SharperDingaan

They beat the street estimate of 2c/share, & EBITA is pretty stable at 15,799. 62M of EBITA/yr x 5/130M shares produces a share value of roughly 2.38. 47% above yesterdays 1.62 close, & 116% above the 1.10 year-end price - yet everyone is whining? Cost-plus volume in the RBK line is significantly reducing the business risk & turning it into a utility making a positive spread – when they have 50% of the market, & their long-term volume that can only grow (there’s no less garbage!). We’d like to see it at 75% It is becoming far easier to split the businesses. SD

Perhaps a mixed blessing but it is more likely that there will be another bailout - with the money going to the German & French banks - & not Ireland. Most folks would think that Greece, & Ireland, would be far better off if they were evicted from Euroland, allowed to declare a moratorium on their debt (as per Iceland), & float their own currencies. Each to their own solution. The fear to date has been the massive German & French bank write-downs that this would trigger – but it’s quite curable by redirecting the bailout, & will end the negotiation. The reality for the young in both countries, is that if you’re ambitious & employable, you are going to have to leave Ireland &/or Greece to seek work elsewhere - & for at least the better part of the next decade. Not a bad thing, but for those left behind or unable to move/adapt it will be gut wrenching. Keep in mind that the last time Ireland was in such bad economic shape was during the Great Depression, & it took a very long time to come out of it. Eighty years of progress has at least produced a more humane approach. SD

Keep in mind this is oil & gas. Governments set the global price, not the ‘free’ market. Country A may have the reserve under its land, but it needs Country B to let it buy the expertise/equipment & ongoing maintenance from the citizens of Country B to get the oil out of the ground. Country B obliges – so long as Country A gives it a sweetheart deal on X% of the output, for an extended period. County A agrees & sells the remaining output on the global market at spot. Country B needs to get its money back, & persuade Country A to buy its goods & balance the terms of trade. Country A agrees to buy weapons & development from Country B at cost, less a little something off the top, along with some surety of supply. We keep selling you oil, & you prop us up if ever we have a possible regime change. Time passes by & declining reservoir pressure results in less production per year. Country B gets fewer sweetheart barrels & makes up its shortfall from the spot market. As Country A has fewer barrels to supply the spot market, price rises. Country C & D also need oil, & note that the higher spot price makes oil fields in Country G & H viable, & that their viability will increase over time as production declines. Deals get done, even though Country G & H are highly unstable. Country H has a lot of population but little oil. To avoid a regime change they need to spread the wealth, & to get the wealth they need to push the price up. Country C is industrializing & to avoid a regime change it needs more oil to power its growth. Country C does a deal with Country A on the same terms as Country B to boost its production with new technology. Spot prices stabilize ($60-70/bbl), but the producing regions get more volatile, as new production comes to the market. Inflation happens & Country G has a regime change. Country H will follow, but its leadership chooses to fight – with the weapons coming from Country B & C. Very bad news being broadcast on CNN 24x7. But if Country B & C agree to pay more, via the spot market, Country H can grease the right wheels & the problem goes away. The price rises & calm returns. SD

There is no market, standardized contract, promotional press, advice, etc - it is entirely bespoke. In Canada you essentially have to approach one of the big 4 tax/wealth-management specialists, tell them EXACTLY what you want to do, & what you want from them - then hand them all your research. They'll give you an opinion, which you give to the custodian (triggering the AML/ATF review process), following which a lawyer who will draft up the contract for you. Cost of replication then becomes just the cost of a new contract. The simpler, & the less said, the better - as there are many potential applications. SD

