SharperDingaan

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

The assumption is that surplus cash buys back stock; it does not repay debt to restore D/E ratios, it does not get paid out in 'special' dividends, & it does not pay carry cost on new acquisitions debt. Industry's that use acquistion as a tool (O&G, resources), lack capital discipline (airlines), & have capital issues (banks) are probably not good targets. Industry's with very high depreciation (railroads) & long-lived assets are probably good. SD

Assume a 25% weighting to FBK, & a double in 1 yr. If nothing else happened, the change in the price of FBK will increase the value of the portfolio 25% [25%+25%+25%+25%x2] = 125%/100% = 25% potfolio increase .... but if you had reduced your FBK weighting by 50%, the change in the price of FBK will now increase the value of the portfolio by only 12.5% [37.5%+25%+25%+12.5%x2] = 112.5%/100% = 12.5% potfolio increase. And if FBK doubled in 2 yrs vs 1 ? .... the portfolio would increase by 12.5% & 6.75% respectively Point(s) (1) Without a very sizeable portfolio weighting to FBK, the effect on overall results is minimal (2) If you have a sizeable weighting, your primary concern is the day-to-day liquidity - not the return on the portfolio. SD

Keep in mind: 1) What needs to happen for a double to 2.70 ? Is it realistic, what is the time-frame, etc. Most would argue that it is when, not if - 100% ROI if its 1yr, a 36% [72/2] ROI if its 2 yrs, & high probability. 2) What needs to happen to double again to 5.20 ? Most would argue that this is hazy - lots of possibilities, very high ROI, but much lower probability. 3) What happens the sooner results start to show ? Most would argue improving EBITA, AND a higher multiple. The less time taken, the higher the ROI, & the greater the momentum pushing the EBITA multiple up - & raising the ROI still further. A virtuous circle. It is highly likely that management does read this board, & are well aware that patience is limited & that failure will result in asset sales - not a bad thing. They will also be acutely aware that without FFH's graces they wouldn't have this 2nd chance. There is still risk, but most of the FBK specific risk would seem to be behind us. Today, the main risk is probably the selling down of a high portfolio weighting too early. SD

Assume that with no changes, they expect 38M in EBITA with an multiple of 4.5 (38x4.5/130=1.52/share). They've said that a significant portion of their RBK mill production will be sold on a cost+ basis starting (roughly) 12-18 months out - materially reducing EBITA volatility. They've also said they expect an extra 6M in EBITA from power sales commencing Jan-2012. Most people would pay an extra 10% for less EBITA volatility (ie A multiple of 5.0x vs 4.5x). 12 months forward EBITA is maybe 44M? (38+6). A patient person might thefore expect at least 1.70 (28% above current price); 12 months out - & under very conservative assumptions. ... and all of this assumes no asset sales, overly conservative pulp revenues (volume+price), & no benefit for the 3.5M of interest expense they've just eliminated with the Deb retirement. Patience. SD

Over the longer term, spot gas prices can only rise appreciably as the $ for new drilling dry up & the spikes of new (temporary) supply dry up with it. When the bubble bursts there will be tears, & those shale fields will get sold to the majors for cents on the $. It will all be proven reserve, & buyers will have no qualms shuttering the wells to improve the economics. Hard to say why you wouldn't go with the drillers. Money thrown at them today (from market financings) & money again tommorrow (from higher commodity spreads). Maybe 1-2 quarters of disruption when the bubble actually bursts but that's about it. Normal part of the process. SD

+5%, but the real message is no margin. SD

We actually prefer Mercedes. But since the car is ‘used’ - consider the ‘c’ in Porsche as depreciation ;D SD

Agreed with FFHWatcher There is nothing wrong in taking Mr Market up on his manic moods, we just don't have to be like him. Our longer time horizon, & insistence on physical stock vs put/call options, lets us smooth out the volatility. In option terms we're essentially doing volatilty arbitrage, & leveraging liquidity. When Mr Market is depressed &/or illiquid, he is going to pay us a lot for our cash. Conversely, when he is happy & flush - we'll have a very easy time selling. Mr Market drives the new porshe (& pays the depreciation), we just drive the re-posessed one SD

Sold MFC on the run-up. Reinvested in PD & sold into Q1 seasonality. Reinvested in NEM & 1 other. FBK was a 40% unrealized gain at one point, but is now only 20%. We are longer term investors with a roughly 3-4 yr horizon over which we expect at least a double. If we were wholly unleveraged & did nothing, we would expect a compound return of at least 18%/yr (72/4). With very moderate leverage & seasonal trading we expect to do materially better. In the bad years, we may lose maybe 25-30%/yr. In the good years, we make well over 100%. To ensure that we don't blow our brains out (casino effect), every time we double we withdraw 45% of our total capital. SD

Up 30%+ on realized seasonal sector rotations & unrealized gains. Unrealized gains are down by about 50% but we see it as being largely temporary. If something doubles in 3 vs 2 years its still a compound ROI of 26% SD

3 things missing What do you want the funds for ?, when do you want them ? , & what is your risk tolerance ?. Defines where you need to be (stock vs bond weighting), your time-line (2,4, 6yrs?), & how much loss you're comfortable with (-40% the day after you buy is OK?). Holding the greatest stock in the world is pretty useless to you if you cannot handle its inherent risk & can only hold for 6 months. Filter for the worst sectors over the last year, not security, & go with the best quality in that sector. Both the good & the bad fell with the tide, but all tides eventually rise again - & the good continue to float. 1 company per sector - & only 1. SD

