SharperDingaan

We've only been over once so far & that was in summer. Holed up in Reykjavic to do the DD & sign-offs, then a self drive tour along the South & West Coast. Rather not say who we talked to - as Iceland is a VERY small place! The plan is to return/vacation every 18 months or so, over summer & winter. We x-country ski in Southern Ontario, Algonquin NP, & Quebec. Occasional dog-sledding as well around Thunder Bay & Whitehorse.

Oddly we actually did use the central bank auction, & also hold some Marel. As at Friday the FX rate was 126 ISK to the $C (around 150 ISK using the central bank auction), & Marel was at 135 ISK - or $C 0.90. OK, so you have to hold for a minimum 5 years - but we don't see any similar quality juniors about at comparable prices - even if the market falls off the fiscal cliff. Iceland is not that far away, the people are very friendly, & x-country skiing under the northern lights is pretty special. Agreed on the Real Estate, but players who haven't failed by now are most likely not going to. We're on the property management side, & one of our partners has deep experience in the business.

http://www.bloomberg.com/quote/ICEXI:IND You need to do your own dig, as the main limitation is where the very small universe is listed; trade scale/transaction cost is an issue as well. New investment is not subject to capital control, & it is possible to do Icelandic Kroner deals at better than the official exchange rate. We hold a modest investment in fish, oil, & property management via a limited term partnership. When capital controls are eventually relaxed we will do very well. There is also an article on Iceland in this months CFA magazine."Necessary Adjustments"

Look at the Icelandic companies, & try to pay in Icelandic Kroner. Execution is difficult, but the results canl be rewarding.

Broaden the instruments in the bond category to include margin &/or mortgage. $ from the Bond allocation pay down the margin/mortgage. Reverse the process when you can earn more on the bonds than the mortgage costs. Lower leverage (risk), higher net after-tax return, & less over-exposure to equities in the bad times. The lower fee income from the reduction in Assets Under Management will put your adviser/agent in the poor house, so don't expect a recommendation. Graham generally didn't leverage, so debt (margin/mortgage) was not a 'category' or even a (negative) bond adjustment. Had he done so we would all be leveraging only in bull markets, & viewing net carry cost as importantly as Margin of Safety.

CFX: Does anyone really think the dividend will remain at 5c/quarter? Cash: If it looks like a loss for the Republicans, why would you NOT expect Tea Party members to use the 'fiscal cliff' to change the game?

Notable is the deleveraging. Student debt is a commitment & they have the cashflow to remove it.

Not visible yet, but we know it is occurring: US. 0-6 months. Lot of drama, but the fiscal cliff ultimately gets punted as part of the 'global growth agenda'. Neither party will want to wear austerity cuts. Fed is already positioning to counter the anticipated drama. • Press Reports: Operation Twist extension, QE3 on standby, etc. Eurozone. 0-6 months. Framework to transfer fiscal & political powers to new global eurozone governance institutions. You want German help ? agree to it. • Press Reports: Merkel ‘relenting’. Bail-out funds increased to 750B Euros. Louder calls for growth & sudden silence on ‘Eurobonds’. • Cdn Visitations: PM ‘Runway’ comment, Finance Minister ‘governance comments’, BOC Governor presence in senior committees. Eurozone. 6-18 months. Coordinated eurozone attack to 'grow their way out', stabilize/reduce unemployment levels, & keep politicians in power (Germany, France, Italy, Spain, Greece) (1) Sovereign debt restructuring. 40-60% of existing debt re-termed, converted into zero-coupon, & backed by gold, forex, & global SDR reserves. FX rates centrally 'managed' against global SDRs. Martial Plan 2 (MP2). (2) Extensive eurozone infrastructure rebuilding as fiscal policy, paid for with new printing. Hard assets grow at the inflation rate, bail out funds re-tasked to buying in devaluing sovereign debt & mitigating the jump in the yield curve. • Press Reports. MP2 concept recently floated in senior places. Sudden foreign interest in SDR’s Eurozone. 3-5 yrs. Bretton Woods FX reset (BW2). (3) Co-ordinated Basel IV restructuring & trust busting of the financial industry. A few heavily regulated systemically important oligarchs - & a lot of smaller & more easily controlled entities. Zombies allowed to collapse. (4) New global securities act. Direct nation state investment in the traditional hedge fund areas. Securitization, trade clearing, share lending etc. standardized, commoditized, & state supervised. Bulk central bank long/short trading (for state pension plans) disciplining markets. According to the 'chattering class' this is the 'Great Recession'. Does anyone really think the policy response can be anything else but real change - & extensive modernization of the 80 year global '1930 Investment Act' ?

