hours and days.” Even its detractors acknowledge that short selling, in a normal environment, helps the markets to question conventional wisdom. But a sharper complaint, usually heard from targets, is that short-sellers acting together to sow FUD (fear, uncertainty and doubt) about a company’s accounting or financial position can become a self-fulfilling prophecy. In the past, investors such as Chanos have moved markets just by revealing a bet against a particular company. Chanos happily concedes that he talks frequently to other short-sellers. He shorted Luckin Coffee, once touted as China’s answer to Starbucks, after Carson Block of Muddy Waters encouraged him to look at it. (The company is now being investigated for accounting fraud.) But it’s “a myth” that short-sellers act together, he tells me from Prime 112’s private room. “If there were conspiracies, we’d be in something much more profitable than short selling.” I mention Canadian insurer Fairfax Financial Holdings Ltd. It sued a group of hedge funds, including those run by Chanos, Dan Loeb and Steve Cohen, for allegedly driving down its stock under a short selling scheme. “That was the perception, but it wasn’t true,” says Chanos. “The case was thrown out (in 2018) on jurisdictional grounds. Our allegation was that the company was overstating their earnings, and during the process they restated their earnings.” Chanos’s hedge fund manager Kynikos Associates Ltd. is named after the ancient Greek word for “cynic”. His pitch is that he can identify corporate disasters-in-the-making. The New York-based outfit employs 20 people and has US$1.5 billion in assets under management. Chanos also teaches a course on the history of financial fraud (“how to detect it, not how to commit it”, he quips) at Yale University, his alma mater. The syllabus stretches back to the 17th century. Today, he says, “we are in the golden age of fraud”. Chanos describes the current environment as “a really fertile field for people to play fast and loose with the truth, and for corporate wrongdoers to get away with it for a long time”. He reels off why: a 10-year bull market driven by central bank intervention; a level of retail participation in the markets reminiscent of the end of the dotcom boom; Trumpian “post-truth in politics, where my facts are your fake news”; and Silicon Valley’s “fake it until you make it” culture, which is compounded by Fomo — the fear of missing out. All of this is exacerbated by lax oversight. Financial regulators and law enforcement, he says, “are the financial archaeologists — they will tell you after the company has collapsed what the problem was.” All in all, it’s “a heady witch’s brew for trouble”. A waiter arrives to take his order. Chanos knows the menu by heart and picks a wedge salad of iceberg lettuce, bacon, tomatoes and Roquefort dressing, followed by a strip steak (medium) with a baked potato. He doesn’t normally eat or drink like this at midday but says he will make an exception for Lunch with the FT, and orders a glass of Cabernet Sauvignon. At Oswald’s, the general manager Michele greets me with a glass of champagne and explains that the chef will prepare his own selection of dishes for me. I’m out of practice with ordering, so this comes as something of a relief. Chanos’s mission is focused on understanding a company’s business model and then ascertaining if its financial statements reflect it. Certain themes crop up time and again in his hunt for short positions: technological obsolescence, consumer fads, single-product companies, growth via acquisitions and accounting games. Notably he looks for “legal fraud” — where companies adhere to the accounting rules and regulations but there’s still an “intent to deceive”. Enron epitomised this — Chanos identified that it was using aggressive accounting to front-load profits and hide debt in its subsidiaries. He wasn’t the first short-seller to the Wirecard party. Chanos initiated a short in the German payments company last year and increased the position last autumn, when the FT published documents indicating that profits at Wirecard units in Dubai and Dublin were fraudulently inflated and that customers listed in documents provided to auditor EY did not exist. Wirecard’s collapse, when it finally came, was dramatic. But, says Chanos, most fraud is on the edges. And these days, often it is “staring at you right in the face through the use of company-designed metrics” through which they are “gaming the system”. He is referring to creative accounting measures used to flatter companies’ books, notably office-space provider WeWork’s now infamous community-adjusted ebitda. The coronavirus crisis has spawned “ebitdac”, or earnings before interest, taxes, depreciation, amortisation — and coronavirus — where companies are adding back profits they say they would have made but for the pandemic. Regulators, he says, could be much firmer in clamping down on metrics “that just are increasingly unmooring themselves from reality”. Growing up as the son of Greek and Irish immigrants who ran a chain of dry-cleaning shops in Milwaukee, Chanos says he was interested in stock markets at an early age. After Yale, he worked for an investment bank in Chicago and then retail brokerage Gilford Securities, where he began writing research on individual stocks. He had a baptism by fire: “The first major company I looked at and wrote up turned out to be an immense accounting fraud.” Baldwin-United was a piano company that had morphed into a financial supermarket. Chanos’s research pointed out inconsistencies with its numbers and recommended that investors sell the stock. It went bankrupt the following year, in 1983, at the time the largest-ever U.S. corporate bankruptcy. Baldwin’s collapse piqued the interest of Gilford’s hedge fund clients who followed its stock recommendations, notably George Soros and Michael Steinhardt. “What else does the kid not like?” they asked, Chanos recalls. Soon afterwards, he