SharperDingaan

The sell rating and concurrent insider buying is probably not wholly accidental. SD

HTM are bonds valued at cost + any ongoing amortization if you're holding zeros (or coupon bonds no longer paying interest). There is only a gain/loss when the bond matures at 100, or the bond is sold/transferred to HFS (deemed sale). The HTM portfolio probably exchanged the better quality bonds for whatever the HFS couldn't dump, & restructured whatever was about to default bonds into long term zeros. The HTM number is probably high relative to what it iniatially was. The HFS is high because it has the best of both portfolios in it. Were there a 10% drop in the HFS portfolio, the whole delta would hit their P&L immediately. A hit big enough to really screw up their day? SD

Banks are required to mark the Held For Sale portfolio to market with the mark going directly to income. You hold these things for trading, so if you screw up - you take the P&L hit & reduce your equity immediately. The value of the loans is what someone else is willing to pay for them, not what you'd like it to be. I sell you my bad loans for X, & agree to buy your bad loans for X. We both have a valuation sale & no cash changed hands, but neither of us will trade as we dont believe each other. Instead we'll each sell some of our bad loans to the fed in return for cash & slightly better quality bad loans. The fed takes the bottom tranche of credit risk & pushes out cash that gets reinvested in T-Bills. Each banks average loan quality & T-Bill holding rises, which reduces their capital requirement & leverage ratio. Deleveraging. If the banks take a collective material writedown (ie: foreclosure mess) the process stalls & leverage ratios abruptly climb. To get the ratio back down, the banks need a collective equity issue equal to writedown. SD

Keep in mind that if you buy & hold, a 10% return just means a double every 8 yrs. Any interim dividend receipt or inflation experience simply drives the future value up quicker, reduces the time to double, & increases the compound return. All of which is gravy. Do nothing but buy good quality equities, cheaply, and hedge on an ongoing basis against a material downturn - & you're almost guaranteed a double within 5 yrs (14.87% ROI). Longleafs inflation + 10% is pretty conservative. Same thing with Prems 15% target. The real elegance is in what happens to these portfolios if there is an extended period of asset deflation & consumer price inflation. SD

Very noticable is the distinction in timing; < 2yrs, & > 6-10yrs with different strategies for each. Overweight cash by repaying/terming out debt (ie: FFH), buying back shares (ie: FFH buy-ins of minority positions), or returning original capital (ie: Klarman/Baupost). Get that cash by selling into the rally, & selling puts (ie: FFH CDS swaps & S&P hedges) to profit on the way down. Cash is off BS - via a stronger financial position & exchange traded derivatives (with the fed indirectly backing the exchange). Add to the minority stakes in the developing world by using the exit disruption generated from hot vs cold money arbitrage. Elegant. If you can buy cheaply & hold, renewable commodities are clearly where it is at (ie: FFH holdings of FBK & Abitibi). Explains the FFH approach over FBK & early last years decision to learn the oil/gas business. SD

You might want to consider why the fed felt that it still had to do QE2 - as it is highly likely that they would have been fully aware of the firestorm that it would set off. We woud suggest that the foreclosure moratorium & state/municipal budget setting, are going to generate ugly surprizes in Q4/Q1, big enough to force many back to the well for additional capital. When even sovereigns cannot afford to roll their debt at 5%, what do you think will happen if some of the US states cannot do it ether? QE2 or a PIIGS type crisis on US soil - just when many have to go back to market? Which is the least damaging? Import prices will go up (by FX devaluation &/or cost push inflation), import volume will fall, Americans will pay more for their goods, & their current account gap will fall. That said - less things bought, & more local buying employing more local people, is not such a bad thing. SD

Analysts are under pressure to get a flash report out, & get their name on the conference call record. AR & QR docs are scanned, numbers are cherry picked & dropped into models - if it doesn't 'fit' the model it doesn't get plugged in. (FBK 10M/yr wood-chip future woodchip saving). The result is volatile trading & shallow questions on earnings day. A more detailed report, & a clear recommendation, is expected within 2 days. Initially property of the favoured few, then spun out to broader & broader audiences. Recommendations become part of the analysts track record. The result is typically a price rise that plateaus at a level sustained by the broadening buying. Manipulation is part of the business. Bad-mouth on earnings day to drop the price, buy in inventory, & make your recommendation look better. Report distribution is essentially market skimming via premium, market, & discount pricing. Play the game or you're fired. SD

3 considerations: - You really want to be holding something stable in a petro-currency, & let Euro devaluation against that currency boost your return. A Cdn Sched-A bank, or dominant life insurer, should head your list (ie: 8 names) - If you must stay in Europe you want a beat-up government backed vehicle, where your bigger risk is dilution vs bankruptcy. The expectation is that the company will look very different < 2-4 yrs. BP makes good sense, similar thing for the major german industrials, & the spanish bank. - If you're restricted to Europe, & low risk, buying a concentration in almost any one or two european majors will do - provided you roll in your purchase over a 1-3yr period. The expectation is that at least some of your buys will be good ones, & the major will eventually either buy out somebody - or get bought out. SD

