omagh
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Posts posted by omagh
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Buying of bonds has gotten mindless in the corporate debt markets...Corporate debt markets are pricing in wholesale dividend cuts and deflation across the board OR corporate debt markets are in bubble territory.
Now, if you have been paying attention, you will see that those yields are comparable to the dividend yields on the equities of those same companies. The following is a comparison between dividend yields and yield-to-maturities of a select group of companies that have issued a significant amount of debt. The bonds all expire in eight to twelve years.
http://runningofthebulls.typepad.com/.a/6a00d83451986b69e20133f2c55ed1970b-popup
The dividend yields of some of the highest quality companies in the world are comparable to or exceed the bond yields of the debt of those same companies.
Frankly, that's nuts.
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Transcript is here: http://seekingalpha.com/article/217810-fairfax-financial-holdings-ltd-q2-2010-earnings-call-transcript
click tabs in page for opening remarks and Q&A
-O
About 8-9 mins in length, Prem discusses
- Soft market - never know when it will end
- CPI linked derivative contracts - provides protection, contracts with strong counterparties who will be there in 10 years time
- TIG acquisition - runoff duration 3-5 years, they have looked at many runoffs and have finally found one that meets their crietera, he sounds pretty excited
Cheers
nwoodman
- Soft market - never know when it will end
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It speaks highly of Fairfax's board. Congratulations to David Johnston.
http://www.cbc.ca/canada/story/2010/07/08/f-governor-general-david-johnston-profile.html
http://en.wikipedia.org/wiki/Fairfax_Financial#Board_of_Directors
-O
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http://ir.wrberkley.com/events.cfm
At the UBS Conference (11 May 2010), Berkley gave his opinion that the industry is writing at a CR of 110, but fudging with reserve releases. His comments were around slide 8 in the presentation deck. IIRC, he mentioned AIG in comments to an earlier slide. Berkley has been cutting their business due to soft pricing.
-O
Recent comments from Bill Berkley about AIG's reserving are worrisome:
Chairman Berkley said at the media lunch that AIG is charging commercial customers "prices that are clearly uneconomic" as it works to retain clients.
"AIG continues to be one of the most aggressive participants in the marketplace," he said, while saying the company is "a little less aggressive" than it was a year ago. Still, he said, the company is no longer setting aside enough money to pay claims on the policies it's selling.
"AIG has reserving issues, in my opinion," Berkley said. "AIG's reserves are, at best, optimistic," he said, while allowing that he didn't have as much information about the bailed-out insurer's business as AIG does. "No one knows AIG's reserves as well as AIG does."
Berkley's comments seem to echo those of others, including CEO Ted Kelly of Liberty Mutual and Chubb Corp. (CB) CEO John Finnegan, who said AIG has been cutting prices to keep customers. AIG has vigorously denied the charge, and a study by the Government Accountability Office found no evidence after an earlier round of accusations from rivals a year ago.
http://english.capital.gr/news.asp?id=977783
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http://ir.wrberkley.com/events.cfm
Bill Berkley presented recently at the UBS conference. He estimates that the industry is writing business at 110 CR, but fudging with reserve releases. Chart 8 in the 2nd link above shows the gap. A couple of other charts show that we're headed for lows simliar to 1983 and 1999 prior to hard markets. It will take a major cat to blow out a couple of insurers/reinsurers and the tide will turn. If AIG is the one, and the leading writer of weak business, does the government provide backstop or let AIG go? I suspect that they will continue to throw capital at AIG which will continue to distort the natural fallout of the marketplace.
-O
T-bone, you have hit the nail on the head. There is too much capacity today. That is causing the soft market. Until capacity falls materially then we will not see a hard market.
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Thanks Hoodlum. That's why we keep some dry powder...
-O
The NOAA will be releasing their hurricane forecast tomorrow. Here is one from WSI that was released yesterday.
http://news.yahoo.com/s/nm/20100525/us_nm/us_storm_wsi_forecast_1
NEW YORK (Reuters) – The 2010 Atlantic hurricane season could be the most active since 2005, the most active season in recorded history, Weather Services International (WSI) said on Tuesday.
