omagh

Hi frog, It's probably on one of the old computers in storage, so I'll have a look for it in the next couple of weeks and post if I can find it. If it was on a work laptop, it may not have survived. For someone with some free evening time, it's easy enough to do but tedious now that there are about 25 years of annuals to wade through. -O

When you're being presented with book value growth numbers by Fairfax, always remember that a substantial portion of book value growth is from share issuance. About 8 or 9 years ago, I did a spreadsheet going back to 1985 to look at the approximate returns on book value using 1985 issued shares and returns on new capital to get a sense of how much return Fairfax generates per retained earning dollar. Obviously there are some judgement calls in doing such a spreadsheet, but some fair assumptions can be made. Fairfax's returns on existing 1985 capital and new issues are nothing stellar and are much less than the absolute book value growth that Watsa likes to showcase. That said, I still think that Watsa is an excellent jockey. -O

FT, Why speculate on a hedge? What special insights do you have into the future of the S&P 500 that make it worth allocating your hard-earned money? Here's a reasoned counter-argument... http://online.wsj.com/article/SB10001424052970204518504574420811475582956.html#articleTabs=article Maybe an S&P bet is not such a "fat pitch". H-W made its hedges when there was substantial evidence of massive credit issues and Watsa presented his arguments to shareholders at the annual meetings in 2006 and 2007. Further, if inflation starts, E inflates and why cap your P? If economy recovers, E inflates and why cap your P? -O

Zorro, Government in the US (Fed) expanded its balance sheet on the order of ~$1T. Further, there has been a stimulus package of ~$780B. In a $15T economy, these are significant, but they're definitely not the whole picture. Unemployment is undoubtedly crappy, confidence is crappy, but tremendous amounts of human and financial capacity sit on the sidelines. Personally, I've been fully invested since March (maybe 3-5% cash) and keep rolling over companies that are being taken out (3 so far this year - TUN.TO, WEST, ORH with a fourth rejecting a low-ball offer). Companies with strong balance sheets are taking advantage of low market pricing relative to future growth opportunities. The opportunities to re-invest with decent margins of safety are still available, but dwindling. Perma-bear James Grant has a downright peppy essay in WSJ today which questions the consensus opinion that the recovery will be slow and tepid. http://online.wsj.com/article/SB10001424052970204518504574420811475582956.html As if they really knew, leading economists predict that recovery from our Great Recession will be plodding, gray and jobless. But they don't know, and can't. The future is unfathomable. ... Growth snapped back following the depressions of 1893-94, 1907-08, 1920-21 and 1929-33. If ugly downturns made for torpid recoveries, as today's economists suggest, the economic history of this country would have to be rewritten. Amity Shlaes, in her "The Forgotten Man," a history of the Depression, shows what the New Deal failed to achieve in the way of long-term economic stimulus. However, in the first full year of the administration of Franklin D. Roosevelt (and the first full year of recovery from the Great Depression), inflation-adjusted gross national product spurted by 17.3%. Many were caught short. Among his first acts in office, Roosevelt had closed the banks. He had excoriated the bankers, devalued the dollar, called in the people's gold and instituted, through the National Industrial Recovery Act, a program of coerced reflation.

Zorro, The 'end of recession' means that things have stopped getting worse and the opposing force for recession is growth. The dramatic stock price drops over the last year have been a result of economic declines and uncertainty. The "quick, dramatic recovery" is repricing to the "economic decline" and removing the "uncertainty", but earnings provide the floor for stock prices. Earnings have stabilized in many industries and have gone up in a few stocks that I own. Companies will start hiring soon enough and employment will start its downward descent. The economic gloom in the US reminds me of Canada in 1991-1994 when we had gobs of foreign debt and were being threatened with credit downgrades. This is the Baby Boom generation's last chance before they all retire, so there will be a lot of pressure on government to get its balance sheet into better shape. I think that we're moving on from the Early Surge to the Surge Continues in John Train's fictional essay about market cycles. http://web.mac.com/thebroadside/T/Broadside/Entries/1994/11/13_Twelve_Choruses_of_a_Market_Cycle.html -O