You would be very surprized at just how easy, & relatively cheap, this is to do - & especially at the retail level. For Canada you need only be a qualified & private investor, specify the custodian, go through AML/ATF verification, have the terms of the trade documented in a legal contract, & have independents both confirm the pricing terms & verify the trigger event. If you're on both sides of the trade (RRSP, TFSA, Private Coy accounts, etc) an ISDA agreement, & collateral posting, is not necessary. Assuming the contract is modeled along the lines of a Credit Default Swap, a sample trigger event would be the failure to file on the TASS database by XYZ Hedge Fund, within X months of due date. Not without risk (audit), & very application specific (tax planning), but quite doable. Just expect some raised eyebrows, & perhaps some unwelcome verification/curiosity, when you talk to your independents. You end up with a derivative that acts like finite insurance (HF reporting lasts an average 7 yrs) but with the exchange mechanism of a CDS swap - so you better understand it! SD

We know the global industry is expected to consolidate, & the process has allready begun (PwC Report). We know that FBK is a weak player, consolidation has always been in the game plan from Day-1, & shareholders are restless. We know that a share price < $5 prevents the significant majority of institutions from owning it. We know that 1/2 the Debs have been called, FBKs pulp markets are likely to remain strong for the next 1-2 years, & that it is highly likely they have the means (COH + credit lines) to recall the remaining Debs anytime they wish. Todays price of 1.56 is up 42% on the year - to go up 100% to 2.20 - what really needs to happen? Most would think we need new shareholders. A 2.5-3:1 share consolidation to get > $5/share With 3:1 consolidation to 44M shares, most would expect a new share issue to retire the remaining debs New shareholders would want an asset sale - as soon as the power contracts start adding EBITA A 2.5-3:1 consolidation produces a current share price range of 1.67-2.00/share. On May-02 the shares closed at 1.64. Patience. SD

Assume that for now, to bet against the industry you need a ‘bespoke’ agreement. It’s going to cost a lot (legal, accounting, ISDA, etc) to structure, the counterparty will have to be a ‘name’, & you’re going to have to effectively bribe them to take the position. It’s highly sensitive, & there’s a risk that its existence (& the counter-party name) could ‘leak’ into the public domain. The counterparty could be a cephalopod or a member of the industry – but it’s much easier to persuade a squid. You might be one or many central bankers. Our agreement gets done. A prominent HF, anywhere in the world, goofs - & one of the counterparties starts to purposely leak. The leaks will stop if a standardized contract is set-up & traded – the HF industry on one side attempting to hedge its regulatory risk, our central-bankers & speculators on the other - with the squid running the book (persuasion). Our market gets born & starts growing. Capitalism does its thing, the players start to drop/consolidate. Safety is sought in ‘too big to fail’, & our market making squids book becomes less profitable. That original ‘bespoke’ agreement matures, & becomes subject to freedom of information searches. Our counterparties huddle & agree to resolve the reputational image problem - with new (& evergreen) agreements on each of the industry’s main players. Protection. Lo & behold – we have a ‘market’ solution to the HF industry, without the need for regulation! ....... And a ‘too big to fail’ solution. Fail to behave - & suffer a material increase in the size of the bet on your failure. To stop the fund withdrawals you need to either side-bar, or have you & your supporters take the other side of the additional bet – with all parties have to post more & more margin the closer you get to failure. Way too damaging on the ego. Elegant solution .... so why does it appear that it hasn’t happened ? SD

Just to stir the pot. There is an interesting article in the Jan/Feb 2011 FAJ entitled the ABCs of Hedge Funds: Alphas, Betas, and Costs. Notable points are 1) Median fee is 1.5% + 20% incentive fee, 2) 2 in 3 hedge funds cease to exist < 10 yrs of posting results, 3) Survivorship Bias (only get the winners results) is around 5.1%, 4) Backfill bias (only start posting when you have good history) is around 2.05%, 5)Average Alpha is roughly 3% - but up to 80% of it may be nothing more than momentum (ie: Beta) In short, you need to deduct 8.7% (5.1%+2.05%+1.5%) from a HF return just to eliminate the bias & fees. You also pay the HF outlandishly for their Alpha (ie: long-short gains), & it would appear that most of it (per the universe of HFs) is bull. Given that HFs are consistent targets for most regulators in their ‘new orders’, & that if you can’t beat them – join them; A) How do you short specific types of HF ? B) How do you short the HF industry itself ? C) Why is there no ‘standard’ lot for what would clearly be very profitable ? If you’re the regulator, you can control the industry by simply shorting it - or individual HFs within it. Muscular regulation that results in the regulator &/or central bank getting paid for it if the HF fails, or closes? If the private XYZ HF takes a run at you, all you can do to preserve value is buy puts on your own shares – which XYZ is selling to you. Why can you not do the same thing on XYZ HF? SD

