omagh

http://online.wsj.com/article/SB126056572135687829.html?mod=googlenews_wsj whole article is here...Buffett at his Ted Williams best! -O

DELL and AMZN have similarities in their generation of cashflow (i.e. derived from income statement (sales) and balance sheet (negative working capital)). This business model is successful when driving volume sales as the lowest cost supplier in their market. Volume grows quickly since lower costs draw customers away from competitors as buyers switch to the lowest cost offered. But there's a fundamental difference around the character of their contribution margin (http://en.wikipedia.org/wiki/Contribution_margin). Dell's core product line of device sales has a strong decline in the price/unit. Even though they drive sales volume, contribution margin per device sold is shrinking much faster than Amazon. Where people were spending >$1000 per device just a few years ago and >$1500 a few years before that, now devices are well <$1000 and often <$700. Even with constant gross margins of 25%, the contribution margin per sale shrinks. With market growth topping out, one of my sisters who worked in finance at Dell left for pharmaceuticals since the decline was becoming apparent at Dell. AMZN is impacted to a much less degree by shrinking contribution margins, but they are being amply offset by the continued growth in sales volumes. -O

With a call to their help centre, you can extend those $9.99 trades to smaller accounts within the same household -- RESP accounts for kids, spousal accounts, business brokerage accounts, etc. It will save $20/trade in any small accounts. -O

Rabbit, Seth Klarman seems to think that trust was a big part of the rating agencies business. CDO buyers certainly relied on the trustworthiness of the rating agencies. That trust and reliability was central to their business model and it's now gone; hence, Buffett dumped them as an investment because the moat has disappeared. http://www.gurufocus.com/news.php?id=77901 "Credit rating agencies were central to the disaster that played out. These formerly trusted assessors of credit quality had completely let down their guard over the last several years, blessing as investment grade a shocking large volume of securities backed by loans that should never have been made. One of their biggest mistakes was not understanding their central place in the virtuous circle that enabled, and even encouraged, the uncreditworthy to falsify loan applications to become homeowners. When these mortgages were pooled, sliced and diced, and securitized, they allowed dross to briefly become investment grade gold. CDOs holding junior tranches of subprime mortgage securities were able to carve up BBB-subprime mortgage tranches into large slugs of AAA rated paper, a modern-day financial alchemy based on backward-looking computer models and credulous buyers. Yield gluttons foolishly trusted these ratings enough to risk complete loss of principal for a handful of basis points of promised incremental return." -O

http://www.nationalpost.com/story-printer.html?id=2287614

Deleveraging continues with intent to IPO AIG subsidiaries... http://www.nytimes.com/2009/12/02/business/02aig.html?partner=rss&emc=rss A.I.G. said that as of Tuesday, its outstanding principal balance under the New York Fed credit facility was about $17 billion and the total amount available under the facility had been reduced to $35 billion from $60 billion. A.I.G. said that under the agreement the New York Fed would receive preferred shares with a liquidation preference worth $16 billion in American Life Insurance Company and $9 billion in American International Assurance Company Ltd., which would be placed in special purpose vehicles .

C, OSTK is FCF-positive on an annualized basis and the value of that cash stream will grow going forward. It has also been built with less invested capital than AMZN. You'll also note that they don't capitalize many of their costs for amortization over several years, so they're running things such as e-platform development costs through the income statement in a single year, but the value of the e-platform persists. It's worth much more than its book value. O'Byrne with a more sensible personality would be a good partner. If his father was running the show, I would invest. -O