joined Deutsche Bank in New York. It was a short-lived affair. In September 1985, The Wall Street Journal ran a front-page investigation into the “aggressive methods” of a network of short-sellers that it alleged was driving down the shares of US companies. The then 27-year-old Chanos was portrayed as an enfant terrible at the centre of the network. “People think I have two horns and spread syphilis,” he quipped in the article. Deutsche fired him and his boss. “The postscript is that nine of the 10 companies mentioned (in the article) either went bankrupt or were prosecuted for fraud,” he says. Chanos’s wedge salad and my own starter (a plate of oysters, deliciously juicy, with a glass of crisp white Burgundy) arrive. It must take a certain personality type to be a perma-bear, I venture. A long time ago, Chanos believed that going short was just “the mirror image of going long”. He has changed his tune on this, however, “because there is a lot of behavioural finance at work in the markets”. On Wall Street, he says, “the bull case is everywhere” — optimistic management projections, takeover rumours that boost targets’ stock prices, and company earnings estimates revised upwards. “So I think that it does take a certain peculiar personality — and I’ll leave it at that — to say ‘OK, here’s my facts and here’s the conclusions I draw from my facts, and that’s why I think there’s an opportunity on the short side here.'” Many can’t stomach it. Less than a year after the 1985 launch of Kynikos — amid “the rip-roaring bull market” of the time — Chanos’s business partner declared that he wasn’t comfortable with the pure short selling side of the business. He said his accountant had advised him to sell back his stake to Chanos for a nominal amount of US$1. “And I paid him right there on the spot out of my wallet,” says Chanos. “It was the greatest trade I think I ever did,” he adds with a chuckle. Chanos has put the remains of his salad to one side to make way for the steak. I’m delighted by my main course: deep red toro tuna carpaccio, garnished with avocado mousse. My guest has one of the best track records in the hedge fund industry. The Kynikos Capital Partners fund, a long/short equity strategy, has gained 22 per cent a year on average over the past 35 years — double that of the S&P 500 index. In the same period, against the backdrop of rising equity markets, its U.S. short-only Ursus strategy — named after the Latin for “bear” — has lost 2 per cent a year. In one of the biggest financial frauds of recent years, German payments provider Wirecard admitted 1.9 billion euros that auditors say are missing from its accounts likely “do not exist”. CHRISTOF STACHE/AFP VIA GETTY IMAGES The past decade has been a difficult one for short-sellers in general, as trillions of dollars of central bank stimulus have lifted prices of assets indiscriminately across the board. How do you trade that? “Very carefully and painfully,” he says. Fundraising has been tough. Kynikos’s assets peaked at around US$7 billion after 2008, when short-only Ursus gained 44 per cent, net of fees. They have slumped to US$1.5 billion since then. This year Chanos sold a minority stake in the management company to boutique investment firm Conlon & Co and the family office of Richard M Daley, former mayor of Chicago. Prolonged periods of quantitative easing — most recently to ease the economic pain of the coronavirus crisis — is “adding to inequality” by benefiting the people who own financial assets, says Chanos. He believes that the Federal Reserve ought to cut credit card rates for consumers, which are still 15-18 per cent in the U.S., and sees a potential political backlash against the central banks for their part in how “the rich have gotten much richer and the vast majority of people have not”. Political risk is one of the reasons that Chanos is shorting gig economy comp­anies such as ride-hailing apps Uber and Lyft and online food-delivery platforms Grubhub and Just Eat Takeaway. Not only are they losing money, but he believes that there is going to be a greater political focus on low-wage workers, which poses an existential threat to their business models. Chanos sits on the finance committee of U.S. presidential hopeful Joe Biden, who is supporting a new California law to strengthen legal protections for gig economy workers. A Biden administration raises the prospect of higher taxes. “I think it’s fair that rates of taxation on capital probably should go up, relative to rates of taxation on earned income. I know that makes me a communist on Wall Street but I’ve always felt that.” Chanos declines a second glass of wine, joking that “I don’t want to be drunk for this.” Defeated by his huge steak and salad, he asks the waiter to put them in a doggy bag. On my encouragement, he decides to be a good sport and orders the “decadent” fried Oreos that the restaurant is famous for. My own dessert is a coconut choc ice. I return to the subject of Tesla, whose shares have surged around six-fold in the five years since Chanos began shorting the company. What is going on here? “I think Elon Musk has personified the hopes and dreams of this bull market,” he says, setting out his bear case against Tesla, which he sees as unprofitable, highly leveraged and facing increasing competition. Tesla “burnishes its results through aggressive accounting”, in his view. He also describes it as “a culture of deception” because it is selling self-driving to consumers, which as yet “doesn’t exist”. What, I ask, is Chanos’s main motivation: to be rich or to be right? “I want to do this until they pull me out of the seat,” he replies. When Wirecard filed for insolvency, there was “an electricity” that ran through Kynikos. “That keeps you going.” And so, he says, does his belief that “this market is setting up to be one of the great short opportunities of all time”. “Trouble’s coming, I don’t know when, but it’s coming.” © 2020 The Financial Times Ltd