“However, amounts above 60% would be transferred gradually into a redemption fund”. Put another way: All EZ sovereign debt (including Germany) gets a 40% haircut, & you get a zero-coupon long term CDO backed by grossly inflated assets. All CDO’s are constructed from low grade debt, salted with some kind of favorable covenant, & resold at a higher price. In this case – default debt, backed by central bank gold & forex reserves, & a ‘Solidarity Surcharge’. On origination, the reserves are pledged into the thing at historic highs, & the quality of the remaining debt improves because its debt coverage rises (higher prices). But …. The gold & forex reserves already back ALL EZ sovereign debt. Re-assigning it to the CDO tower, removed the liquid collateral from the remaining debt; & turned it into debentures backed with nothing more than a ‘promise to repay’. Except that every financial hiccup following origination now goes directly against that ‘promise to repay’ – effectively making it ‘never’. The gold & forex wasn’t sold into the market – because it could not be. So how exactly do you exchange this paper for say 10 tons worth of the pledged gold & forex collateral? & how do you ensure that the collective EZ sovereigns will actually give it to you? The fact is that you cannot – it is just another collective sovereign ‘promise to pay’. Central banks hold gold & forex reserves for diversification & ‘emergency’. So when they are pledging those reserves, en-masse, it must be some monumental emergency; yet supposedly the central bank ‘promise to repay’ did not get any riskier ? Debt prices should go down, & aggressively – once it is realized. Where is the collateral margin maintenance, & what does it get paid in? If the collateral goes from 1600/oz to 400/oz is the difference paid in fiat toilet paper - or more gold & forex? Odds are it will be toilet paper. The reserves are pledged, not sold; if the collateral goes to 2000/oz, the central banks pocket the gain. Now if I was a central banker why would I NOT print Euros to inflate my way to growth? I could devalue my ‘promise to repay’ paper, buy it back cheap (& book a cancellation gain), & use the gain in gold prices to issue still more reserve backed paper. If the collective EZ sovereigns can only pay $6 of debt service + Solidarity Surcharge, instead of the original $10; how exactly is the Solidarity Surcharge NOT going to end up as being zero when it comes time to actually pay it (ie: the collective EZ sovereigns determine it, write the enabling laws, collect it, etc.). And if the charge is not zero, isn’t it really a Ponzi scheme payment - because the central bank wants to issue more of these bonds? Remove the wrapper. This is really a Ponzi coupon bond backed by toilet paper, & exists primarily to avoid/mitigate CDS payouts. At best you get to collect coupons & sell it on – but only if inflation bites & gold rises. At worst you get your money back years from now, in a currency nobody wants. Looks like a junk bond.

The Eurozone & the US are not islands. US sub-prime brought down the Eurozone, & that distress is washing across the US. Lehman-2 is a guess. Nobody knows what the mechanics might be, if, when, why, or how deep the fallout may go. You take your best guess on probability, & loss magnitude, & ensure you have the capital to cover it; hedge, sell down, new cash - your choice. You survive. Lehman was also a black swan, and results were worsened because nobody had experience in anything remotely like it. We have no idea what would happen in today’s markets if multiple sovereigns were to hit the debt wall in short order. We live in an imperfect world. We know downside risk is consistently underestimated, & there is resistance to holding capital against remote 'tail' events. If you're right you get a bigger return (& bonus), if you're wrong you blow up. bmichaud. The last article referred to the idea of issuing jointly guaranteed long-term 'redemption' bonds, following a redraft & tightening of fiscal responsibilities within the Eurozone. In the old days when you went to war & lost - you paid the winner war reparations to compensate them for the cost of going to war with you. To get the money you had to build new plant, borrow from the winners, & give sweetheart industrial deals, on extortionate terms. Put bluntly, you issued long term, high coupon, participating bonds - & had minimal say in the terms. The new name for these would appear to be 'Redemption' bond. Of course it doesn’t mean that the defeated issuer will actually repay. Lenin didn’t repay Czarist debt, & Hitler didn’t repay WW1 debt. A ‘Redemption’ junk bond doesn’t sell ;)