Fired is probably too harsh, but the FFH board is probably disappointed with the NYSE and SEC enforcement. I pulled some clips (below) from a couple of older annual reports to get Watsa's words. In the 1st clip, Watsa explains his rationale. In the 2nd clip, Watsa describes the initial short attack and his first tentative reactions -- he's a much wiser soul now after the last 7 years. Strategically, international growth is part of the next wave; US markets are likely to be stagnant/flat for several years (Hoisington thesis); FFH is well capitalized; FFH will continue to report in US$ (possibly informal US GAAP as well as formal Cdn GAAP); TSE provides single market quote; underwriting of any future debt/equity tranches comes from the home Cdn market; etc. So, the NYSE has become less relevant to the FFH strategic story. -O ==================== Going back to the 1999 AR: You will note that as a Canadian company reporting in Canadian dollars, we have always hedged our foreign exchange exposures when we purchased companies in the U.S. or in other countries. At the end of 1999, we have approximately 75% of our business in U.S. dollars and approximately 75% of our employees are in the U.S. For these reasons, we plan to go to U.S. dollar reporting and also list on the NYSE within the next two years. The exact timing will be dictated by the appropriate time to unwind our hedges. While on the subject of hedging, it is interesting to note that since we bought the first of our U.S. companies at the end of 1993, the Canadian dollar has steadily trended down from US75.5¢ to US69¢ currently – we would have been smart not to have hedged any of our exposures!! And from the 2002 AR: We listed on the NYSE on December 18, 2002 as we suggested we might. We were warmly welcomed and on January 14, 2003, the NYSE reported that there were almost 2 million shares shorted! Soon after, there was a spate of negative articles and reports on Fairfax, including a report containing seriously misleading commentary on Fairfax’s reserves. We have always tried to give very full disclosure in our annual reports, and we expand that disclosure if we discover that there are areas where enhanced disclosure would be useful (this year, for instance, our MD&A includes significantly expanded disclosure on our ORC Re subsidiary and our asbestos and pollution reserves). Because we are always concerned for our long term investors, we have decided to have conference calls after our earnings releases. There will continue to be no earnings guidance – quarterly or annually – but we will be open to answering any questions that shareholders or others may have. Although we are very much against quarterly conference calls because of their short term focus and promotional nature, we were guided by the greater concern that our investors not suffer from misleading information. We also plan to continue to have an annual investor meeting in New York, likely in the fall.

It's a series of 10 card flips with a cumulative total score. Buffett lost the first card flip, but let's see how he does after 9 more. The odds are in Buffett's favour. -O

Chou had some words on a bubble that he sees... However, when compared to corporate bonds, U.S. treasuries are in bubble territory. In our opinion, this is the worst time to hold cash and short-term treasuries unless you believe we are headed into a 1930s style depression. And if you believe that you should redeem all your Fund units. ...and the counter move that he sees... CONSTANT MATURITY SWAPS: With world governments flooding the system with liquidity and keeping interest rates unduly low, we wonder what financial instruments we can use that will protect us if inflation takes hold. We want an instrument similar to an insurance policy whereby the most we could lose is the amount of premium we pay upfront but get all the upside if the interest rate rises. We have identified two such instruments: Constant Maturity Swap Rate Caps (CMS RC) and Constant Maturity Swap Curve Caps (CMS CC). http://choufunds.com/pdf/SeAR%2009%20printing.pdf

This graph is mind-blowing -- it's deflation in action! The impairment of homeowner capital is permanent. If you're a homeowner on the left hand side of the side of the curve, do you keep paying or do you walk away and force your bank to take the loss? http://1.bp.blogspot.com/_pMscxxELHEg/SwwiMIoaTVI/AAAAAAAAG4s/Q0pSaNCwU_w/s1600/Q3NegEquity3.jpg I suspect that inventories will continue to grow through 2010. The current price:rent payment ratio is 1:1 which bodes well for reduction in inventories IF consumers can get credit. There is ample room for the ratio to fall further using the 1990 recession as a proxy. http://4.bp.blogspot.com/_pMscxxELHEg/SwwLMNmxidI/AAAAAAAAG4U/YExykMMJm5Q/s1600/Q3PriceRent.jpg -O

99% true...the exception is that an equivalent US$ trade on the same day (called a wash trade by TD Waterhouse) can be done without incurring a currency conversion. That is, sell US$-denominated shares and have an equivalent value buy of US$-denominated shares. -O