This is where the long view counts. Lots of sovereigns have defaulted in the last 50 yrs or so, & almost all had the same experience. It took a while, but the market started lending them money again, & those original bond holders ended up with what were really equity sweeteners (zero-coupon future dated PIK, etc). Worst case. Greece gets ejected from EuroLand, takes back the Drachma, & tells you that they'll repay 40% of the principal of your Euro Backed bond in Drachma -10 yrs from its maturity date. The trader will take the deal, dump the Drachma bond, & be thankful they're out. The value investor would buy the Drachma bond at 30-50% off its intrinsic value, & buy a greek villa at 20-40% off the market value - financed with a Drachma denominated mortgage equal to the FV of the drachma bond. You get your villa today & a interest only 'rent' cost for 10yrs - that is getting cheaper each month (drachma devaluing). End of yr 10 you pay off the morgage with the proceeeds from your drachma bond. The riviera life style year round for maybe 1/2 the cost of a California condo ? SD

All that happens is that the BS & opening equity gets adjusted downwards. They have allready disclosed how much & where the adjustments will be. Because they wrote down plant there is less to depreciate, so most would expect quarterly depreciation from 01/01/2011 onwards to be lower than the previous run-rate. Improved profitability. SD

NPO's are governed by local state law, but most will follow the same principles. As with any liquidation, asset proceeds pay off liabilities in order of seniority. Any surplus goes to repaying the granters of their various endowments (equity equivalent). In a bankruptcy the liabilities > proceeds, & there will be no return of funds. Sale & leaseback of an asset (ie: hospital wing & all related content) is common practice. Usually the result of either 1) bankers pressing for repayment of outstanding loans, 2) the hospital has a funding commitment that it cannot meet from its endowment structures, or 3) the hospital is expanding & this is funding their portion of some partnership agreement. [Googel P3 partnerships] Given that the state is California, its probably 1) or 2) SD

Makes a good story but no different to your office pool winning the lottery. If you don't have a ticket - quit the whining & get over it! The reality is that there will be a industry demutualizaton. As with the LifeCo's; time limited regulatory protection post demutualization, time limited restrictions on the funds (capital requirements), & a lot of whine because of player containment. When the protection ends there will be consolidation. While those without mutual policy holders may be lunch for those with them, its not a done deal. SD

P (04/08/2011) = 377.99 B (12/31/2010) = 379.46 P/B =1.0x We know the P/B is seasonal for FFH, usually at its peak around the AGM, & it seldom goes > 1.05-1.10x It is very likely that Japan will result in one of the largest reinsurance losses in history. Odyssey Re is in this business, so what are the odds? To provision you have to estimate the total cost to repair. How accurate can you really expect to be at this point? Most would expect the current industry multiple to decline at least 5-10% once the estimates start arriving. FFH gets discounted more heavily because of its investment vs UW source of revenue. Assume a provisioning that drops BV 25 to 354 & a P/B of .9x. Price drops 61 (16%) to around 318 Nothing to do with FFH fundamentals, just the tide falling SD

Keep in mind that its not just CAD strengthening, its also the USD weakening. A 12% increase in CAD fundamentals, & a 13% worsening in the US position - is a 25% total change. Plus side: Rising demand as a reserve currency against anticipated home currency devaluation Cdn oil/gas replacing ME oil/gas. Secular volume & price increase in CAD demand Aggressive BoC will hike rates to quell inflation. Higher rates on Canada's pulling in more CAD demand Most sectors are now at/near pre-recession levels Higher CAD lowers the cost of imports & inflation Minus side: Pending US muni-debt crunch. Flight out of US investment. USD oversupply US inability to raise rates without blowing the recovery. USD outflows going to higher yields elsewhere QE3 +++. USD oversupply. SD