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This may be the article. Definitely unconventional thinking...
I was reading a fascinating, but brief article on the weekend where the author suggested that the Eurozone, and the US, will try to drive down the price of oil one way or another. The rationale for this is that they will save enough in a couple of years to pay for all of the stimulus packages, deficits, etc. 30-40/bbl oil will save the collective EU/US a couple of trillion over a couple of years. China would also benefit.
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http://spreadsheets.google.com/pub?key=tIy8S6q-FeHMGdBYCEqQMFg&output=html
[edit: fixed column headings]
-O
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[originally posted by farnamstreet; original lost due to 2xWordPress hacks;recovered from Google]
(a few modifications were made to the original for readability)
Around 2007, a fictional man named Big Liar, discovered a company, Takhomasak, on the stock exchange that was largely populated with inept management, but otherwise rich in all the bounty.
Big Liar thought he could correct the misfortunes of Takhomasak, so he communicated in writing with the owners intentionally evoking comparisons with a wealthy and well respected citizen named Yoda. Big Liar told the shareholders he was smart, full of integrity, and had all the tools necessary to do the job. Not only that, he wanted to do the job in the right way--The way everyone wished corporate america worked.
He exposed the virtues of his idol, Yoda, and explained to shareholders his thoughts in detail: He would do whatever it took to turn around Takhomasak, even forgoing stock options and extra renumeration to do so. After all, as a large shareholder, he planned to make money with shareholders, not off them. He stated, "When the share price rises, we will reap our rewards."
The owners of Takhomasak were thrilled that someone of such integrity and promise had come to rescue their company. The owners were citizens of GullibleLand and, true to their namesake, they were rather easily persuaded by the smooth talking Big Liar.
They quickly voted Big Liar into power. Not long after warning flags started to show. No longer was Big Liar content with a just board seat, now he wanted to run the company. At first he took a fairly small salary, yet still something in the top 10%, of all citizens in GullibleLand. He certainly wasn't hurting. Not to mention as the share-price of Takhomasak improved, Big Liar was given a lot of compensation by his other business partners for his hard work.
As the performance of the company began to improve, Big Liar realized he was not making enough money. No longer content to merely make money with shareholders, he quickly escalated his salary to a level in the top 1% of GullibleLand. The owners, looking at the operating performance of their company, decided to over-look this compensation change and rationalized that, hey, ok, we can give him this one.
Not much time passed before Big Liar grew tired of going to work everyday for a company called Takhomasak. He reasoned that since he had invested so much time and effort into the company, its name should change as a tribute to him. In choosing a new name he once again looked towards his idol, Yoda, who ran Be Helpful and intentionally invoked comparisons when he proposed the new company should be called Big Head.
The shareholders of Big Head--the very shareholders that had elected Big Liar to the company in the first place--began to grow wary and sensed a disturbance in the force. Big Liar was supposed to be different and unlike the other schmucks yet, increasingly, he was behaving as if he were one of them.
Looking around, Big Liar, soon found examples of people who made more money than him and his greed started to get the best of him every so slowly. Despite the words he had written, not two years ago, Big Liar realized he could make even more money off the owners of the Big Head. After all, it was now his company. So ever so slightly he started to trade his beliefs for more and more money. After all, the money was quite the seductrice. Like any addict, he thought it would be easy to stop once he tasted the pleasures of the seductrice. Yet her siren song was too strong for him to overcome.
Despite personally owning less then 2% of the company, Big Liar claimed, at the shareholders meeting, that he would be "CEO until he dies" which seemed a little peculiar at the time given that he didn't really own that much of the company. The company's owners walked away feeling amiss but couldn't quite put their finger on it.