Had the post Lehman outcome been as widely known before it actually happened, do you not think the market would have been far lower heading into that fateful weekend? Most would have refused to take the paper losses, or front the cost of the hedges, for fear of appearing 'weak' or 'unamerican'. The market would have been lower - but not low enough; as few would believe that it might ever actually be allowed to happen. The 'old' name for "Redemption Fund" is "Reparation Fund". Reparations are payments intended to cover damage or injury during a war. Generally, the term war reparations refers to money or goods changing hands, rather than such property transfers as the annexation of land. http://en.wikipedia.org/wiki/War_reparations

An awful lot changed in Euroland in even the last 3 months, it is just not visible – yet. When was the last time you saw a ‘deposit run’ – maybe Northern Rock? They are now occurring monthly, the amounts are massive, & the funds are leaving Europe entirely. Even the tax evaders (ie: the most informed) have stopped investing, & possibly re-investing, their cash in Bundts. http://www.telegraph.co.uk/finance/financialcrisis/9307106/Spain-is-in-total-emergency-the-EU-in-total-denial.html http://howestreet.com/2012/05/full-fledged-european-bank-run-ecb-deposit-insurance-is-not-the-answer-how-fdic-played-a-part-in-the-us-real-estate-bust-monetarist-fools-are-everywhere-believe-in-gold/ When was the last time you saw investors ‘pay’ central banks to take their money? - & a central bank reject it (by not massively increasing their offering & relending the money to the IMF crisis fund). A sudden need to recycle through another route is not encouraging http://www.thelocal.se/40326/20120418/ http://www.dailymail.co.uk/news/article-2153324/Markets-facing-rerun-Great-Panic-2008-Head-World-Bank-warns-Europe-heading-danger-zone-bleakest-day-global-economy-year.html http://www.reuters.com/article/2012/05/31/markets-usa-bonds-idUSL1E8GVOJ720120531 Some might suggest that Europe has had the equivalent of a stroke. We just don’t know how serious yet, or what is paralyzed. The other man in the room is also not doing well. http://online.barrons.com/article/SB50001424053111903964304577422293673015120.html?mod=BOL_hpp_mag Now why would a rational man not expect at least a 30% drop, & have those long equity positions hedged?

We all need to realize - that the more misery, the more the Euro devalues, & the more Germany benefits. They make the widgets, they reap the margins, every FX downtick makes the widgets cheaper, & they have the employment. It is not in the German, or Euroland interests, to break up. Euroloand substituted population for FX movement. You move to where the jobs are, & ‘retire’ to your home country (state) when you’re done working – same as in the US. The age profile of the North underpins labour flow from the South to the North, & remittances from the North to the South. Northerners vacationing in the South add to the net wealth transfer. The wealthier the North the more ‘2nd homes’ in the South, & the more Northerners retiring in the South. The result is more homebuilding in the South, and a market for the labour of those older Southerners who can meet the needs of those older Northerners who have moved south. The real discipline is eviction from the magic circle. Members are expected to break the rules, but the egregious end up dead; same as everyone can drive 20km over the speed limit, but if you drive at 50+ over the limit & like to weave in/out of traffic - the odds are that you will have a short life. Eviction is the cure to moral hazard, & it is in the Northern interests to enforce it. In the old days Europe regularly had brutal wars, diseases, etc. that keep the population reasonably in check. The young & the old were regularly culled -& both sides lost much of their productive capital stock. For those who lived, the result was favorable population pyramids, scarcity driven innovation (overcoming labor shortages), & rapid replacement of capital with state-of-the-art machinery and processes; extended bursts of massive productivity that dramatically improved the standard of living. Most recognize that the old days were a little extreme. Until older folks die off at a faster pace than they are created, slow/no growth in Europe is almost guaranteed – & it is really no different to Japan. When Japan’s miracle collapsed, much of the workforce > 50 was forcibly retired, & never worked again at anything remotely approaching its previously productivity; the new additions outpaced the morbidity rate for years, & Japan had to implement successive rounds of stimulus to achieve just slow growth. Euroland is going to remain; if only to ensure that Europe remains at peace (not its natural state). The demographics will do its thing, & some members will get evicted - so expect volatility.