"How much higher do board members see the CAN$ going?" We expect $1.15-$1.30 within 18-30 months - primarily from rising oil/gas prices, & export volumes, driving up CAD demand. We also expect rate hikes to kill off inflation (increasing CAD demand to buy Canada's) but it should be dampened somewhat by the higher CAD (lowering the CAD price of food imports). Ontario/Quebec is not that big a problem. Just let the FX rate rise slowly, & offer tax incentives to replace equipment &/or set up service industry in the provinces. These are borderline line 'have-not' provinces, & workforce aging is allready rapidly reducing the labour pool. With a potential 25% CAD appreciation - dominant USD revenue streams, or USD denominated equity, has to be a concern. If you can hold until CAD returns to parity you will not be affected ..... but it could be a very long time. SD

Tax treatment differs north of the border. Everything is 'deemed' to have been sold on the day you died, whether it was actually sold or not. While in probate the resultant tax, funeral, accounting & legal bills, etc. are paid by the estate, following which the residual is distributed to the heirs. If there is insufficient liquidity (unlikely if there's life insurance) estate assets are sold off to raise the necessary cash. You receive the asset at market value, & the estate takes the tax hit. Obviously there is room for tax planning, but the taxman still gets his lb of flesh. SD

The object of the tax is to trigger accumulated unrealized gains/losses, not redistribute the wealth. The "inheritance tax" is the subsidy you've been receiving each year because you've been able to defer the asset sale. The resentment is because the subsidy became an entitlement, paying it back was never really in the plan, & the 'heirs' are going to get less because of it. The retain/sell decision is your heir's, not yours. SD

We’ll be the heretic …. You die, your estate sells all your assets & ends your tax deferrals … as they are your assets & liabilities, not your kids. Calculate tax the normal way & the “inheritance” tax is what your estate paid the year you died – less what you paid the previous year. Great grandpa passed along the farm in 1935 (depression valuation) & you pass it to a grandkid in 1990 – 55 years later (your ghost reads this board). Nothing but rocks & a hay crop once/yr. Except …. This farm is now in the city which has grown up all around it (bubble valuation). Highest & best use is to plant condos on it (assuming you can sell them). Lots of jobs, & short/long-term economic activity for all …. but nothing can happen until you plant. Grandpa, dad, & I are farmers … it’s what we do … this is where we farm! … it’s good land!! It may well be. But the fact is you would be better off selling that high priced high quality land, buying similar but lower priced quality elsewhere, & investing the difference in machinery to help you farm better, more effectively, etc. If the estate does not want to sell it can borrow against the land to pay the tax, & pass both the land & the debt on to you. The cash debt service cost is the monthly cost of your decision. Time/progress moves on; if you want to stop it - you have to pay for the privilege. SD

" So my question is why is a house on a small lake in Canada worth more than one on the ocean in California? pricing is wrong somewhere...my" Earthquakes. That beachfront property could vanish into the ocean, & the cliffside property could well fall off that cliff. Total write-off if it occurrs, & lots of TV coverage to prove that it can/will occurr. State of California finances. If taxation doubles because they need the money, you cant pick up your house & go someplace else. Increase the cost of ownership, & you're carrying a smaller mortgage. Add in Canadas free health care as you age, & a generally lower cost of living (fewer restaurants, shows, etc.) .... & the numbers start to rapidly change. Vacancy/foreclosures,etc. Maybe 1 in 5 houses on your block ? or neighbourhoods in your city? Pack everyone together & it's noticeable - plus the guy breaking in doesn't have to walk far to the next one. If the next house is on the other side of the lake .... its a lot more work. Potential + live vs visit. Eye of the beholder, but you can always add another/better house around that lake ... not so much if there's allready a house there. Yes, the pricing may be off a little, but its really telling you just how bad a shape California is in. If you think that it may take a long while for California to come back, shovelling the snow off your rock doesn't look so bad. SD

