SharperDingaan

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

Illiquid & lower quality securities to long-term accounts (time as the hedge) All margin retired. Positions reduced to 50% long, 50% cash (cash as the hedge) Optimizes under a moderate market sell-off - re-purchase & re-leverage at lower prices once volatility declines. Deeper the sell-off the more the up-front gain, & the longer the recovery will take (essentially a bar-bell). Moderate opportunity loss if markets jump (assumes nimble repurchase). Small price for dodging the bullet. SD

We all might want to see the opportunity. Irrespective of outcome, the US has been severely damaged, & it is self inflicted. If there is no resolution, or a delay, we have selective default; same as Greece - the US gets downgraded. If there is a resolution we still get a downgrade ..... it just takes a little longer as the ability to reach concensus continues to decay. US rates of 1/4 of 1% are only low because of treasury intervention. Take away that ability to intervene & borrowing costs will quickly approach the 3-4% that PIGS have been paying. 3% is still very low (for the circumstance), but it is 12x the current cost. Even if rates ONLY increase to 3/4 of 1% (under threat of a downgrade), it is still 3x the current cost. When you are having trouble trying to pay your interest bill now, why should I think that it will get easier when that bill is likely to at least triple ? Cash & a few call options has a lot going for it. SD

Its not really a 'limit' when you simply increase it every year. SD

http://fpc.state.gov/documents/organization/105193.pdf It would seem that this is a regular ocurrence that has taken place almost every year since 2001. So why is this time different from all the other times ?, & who benefits by trying to manufacture a 'market' hysteria ? Puts quite a different spin on the issue. SD

Keep in mind that Bernake just announced QE3. To get the funds he will have to print bills, & that will require congressional approval. The real question though, is how far the USD devalues right after the announcement ? - when there are deep liquid forwards & futures markets to sell USD into - If congress approves. USD debases. Buy back the position for a consolation gain - If congress rejects. USD denominated assets sell off aggressively. Buy back the position for real money - Lifetime chance to be beat Soros's bet against the BoE. SD

Depreciation is a non cash expense, but if you're profitable - you recovered the expense when the buyer of your goods/services paid (cash) for them. If the underlying business is not growing - you dont need additional rolling stock, you can use fewer engines (replacements can pull more than the old), & operating costs shrink (fuel & labour savings). Capex becomes NEGATIVE, & the CEO/CFO has a mountain of surplus net cash inflow to bolster results - for a number of years. Agreed, if surplus cashflow is returned to investors via a dividend - they can reinvest in higher yielding assets elsewhere (inflation optionality). However, most CEO/CFO bonus structures favour buy-backs to reduce dilution, increase earnings & multiples, & elevate share price. The surplus net cash inflow is essentially capitalized; & you reinvest elsewhere by selling your shares. The discipline advantage of railroads is that it is difficult to sell the idea of expanding track or buying another rail-road unless it directly connects to you. Authorities do not appreciate monopolists, & most shareholders do not want that surplus net cash inflow going on anything but buy-backs. It also doesn't hurt that to get that adjacent rail-road you will have to over-pay. The operating advantage of onging falling variable costs, & higher freight prices (inflation), just improves margin & further diversifies the surplus net cash inflow (reduced volatilty). Point(s) 1) Yes we like the inflation optionality because we expect it to be capitalized 2) CEO/CFO is incentivised to make it happen. SD

Rules exist to provide a framework. When the rules are rigid, you are not confident in your understanding as to why they are there. Most would not relax the investment quality rules, unless very experienced. Failure results in either a write-off or a long saga of successive decisions that all have to be right - & the smarter thing is usually to write-off & move on. Case in point: FBK At inception this was a trust, returning capital at 5c/month. Competitive plant, iffy management, in a cyclical industry, but at $3.50/share your cost base fell 17%/yr. The MOS (non-financial) was FFH in the backround (capital discipline), & new plant that was one of the lowest cost plants in NA (minimal CAPEX requirement for some time). Should have sold at $5.50 & walked away. Cycle turned, & break-even turned to loss. Should have sold but did not - small % of portfolio, MOS was still there, & we're experienced at recovery. Price fell to 20c, debs fell to < $35, bankruptcy &/or dilution was imminent. The investment became an option on a successfull restructuring. Management/Bank huddle - & they stay alive. We increased the original $ investment by 4x, & injected the new funds into stock & debs. 10x the number of shares, cost base close to market, debs with cash yields > 22%, & a high % portfolio weighting. A FBK recovery mattered to our results. But it was based on evidence the MOS was working, & experience. Rest is history. We've done very well, but its been maybe 6-7 yrs. In normal makets, it would have been far better to walk away at $5.50. By luck, we consequently were not that exposed to the credit crash as our focus was here, & got a opportunity gain as well. Point(s) 1) Relaxing constraints can expose you to a world of pain, but it is how you learn 2) Investment is a art not a science - intuition, application, courage, & experience is also a large part of it. SD