SharperDingaan

At 90% you can force the minority to sell. Given that this a friendly deal it'll be what the majority of the remaining shareholders want to do, that will decide it. The major players in that group will also negotiate the exchange rate on everyone's behalf. Couple of beers around a table, & saw-off somewhere around half-way between $1.00 & IV. SD

Alert. Keep in mind that it is highly likely that most/all of the shares in lock-up will opt for conversion. Makes the sale a tax-free roll-over, & the holder indifferent as they have not lost any value. Arguably, if enough shareholders opt for conversion (90%+) they could collectively negotiate for a better price (liquidation value) & 100% conversion. The buyer gets a bigger equity issue, & can use all of the sellers cash to pay down debt - improving their D/E ratio. $1.00/share may well just be the opening bid. Here's to hoping that Santa is a little more generous! SD

The price sucks at approx 2.7x projected stable EBITDA (with power) of 48.5M, but at least it will be more liquid (with better prospects) holding ABH over FBK. Think they could afford more, but a friendly bid was pretty much inevitable. Looking forward to holding ABH! SD

Re asymmetric bets: For maybe 80% of PMs ?, a short is one side of a pair trade - done to extract alpha, & executed via options to extract leverage and avoid the possibility of an inopportune loan call. The different dynamics drive the typical response. Most see the asymmetric bet as a small (but certain) realized outflow against a high (but very uncertain) REALIZED inflow. EG. Long a marginally out-of-the-money put option on XYZ Coy. Easy to understand, intuitively obvious, but most don’t get that the magnitude of the payoff x its probability is key (Taleb) ... But an asymmetric bet can ALSO be as a small (& certain) realized inflow against a high (but less uncertain) UNREALIZED inflow. EG. Long a T-Bill & short a put on XYZ coy - or - selling existing XYZ coy & repurchasing later (synthetic short). Not so easy to understand is that the intent is to get called (to the get the stock cheaply) & THEN HOLD IT, & it is not intuitive that Mr Market is going to pay you to do it (premium + T-Bill interest). Examples might be BAC, RIM, etc. We use variations of the synthetic short extensively, & find that in a concentrated portfolio it materially reduces month-to-month volatility. Given that the risk is that the stock could run while you’re short, we don’t sell more than 50% of our position. Hope it works for you. SD

Know what you’re trying to hedge & why. Measure ‘wealth’ by sustainable cash flow. Most retail would systematically withdraw investment funds, reduce debt to low levels, & maintain debt service at current rates. The hedge is against loss (on those funds withdrawn) & caps the major cash outflows (interest rates can now double if you hold only 50% of the previous debt level). Most retail would also invest for positive CF, & sell covered calls - patience, call premium & dividends as a hedge against loss. Pops to periodically take out the position & associated margin. Patience to repurchase on dips at 5-10% lower. Notable, is that this is pretty close to the Taleb approach – but for different reasons. SD

Core to Cdn financials is concentration in few hands, & the omnipresence of OSFI. Risk management is extensively examined every year, & there is little tolerance for chronic repeated failures. The result is better financial resiliency, less volatility, & on-going focus on day-to-day business. When Canada hit the debt-wall in the early 90’s, the Cdn financial sector did very well – most would argue that today, the sector is materially stronger than it was back then. It is much harder to get a double on the retail businesses, as you really need a sustained & extreme external event to materially force down the multiple. The businesses themselves are going to reliably continue generating EPS, with at most a 15-20% reduction off the ‘norm’. The source of that EPS is now also increasingly diversified outside of Canada. The big questions are currency & the benchmark. A double in a hard currency may be equivalent to a 4 bagger in a softer currency, but only if FX depreciation goes your way. The unemployment rate, usually trumps a rising dollar – hence a crap shoot as to where FX might go over the mid-long term. OK place to be, if measured against the TSX; a great place if measured against the DOW, DAX, FTSE, etc. If you want 25% compound returns this probably isn’t it. If you’re OK with 15% & some FX risk, there are lots of choices. SD

The case for the defence: BAC is 1 of 4 unique oligarchs in the US. If someone else wanted to be BAC they would effectively have to buy the company (established relationships, market share, etc). And even if BAC had to massively dilute to weather the coming storm, the buyer has nowhere else to go. The only question is how material an interim direct stake the fed might take – as if it is good enough for AIG, GM, etc. it is certainly good enough for BAC. There is nothing wrong with threatened &/or state intervention. WEB used it with GS. HW has used it with the Bank of Ireland. Today - both GS & the Bank of Ireland are doing very well. Most would argue that for the price paid - both investors have either done very well, or may reasonably expect to. Venture Capitalists have long practiced J curve investing, & currently a long-term investment in BAC is really no different. However - unlike a start-up, BAC has long established relationships, market share, etc. One hell of a moat, that actually strengthens when they start a buyback at some distant future point. It is highly likely that over the long-term, BAC is a solid investment. But until Europe resolves ... there is probably no rush - which is what the absence of insider buying is saying. SD