Silly question: What happens when the so-called “our third business” start to dwarf the second and the first business in terms of sheer size. Or will Apple will always be “our third” business by virtue of BRK not being the controlling shareholder regardless of its sheer size.

https://aviationweek.com/ad-week/video-interviews/raytheon-technologies-ceo-riding-out-covid-19-crisis Great read ! --------------------------------------- Raytheon Technologies CEO On Riding Out The COVID-19 Crisis Joe Anselmo Michael Bruno July 13, 2020 When he was United Technologies Corp. chairman and CEO, Greg Hayes took a lot of heat for merging his company with Raytheon to create aerospace powerhouse Raytheon Technologies. But the critics have been silenced as defense has cushioned the company from the battering the commercial downturn has inflicted on its Collins Aerospace and Pratt & Whitney operations. Hayes spoke via videoconference with AW&ST Editor-in-Chief Joe Anselmo and Senior Business Editor Michael Bruno. AW&ST: How long will it take the commercial aviation industry to recover from the COVID-19 crisis? Initially, we thought this was going to be like the severe acute respiratory syndrome (SARS) in 2002-03. We thought it was going to be relatively short-lived, where air traffic would go down for a little while but then gradually recover. I don’t think any of us envisioned the morbidity or the scope of this pandemic and its impact on travel. I would say we’re looking now at getting back to 2019 in 2023, maybe 2024. It is going to be a slow recovery. The good news is we’ve got plenty of liquidity. We’ll see our way through this, but it is going to be a tough road. We are hunkering down for a protracted recession on the commercial aero side. Our aftermarket orders are down 50%-plus at both Collins Aerospace and Pratt & Whitney. That’s where a lot of the profits come from. The reason we can spend $2.5 billion a year on R&D for the commercial businesses is because we have this spares business that generates strong cash. When that goes away, it’s tough. And as a result, we’re going to cut R&D this year by $500 million on the commercial side. Unfortunately, the airlines are not in a position to weather this storm for probably more than another 12 months without government assistance. That’s really going to be the key. Do governments in the U.S., Europe, South America and across Asia step up to support what is a critical industry in aerospace? Is the industry underplaying the severity of the COVID-19 downturn? A vaccine is the key, and it has to be widely available. The World Health Organization is working on that, but we’re going to have hotspots with this pandemic for the next year or two. So even if the U.S. and Europe are completely vaccinated, what does that mean for travel to Africa, Asia, to the fast-growing markets? I’d almost bifurcate the aerospace industry between a narrowbody recovery and widebody recovery. The narrowbody is primarily domestic, whether it’s Europe, the U.S. or even China. That will recover more quickly as people become confident-—there’s either a vaccine or they’ve found new treatment options. But on the international side, we can’t fly today into Europe, and we don’t want the Europeans to fly to the U.S. We can’t go to South America or China. Those routes are going to take much, much longer to recover. The fact is there are so many excess aircraft out there right now that we believe you’re going to see more parting out of existing fleets before we see a resurgence. And that’s why even when passenger traffic starts to come back, there’s probably a full 6-12 months before we’re going to see a return to normalcy in our aftermarket organization. Pratt supplies the PW1000G engine option for the Airbus A320neo. How much downside risk is there for -deliveries? We’re planning for about a 40% reduction in A320 deliveries this year and next year compared with February 2020 production rates. Airbus would love to build more, but it’s not clear to us that customers are going to be around to take more than that. The good news is our market share went from about 42% [of A320neo engines] to north of 50% in the last year. Customers are starting to believe in the geared turbofan because of the fuel efficiency. Do you see the market share between Airbus and Boeing shifting? The order book for the A320 is much stronger today, with all the cancellations that we’ve seen on the 737 MAX because of delays. We still think the 737 will get back in the air this year, and we continue to work with Boeing on software updates. We firmly believe it’s a great aircraft. Keep in mind we have about $2.5 million of content per shipset on the 737. It’s going to be a tough couple of years, but we ultimately have faith in the airframe and the certification process. Where are you focusing your future efforts with Boeing and Airbus? We were optimistically cautious about the [proposed Boeing] new mid-market airplane (NMA), but there is a lot of excess capacity now, and it’s not clear another evolutionary design is going to be the answer. So our focus right now is the next-generation single--aisle. And we think that’s probably been pushed out a couple of years, to maybe 2033 or 2035. They’re talking about a 30% efficiency gain from the current single-aisle. Two-thirds of that gain has to come from engine design. At the Paris Air Show last year, we talked about a hybrid electric design [Project 804]. We’re going to continue on that path. We’re trying to figure out how you can have enough power at takeoff while having a much lower fuel consumption at cruise. And that’s where hybrid electric comes in. It’s going to take us at least a decade to prove that out. I don’t know if hybrid electric is the answer. There are other things that we’re working on. But obviously it’s got to be something completely different than what we’ve been building in the past. Governments around the world are taking on huge debt to alleviate the coronavirus crisis. Are you worried that will put pressure on military spending over the long term? You would have to have your head in the sand to not understand what’s going to happen to defense budgets over time. When [Raytheon CEO] Tom Kennedy and I first talked about this merger, it was, “What can we do together that we can’t do separately?” And it really was bringing the technologies of the two companies together to solve customer problems in new and innovative ways. Defense budgets will go down, but I think the real question is where Defense Department spending is going. I remember talking two years ago with [then-Defense Secretary] Gen. [James] Mattis, and he said, “Bring us innovative solutions, not to fight the last war but to fight the next war.” And the next war, he said, is going to be fought in cyberspace and outer space. The capabilities of the legacy Raytheon business are second to none in space and are outstanding on the cyber side. You marry that up with the manufacturing and material science that Pratt & Whitney brings, with the communication systems that Rockwell Collins brings, and