...so, now the NASDAQ files notice that OSTK is delinquent in their filing...and notably, their CEO certification under SarbOx. Johnston seems to have taken over the file from O'Byrne and is now handling the press releases with a plan to put the company back on track with proper financials. The board meetings must be fascinating these days... http://investors.overstock.com/phoenix.zhtml?c=131091&p=RssLanding&cat=news&id=1357961 -O

http://investors.overstock.com/phoenix.zhtml?c=131091&p=RssLanding&cat=news&id=1356035 This letter to shareholders furrows the brow...I don't doubt the veracity of the letter, but Patrick O'Byrne strikes me as a no-backdown, no-compromise negotiator. -O

Partner/Smazz, How's this for boring? Auto parts distribution...snore. But, it's a moat on a set of captive retailers and captive jobbers that require a constant supply of parts. The average age of car in North America continues to climb and people continue to service those older cars. In this recession, it's a hard market for auto parts distributors and margins have been increasing accordingly. It's not the industry or the industry economics that matter, it's a talented group of people who have the talent, desire, and opportunities to improve costs and service. The company has grown its talent pool and continues to have a founder as chairman, an ex-CEO and an ex-CFO on the board, and a current CEO who rose through the ranks and made his mark as CIO. They grow with fair and friendly acquisitions -- sounds familiar -- with a strategic focus on growth by acquisition in a fragmented marketplace. CEOs have a RoCE bonus in their employment agreement. In 13 years, the worst year was a 10% RoCE, but typically above 15% and you could buy it for close to book value several times. One thumbnail calculation that I like to do is to take the average RoCE for the last 5 or 10 years and multiply it by 1/book value. Since most stocks trade for a premium over book, what's the premium that I'm paying for every dollar of equity being purchased per share? If RoCE is the return that I'm getting per dollar of equity, it's roughly an annual coupon similar to a bond. Then by multiplying by 1/BV, it roughly tells me the coupon after factoring in the premium to book and tells me the coupon spread over a 10-year treasury. If I can buy a growing coupon with a starting point above 10%, I'm interested. What makes me continually excited about this company is the steady and continuous growth fed by its moat. It was my first ever stock purchase 13 years ago and it's been a wonderful learning experience to have this stallion in the stable. You'll know that I've been adding over the last 12 months after doing the calculation based on some of the 52-week lows. The double play of rising earnings and rising P/E's lies ahead. http://www.uniselect.com/eng/PDFs/roadshow%20septembre%2021%202009.pdf Cheers, -O

Al...just went back to the 91/92/93 annuals. Not seeing where they had exceptional returns in CRE. There was a $4.6M investment in a Calgary mall. Watsa (1993 AR): "We are working at disposing of our real estate investments ($4.2 million) by the end of 1994. We will be pleased to get our money back. I was too optimistic in the past!" -O

;) What does it cost to rent it for a week?

Shalab...you're mixing investment income and operating income. If you look at Note 17 in the BRK 3Q2009, you'll see that investment income is $4109 and $3400 for first 9 months of 2009 and 2008 which you've probably gone ahead and annualized. You need to back those out of the operating income. It's a form of double counting in the valuation model. The investments and the operating businesses should be valued separately. The market cap of the equities and fixed maturity investments is based on the income streams that they generate, so assign them to the valuation of the investments. That should make your model cleaner... -O

http://www.businessweek.com/magazine/content/09_46/b4155015765109.htm?chan=magazine+channel_the+business+week A New York Times story last week suggested that you are poaching talent from AIG and reconstructing the AIG model at your privately held firm, C.V. Starr. Is your intention to build a competitor to AIG? No. Look, I'm building an insurance company and an investment company. We didn't poach anybody. We hired 13 people from AIG out of the 100,000-plus they have. We didn't poach them; they came to us. A lot of them had left AIG previously. I know one company in Switzerland that hired 130 people from AIG. ... Treasury Secretary Tim Geithner was asked on Meet the Press on Nov. 1 if he would like to see AIG prosper. And he said: "I'd like it to be successful enough that the taxpayer can get out." After that, he said he didn't care what happened. That's a really great statement, isn't it? What's the government's goal here? To liquidate the company and pay the taxpayer back. But the taxpayer will never be paid back by liquidating AIG. The only way to get paid back is to rebuild the company so it becomes viable again. Why was it decided AIG would be the sacrificial lamb? Was it to save Goldman Sachs? Maybe. But I think there's got to be a complete investigation of who did what and why. -O

