SharperDingaan

We'll speak to the IFRS impact tommorrow once we've had a chance to review the MD&A Going forward they should do quite well but there will be a lot of price volatility - which is no big deal if you just buy & hold. There is some merit to taking the unrealized gain to date off the table, but not untill prices stabilize. We also think that they will no longer be a Cdn coy by year-end. SD

Look at the press release; Q4-2010: Operating Loss - Net Loss does NOT equal what it shown. Difference of 10. Financials do not show earnings after OCI - see Q3-2010 press release. So they could not report Q4-2010 numbers accurately ? & they forgot to mention OCI - which is probably a gain ? ... & 2 investment houses release fresh & adverse reports just before the earnngs release ? SD

The loss is because of the operating leverage - with so many days down, costs were spread over less production; it was a one-time thing, & its done. The disconnect is because mgmt is looking past it. Their business model is to clearly grow the RBK business (presentation deck), & they need capital to do it. We expect St Feliceon, its future power generation, & the green grants to be sold in fairly short order - & probably to ABH. IFRS accounting (2011) may also give the BS an upward revaluation boost. Look past the headline loss & the results are not bad. Whether they should be allowed to remain independent or not is another story. SD

Finally .... we have some intelligent investor relations. Money well spent. Keep thinking that they would not have this investor presentation out, before the earnings release, unless they have something very good to say. They would also not be making references to competitors, if they could not sustain the reported EBITA (& on either an ongoing, or capitalized sale basis). Looking forward to hearing what they have to say. SD

Keep in mind that pricing power is only temporary, those who have it can only lose it. Today it may be Google, but 2 yrs out that will be very diminished unless they can stay ahead of their competitors. The Coy has to offer something unique, but it doesn't have to be the major, or only, seller. The honest guy selling into a corrupt market does well - as his is the only one that is seen to be not ripping off its customers. Nothing to do with price. You need a material & significant barrier to entry, & you need the coy to pay a dividend - as todays price leader is the cash cow that you're reinvesting in tommorrows leader. Cdn charterted banks & rail companies. SD

Nothing ventured, nothing gained .... Congratulations! SD

Wait for the IFRS disclosure in the Annual Report. Some of the hedging structure will become obvious once you understand how MTM unrealized gains/losses on hedged, & trading, positions are to be recognized from Jan 01, 2011 onwards. Other comprehensive income reporting, etc. SD

You might want to keep in mind that Feb is RRSP deadline month in Canada, & that $ inflows have material seasonality. The major bad news story (Arab state revolution) has also bumped the worsening economic story - esp. Spain. Good news sells, & pulls in more advertisng $ - bad news does not. SD

No disputing that laws can be retro-actively changed, but in 2 cases they weren't - so does it really happen? Banks are 'special' .... If you're a systemic bank your bonds are less risky than expected, & they should trade at a lower yield because of the implied backstop - & they generally do in normal markets. The bonds can/will default, but for the most part you will get your principal back - just not when/how you expected it. All a backstopping sovereign has to do is with-hold interest payment ahead of a forced 50% debt/equity conversion, & a forced re-terming of LTD starting at 10 yrs +. Instant recapitalization, & debt service reduction - or nothing. Bankrupt or deal, you're choice - & they don't need 3 banks. SD

WEB just recognizes what many others have missed ..... http://www.vanityfair.com/business/features/2011/03/michael-lewis-ireland-201103?currentPage=all "The Irish financial markets are governed by rules rooted in English law, and under English law bondholders enjoy the same status as ordinary depositors. That is, it was against the law to protect the little people with deposits in the bank without also saving the big investors who owned Irish bank bonds. This rings a bell. When U.S. Treasury secretary Hank Paulson realized that allowing Lehman Brothers to fail was viewed not as brave and principled but catastrophic, he, too, claimed he’d done what he’d done because the law gave him no other option. But in the heat of the crisis, Paulson had neglected to mention the law just as Lenihan didn’t bring up the law requiring him to pay off the banks’ private lenders until long after he’d done it. In both cases the explanation was legalistic: narrowly true, but generally false" SD

Couldn't happen to nicer people ;) http://www.hedgefund.net/publicnews/default.aspx?story=12180

More like Status Quo is no longer an option, and one sale valuation supporting another.