1) Being reserved does not mean that you’re liquid. If you have to sell assets rapidly, into a shallow market, & participants know you need the money, there will be a liquidity discount. And the more complex, or unloved, or unsexy, the asset the higher the discount – if you can sell at all. As many former US Investment Banks discovered, liquidity discounts of 40-50% is not uncommon. Selling shares below book value and parts of their subsidiaries was their best option. 2) Finite insurance is the arcane insurance version of regulatory repo arbitrage. I agree to sell you my poor asset (with a high regulatory capital requirement) & repurchase it back from you in X days at $Y. To pay for the transaction you put up your T-Bill (with a low regulatory capital requirement). At month-end I have the same total assets but require less regulatory capital, as the quality of my assets is now higher – but I pay you a fee for the privilege. Easy target, especially when you gloss over that FFH was essentially the guy with the T-Bill (cash coming from TIG in run-off) 3) Uncovering 3 frauds in a row does not make you an expert, you just think you are. No different to being in a casino & correctly predicting red 3 spins in succession. Because you were right on the last 3 spins you must know what you’re doing, so if you predict the 4th spin will be red it MUST be red – it cannot possibly come up black. SD

All the fed need do is rescind the on-shore restrictions that underpin the Euro$ market. All of a sudden the vast majority of offshore US currency will flood on-shore & in very short order. Instant domestic inflation, material USD devaluation, & a haircut to all foreign holder of USD denominated debt. SD

"What are you trying to say? The option market for Sino wasn't liquid at all" Somebody lent the shorter 10-15% of all the o/s shares on a term loan basis. If the borrower cant repay the term loan in full on its due-date - the lender will ultimately let them roll-over the shortfall at an extortionist interest rate. No different to a conventional loan default. To get the shares to repay the rollover & raise the $ to pay the interest, the shorter will be a heavy buyer of out-of-money calls - & seller of at-the-market puts. Buying in the shares will raise the share price, cause the calls to excercize, & deliver huge quantities of shares to the shorter which he can use to close his short position & escape further losses. The option market should show a rising open interest & more frequent trades as we get further from the short 'event'. It will seem more liquid when in fact it isn't. And if the lender bought a significant portion of the shares the borrower sold he will trap the short & essentially earn an arbitrage profit. .... almost identical to the mechanisms that were acting on FFH a few years back. SD

You might want to consider • Somebody had to lend them maybe 10-15% of the total shares o/s for an extended period of time. But the shorter still didn’t think that it was enough - or they would not have also shopped the idea. How many people own at least 15% of TRE? • To make it work the shorter needs to be a net seller all the way down, & in increasing volume. Somebody had to be on the buy side - & you cannot assume that they were not amongst those who lent the shares. Average cost/share just come down, & the position has gone overweight. • To mitigate the risk the shorter needs to be THE net buyer, & in quantity, when the market is attempting to decide the case. Should there be a competing buyer who just buys & holds, they will effectively draw down the artificially high float - & ensure that the shorter cannot cover their term share loan when it comes due. The cost of the loan goes to 20%+ & the option market in TRE suddenly starts to see lots of ‘liquidity’. • No shorter would do this unless they could cap their maximum loss. How many people could quietly give them an OTC call on sufficient quantity ? And why would a competing buyer at the bottom of the panic not be the same person who wrote the OTC call ? As the ‘Dune’ mantra goes; “Fear is the mind killer” SD

It is highly unlikely that there will any buybacks &/or divs. They have used their cashflow to take out the remaining debs, & remove the dilution & price cap that the conversion was imposing. Get over $5/share & the pool of buyers dramatically expands. More demand over a consolidated supply can only drive up the price, but if you want the shares - you now have to buy them out of the market. A desirable thing. If they get FDA approval & the fast-food contracts, the US plants will effectively be utilities with maybe 2/3 of their production earning a fixed spread. And if you are a fixed income fund investing in utilities, you will pretty much have to own FBK (US) because of the asset class diversification it offers. Building practical pressure to split the company. They would seem to be doing the right thing - let them get on with it ! SD

Most folks are not going to be covered as the possibility of a loss seemed to remote to warrant paying the premium. Then when it occurrs, they will be too poor to buy it after replacing the house. Net result is that most of the damages will bypass the market. The costly great white (or wind) combine claims are those from car/farm equipment dealers, as the inventory financing requires the stock to always be insured. For the most part, average Joe will swallow the bulk of the damage to avoid pushing their premiums up. Couple of claims with a lot of PR attached, but thats about it. SD

There are 2 Cdn Banks that like to offer 6 month 'visa account balance transfers' at 0.99% or less, provided you make the minimum payments. With a little shuffling you can use the banks own cash to buy its shares, & earn a dividend well above that 0.99% The other bank likes to offer 1 air-mile for every $ of interest paid on a LOC (mortgage, margin, etc.) A little shuffling to borrow to buy the banks higher yielding pref share, & you've got +ve carry & a free retun flight to Europe every other year And in both cases ..... the bank considers you an excellent customer ;D SD