this is going to be a great play. The U.S. Air Force wants more software-driven capabilities, delivered in weeks or even days. How does that square with your businesses, which often involve long-term hardware evolutions? It’s making sure that we’re continuing to evolve our products. The missiles we’re delivering today, such as the SM-3 [interceptor] or the SM-6 [anti-air/anti-surface/-ballistic missile defense] are state of the art, and we continue to find new uses for them. A lot of things will change over time in terms of how the weapons are deployed. Think about the Storm-Breaker missile that we just demonstrated, which has the tri-mode seeker. It can do things the last generation of missiles could never do in terms of going through smoke, fog, dust and sand. The LRSO [Long-Range Standoff nuclear cruise missile] is another example. And the Tomahawk is an established product that we will evolve as the needs of the battlefield change to meet new requirements. That’s really what we want to focus on: How do we continue software-driven solutions but also find ways to redeploy and reinvigorate the product line and bring new capabilities to the warfighter? Are you making long-term investments in hypersonics? Hypersonics are a destabilizing technology. There’s only so much we can talk about, but we know we’re behind the Chinese and probably behind the Russians. I think in 3-5 years we’ll be on a level playing field. Our focus has been on defensive systems, using space-based assets to track hypersonics. It’s nothing that a ground radar could ever do because they move too fast. And then countermeasures that we could use to defend against hypersonics is the bigger market. We’re obviously investing. We’ve got a program, the HAWC [Hypersonic Air-breathing Weapon Concept], which is an air-breathing hypersonic missile that we’re working on. I think we’ll flight-test that later this year. Also think about the materials science that Pratt brings. The key to hypersonics is how to keep the electronics from getting fried when you’re operating at something like 5,000F. We’re investing in cooling materials—that will be one of the big bets that we’re going to have to make. Tom Kennedy saw the need to make these investments, and we’re going to do that. The other piece is on the space side. There’s not a lot that we can say, other than that we think space will be the frontier that will differentiate us—that is, the defense of space assets, as well as using space assets to detect, track and target hypersonic weapons. When the merger of United Technologies and Raytheon was announced, there was a lot of criticism from investors. Now they’re happy about how well-positioned the combined company is to weather the COVID-19 storm. There was a lot of pushback from investors, especially from the hedge fund guys. They saw us taking a lower-margin business, and they didn’t like the fact that the technology takes 5-10 years to pay off. I was roundly criticized. All I can say is I was an idiot a year ago and now I’m a genius, through no fault of my own. We did this for the long term, and it was completely fortuitous that the merger happened when it did. The commercial businesses won’t make any money this year, and they are going to struggle for the next couple of years, but now we’ve got a rock-solid balance sheet and a lot of cash. And that defense business is going to grow 5-8% this year. We’ve got a good backlog. I’d like to say it was genius, but it really was just doing what’s right for the long term. My goal is to leave this company better than I found it. You have reshaped this company, starting with selling Sikorsky to Lockheed Martin in 2015. Then you acquired Rockwell Collins and moved to break up the UTC conglomerate, and it looked like UTC was going to be a commercial aerospace company. Now comes Raytheon. Are you done, or is there more to come? I’m never done until I’m gone, but we don’t need to do anything else big. The driving force [behind the Raytheon merger] was putting two big technology companies together with cyclical balance [between commercial and defense]. Tom Kennedy always felt he was at a disadvantage against the Lockheeds of the world because of the scale of Lockheed versus Raytheon. This gives us the scale to invest and compete head on with the Lockheed Martins and Northrop Grummans, as well as being the largest supplier to both Boeing and Airbus. We have some clout in the marketplace. We’ve got 700,000 different things that we deliver to customers: missiles, APUs, engines, communications gear. Some we really love; others don’t have the returns that we want or require too much investment for a limited market. We hope to have a portfolio review done by the end of the year. And you’ll probably see some divestitures, but not big pieces. We also continue to look for technology bolt-ons as we think about what’s next in defense and the space and cyber spectrums. Longer term, the big question in my mind is what happens to Rolls-Royce, a great technology company that is facing challenging financial circumstances. We loved the partnership Pratt had with Rolls on International Aero Engines. Could we recreate that someday? Perhaps, but not now. Ian Davis, who’s the chairman over there, is a good guy. We always say, “Look, we need to find ways to collaborate so we can take on GE Aviation.” Despite the fact that GE may be on its heels today, they’ve got over 30,000 engines out there. Their aftermarket will recover, they will get better, and they will be the formidable competitor for both Rolls and Raytheon Technologies for the foreseeable future. We’re hearing from Wall Street that you’re expected to sell off the Forcepoint business. Forcepoint is a commercial cyber business Tom Kennedy created when he brought a couple of companies together about five years ago. It has some great technology, but it clearly doesn’t fit in the portfolio. We’ll figure that out in the next six months. How is the integration going? Nothing went according to plan except the merger itself. We sent everybody home the week of March 12 [because of COVID-19], and we were still three weeks away from the merger. So we had to complete the merger and all of the integration remotely. And we had to spin off Carrier and Otis. All of that came to fruition on time and exactly as we had planned while working from home. The resilience and the ingenuity of our folks to figure all this out has probably been the most pleasing. There was some concern that the cultures at Raytheon and the commercial guys at Pratt and Collins would never come together. That is the last thing I worry about. Everything we laid out has gotten done. We’re on track for synergies in cost, technology and revenue. The difference is I have yet to have a staff meeting in person. I’ve got 17 people who work for me, and we do everything on Zoom. Each one of our three board meetings since the merger has been done on Zoom. If you had told me 3-4 months ago that we would be working from home for a good deal of time, I’d have really panicked. But we figured it out.