Domtar Q4/2010 Earnings: http://www.newswire.ca/en/releases/archive/February2011/04/c7329.html Somebody else in Montreal would appear to be shopping for pulp! "Commenting on the 2010 performance, Mr. Williams said, "We continued to aggressively execute on our "Perform, Grow, Break out" strategic journey, thanks to excellent cost management and decisive actions that realigned our asset portfolio and reduced our exposure to challenging businesses. We have also made strategic investments in growth markets that bode well for the future, notably in fluff pulp and nanocrystalline cellulose, and built a flexible balance sheet that provides us with the ability to seize opportunities. We are well positioned for the year to come." SD

Still think the Yuan is really the regional reserve currency. We've far more confidence in the ability of the government to retain power, than we have in central bankers. SD

Good presentation. Keep in mind that Malls/Commercial Real Estate are a prime money launderiing vehicle in much of the Middle East. China is not unique. The criminal element pays for the bricks & mortar, & the bank lends them back 98% of what they put in, against the physical collateral. Building occupancy is essentially irrelevant. UAE (Dubai), Vegas in its early days, etc. Borrow enough & you also control the bank - if dont pay the debt service, the loans default, the collateral sells @ < 10 cents in the $, & the bank will go under. 5% bi-annual protection money as a new loan please. Idle Capacity: Make millions of the poor a little richer & they will start buying, but they'll buy the cheapest goods - & they will come from that idle Chineese capacity. China will be primarily buying from itself, which probably close to the long term plan. Interest Rates. The risk free Global real interest rate can only move up, & aggressively. Add in risk & inflation premiums & its hard to see how mid-term Euro backed debt can average a market yield of much < 8-10%. If you've hit the debt wall, maybe 15-20% (Canada reached 17%+) We live in interesting times. SD

Agreed. On a per position basis it just makes you take gains & reduces your share count over time. Desirable as you want to see the risk around the decision come down as experience with the position accumulates. Nature of the reinvestment risk also changes. If the cash reduces leverage, or goes into T-Bills, there is direct risk reduction. If it goes into 2 or more new/existing equity positions - not so much. We look upon the risk much as the Spanish did in the 17/18th Centuries. If your Galleon made it back from the new world you were rich - but you took roughly 1/2 the gain for yourself & reinvested the remainder in risk spreading syndicates which outfitted 4-6 new ships to return to the new world to repeat the process. If only 1/3 of them made it back, you were going to be very wealthy, but you had to reinvest in those new ships. In todays terms that fully loaded Galleon might go for 1-2 Billion. SD

A brief note: Taking unrealized gains & changing the cost base does not mean sell the entire holding: Assume 100,000 shares bought @ $2/share. Total investment of 200K Price rises to $3/share. Unrealized gain = 100K [100000*(3-2)] Sell 33,333 shares @ $3/share to raise $100K Retain 66,667 shares & change the cost base to $3/share. Total investment of 200K You have the same investment in XYZ Portfolio increased by 100K, so XYZ is now a lower weighting – less risk If the share price falls, you only lose on 66,667 shares vs 100,000 – less risk If the share price rises, you profit on your remaining 66,667 shares. SD

My question was strictly about the #'s - did banks have enough capital prior to TARP to absorb their eventual losses? No. They had lots of capital but they assumed that they could sell the assets in an orderly process, & get more for them than they actually could. A worst case TARP type intervention was always built in, but the expectation was that it would be temporary. SD

