SharperDingaan

Hawk, we’ve done 2 transactions - both in the UK. An X% interest in a relative’s home, with proceeds paying down the mortgage. The interest itself passing through to the kids via a trust arrangement, & a portion of the ongoing monthly mortgage savings going to the kids university funds. Took advantage of an inflated $C, & a fairly highly mortgage rate (variation on a $ saved is a $ earned). A 100% interest in a parental home, less a life lease on the property itself. The interest itself passing through to the family via a trust arrangement. The purpose of the transaction was to take advantage of an inflated $C, release capital, & allow the trust to maintain the property &/or cover some of the monthly upkeep. Were these not family transactions we would probably not have done them. The investment ‘return’ is the reduction of monthly ownership costs, & possibly a terminal inflation &/or repatriation gain when the funds come back to Canada. At some later point we might look at a partnership in a small hotel/apartment in one of the club-med countries, but not for a couple of years yet SD

> 40% YTD About 50/50 split to luck versus skill. Correctly hedged the commodities run-up by moving to 70% cash, but we’ve been slow on the Europe rebound & got hit by FBK. The material majority of our synthetic shorts have been covered, & we’ve added to long positions where it has made sense. We’re comfortable with what we have. Our 5 yr return is not comparable as we’ve more or less held the portfolio to a common size by systematically withdrawing excess capital. Only possible because we’re private money. Withdrawals paying off family mortgages &/or acquire rental retirement income properties in various countries. SD

Nassim Taleb in his book "Fooled By Randomness", includes a clever exercise on what 'average' means to most people - & why that is so wrong. The gist of the example is that if 9 folks have $100K of wealth each, the average wealth per person of this group is $100K. Add 1 'poor' person with wealth of $1 to the group, & the average wealth per person becomes $90K. 9 of 10 (90%) of the group are ABOVE average, & most everyone feels 'great'. Add 1 'rich' person with wealth of $1000K to the group, & the average wealth per person becomes $190K. 9 of 10 (90%) of the group are BELOW average, & most everyone feels 'ripped'. Perhaps the real reason for the anger of the mob ? SD

But did you notice that the 2-3 girls were usually the daughters of engineers, & they all had 300+ brothers! Most folks in NA should not be at a university, but a trade school. They didn't go to the trade school because their parents persuaded them that it was low status - there was no money in it, & that if you went - that hot babe next door wouldn't even look at you. Maybe 50 yrs ago that was true. But in the modern age almost all those programing the factory robots, working the control room, or making the tool dies will make 2-3x what the average university trained joe/jane will make over their working life. When was the last time you came accross an unemployed tool & die maker? The unique strength of NA manufacturing is its ability to think up the game-changers & build them. Lot of other places do the subsequent evolution, minaturization, precision, robustness, & utilitarian far better. SD

A slightly different perspective: We’re (family accounts) retail investors, but we’re professionally trained (CFA, industry experience, etc). We don’t do retail OPM because we don’t have the patience for the whining. Very occasionally we may do the odd special purpose vehicle partnership. We are effectively capital allocators, & prefer to actually run businesses - versus ‘just’ invest in them. We keep our feet in both worlds, & we try to take the best from each. This board is an excellent way of accomplishing that. Investing in XYZ coy on the basis of business merit, is superb training for the business world. You are forced to apply financial understanding (what the financials represent, what they are telling you, & how they can be manipulated), marketing (product lifecycles, penetration, pricing), & business strategy in live time. Do it well, & you will accumulate wealth. Do it really well, & you may end up owning one of those companies. Investing in XYZ coy on the basis of relative valuation, is gambling. If you invest for the long term you are by default- investing on the basis of business merit. You chose Industry A over industry B, because A’s prospects were better. Within industry A you chose XYZ coy versus ABC coy, because XYZ’s valuation metrics were better. If you invest for the short term, you have a different perspective. Do it well & you will accumulate trading wealth, but it is a zero-sum game – trade long enough, & you will eventually lose (commission costs). Every profession/industry needs new people. We try to learn from those before us, & from those who are the masters at what they do. The principles stay the same, but application changes with the times. We post to encourage new people to see through the hype, & invest on the basis of business merit. It used to be that in western societies everybody wanted to be a ‘rockstar’- because it got you copious amounts of glamour, status, drugs & sex. Then it changed to ‘investment banker’ - because it got you copious amounts of money with which to ‘buy’ the glamour, status, drugs & sex. Yesterdays ‘rockstar’ overdosed, today’s ‘investment banker’ is the scum of the earth (Greece). Apparently there is redemption though – the Rolling Stones still play live at an average age of 67+! To everything there is a season. SD