Keep in mind that a stress test is after the really bad stuff has been repo’d off the books – in today’s market it will the best possible outcome after the MAXIMUM POSSIBLE manipulation. All (Asia as well?) central banks (& agents), insurance companies (with different quarter-ends), & Hedge Funds (non regulated orbit) swapping dung for T-Bills over the cut-off date – to give the banks the maximum possible regulatory capital. Subtract actual from desired capital to find the capital shortfall – for the financial system as a whole – then force the banks to raise it, allocated by market share. Yet all seem to be 100% certain that BAC will not have to dilute (again), when we know that regulators have (publicly, via the leak) warned of insufficient capital ? To most folks a public warning implies that the target is currently BELOW its minimum capital requirement, & that existing anticipated capital raises have already been anticipated (which will bring them back on side). There are lots of ways that big friends can help with the capital, but is it really likely that there will be no further dilution? SD

Some observations: BoA grew assets by 3x (2250/750) over a 6 year period during the credit crunch. Created a hell of a BS strain; but as a good portion of that growth probably has an implied fed guarantee - the risk is not solvency, it is dilution. The global credit mess is likely going to require all banks to hold more capital. That capital can only come from calling in loans, reserve releases from improving loan quality, asset sales, reduced exposure to the higher risk business lines, &/or dilution. Fewer assets, generating less margin, & dilution risk largely dependent on uncontrollable macro factors. Going forward, a lower earnings stream that could well end up spread over more shareholders. It is implied that BoA remains as one entity over the ‘work-out’ period. That may not be reasonable, as most would expect regulatory & business incentives to develop - that spin the businesses into separate recapitalized ‘banking’ pillars. Going forward, multiple (& initially lower) earnings streams, virtually assured dilution, but capital in place to grow what are now healthy Balance Sheets. At 35% dilution (guess), consolidated income needs to increase by 35% over ‘X’ years – just to maintain the current EPS. To make money during the period - either the P/E ratio must increase, or earnings must grow faster than dilution - & all with a high probability of it actually occurring. The longer ‘X’ is, &/or the lower the probability of it actually occurring, the lower the expected compound return will be. To offset the risk you need a very low cost base, but post ‘X’ this is a growth stock with the commensurate return. There is a need to recognize the reliance on ergodicity (the longer the event path the more the eventual possible outcomes resemble each other). Just as a bad trade will catch up with you the longer you play, the same applies to the good trade. As long as BoA does not bankrupt - the longer the ‘X’ year period is, the greater the certainty in a return to ‘normal’. Punch-card bet, but you have to be prepared to marry it for what could be a very long time. SD

[amazonsearch]Fooled By Randomness[/amazonsearch] Very good ‘heretic’ read for those statistically & market minded. To get the most out of it, expect to re-read each chapter & map out what you are being told - as it is not intuitive. Then expect it to completely changes your view of markets. Snippets from Chapter 2: You will probably not do very well if you ... - Don’t recognize that history is written by the winners, not the losers. If you’re a despot but invade someone & win, you’re a hero. You’re still a despot - but no one will hold it against you! - Don’t recognize that the idiot who can present well - comes off as the expert. The alchemy of the CNN talking head! - Don’t recognize the Risk Management is done to give the impression of Risk Management – not actually do it. - Don’t recognize that you should insure against the abstract risk, not the vivid one. The vivid risk is already priced in - the abstract is not, & the reason why HW can occasionally make 2B on CDS swaps! SD

Agreed re Greenblatt. But assuming no real change in share price until IV is realized - there’s not much difference. Nice thing with the equity though is that the timeframe is open-ended, & buybacks (speculation) tend to increase both floor price & liquidity. You may get an opportunity loss, but you’re unlikely to lose on the actual investment itself. Obviously, not for everyone. SD