Purchase of Booking.com by Priceline Purchase of Instagram by Facebook Investment in Alibaba by Softbank in the latter case, it wasn't so much about finding Jack Ma, i doubt there were many tech entrepreneur in China in the 90s, so that wasn't the hard part relatively speaking. i think the hard part was holding unto it through IPO in 2014 and beyond.

I guess, it make sense he is putting priority on the investing in the insurance business. FFH can always buy back the shares tomorrow (and i doubt shareprice will move that much), and financial engineering should never be at the expense of creating intrinsic value. You don't want to be like Boeing or GE, hollowing out the balance sheet through massive buybacks for the sake of exiting shareholders and Wall Street, instead of taking a hard look at the pillars of the business and see where you can invest first to maintain one's competitiveness in the market place. And I would also say that if Mr. Watsa had an ownership of 1%, he may have preferred hollowing out the balance sheet through buybacks to keep the numbers up. So despite his weird gymnastics when it comes to common stock investment, I can safely state that I feel that he has an incentive to build the business for the long term shareholders and not to hollow it out. And I understand the counter points about mismatch between voting shares and involvement of his family etc. and agree with those as well. That said, while Prem' is probably doing the right thing balancing capital allocation, the pill would have been easier to swallow, if this hasn't been coming after the long list of disappointments and mistakes, all well documented in this forum. Personally, i don't care too much stock prices not going up for the short term, as i can extremely patient, but what I CANNOT stand is his stubbornness when it comes to technology names, parading the names in the annual shareholder letters, with the most elementary valuation metric (p/e) to make a case. I am sorry, if after 20 years you have not understood that the Big Tech are not the Nortel et al. of 1999-2000, I will classify that as stubbornness. The Economist had an article few weeks ago, where it was saying that how the 2000 stock market crash created a bias for deep value investors. Perhaps that is true, that 1999-2000 bias messes up their framework, as they all eagerly await for the Judgment Day, when Prophecy shall be fulfilled and the technology name halved again. But the point is that even if the Prophecy is fulfilled, why take a short position against the mother of all secular trends, only to lose money in a massive rally and then break-even on the shorts when its goes back down. Short the easy stuff. Short the airlines, the restaurants, short Cara Operations ! ... wait in fact, you had said in past AGMs you will not short anymore, why are we even seeing short positions popping out on the quarterly results. Thankfully, while, his weird equity investment, grabs the headlines and captures not our imagination but our frustration, we can be glad to know that the bulk of the $40 portfolio is not made up equity investments.