Assume you have a 1 stock portfolio. Your stock (Stock A) has seasonal bias, usually doing well in Q1 & Q2, poorly in Q3, & a crap-shoot in Q4. You’ve noticed that another stock (Stock B) also has seasonal bias, but it usually does well in Q3 & Q4, & more poorly in Q1 & Q2. Stock A & B are in totally different & unrelated industries – & you view yourself as a long term holder of both Stock A & B. The wise man would sell Stock A in Q2 & buy Stock B - then sell Stock B in Q4 & buy Stock A. He would systematically capture the seasonal gains of both stocks, as well as the long-term appreciation which is the reason for his investment. However, the portfolio turnover of 200% translates into an average holding period of 1 quarter. Most would say that you are trading, not investing – when the reality is very different. High portfolio turnover is not necessarily a bad thing SD

We all might want to apply what we know. Most would argue that what Europe does, its timing, & execution – cannot be reasonably predicted. We can say that if Europe comes up with a reasonable plan, global markets will probably rally strongly. We can also say that if it takes a while, the ongoing uncertainty is likely to lower markets. Market timing, & binary outcomes are usually addressed through the use of options/hedging. The longer the investment horizon, the more the mathematics favour an equity versus option investment. The bias is especially strong when the carry cost is low (or can be reasonably expected to become positive) - as the comparable equity is a hedged, & leveraged investment. Most would buy the dividend paying euro equity today, leverage & hedge once the European plan is executing; then sit on the investment for years. Classic WEB. Classic Watsa. A lot of financial services people will very likely lose their jobs if markets do not rally strongly. Most markets are moderately down Year-To-Date. Were there not the current 10%+ rally based on ‘the plan to have a plan’ the Year-To-Date loss would be roughly 13%+ (TSX), & retail would be telling their advisors to sell & go to cash. Promotional self-interest. Assuming the current global economic malaise is (hopefully) a once-in-a- lifetime opportunity – it should not be surprising that the punch cards are out in force. SD

It would appear that story per the financial press, & that of the average greek, are very far apart http://www.thestar.com/news/world/article/1066783--dimanno-will-greek-crisis-end-in-ruin Try as we all might - why is it NOT in the average Greek, Italian, or Spanish interest to simply do a Icelandic default? & move on. World wide, the IMF experience has been that they can only push the recalcitrant so far. Were Greece, Italy, & Spain to act together - they would be the ones COLLECTIVELY dictating the terms, not the other way around. We do not live in dictatorships. Austerity measures have to be voted in, they are widely seen as benefiting only the banks, & it is a small step for ambitious men to adversely sway a populace. The Wall Street 'sit-ins' are not going away - they are growing, & they are being co-opted. Not that long ago, the Greece of the time was Germany, & the crises gave the world Hitler. Record unemployment amongst the < 25 was ultimately solved by war. Guess who dies first. We have forgotten that it is in all our interests to periodically have widespread bank failures. Break the power of the banking lobby, let the governments make depositors whole, & let new state/private banks rise out of the ashes to take over the function. The banker is your servant, NOT your master. SD

We cannot imagine that this is just us ..... But has anyone else noticed that the real money a value investor will make in this market will be simply by trading their position, reducing cost bases to almost zero, & just parking the gains in cash/index puts? Case in point. Last week, the S&P/TSX Index rose 8.95% off its low - on nothing better than 2-3 days of press report respite on the news from Europe. Dexia was bailed out this weekend, & tonight Merkel/Sarkozy negotiate on how the EFSF fund will be used. Of course, the 11 billion Euro capital raise that BNP Paribas & Societe Generale will otherwise require has nothing to do with it? http://www.reuters.com/article/2011/10/09/us-eurozone-idUSTRE7953D520111009. And neither do the highly likely significant unrealized losses sitting in Deutsche Bank &/or the Landesbanks ? So why on earth would you expect that last weeks S&P/TSX Index 8.95% is going to hold - if ONLY these two banks, need to raise even HALF their 11 billion requirement? We live in interesting times!