Bottom line: Management had a great story & screwed up. In the modern era investor relations is a functional requirement - no different to marketing, human resources, or accounting. They need to get over it. - When was the last time you saw FBK make an industry presentation? & why do I NOT see a NEW power point deck on the website every quarter? Or do we only hear from them, when they want something? - When was the last time you saw annual EBITA guidance on a quarterly basis? Yes it’s an estimate, not industry ‘practice’, & you have to explain actual vs forecast differences – but why is that so wrong? Standard practice for budgeting. - When was the last time you saw them regularly consult their fellow owners - when they weren’t in trouble? Jean Guy may be great at running the bush lots, but he doesn’t work in isolation. Actual Q3 results were quite good. - At 130.1M shares & 1.25/share; shares are pricing at 2.9x trailing 1 year EBITA (.4, 15.1, 20.8, 19.8). If 2010 results YTD are representative for the next year - base EBITA is 74M (15.1+20.8+19.8)*4/3 ... but add 10M in wood chip savings (announced Q3) & 3M in cost/financing savings (announced Q1, Q2). Forward 1 yr EBITA is approx 87M. - If Investor Relations does no worse & the EBITA multiple remains at 2.9x, the forward price is about $1.95 (2.9x87/130.1). In line with recent postings on the stockhouse board. - If Investor Relations does better (Deb retirement, EBITA guidance, road shows, etc) & the EBITA multiple goes to 3.5x, the forward price is at least $2.34 (3.5x87/130.1). 132% above the $1.01 rights issue price Earnings trading. - The rational institutional trade is buy CFX, move to UFX, Sell FBK, Sell UFX, Buy FBK. The trade should be buy CFC, move to UFX, move to FBK, sell FBK. Either way, FBK has a high volume day following the announcement – which is what we saw. - The rational retail trade is sell FBK & take the gain – also what we saw. Needless to say, we’re the irrational retail that buys when others sell. SD

I also come from an engineering backround (petroleum) & have the CFA. The CFA should be looked on the same way as engineering courses - lots of theory & mathematics, & light on application; but without the background you really can't do anything. You learn application by getting out into the field, & being forced to figure out how to do something with squat. The result is many possible solutions. Every profession has its propaganda & the CFA is no different; you just don't have to follow the herd. A securities analyst with a CFA might aspire to become a PM and/or fund partner. A PEng with a CFA might aspire to be the CFO partner within an engineering firm. Different strokes. Once you have the technical, you'll probably get the most value by looking at the styles of WEB, Soros, etc. & ensuring that you include a heavy leavening of Indian, Asian, & Middle Eastern names in the mix. It's also helpful to travel to those countries to get a sense of their conditions. Western culture is just one of the many pimples on the arse of the world! SD

The zero coupon is a lot more elegant than you think. At inception, the unearned zero interest is non-cash equity limiting risk & reducing the D/E ratio. Going forward, if nothing happens the zero's BV increases 6%, but is offset with positive earnings - increasing the D/E ratio going forward & return/$ invested. If something goes wrong both their earnings & the zero's BV decline by the same amount, decreasing the D/E ratio. Subtle, & elegant SD

Keep in mind that valuation reflects overly low revenue estimates, discounts the effect of operating & interest savings (approx 1M+/qtr), & is not recognizing co-generation expense capitalization. Most folks will have discounted the estimated NBSK market price received with a 15-20% discount off the list price, & will not recognize the operating/interest savings until they actually see them. Obviously if you think differently, there is some earning upside. To move up we really need the P/E multiple to rise. ie: 1) rising confidence in earnings predictability, 2) disclosure on the new material ownership positions (where did the new rights shares actually go?), 3) management maturity, & 4) credible guidance around 2011 business objectives (debs repaid with cash/shares?, acquisition/divestment?, etc.). When the result is material outcomes, a mature management should be disclosing the broadbrush intent & not hiding behind the corporate veil. It is because management has not spoken up - that FBK trades as a bankrupt ... as why on earth should I pony up when mgmt cannot evidence that it even has a plan ? SD

Think in terms of recovering a fixed $ investment over time. Over time either you get paid a quarterly cash yield, or you hold the same share count for a lower total investment. Lower your cost by trading your position - sell 50% of a position to repurchase later & you’ve hedged. Hedging a margined security at 50% margin is particularly effective - guess correctly & on the way up you have 2x the gain, on the way down 1x the loss. Trade successfully & you will recover your entire fixed $ investment, earn a healthy cash yield on the $ investment deployed, & still hold the shares. Reinvesting the recovered $ investment in a Treasury/Canada/Guilt removes the casino effect (reinvesting the gains to double the share count), & creates a low risk synthetic convertible. Reinvest recovered investment $ in mortgage prepayments & you’ve maximized after-tax cash return. Time & volatility become your friends. SD