Thanks I think it was a good call. No question about TorStar or Fairfax Africa's sale. ---------------- Funny question from an individual investor, who confused Exxon and Chevron with Enron and Chevrolet. I listened to the audio, he actually said Enron and Chevrolet. "Okay. And the second question is the stocks that you guys bought in March like Enron, Chevrolet, Google, have you guys sold any of those positions, or do we have to wait till the next quarterly filings to see those?" ---------------- Anybody understands this statement: "The losses were principally comprised of incurred but not reported losses that represented on a net basis 70% of the COVID-19 losses reported." is that like how banks do loan losses provisions. ? what does it mean incurred but not reported.

That is for the first six months of the year, right? Making money in 6 months during a pandemic? Really? I am stealing Parsad's favourite: cheers! Yes, during the pandemic.

$821 million is over 6 months. For Q1 the investment loss was about $1.3 billion, half of which got recouped by this quarter $600 or so investment gain. So, net, we are at the $821 million mark for the first six months. I don't expect much mark-to-market bounce back on BV from the common stock portfolio. This would have been the peak on mark-to-market bounce back I think. It will be up to the insurance business, capital gains on the bond portfolio and earning pickups from Associates to build up the BV going forward I think.

you are exactly right ! A paltry bounce back both on the bond and common stock portfolio, purely from a realized/unrealized capital gain/loss point of view. That explains the mediocre 3% bounce back on the book, in turn. 494 million return on bonds portfolio of ~$17 billion + 130 million returns on the common stock portfolio of 3.8 billion The crown jewels* are, however, grouped under the Associates (~$4.6 billion in value). For, those unless there is an impairment charge, you wont see the their stock movement captured in page 15, I believe. But overtime, one should see FFH's portion of earning to do better if those associate perform better. I should state however that one-quarter of S&P500 is made of BigTech/FANG, and the aggregate bounce back of the BigTech lifted the S&P500 far better than Blackberry powerhouse bounce back did within the FFH common stock portfolio. If you are competing against S&P500, you need either of the following two things: (1) either you got the genius to do without Big Tech in the portfolio and still do really well or (2) have at least as much Big Tech as the index, and you can get creative on the remaining 3/4 of the portfolio. *crown jewels net of Resolute, as RFP is no jewel let alone a crown jewel

Unless I am reading wrong book value had a paltry 3% bounce up of March 31 lows. The net investment portfolio loss of $1.3 billion at the end of Q1, reverses by half, for the six months period.

Folks For the uninitiated, is LEAP the same as out of the money call way out in the future ? Or is it a combo option play with something else. Just not sure why folks here call it LEAP instead of out of call calls.