Zorro, Employment is a lagging indicator. I wouldn't put too much stock in it other than to suggest that demand will be slow in some corners. http://www.calculatedriskblog.com/2009/03/business-cycle-temporal-order.html (written in March 2009 at the height of the stock market panic) -O

For a second there, I thought this was the Yahoo! board... ;)

<iv, Cole would be proud...thanks for the detailed breakout of your case. It's quite compelling and I'm doing some further due diligence. I've had some mixed success with leasing co's. Cheers, -O

http://www.goodwoodfunds.com/investinfo.htm http://www.goodwoodfunds.com/pics/gwdfund_mo_perf.gif

The following alarmist article suggests overcapacity. Is this significant to your thesis? http://www.dailymail.co.uk/home/moslive/article-1212013/Revealed-The-ghost-fleet-recession.html The biggest and most secretive gathering of ships in maritime history lies at anchor east of Singapore. Never before photographed, it is bigger than the U.S. and British navies combined but has no crew, no cargo and no destination - and is why your Christmas stocking may be on the light side this year The 'ghost fleet' near Singapore http://i.dailymail.co.uk/i/pix/2009/09/08/article-1212013-06435781000005DC-710_634x403.jpg The 'ghost fleet' near Singapore. The world's ship owners and government economists would prefer you not to see this symbol of the depths of the plague still crippling the world's economies -O

Thanks 653211/JEast. Here's the correction notice from Gurufocus. Cheers, -O ======== Correction: Fairfax Financial did not increase its holdings in Odyssey Re since 6/30/2009. The confusion was caused by an Aug. 14 13-F filing of Fairfax, which indicated that Fairfax owns about 37.8 million shares of Odyssey Re. Fairfax filed an amendment on Aug. 17 to correct the errors about Odyssey Re. GuruFocus missed that amendment, which resulted in this confusion.

http://www.gurufocus.com/news.php?id=68897 FFH is buying above their offer of $60. That's a strong indicator of an increased offer. -O

Right now, the market is discounting a takeout at ~$65-67 rather than the $60 offered by FFH. After going through a couple of buyouts of 2 Canadian stocks already in this rally since March, I'm biding my time. So far, buyers have either paid more or been rebuffed and the price still stayed at the bid. If another undervaluation comes along in my research, then I may pull the plug sooner. I'm mostly raising cash from US holdings back into C$ as well. -O

As 70+% shareholder, FFH is only competing with themselves and an 'independent' valuation. Who else competes? Where's the greenmail opportunity? For most ORH shareholders, there is a gain. BUT, every ORH shareholder knew they were in a minority position starting out. The catalytic events for realization of value were twofold: 1) company performance and 2) FFH takeout. Other outcomes were minor such as FFH sale of ORH position or somebody taking a 5% position and 'ruckus'ing about valuation. The 'independent' valuation is a bit of theatre. There are relationships in play that will not be fully disclosed. These valuations are never high and the acquirer never walks away. FFH is being opportunistic here based on their estimation of ORH's future cashflows, but the valuation will not reflect FFH's real estimate. FFH shareholders will be well served and ORH shareholders will not, but the theatre from here to transaction close will quibble over a few $/share. The ORH board has few choices here other than some public statements. Barnard has been anything but independent in his actions to date. Minority shareholders are not well-served in these situations, but they do have the choice to enter these positions or look at other 'fat pitches'. Personally, I took a small position recently ~$37/share as a book value growth play with the expectation that FFH would adopt the NB pattern. I am pleased with the transaction timing but, it could have been a longer wait. -O

What's the long term strategy when taking a series of minority positions (ICICI, Alltrust)? Most operating companies want to be in charge of their destiny through control positions and by taking control of the underwriting and the investment float. Are there national restrictions on percentage ownership? Wouldn't a control position in a wholly-owned national subsidiary be preferable as a long-term strategy? I understand wanting to participate in the upside of strong growth in maturing economies (e.g. BRIC countries). If this is a taste test to a control position, that's a positive risk control measure that FFH has learned during its seven lean years (hi TIG!). -O