Sell part of the postion into strength & buy it back on weakness. Share remains the same but there is a realized gain/(loss) less two commissions. SD

Keep in mind that to make a return on FBK you really need to trade & hedge; not buy & sell. Worst case is that someone takes a run at them & your position is less than it usually is. SD

Re MFC: Most people would look at the quarter/quarter change in the S&P500,TOPIX,TSX, & the US 10yr treasury. Multiply the deltas by the sensitivities quoted in the last MD&A, & you get a nice surprize. Assume the LTCI loss is around the 900M expected, which just happens to be the MTM proceeds. If 1B+ in MTM suddenly showed up?, or the loss was actually lower than expected?, what might you expect to occurr? SD

Keep your cash in T-Bills untill the muni offers a deal that you really cannot refuse. Spain has 20% 'official' unemployment, all the major banks have been forcibly consolidated into just 1 bank, & the state has been forced to impose austerity measures. Not much different from California. The result has been rioting. http://www.telegraph.co.uk/travel/destinations/europe/spain/8032647/General-strike-in-Spain-to-protest-against-austerity-measures.html Rioting/social unrest is not confined to just Spain. http://www.telegraph.co.uk/finance/economics/8036438/Global-employment-crisis-will-stir-social-unrest-warns-UN-agency.html And even the major countries have been forced to bow to IMF restrictions. http://www.telegraph.co.uk/finance/economics/8028170/IMF-backs-austerity-plan-UK-on-the-mend.html If you're a cash strapped Muni there are only 3 choices. 1) Buy enough blanket credit default insurance on your debt to cover your rollover exposure, 2) Pay cash interest only (guaranteed by the fed) but not principal, or 3) Default & replace with long-term zero coupon scrip (guaranteed by the fed). If our muni does any one of these, they will have to offer you a lot more return. All you have to do is wait for 2-3 significant muni’s in the entire US to start the trend, & the media will do the rest. The fed (guaranteed T-Bill) will even pay you to wait. SD

Keep in mind that NW is not really representative: Give an idiot 1M, & you still have an idiot. The guy who saved 100K the hard way is actually the wealthier. The real metric is investment maturity. SD

250M @ 5% is a give away. Good on them. SD

T&T: We're on the same page for 2010, but the razor is 2011. Do nothing & you`ll probably net out ahead. Bet the wrong way, & you could get whiplashed. SD

Most would agreed that FBK is probably not going to have any difficulty meeting the SGF covenant, or be buying out Debs before 2011. Most would also expect that for the rest of 2010 - its show me the money, & that the D/E ratio is continuing to fall. Imagine that the Deb gets repaid in stock, & the interest in cash - a reasonable possibility as from Day 1 the intent behind the Deb has always been to repay the debt via an equity issue [whether by conversion or otherwise]. Assume $1/share (for easy calcs) - D/E drops drastically, & share count goes to 180M from 130M [ie: 38% dilution]. Add 50M to the 06/30/2010 equity, divide by 180M, & you get a BV of approx 2.74 -still above mgmts [re]adjusted option strike, but a lot more reasonable. Then imagine they bought fiber via an acquisition, paid with ST debt, & consolidated at > 2:1. They would be back > the minimum $5/share for institutional ownership, with a low share count to boost P/E [< the 90M they started with], have re-established control over their costs, have done it largely independently of market forces, & ended up in a highly favourable position to term out the debt at very low rates if the economy suffered a temporary relapse. Far to elegant for FBK to come up with - but about par for FFH? SD

Before looking at dividends, buybacks, etc. you might want to look a little closer at the terms of the Deb and managements emphasis since the rights offering. SD

Very nice to see.

Keep in mind that 73% of everyone other than FFH took up the subscription at $1.01 - & if anyone was arbitraging the shares their buyer paid more than $1.01 (ie: a premium). Those were institutions, & trading volume since then indicates they haven't changed their position. If those 'other' shares were arbitraged (highly likely with roughly 23.3M shares) a potential 18% position has collected in somebody elses hands, & the existing institutions have agreed to their presence. FBK has not suddenly become stupid. SD

Be wary of 'long-term' oil vs gas, especially in the US. Gas is very simple to synthesize from coal, portable, green, & there is far more coal than gas in the US. The price for both oil & gas will enevitably rise as shortages periodically occurr, but the gas price is essentially capped at the marginal cost of gassification. Improving technology, & rising volume will drive that marginal cost down. We got the IC engine because its 'fuel' was incredibly cheap, abundant, & fairly easy to get at. Gas was just the sh1te hazardous by-product that you burnt off for safety reasons. Today gas is the cheap fuel, gassy companies are increasingly often worth than oily companies at times, & the whole world pretty much runs on it (power stations, heating, infrastructure etc). Gas is a silent energy 'game changer' that is often overshadowed by its sexier & greener cousins. That said, volatility is the norm, so not for the faint of heart. SD