Bingo. RTX is the one to get. They supply the picks and shovels to all. You want exposure to F-35 production ramp-up, well, Pratt & Whitney is the sole-source provider of the F135 engines. You want narrow body exposure, the P&W has duopoly of on that range of thrust. You want actual growth, then look for where the Hypersonic investment money is going => Lockheed and Raytheon. You want have a diversified exposure between production and Aftermarket, it has (i.e. Boeing pendulum is heavily titled toward production, hence all the cash flow problems) Personally, my top 4 are RTX, Northrop Grumman, Lockheed Martin and L3-Harris. There is a bit of overlap on the F-35 program between the first 3 companies though. If you drop Lockheed Martin but keep => RTX, Northrop Grumman and L3-Harris. I think that combination has much less overlaps and really vectored differently.

It could also be said FFH has effectively re-priced the cost basis of its all-in stake (Deb and commons) on BB. Thereby tilting the position into a more all-or-nothing and with the lower blended cost basis on both debs and commons it would be much easier for it to give up its stake in potential acquisition by a third party.

i disagree with this comment specifically. I think 9-10% ownership is a huge incentive. Sure, this is not BRK level of ownership with Buffet. But if i compare to many other companies their CEO ownership is as low as 1%, it is really high. More so, what else is in Watsa's portfolio. Is it >90% FFH stock, if yes, than i think proper economics incentive is there on both dimensions. Personally, i would preferred no dividends as it gives the optics of cash-cow that all it does is to ensure the cash inflows is just enough to cover the cash outflows + $10 per share for dividends. But that is me.