Sanj, Every time my portfolio hits new highs, I start looking around at what to trim. Now is one of those times. I wouldn't be too worried about the casino players. There are speculators in all markets. We're probably going to start hitting some rougher waters in the fall as major players start coming back into the market after the summer hiatus. The Dow has risen mightily on weakening volume. The market is ripe for some short-selling on speculative run-ups. The nice thing about value investing is that the ups and downs of the market are the opportunities presented by Mr Market who is currently in a manic summer phase. Who knows what the fall brings? -O

Hi Sanj, This is the first year of Francis' new US$/C$ currency hedging policy. Apparently, he had some clients who were uncomfortable with the currency shifts. If you're talking to Francis, I would be curious to know what his thoughts are on the US$/C$ going forward. He previously was of the opinion that the US$/C$ was a long cycle that didn't have significance since the swings were roughly cyclical around a mean. Has his view changed now that the US (deficit $2T on $15T GDP ~ 13%) is in a significant recession while Canada (deficit $0.05T on $1.5T GDP ~ 3%) is in a milder recession? Buffett seems to think that the US$ vs world currency basket is going to decline. BTW: good luck on the burger quest! -O

k, A return of capital to shareholders (an extraordinary dividend) is pretty uncommon, but I did have a stock do that a few years ago. Essentially, the company was generating 20% RoIC, but since revenues were not expanding, RoIC was declining as capital accumulated. So, management which owned a substantial amount of shares determined that the best use of capital was to return money to shareholders via a special dividend. The stock dropped by approximately the same amount. Strangely, there was a run-up in price between the announcement and the dividend cutoff date, but some new shareholders may have been angling to arrange their income by taxation. -O

It's interesting to contrast Buffett's patience to Bill Miller's haste. Miller fully expected that the government would assist the marketplace with backstops when he dug deep on FRE and others. Yes, Buffett is benefiting from TARP indirectly through BRK's holdings, but that's while following rule number one "Don't lose money". -O There are some very valid points in the article. Although the criticism of Buffet is somewhat off target. It is true that all of corporate America has been a beneficiary of TARP and other bailouts. And yes it is probably true that without them both Berkshire's (and this is the key point, everybody else's holdings) might have ended up being depressed for a very long time. So yes, Berkshire benefited, but so did you and I. Do I really believe my other stock holdings would be where they are today without these actions? No way, they'd be in the dumps at the March lows maybe for several more YEARS.

http://www.fairfax.ca/Assets/.../2009_AGM_Slide_Presentation.pdf - slide 12 In 23 years under current management, float has been obtained 230 basis point cheaper than borrowing, including some periods where borrowing was impossible for FFH. FFH also maintains a high cash component on its balance sheet to deal with some inevitable short term risks, including the ass-biting. As a 10-year shareholder, there have been some bumps and lumpy returns, but the track record has been good and I've continued to invest new capital along the way. -O

The Fed should hire Dennis Gibbs. He's shown his mettle in operating run-off. He's run out of things to do at Fairfax. The poor US taxpayer is not done paying for AIG...$160BB and counting. With Buffett and others withdrawing from the marketplace for pricing, it's inevitable that AIG will consume more capital destroy more wealth. Unfortunately, the public purse may not know when it should exit because it's play way outside of its circle of competence. -O

http://seekingalpha.com/article/153023-fairfax-financial-holdings-limited-q2-2009-earnings-call-transcript?page=-1 Q2 2009 Earnings Call Transcript July 31, 2009 8:30 am ET Executives Bradley Martin - VP, COO and Corporate Secretary Prem Watsa - Chairman and CEO Greg Taylor - VP and CFO