100% equity portfolio: 1. Annual sector review. Reallocated/new $ to the worst sector 2. Bi-annual macro review. Drives the Equity/FI mix, leverage, options/futures decisions 3. Don’t short physical, & only sell options – we don’t buy them 4. Per holding EMV after every quarterly release, significant announcement. Drives the hedge decision. 5. Maximum per holding $ investment is the initial investment. Maximum 3-5 equities. 6. Take unrealized gains > 30-50% by selling down & changing the cost base. Repurchase to the amount of the unrealized loss & change the cost base. Total $ investment never to exceed the initial investment. The risk attributable to any given holding decision will automatically decline as either the portfolio grows, or the holding decision is sold down. But a given investment in XYZ may be the aggregate of multiple holding decisions. New $ investment is expected to at least double within 4 yrs. MOS is the long horizon, & always buying quality in an out of favor sector. The more speculative the shorter the horizon; the thesis is either right or it is not – & you will generally know within 2 yrs. Equity margin is offset by FI. We risk adjust the instruments - 100% for a Canada’s/T-Bill’s, 25% for a speculative deb &/or zero coupon. 100K of equity margin is equivalent to 400K Face Value of zero’s. When the portfolio doubles, ½ the gain goes to FI Relatively low maintenance, but you must know your companies. SD

Retiring ½ the Debs now, & ½ later, is a desirable thing. It maintains the cash cushion, uses up the Q4 cash generated, & the remaining ½ will use up the Q1 cash generated. Some of the Deb holders would also like to keep them as long as possible; our cash yield is > 20% Everyone, including ABH, wants a higher price. It revalues their existing portion of St Feliceon upwards (more equity), & if they pay in stock - it increases their total o/s equity, & reduces the Debt/Equity ratio Snr Mgmt will be quite happy with a package. For regular Joe, there would essentially be no change - as only the ownership changes. You still need to run the plants. Clearly the AGM will be an important date, & we can expect a few more announcements. SD

There's a nice little business at WED ! SD

Keep in mind that the Debs trade just > 100. The clear inference is that the built up cash is going to be used to buy them out of the market, & that it will happen < maturity. Solid Q4 earnings, & an AGM announcement of intent to repurchase the Debs, will remove the dilution possibility & boost the share price. ABH is clearly shopping as well, & partial ownership of St Feliceon is not ideal. If there are no announcements, its hard to see how snr management will survive the rest of the year. SD

Sovereigns don't default, they 'restructure'. Put a fed guarantee on 20-40% of all the entire agency, muni, state, & fed debt in the US - & reterm the entire thing out to 100yrs plus. Take the new note, or take a haircut - your choice. 2-3 major currencies for regional trade purposes, & SDR's between sovereigns only. Bretton Woods III to fix the rate. 3 yr renewable limitation on trading block admittance becomes commonplace. Automatic evictions triggering changes in government become a common occurrence. Play by the rules or lose your head - your choice. SD

The macro is still there, it's just that nobody wants to hear it. http://www.theglobeandmail.com/report-on-business/top-business-stories/united-states-a-reclining-world-power-mark-carney-says/article1880471/ The good news is that the directions are becoming progressively more enevitable (euroland shrinkage, changes in reserve currencies, co-ordinated global write-off/re-structurings, Bretton Woods III, etc) & more binary. The bad news is that denial is worsening (US Muni's, US fiscal deadlock, Euroland budgeting, etc.) We think the US will ultimately have to do an Icelandic type restructuring, but there will be a lot of company. SD

"Shouldn't the house values go up if the the cap rate increases. When you said mortgage falls over the LT, you mean in relative to inflation rate? I don't see how ur increase mortgage, roll into short term T-bill will work in Canada where Mortgage rate is quite abit above T-bill rate... And I don't think there is CDN housing index to short .. if there is, I will do it." Higher interest rate = higher capitalization rate. Future equivalent rental income is discounted at the higher interest rate which reduces the PV. Lower PV = lower house value. A house is a hard asset. A mortgage is a hard liability. Inflation increases the price of a hard asset, & reduces the purchasing power cost of hard liability - producing a PV saving on retirement. Yes there is negative cash carry but you miss the point. You will repay the mortgage with inflated $ producing a gain, & the cash is the required margin for the index short. The discussion is also in the US context - Schiller index. If you believe in your premise that there will be inflation, this should not be a problem. To go this route be very sure that you fully understand the application of DCF, what inflation does to hard & soft assets/liabilities, & how to get/maintain an effective hedge. Miss-understanding, could cost you your house. SD