It does not hurt to stay until you at least see the Q1 results. SD

Keep in mind: Boomer retirement. If you were born in the 60's you are the apex of the baby boomers, & in your 50's. In 10-15 yrs you will be retiring & selling your mansion to downsize - but who are you going to sell it to? If if takes 10 yrs to work off the existing cheap inventory, boomer net selling will be just in time to ensure that pricing stays low - for an additional 10 yrs. Great if you want to live in the place, not so hot if it was supposed to be an investment. Vacation home. Add up the property tax, upkeep & maintenance costs, driving cost to/from, & divide by maybe the 3 weeks/yr you use it? For most folks the cost/day is > the cost of a hotel room - which could be anywhere vs the same place year after year. To work - this has to be either an investment, or your future retirement home. If there's questionable appreciation, it can only be a transitional thing. Inflation/deflation. We all hope its inflation, but if we're wrong ? Inflation is too much money chasing the same supply of goods - but it assumes that everyone still wants those goods. If you allready have what you need/want (or are buying the 'experience' vs 'goods') you're not buying those goods, & have just increased the supply of those goods for everyone else - making inflation harder to achieve. Recent retirees 'keep up with the Jones's' by buying cruises - not houses - & they're selling houses (downsizing) to pay for those cruises. With multiple hits against inflation, & in rising numbers, how do you get inflation ? Demographic. Young growing families buy new/bigger houses, aging ones sell. To get housing inflation when more are selling than buying, you have to be where those other sellers want to live - ie living in a local bubble. You also need the right kind of dwelling - if you aren't as mobile anymore you want a large & swank apartment, with someone else to shovel the snow &/or do the maintainance; not the multi-level townhouse &/or condo. Obviously bubbles do exist; Vancouver, California, Hong Kong, etc. but there aren't many of them. If your 2nd/3rd home is the right kind of dwelling, & located in a bubble - all the power to you. But if it is not, expect tears. SD

Keep in mind that much of the Cdn/US difference is structural 1) US mortgages are often non-recourse, in Canada its recourse. Walk away from your house & we'll take your savings, car, etc. until your debt is fully repaid. 2) Cdn mortgage interest is not tax deductible. As there is no government subsidy to help you carry the maximum mortgage possible, you will carry a lower balance than your US counterpart. 3) Cdn gains on a housing sale are tax free, in the US they are not. In the US a $ is a $, in Canada you're paid to hold your property - substantially reducing your risk. 4) Cdn regulation is much more robust than the US, which materially reduces the extremes There is still abuse on both sides of the border (house as a ATM, inflated valuation, etc.) but its much easier to deal with it north of the border. SD

A demultualization is the policy holders receiving shares & the P&C's treasury almost always doing an equity issue to provide the market float. A parent has no say if it agrees to demutualize a P&C sub, & can only offer to buy back the shares (at a control premium) if it wants to go back to 100% ownership. A parent also cannot reject demutualization when the P&C's competitors are doing it - as to do so will force the parent to put up the additional capital, vs the public. The P&C will get the new capital, the value of all P&C's will temporarily rise, & UW profitability of most P&C's will drop as participants price down to vie for market share. Buy, sell, & hold are all possibilities. In fairness to other board members who are in the industry, other than highlighting the pending development, we would prefer than all do own their DD. SD

Very likely more than a passing interest for one or two of the companies on this board! As always, do your own DD http://www.canadianunderwriter.ca/issues/story.aspx?aid=1000405671 http://www.insurance-canada.ca/business/canada/2010/Economical-Mututal-Intention-Demutualize-1012.php SD

Your broker is suggesting to you that you re-purchased these things within 3-6 months of selling them, which you haven't disclosed. SD