Key points... During the first six months of 2009, shareholders’ equity at June 30, 2009 increased by $644.4 to $5,613.2 from $4,968.8 at December 31, 2008. Common shareholders’ equity at June 30, 2009 was $5,510.7 or $315.91 per basic share (excluding the unrecorded $340.1 excess of fair value over the carrying value of investments carried at equity) compared to $278.28 per basic share (excluding the unrecorded $356.0 excess of fair value over the carrying value of investments carried at equity) at the end of 2008, representing an increase per basic share in the first six months of 2009 of 13.5% (without adjustment for the $8.00 per common share dividend paid in the first quarter of 2009, or 16.4% adjusted to include that dividend). During the first six months of 2009, the number of basic shares decreased primarily as a result of the company’s repurchase of 28,700 subordinate voting shares. At June 30, 2009 there were 17,443,784 common shares effectively outstanding. Major changes to portfolio investments in the first six months of 2009 included a net increase of $1.6 billion in bonds, a net decrease in cash and short term investments (principally U.S. Treasury securities) of $2.2 billion and a net increase of $0.8 billion in common stocks. The unrecorded excess of fair value over the carrying value of investments carried at equity was $340.1 at June 30, 2009 ($356.0 at December 31, 2008). Holding company cash, short term investments and marketable securities at June 30, 2009 totalled $880.1 During the first six months of 2009 OdysseyRe purchased on the open market approximately 1.2 million of its common shares pursuant to its previously announced common share repurchase programme, increasing the company’s ownership of OdysseyRe to 71.9% as at June 30, 2009. As of June 30, 2009, the company owned $5.81 billion notional amount of credit default swaps with an average term to maturity of 2.9 years,an original cost of $114.8 and a fair value of $158.4. During the second quarter of 2009, the company sold $140.3 (2008 – $855.0) notional amount of credit default swaps for proceeds of $8.6 (2008 – $190.0) and recorded net losses on sale of $0.3 (2008 – net gains of $22.8) and net mark-to-market losses of $81.7 (2008 – $7.0). During the first six months of 2009, the company sold $3.04 billion (2008 – $4.69 billion) notional amount of credit default swaps for proceeds of $231.6 (2008 – $1,075.0) and recorded net gains on sale of $46.2 (2009 – $317.0) and net mark-to-market losses of $71.8 (2008 – gains of $384.0). Sales of credit default swap contracts during the first six months of 2009 and 2008 caused the company to reverse any previously recorded unrealized market value changes since the inception of the contract and to record the actual amount of the final cash settlement through net gains (losses) on investments in the consolidated statements of net earnings. June 30, December 31, 2009 2008 Holding company cash, short term investments and marketable securities, net of short sale and derivative obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 862.7 1,555.0 Holding company debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 858.3 869.6 Subsidiary debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 899.9 910.2 Other long term obligations – holding company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 176.1 187.7 Total debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,934.3 1,967.5 Net debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,071.6 412.5 Common shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,510.7 4,866.3 Preferred equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102.5 102.5 Non-controlling interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,026.1 1,382.8 Total equity and non-controlling interests. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,639.3 6,351.6 16.1% 6.5% Net debt/total equity and non-controlling interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net debt/net total capital(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13.9% 6.1% Total debt/total capital(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22.6% 23.7% Interest coverage(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.9x 16.4 x

http://fairfax.ca/Assets/Downloads/2009Q2.pdf -O

(letter only, full report isn't posted yet) http://www.longleafpartners.com/pdfs/09q2letter.pdf We use the depressed 2009 numbers as the base for going forward rather than assuming normalized levels of cash flow from an average of the last several years. A stock’s price must be significantly discounted from what current business levels justify for us to buy. We have greater confidence in our appraisals because in addition to using conservative assumptions, some macroeconomic tailwinds could make our valuations too low. Credit remains tight, but its wider availability should help increase business activity. Stimulus spending across the world is in early stages and should show more impact going forward. Production levels dropped significantly more than GDP declined, thereby depleting inventories over the last six months. Industrial production will rise above current rates without demand growth.