WEB did nothing more than take on high risk & get paid for it. The positions typically had an inherently significant & material risk which he simply mitigated through various hedge techniques. The end result was a high return on moderate to low risk - that compounded over time. Slick for his time, but ho-hum today. The hedge techniques were MOS, buy & hold forever, growth vs inflation rate compounding, & taxation assistance. WEB look good because few investors take the time to fully understand how the mitigants work, & how to apply them.

Capital can be returned to you in 2 ways. (1) The company paid you a cash distribution. (2) You sold shares at a high price & bought them back at a low one. The result is the same sized holding with a lower cost base. The difference in cost base is your return of capital. Tax authorities do not recognize gains or losses on ‘wash’ trades as they do not reflect the economic intent or substance of the holding. Most tax authorities define a wash trade as a buy & sell of the same number of shares of XYZ, within a 90 day period. The actual gain or loss from the wash trade is simply added to the cost base. By extension – if your cost base was 10,000 & your wash trade gain is 10,000; your new cost base is zero. Within the volatility text of the posting, wash trades are the norm. To understand the tax assistance, run your own scenarios. We have assumed 50% of the gain or loss is taxable, which is Canadian practice. Tax varies across nationalities & types of account. The rest is classic WEB

Most folks see ‘idea’ as ‘what should I buy and hold, & why’. If the approach, or investment, is good enough for ……. - it is good enough for me. Anything not a liquid stock or bond is ‘too hard’. Arc or rowboat, your ship goes up or down with the tide (volatility)…..Does anyone really think that volatility is likely to decline before Europe finally settles & the US election(s) are over? View ‘idea’ as a technique, & it is not hard to see why folks are reluctant to give away value proposition. The enlightened will recognize that it is actually very good for long-term business - but it is maybe < 5% of the population. Example: Look at tax. Buy 100 XYZ @ 100, sell 100 XYZ @ 150, & pay tax on 5,000 of gain [100*(150-100)]. But .... if I buy back 100 XYZ @ 50 …. I finish the year with the 100 XYZ that I started with + 10,000 in cash [100*(150-50)] + NO TAX to pay. The cash is a tax free return of principal, & l still have my original holding - but my cost base is zero. At a zero cost base, If I ever have to liquidate the 100 XYZ I will pay tax on the entire proceeds. Therefore I need to follow WEB; hold XYZ to death, hold something high quality (or going there), something I can margin against (if I need liquidity), something paying a rising dividend (or likely to), & (maybe) some life insurance to pay the eventual tax bill. If I doubled up on XYZ at 50, the reduction in my tax exposure would offset part of the cost of my additional purchase, & reduce my premium cost. I got to sell XYZ @ 150, & repurchase XYZ @ 50, because I used the market volatility ….. and the more volatile the market the more, & the better, the opportunities that I get.

It would be better to keep them off BS & tighten the footnote disclose. Basel Risk Weighted Assets would rise & most banks would have to increase their capital by around 15% of the offsetting asset. For a bank lending at 20x capital (conservative), & a (conservative) 150bp spread (borrow EFSF, buy sovereign), this could be costly. ie: 100M of operating lease x 15% x 20 = 300M lending reduction. 300M x 150bp = 4.5M/yr of less margin. This operating lease has to be making you AT LEAST 4.5%/yr - just to break even.