As Fairfax grows, Watsa or his successor may change. Watsa has a history of making public pronouncements and changing later -- he now holds conference calls, he now eschews large debt-to-capital ratios, he continually issues shares below intrinsic value, etc. In short, don't put 100% stock in all of Watsa's public comments. I think that Watsa is still a good jockey, he's shown an ability to learn and grow as a leader, but I've learned to be sceptical in the 10 years that I've been a shareholder. When procuring whole companies, Buffett puts special emphasis in each of his deals on having management teams in place that have an owner mentality. That frees him up from wading in and engaging in operational and strategic issues. His Saloman Brothers purchase in the late 80's being an obvious exception which occupied him for a year or more. Watsa or his successor will probably do something similar when the need arises. The third company being followed by this set of boards (SNS) has a CEO in Biglari who is very operationally focused and has the stamina of youth at the moment. Biglari will need to grow his management teams to succeed at larger scales as he puts more capital to work. Fairfax is starting down the whole company ownership path with Ridley and Advent. These are just investments at this point in time, but in the future, it may not make sense to hold back a few 10's or 100's of millions if there's a sharp, competent management team looking for a long-term owner. We'll see...check back in 5 or 10 years :) http://ca.news.finance.yahoo.com/s/24092008/2/biz-finance-fairfax-financial-swallows-69-cent-feed-producer-ridley.html From 2008 Annual... We have positions in two other companies which are only investments, even though the fact that we own over 50% of those companies requires that they be consolidated on our financial statements. In November 2008 we paid $68 million to purchase 67.9% of the shares of Ridley Inc., one of North America’s leading commercial animal nutrition companies, and during 2008 we purchased $25.6 million of additional shares of Advent, bringing our ownership of that company to 66.6%. -O

The prospect of owning thousands of BRK shares ain't what it used to be. :) -O

http://plus.cnbc.com/rssvideosearch/action/player/id/1317645849/code/cnbcplayershare (Buffett phones in around 4:00 minute mark) -O

A couple of interesting points from the article below (currently reading Update 3). BRK will spend $26B in cash and shares. BRK reported $24B on the balance sheet on 30 June. I recall Buffett wanting to maintain a minimum $20B cash position as contingency (correct me if I'm wrong) in the holding company -- after all, they insure/re-insure significant risk positions. The implication here is that BRK has been generating some considerable cash in the past quarter to put into this acquisition -- and probably indicates why Moody's was being sold off. Has anyone seen a cash/stock ratio? I'm assuming that most BNI shareholders would take stock for tax efficiency plus cash for rounding down partial shares. UPDATE: 40% stock, 60% cash -- Buffett on CNBC this morning http://www.bloomberg.com/apps/news?pid=20601087&sid=asfU7Dluabw4&pos=1 The purchase, the largest ever for Berkshire, will cost the company $26 billion, or $100 a share in cash and stock, for the 77.4 percent of the railroad it doesn’t already own. At $100 a share, Buffett is paying 18.2 times Burlington’s estimated 2010 earnings of $5.51, according to the average analyst projection in a Bloomberg survey. -O

Subject to shareholder approval which they may not get. The reason provided is to accomodate small volume holders of Burlington. If shareholders reject, as I suspect they will -- some strange pride thing about owning the current B's, then Berkshire will probably cash out these small shareholders. -O

Sorry Smazz...still buying and since it's a low volume stock, I can name my price and wait. From the pool of stocks that I've bought or considered buying over the years, let me add a few more stocks that it beat: ca:ffh, jnj, brk.a, pfe, wmt, msft, csco and a few that it didn't: dell, ca:hcg, ca:gbta, amzn. You'll note that the capital intensity of each of these stocks is very low -- one of my primary considerations. -O Omagh, do tell, I dont remember the thread. I havent been in the general section much lately if thats where it was posted. Smazz