Big Liar's slippery slope continued when he decided to implement a compensation arrangement that was heavily in his favor. Big Liar proposed this to the shareholders and it was the straw that broke the camels back. They realized that Big Liar, was in fact, a big liar. No longer did they trust his word. Instead they viewed everything with healthy skepticism. Big Liar lost their trust. But Big Liar didn't care, no, he had his company, and his millions, and since he was somewhat smart, he knew he would likely do well. Shareholders tried to send Big Liar a message but this was lost on him as he was blinded by the strong pull of the siren song. As time went on Big Liar used his ever growing fortune to acquire more and more of Big Head's stock.
...
In the end Big Liar gained a fortune but lost his reputation. It's not clear how the story ends, but one thing is clear: once you lose your reputation you can almost never have it back.
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Al,
This is classic Templeton. Watsa has spent significant time learning his craft from Templeton who is no longer with us. That education has clearly left its mark and serves FFH shareholders well.
-O
During the crash last year the only people with significant money to invest were BRK and FFH. No one else had capital. The insurance float allowed them to keep alot of money in cash for a long time and invest strategically when the time came. Most hedge funds and value funds were frozen due to inability to raise cash at that point in time. Not FFH though.
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At 31 March 2010 there were 20,546,935 shares outstanding.
At 31 December 2009 there were 19,988,870 shares outstanding for a difference of 558,065.
Shares issued in the $200M offer were 563,381.
It looks like 5,316 shares were bought in for a rough total of ~$2M (say $375/share average). Not significant, but a start.
-O
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If there's a run on NGB, who backstops? The sovereign cannot backstop in my humble opinion unless supported by other Euro countries. That's a high impact risk and non-zero.
-O
I don't know about NBG specifically, but i have read that the some of the largest sellers of Greece default protection have been the Greek Banks themselves.
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W.R. Berkley Corporation (WRB) - Q1 2010 Earnings Call - April 27, 2010 08:30 am ET
William Berkley - Chairman and CEO
Gene Ballard - SVP and CFO
Rob Berkley - President and COO
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As a thought experiment, look at the research and development costs required to maintain the moat. Viz: Coke << Gillette << Apple
-O
My point is that Coke has been around for an awful lot longer than Apple, has a product that's a heckuva' lot more predictable than anything Apple have and won't be going away anytime soon.
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WRB is a <5% holding in a basket of 3 insurers which represent ~35% of portfolio. Buying a 15% ROCE at book value is better than other options being considered at the moment and better than holding cash, although cash weighting is rising in the portfolio overall. Bill Berkley's comments on the catalysts for a hard market are compelling and actors positioned to play that hand will do well.
Some more points for the checklist:
- CEO holds majority of personal wealth here - 5.9M shares
- focuses on niche insurance markets with less competition
- CEO understands insurance pricing and implements a pricing/capacity optimization strategy which has outperformed over previous cycles
- currently shrinking capacity while remaining profitable
- better underwriters than industry peers and demonstrated over multiple cycles
- average investors, much worse than BRK or FFH
- currently using excess capital to buy in shares -- Book value continued to increase due to a combination of our earnings and the improvement in the value of our investmentportfolio. Given our already well-capitalized position, we elected to use most of the earnings generated this quarter to repurchase our shares at prices that we perceived to be attractive. In the long run, we recognize that creating value for our shareholders occurs when we build a better business that has good predictability, high risk-adjusted returns and the right
amount of capital,
-O
Bargainman, WRB is one of my top three holdings so let me give you what I like and I also would like to hear what omagn says...
Summary: very cheap; solid long term track record; trust management; shareholder oriented; set to grow rapidly when insurance markets harden.
1.) the stock is cheap: my guess is they will earn $3.00 this year, in a very soft market. With the stock trading at $28 this gives us a PE of under 10. BV = $23.80. P/BV = 1.18 which is FAR below their long run average.
2.) I think they understand insurance. They have been in business since 1967 and have what looks to me to be a pretty decent track record.
3.) I trust management. Yes, the father / son routine is a red flag for me. However, as long a Bill Sr is there I am happy.
4.) They appear to be very focused on making an underwriting profit; I believe their people are paid bonus over multiple years based on what their policies actually earn (not by the volume they write).