In manufacturing some things are pretty constant. Relationships are critical as XYZ small biz is often a spin-off from a bigger player. Something happened way back, & a senior exec bought out a LOB; or a senior exec got pushed out & established XYX small biz as a satellite to their old employer. Key person(s) risk. Technology creates the opportunities. Typically a very large capital investment to buy the machinery, a need for some very skilled expensive & hard to find staff, & not enough usage for the large firm to make its hurdle ROI. So... the investment is outsourced to XYZ small biz which splits the risk over 2 or more major clients (ideally) & a number of other smaller ones. Everybody wins. A material new technology investment may easily run to 15-20M, & is not financeable until a reputable buyer issues a material purchase order. The initial financial risk is on the owners, & often beyond the ability &/or willingness of those owners. Additionally, the buyer is also not going to make that commitment unless they know you. Lots of VC’s around, but very few want to operate (or know how to). Your major asset is that you can replace the owners, not the $ brought to the table. Existing owners also don’t have to grow their business, selling out to a major is always an option ... provided the biz’s scale is large enough.

Three practical experiences. Buy existing, buy with partners, and have a plan to at least triple the biz within 4-5 years. You are spraying gasoline ($, people, talent) on an existing blaze. Plan on day-1 to sell out to a major. Your job is to prove concept & develop the market for that major. Cash on the barrel & little discounting. Maximum 8-12 years from start to finish. If you have a 50 yr working life, don’t put more than 20% of it into any one venture. Life happens, & you are a different person at T+10, than you were at T.

End the year with the same number of shares you started with, & trade down your cost base. The reduction is a tax free return of capital ;)

The nightmare is Greece doing an Iceland, & the precedent spreading to the rest of the PIIGS. A unilateral declaration that Greece is leaving the Eurozone, & suspending all Euro denominated sovereign debt & debt service payments for X years. It is not a default (no CDS payout), existing debt suddenly values at cents as zero coupon debt, Greek banks are nationalized overnight, recapitalized in Drachma, & open up next day with wide open Drachma denominated credit taps. Deliberate inflation & devaluation to drive tourism/exports, & put the country back to work. You have to think this is repeatable in Spain & Portugal, the lands of 50%+ youth unemployment. It also has to be looking attractive to southern Italy (Palermo) with 85%+ youth unemployment. The obvious solution is a new Plaza Accord, & two euro’s within Euroland. A hard currency (Germany, France, Switzerland, etc), a soft currency (PIIGS), a fixed hard/soft euro exchange rate, & all existing trade agreements remaining as is. At best, a minimum 3-5 years to implement. A minimum 3-5 yrs of extreme volatility ..... that N America cannot hope to escape.

GSK,Roche. Nothing like being a legalized drug lord in a high cash flow, low cost biz with lots of governmental protection & guaranteed paying markets for my product.

Having acquired approximately 63.3% of the currently outstanding shares of Fibrek as of May 4, Resolute also announced today that its offer to acquire the remaining shares of Fibrek will NOT be further extended and will expire definitively on May 17. As further described in the offer circular and other ancillary documentation related to the offer (as amended), Resolute intends to carry out a second step transaction to acquire the Fibrek shares not deposited in the offer. By tendering before the final expiry time, remaining Fibrek shareholders will avoid the risks associated with a potentially illiquid market until Resolute can complete the second step transaction for the remaining Fibrek shares, if at all. May 18 we will know what the ABH take-up was; highly likely to be above > 66 2/3%, but may be < 90%. ABH ARE doing a follow-up, but expect the knuckles out once the bid expires - to force the price down. Keep in mind they want the remaining shares as cheap as possible. A 1c bid increment will steal their lunch ;)

At each successive ABH take-up, if you asked for the $1 cash under Option 2 that is what you received. It will continue untill the maximum (per the offer details) cumulative 71.5M of cash has been paid out. It takes roughly 10-15 days to get your cash/ABH shares once your FBK shares are accepted. We hedged our bet, we haven't walked away. 85% of our FBK holding for cash reinvested directly in ABH @ <12.5, once ABH attained 50%+1; we're gambling the remaining 15%. Dependent upon what prevails, we may well double up on FBK before its over. The more ABH squeezes the more we gain, & we gain more if ABH stalls at < 90%. Obviously not for everyone, but a page from the ABH playbook. Best of luck to you.

We tendered most of our FBK for cash & bought ABH directly @ < 12.50; with our remaining position we're willing to gamble. About as conflicted as the rest of the major ABH shareholders ;)