We have been quiet buyers at < .75-.80. As long as you dont have to sell & can take a long view you will do very well. Buying (today) in a TFSA account, & contributing (later, & at 1.25+?) to a RRSP account, is the obvious choice. But not a fan otherwise. There are so many other very high quality choices out there right now offering div yields > 4%, &/or P/E's < 5.5-6.0, that FBK is pretty far down the list. SD

Agreed with Packer. But would add that wherever possible 1) you buy the major makers of things that are really needed, 2) where there are clear & favourable demographic trends, 3) you receive a dividend, & 4) you plan on holding for 5-10yrs. IE: The major food & drug coys (everyody, world wide, has to eat - & everybody gets sick). Asian & Indian auto companies. North American long term health care. If in 10 yrs these companies are an average 4x higher than there are today (growth + inflation), & you receive income each year that you are waiting, you will do very well. SD

Keep in mind that there is not 'one' inflation. We have simultaneous asset DE-flation & consumer price IN-flation. We got asset deflation because everyone rushed out & bought the same assets - at the same time, on margin. Because there were more buyers than sellers - prices kept rising, & the price rise kept pulling in still more speculative money. Asset producers ramped up production & the result has been warehouses of inventory valued at nosebleed prices. Now everyone is trying (or being forced to) to sell, when there are no buyers & a material inventory overhang - asset deflation. We got consumer price inflation because monetary authorities, world wide, flooded markets with liquidity & debased their currency. Grain, gasoline, groceries, etc suddenly cost $2 vs $1 because the amount of currency òut there`doubled - consumer price inflation. SD

Very informative & entertaining http://www.businessinsider.com/what-the-world-can-learn-from-icelands-default-model-2011-8 Lot to be said for it. SD

Keep in mind that BP is a somewhat unique case. Demand can vary, but the supply from each cheap oil/gas source falls every year as the field plays out. To meet the supply shortfall the world taps successively higher cost sources, & keeps increasing the base price paid for the product. A decline in demand just means that the world taps the higher cost sources a little slower. The price actually paid reflects the fundamental crude specific demand/supply (Brent, West Texas, etc), futures speculation, & currency change (USD devaluation). Buy BP & you buy skeletons, government sanction, access to cheap oil/gas sources, & the ability to reinvest in tertiary production at the lowest possible cost & greatest certainty (know the geology, location, etc). For someone else to access the goods, it has to be another sovereign company/fund & sanctioned by both governments (UK & ME). Does happen (Saudi-Aramco), but not often. Its cheap because some of the skeletons came out of the closet (Gulf disaster) & global crude demand is perceived to be falling, but nothing else has really changed. SD

Completely agree on the 1929-1932 scenario. Not so sure on total risk, simply because we expect that a stable transference cannot be done without taking big write-downs (actual write-offs, valuations, etc). We essentially end up with everything being worth less, & investing at a lower cost base. Less risk. Nice thing about most of the names is that they are also capital intensive, with high depreciation & no-where for the cash to go. Sadly though, it is effectively industrialized hostage taking - & you get rewarded (buybacks, div increases, etc) for doing it. SD

You might also want to consider that many of the worlds premium companies have implied sovereign guarantees on them - especially those that employ a lot of people. - GECapital - assistance rolling their commercial paper during the credit freeze - GM/Chrysler - auto industry bail-out - Japanese electronic manufacturers, BP/Exxon/Elf, etc? In todays world of every-day state intervention, there may well be a lot less risk than everybody seems to think. SD

T-Bill/Leap Strategy As seller of a covered LEAP, the objective is to mimic buying the share today (at maximum margin) & selling in X yrs at the stated strike price. IE: The seller sells the right, but not the obligation, to buy today’s $30 share at $50, 2 yrs out, for a premium of $3. The premium of $3 is the carry cost on the margin + a pricing adjustment for the greeks (volatility, time, etc) The seller accepts the LEAP obligation, & uses the premium to buy a similar term (or roll shorter terms) T-Bill on margin. IE: Cost of $98, margin of $95, equity of $3. In 2 years .... • The T-Bill will mature at $100. $5 of net gain to offset 2 yrs of carry cost. Positive carry. • 30% chance of a $20 profit on the share already owned (70% of LEAPS expire worthless) But during the 2 years the seller significantly reduces his/her risk ... • If the seller did nothing, he/she would have a 1 asset $30 portfolio, exposed to the entire market risk on that share • If the seller sold the covered LEAP, he/she would have a 2 asset $128 portfolio ($30 + $98 T-Bill) that is only 23% (30/128) exposed to that single share. Most of the (corporate) share risk changes to (sovereign) T-Bill risk, & the seller gets the diversification benefit. If the T-Bill was actually a UK Gilt or a German Bundt, that benefit could be considerable. Obviously not for everybody, & there are many variations, but something that you should be aware of. SD

Most often you will be either rolling 'Up & Out' (higher strike, & a maturity period longer than you previously did), or 'Down & In'. If the existing position is in the money you will have to sell, otherwise just allow it to expire. For even the most liquid LEAP, liquidity will evaporate as soon as the long/margin equivalent becomes cheaper. Consequently, most strategies use T-Bill/LEAP combinations & hold to maturity. SD