5.) They are poised for near term and long term growth. They are sitting on excess capital; currently they are buying back large numbers of shares. Last year they invested in starting up some new ventures they feel will do well when the insurance market turns.
- CEO holds majority of personal wealth here - 5.9M shares
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http://finance.yahoo.com/news/W-R-Berkley-Corporation-bw-3224250850.html?x=0&.v=1
First quarter highlights included:
* Return on equity was 13.2%.
* Book value per share increased 3.6% to $23.80.
* GAAP combined ratio was 94.1%.
* Repurchased 3.8 million shares of common stock at an average cost of $24.78 per share and an aggregate cost of $95 million.
Commenting on the Company’s performance, William R. Berkley, chairman and chief executive officer, said: “We continue to be pleased with our results, especially given the current competitive environment. Our insurance rates remain generally flat, and the pace of the decline in our written premiums has slowed over the past twelve months. We were able to selectively increase prices, although the overall insurance market momentum has not yet turned positive. We are maintaining underwriting discipline and continue to obtain adequately-priced business with customers who value the strengths of our enterprise.
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An awesome panel on the Charlie Rose show dissects the Goldman lawsuit. This is a political move more than anything which is interesting the the ongoing reforms and regulation. Panel was Michael Lewis, David Boies, and Andrew Ross Sorkin.
http://www.charlierose.com/view/interview/10973
Terence Corcoran of the National Post is proposing a positive legal case for Goldman:
http://www.financialpost.com/story-printer.html?id=b8c0d98b-6f86-4bcc-af13-19da67c6fb3b
-O
Goldman can fight all they want; but the rational thing is to sue, as in its early stages the cost of a lawsuit is essentially a very cheap call option premium. Untill they do a deal with the SEC their share price is going to drop, & at an accelerating rate as support starts 'backing away' from them.
But ... Goldman also has an optics problem in that they can't hedge.
Going long puts now, & going long calls just before they deal, will simply prove the allegations true; and given the extremes - the 'self dealing' gains will be in the billions. Competitors of course will be shorting them down, & doing exactly this ;D
And .... if they tried their luck with off balance sheet hedges on other peoples books, the fed/SEC will see enough of the trades to go after the hosts ... & spread the tar. Elegant
The smart thing is to cave, & quickly.
SD
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Terence Corcoran of the National Post is proposing a positive legal case for Goldman:
http://www.financialpost.com/story-printer.html?id=b8c0d98b-6f86-4bcc-af13-19da67c6fb3b
-O
Goldman can fight all they want; but the rational thing is to sue, as in its early stages the cost of a lawsuit is essentially a very cheap call option premium. Untill they do a deal with the SEC their share price is going to drop, & at an accelerating rate as support starts 'backing away' from them.
But ... Goldman also has an optics problem in that they can't hedge.
Going long puts now, & going long calls just before they deal, will simply prove the allegations true; and given the extremes - the 'self dealing' gains will be in the billions. Competitors of course will be shorting them down, & doing exactly this ;D
And .... if they tried their luck with off balance sheet hedges on other peoples books, the fed/SEC will see enough of the trades to go after the hosts ... & spread the tar. Elegant
The smart thing is to cave, & quickly.
SD
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Norm,
I didn't attend this year. Who mentioned the share buybacks? Shareholder question or Watsa response?
-O
I found the underlined part of this quote in the article to be very interesting... If true and FFH continues to grow BV and insurance pricing remains soft looks to me that meaningful share repurchase are likely...
"Watsa, referred to as the “Buffett of the North” by publications such as Forbes magazine, will take over Zenith’s assets, valued at $2.4 billion at Dec. 31, and add them to the $29.8 billion Fairfax already manages. He told Fairfax shareholders at the company’s annual meeting today the insurer doesn’t need to make any more acquisitions."
FFH's prior 20%+ buybacks were mentioned at the meeting as a tantalizing possibility. Oh, and a $25 dividend. ;D (Just don't expect either real soon.)
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Sources indicate a bid that includes newspaper owner Torstar Corp. is now emerging as a favourite, since it is expected to involve more cash than other offers.