If you think FBK will see IV in 3 yrs, the compound return is above 40%/yr – but you essentially see FBK as akin to a zero-coupon bond maturing at 100. We think IV realization is conditional (share consolidation, merger), but given the type of institutional ownership - reasonably likely. To get 40%+/yr this has to be a pretty special business. We think it is. They hold a dominant portion of the RBK market, & have a significant new product in that market at the beginning of its life cycle. They have a profitable NBSK operation, which will have a material portion of its EBITDA hedged against an independent income within 12-18 months. They have very little debt, free cash flow, & the ability to grow EBITDA at more than 36% - by simply repurchasing shares that nobody wants. They are indeed pretty special. Most folks will not pay $1 today, for $2.50 - 3 or more years out (in spite of it being a 40c dollar). To get the Greenblatt 30% return experience, you have to be 75% confident that you will actually see IV realization within 3 years. SD

Assume the debt has a refinancing penalty that makes it uneconomic - until it rolls-over, there is little they can do. Business wise they are pretty much limited to strengthening their value proposition, & their Balance Sheet, for the next 12-18 months. Depending on the method used, the IV is maybe 2.25-2.75/share. Given that it is highly unlikely the market is going to pay that - the best interim prospect is periodic share buybacks. Buybacks financed with new debt at dirt-cheap rates, repaid from future free cash-flow over the next 12-18 months. If you applied the Greenblatt approach & held for 3 years, most would argue that you could do very well. Taleb (The Black Swan, Fooled By Randomness) would hedge against a lower return higher probability equity. WEB would consider the tax position. Not for the rabbit footed - but if you want to practice applying the craft, there are probably few better places for the price. SD

Not so sure on Germany. It is virtually certain the banks would get nationalized following a Euro haircut, but it is also highly likely that Germany will not permit the degree of inflation that the rest of Euroland will probably use (Weimar experience). CHF or DM essentially become the regional trading currency, & they get to borrow at lower cost. It also means that German industry sets up new plant in the lower cost Euroland (as occurred in the former East Germany)to reduce its costs. Germany remains the global power-house for decades to come, & can use the crises to offset it ageing demographic. SD

Hard to see why the solution is not Germany & France ultimately pulling out of Euroland, & effectively nationalizing their domestic banks. The big domestic industrials get protected, we get Breton Woods 2, & global banking broken into segregated pillars – capitalized according to the risk. Assuming all Euroland does an Iceland, & declares an average 25% haircut ..... things could get very ugly. SD

We think the investment community will need to re-assess. It is hard to make the case that a down-turn in the pulp cycle will hurt, when there is maybe 4-6M/yr of power generation EBITDA coming on stream in 12 months. An analyst cannot afford to ignore its existence, & the valuation hedge that it provides. It is hard to make the case that price driven market substitution to lower grade RBK will hurt, when they have a significant new product in this LOB at the beginning of its product life cycle. Not recognizing that the segments trend may well reverse, & soon, could be a career limiting error. It is hard to argue that the high industry leverage ratio applies to them too when they are cash heavy, their leverage is trending down & is probably at/near the record industry low. If anything, they should be terming out &/or taking on new debt at today’s record low rates. The negative is that < $5/share, FBK is difficult for most institutions to trade. Impossible to take an activist role to force a break up &/or an acquisition, & hard to acquire any meaningful float without driving the price up. In practical terms, you can only buy & hold, & most institutions cannot buy because the price is <$5/share. Their competitors may be dogs – but at least you can trade them! Hard to see why the price would not rise to about the average cost base of the institutions holding it, as the restructuring risk has effectively gone. Long term there needs to be a share consolidation, but we don’t see it happening until the power generation is on line. SD

Nice to see the results of all the changes finally get traction on the financials. http://www.fibrek.com/static/en/PDF/infoFinanciere/rapports_de_gestion/2011_3Q_MDA.pdf Keep in mind that the new RBK product is probably a higher margin product, it hits the market this quarter, & most buyers would probably prefer volume under cost plus pricing if the product is a hit. The losses on the LOB are unlikely to continue, & the business risk is likely to continue declining. Power generation commences 12 months out & is proceeding as planned. Most folks will recognize that the future earnings stream will need to be PV'd into the 1 yr forward earnings projection, & that the closer we get to generation the higher the PV impact will be. Pulp prices have to soften by > 30% to offset the hedge from that future power generation. Elegant. SD

Today’s Lifeco purchase is for positive carry. Simply buying MFC common with 60% margin @ 4.25% will produce a net yield of > 4% on the equity invested. Captures spread & appreciation, but creates an exposure to higher margin rates & a possible dividend cut. Not popular, & over the medium term the Lifeco may not do so well, but it is not really relevant – Brand Name & Quality is. IE: MFC: Take the closing price on its first day of trading, adjust upwards for inflation, & compare it to the price today. Is the 12 yrs of intervening business growth in a name plate OSFI regulated company - really only worth a premium of 11%? SD

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