Keep in mind: The risk free rate is the lowest cost of funds for all borrowers in a sovereign state – because the least risky credit is usually the sovereign itself, it is usually the sovereign cost of borrowing. • Corporations within the sovereign can have better ratings than the sovereign itself (common during many of the various Latin American debt crisis) • The risk free rate is not the same for each sovereign (Germany is less risky than Greece) Increase the sovereign cost of borrowing, & you increase the cost of borrowing for most of that sovereign’s citizenry. The US either cuts more spending, or raises taxes, to cover its additional cost of borrowing. But the USD is also the global reserve (store of value) currency. The whole world has to buy USD denominated debt to store its surplus, & it buys the debt of the least risky credit in that USD denomination. The least risky USD denominated credit has to be AAA, it has to be able to issue enough debt to absorb the world investment demand, & it gets to borrow at the lowest cost of all sovereigns - & set the base cost of borrowing for all other sovereigns. • When other USD denominated debt issuers (sovereigns, corporations) have better ratings than you do, the world goes to them first - & only comes to you if those issuers were not able to issue sufficient quantity. If you can get refinancing - your (& every other sovereign with your rating or worse) cost of refinancing goes up (crowding out). • Drop too many ratings, & there are so many better credits ahead of you that you have to outbid competition through rising premiums. Lose reserve status & US unemployment rises. Assuming something approaching the unadjusted 9.5% Eurozone average http://www.bls.gov/ilc/intl_unemployment_rates_monthly.htm, applied to the existing 9.1% rate & 310M US population – about another 1.3M people (+ another 1.5M for every .5% spike in the US unemployment rate). Obvious opportunities, but the long term solution is probably the SDR (Special Drawing Right) as the global store of value, & relegation of the USD, Euro, etc to regional trading currency. Risk calibration returns to ‘normal’, spendthrifts pay their freight, & savers (retirees) earn enough interest on their deposits to retire on (a primary retiree problem in most western nations). The debt limit theatre has demonstrated to the world that the US is incapable of making the societal decisions necessary, & that change is highly unlikely for at least another year. The world is done being held captive, & is moving on. May we all never have to experience it again. SD

The results are actually very good. Full-year EBITA should be about 65M. At 5.5x EBITA, price should be around 2.74 Margin squeeze more than offset by interest saving on the deb retirement SD

7-10 if its very, very lucky SD

http://www.theglobeandmail.com/report-on-business/americans-fret-about-how-to-survive-a-debt-default/article2111459/ Keep in mind that the advisers job in times like this is to spike the panic selling before it starts, & these retail calls are pouring into every advisory firm. We don't need much of a intra-day point drop, for those callers to start refusing the pablum. Most folks don't use advisors - they trade directly, & they don't have a lot of patience. Experience a one-day 300-500 point drop, & almost everybody is going to suddenly be a seller. Back in the day, a JP Morgan could send a message - by standing in the pit & aggressively buying anything that moved. Hard to do today. At best, it will take a day to get an agreement - & another day to vote it into law. Inaction, that can only increase the odds of triggering a panic. You don't call your congressman to vent, you place your sell order or tell your broker to do it for you. Hopefully we don't see it SD

(2) If you have a sizeable weighting, your primary concern is the day-to-day liquidity - not the return on the portfolio. Most people would be hedging this in the current climate SD

High 50%, with all our synthetic shorts covered by calls SD

Every student who ever studied a yield curve has had it drilled into them - the higher the risk, the higher the yield you need to compensate for that risk. As risk increases the longer it takes to get repaid - we get the positively shaped yield curve. The higher the systemic risk (non-diversifiable), the higher the risk free rate that the yield curve starts from. At 1/4 of 1% there is supposedly almost no systemic risk. But how can that possibly be when there have been multiple PIG bail-outs within the last 6 months, & the US appears to under imminent threat of default ? - UNLESS there has been extensive ongoing treasury intervention that is absorbing an awfull lot of risk. Restrict that ongoing intervention & we all see a world of hurt. Reserves rise because either 1) your loanable credits are repaying their debt, not increasing it, or 2) your central bank has required you to (China, & some BRIC nations). When a central bank is doing 2) it is usually anticipating that a lot of its banking systems existing loans are going to default, & that a systemic write off against reserves will be required (hence it wants a bigger cushion to charge against). In the global village, when you summize that the biggest global creditor may have a banking problem - there is no way that you're going to deplete your reserves. We are not going back to the way it was, so welcome to some hurt! SD