The publisher of the Toronto Star and 97 other Ontario papers is backed by the deep pockets of Fairfax Financial Holdings Ltd., which owns 19 per cent of Torstar.
Torstar would come aboard as the operator of the CanWest papers, but would limit its exposure by contributing a relatively small amount of its own money, while relying on the financial muscle of Fairfax, the insurance company headed by Prem Watsa.
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With the spate of improving news lately, I think that we're now moving into Stage 4 in John Train's fictional essay on market cycles and behavioural investing. It appears that the bullish calls are now being made. Paulson and Fisher are here. Who's next? Who's Nouriel Roubini?
http://www.marketwatch.com/story/paulson-co-turns-bullish-on-housing-economy-2010-04-21?pagenumber=2
Paulson & Co. covered, or closed, many of its short positions recently and that showed up in stronger returns in April, the fund manager noted. The firm has been "much more aggressive" in positioning its Advantage funds to "participate in a stronger economic recovery," Paulson said.
there are many reasons to expect a good return on stocks in 2010. Here are five you likely haven't heard elsewhere.
Long-term mutual funds saw net buying for the latest week on continued strength for bond funds, while stock funds in the U.S. and abroad also reported inflows, according to the Investment Company Institute.
Total estimated inflows were $9.04 billion for the week ended April 14. For more than a year, the lion's share of investment in mutual funds has gone to bonds, which typically thrive in a lower-interest-rate environment. Meanwhile, stock funds have failed to consistently attract new interest despite the equity market's sharp rally.
The excerpt from Train's 1994 essay:
3. The Surge Continues: "Prices seem high. It's too late to buy."
More months pass and the market establishes an upward channel. Higher prices pull in buying from the institutions waiting on the sidelines. The public moves from feeling that it is too early to buy to suspecting it might be too late.
4. The Second Stage of the Rocket: "Maybe it's okay to buy."
A year or so after the bottom, the public, watching from the sidelines, becomes interested. There are a number of downward bounces, or tests, against the bottom of the market's rising channel. Each time, the recovery starts from a higher level.
5. Not a Cloud in the Sky: "Buy!"
More months go by, the market is way up and the public is hooked. Business news is excellent. The "standard forecast" is optimistic. Jazzy new funds proliferate. Some particular market area becomes a market darling, if not a mania, and is bid up to irrational levels. We see, also, the latest leveraging toy—this time, the use of derivatives—on a vast scale.
Have fun!
-O
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OSTK is now back in the good graces of the NASDAQ...
http://investors.overstock.com/phoenix.zhtml?c=131091&p=RssLanding&cat=news&id=1409639
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
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Viking,
I've been following Watsa for 12+ years and have yet to see a meaningful share repurchase. I'm guessing that Watsa is predisposed to expanding the platform or maintaining cash on hand. If one can obtain float at cost ~2%, lever 5x, and generate a spread of 300-700 points less operating costs and insurance losses, it's not a bad approach to expanding the book value of the business. The A-rating will also have advantages for the platform since it generates a higher spread.
If the Templeton approach is 50% discount to 1.3BV, then you're looking at ~0.7BV (~50% discount) to start a meaningful share repurchase.
-O
omagh, I agree that FFH may use excess cash to make more aquisitions. There is a chance that over the next quarter the economic data from the US could suprise to the upside and risk assets could continue to rally and as a result FFH may decide to monetize some of those massive gains. What to do with the excess? I think it is more likely they will purchase their own shares (below book, lets say at 90%) than make a large external aquisition at 1.3xBV.
I do not expect them to buy back 25% of outstanding shares... but I could see a repurchase in the order of 5 to 10% should the stars align.
Many insurers / reinsurers are currently buying back lots of shares and most are trading at more than 0.9xBV (not that that says alot)...
As per usual, just a guess...
Dividend yields exceeding bond yields
in General Discussion
Posted
Shalab,
Let me know when Coke, Chevron, McDonalds, P&G, Merck, Pfizer, etc liquidate. ;)
-O