Spekulatius, probably you will find this interview with the L3 boss interesting. https://aviationweek.com/ad-week/video-interviews/l3harris-eyes-foreign-defense-expansion-shakes-commercial-dip On the overall A&D sector, my view is that in the short term, while defense might to better than commercial, in the long term, the defense budget will be very much impacted due to the massive spending governments around the world have undertaken to re-build their economies. Also defense is not immune, as their supply chain did get impacted. Lockheed Martin for instance for the first time in 10 years its F-35 production deliveries is not growing y-o-y. ------------------------------------------------------------------------------------------------------ L3Harris Eyes Foreign Defense Expansion, Shakes Off Commercial Dip Michael Bruno July 16, 2020 L3Harris executives L3Harris Chairman and CEO Bill Brown (left) and Vice Chairman and Chief Operating Officer Chris Kubasik. Credit: L3Harris L3Harris Technologies is celebrating its first anniversary as a combined company after predecessors L3 Technologies and Harris Corp. came together in the summer of 2019. The merger created a so-called “sixth prime” defense contractor that enjoyed growing civil aerospace work through pilot training, simulation, avionics, FAA support and NASA work. But the merger was envisioned long before COVID-19 upended the aerospace and defense marketplace. Like other companies, Melbourne, Florida-based L3Harris is adapting. Chairman and CEO Bill Brown and Vice Chairman, Chief Operating Officer and President Chris Kubasik talked with Senior Business Editor Michael Bruno about the past year and looking ahead. AW&ST: You just completed the first year of a three-year plan to integrate L3Harris Technologies. How is it going? Brown: Chris and I couldn’t be prouder of the broader leadership team and all the employees for all that we’ve accomplished over the last year to make this merger successful. And it has been a success in an environment that is truly unprecedented in many ways. Strategically, if you remember a year ago, we set out to leverage our broader scale and complementary technologies to create sort of a new agile, innovative mission solutions prime that goes across all of the domains. I think we have proven that out through a lot of the revenue synergies we’ve already started to capture in the big pipeline ahead of us operationally, and we’re making really good progress. We’re also building a strong culture of operational excellence within the company to sustain our performance beyond the integration period. More international defense work targeted Cost-takeout from operations could increase Commercial aerospace drop not alarming Many financial analysts have named L3Harris a favorite stock pick. You have a $300 million goal for cost takeout from the merger, and you just accelerated that by a year to 2021. Do you feel pressure to do even more? Brown: I think maybe what people are excited about is that we were underpenetrated internationally. So we have opportunities to grow there. We’re going after broader end-to-end mission solutions and we’re starting to capture synergy. So we believe we have an opportunity to gain share in a defense market, in a global market. But we also have really good execution on the cost side to allow earnings per share to grow and margins to expand, regardless of what happens on the top line. I think that’s what investors are excited about—just that execution on the fundamentals. If we hit $300 million next year and we keep running it into that third year—calendar 2022—it should be better than we first expected. The merger was marketed in part about becoming a sixth prime defense contractor with accompanying heft. Did it work? How are you growing? Kubasik: We see a lot of opportunities in the classified environment dealing with command and control, with integrating capabilities from both legacy companies. We put in 41 proposals—neither one of us would have primed or put these bids in had we not merged. That gives you an idea of volume. A lot of these start out relatively small, whether they’re with DARPA or other agencies where you’re downselected as one of three, and then a year from now you get another opportunity and keep going. We’re pretty pleased. We’ve had eight awards so far. About 20% of annual revenue comes from international sales. Can you still grow there? Kubasik: There is a couple of billion dollars of opportunity on the international front. We have a pretty big presence in Australia, Canada and the UK. We haven’t seen any budget pressures for 2020. Do we expect many for 2021? That will be something we watch. Most of these countries fund defense as a percent of GDP, so if GDP drops, maybe there’s an impact there in the out years. But we continue to see a lot of interest in the Pacific region. And, of course, the Mideast is somewhere that both companies had worked in historically and continue to work. Since the merger was announced in October 2018, you have been busy with divestitures. Are you interested in more acquisitions, especially as prices may drop for some targets due to COVID-19? Brown: It’s early to talk about it, frankly. We’re busy; we’ve got a lot of stuff going on just integrating the companies, stabilizing it, taking costs out, improving systems, capturing revenue opportunities and dealing with the COVID pandemic. We believe we’re adding a lot of value by focusing on building fundamentals, building a strong foundation upon which to grow over time, and [acquisitions] will play a role. It’s not on the near-term horizon. We’ve got our hands full just executing our game plan as we see it today. Your commercial aerospace businesses took a hit from COVID-19 along with the rest of the marketplace. How much of a setback is that to the business model? Brown: That business might be evolving in the future, but it’s not a big part of the company. Commercial aerospace, which is all the pilot training and academy work plus avionics, is less than 5% of the company. Roughly speaking, it’s about $500 million of revenue this year—down 30-40%, about $300 million. We do see that business under pressure, and we see that also in the pilot training side. It’s very difficult to train new pilots when you can’t have them come to your academies, or have airline pilots that aren’t flying. They’re not going to be in the training systems. So that does slow pretty dramatically. Both of you are veteran leaders and have seen downturns before, but how does COVID-19 differ? Kubasik: This is clearly one of the more significant declines. You look at all the different events over history that have caused commercial aerospace to hit a bump, and most of those have bounced back relatively quickly from events like 9/11 or SARS. This one is global in nature, and I think the whole discussion is going to be about the recovery. Ultimately, I think people are going to get back on planes and fly, clearly. We’ve found some ways to be a little more efficient with Zoom and Skype, and maybe there are fewer business trips. If everything gets back to the same way we were pre-COVID-19, we will have missed an opportunity to reimagine the future of the workplace and productivity. Brown: There are implications for the overall supply base, on both the aerospace and defense sides. Clearly we need more resilience. This has a great impact on some of the smallest suppliers on which we’re leaning to survive. This is not a temporary situation where you advance cash and things get better in three months. This is going to be a longer-term downturn, and we have to make sure that those precious small suppliers who are very vulnerable can see their way through this crisis. Larger companies can; the concern is really the smallest ones.

Just a quick comment since it was not mentioned. On BNN it was alluded that the families prefer the Rivett bid because it was seen as more aligned with the political view that the newspaper has. Something along those lines. In the grand scheme of things, peanuts for FFH but if there is a pattern than that is more problematic. I suspect this wouldn’t be a huge issue if FFH overall return would have been spectacular in the past 10 years. Which says something about us as well. When the tide is high, we tend to look past these things. Well I should speak for myself I guess. On the subs, you cannot blame FFH to prioritize FFH book value above FIH and FAH. We always said there is a permanent discount to BV on them for this very reason. Their discount to BV will widen and shrink but will never close. Even if it widens by huge margin, it is likely that the market is discounting a steep drop that is yet to come on the BV as oppose it to be a great opportunity. At the end of the day, FIH return to its shareholder will be great as long as India massive long term potential holds and exceed despite “structural issues with the vehicle”. But for that you are getting a discount. On OMERS, I like to fly on a wall in their internal meeting to how they really perceive their deals with FFH. Do they keep coming back because it is the devil that they know, or are they somehow perceive that they can get good and fair deals.

I am no expert. I think the marked down ought to happen. But marked down is not as bad as impairment that is typically not reversed back with a mark up.