SharperDingaan

Just to stir the pot. There is an interesting article in the Jan/Feb 2011 FAJ entitled the ABCs of Hedge Funds: Alphas, Betas, and Costs. Notable points are 1) Median fee is 1.5% + 20% incentive fee, 2) 2 in 3 hedge funds cease to exist < 10 yrs of posting results, 3) Survivorship Bias (only get the winners results) is around 5.1%, 4) Backfill bias (only start posting when you have good history) is around 2.05%, 5)Average Alpha is roughly 3% - but up to 80% of it may be nothing more than momentum (ie: Beta) In short, you need to deduct 8.7% (5.1%+2.05%+1.5%) from a HF return just to eliminate the bias & fees. You also pay the HF outlandishly for their Alpha (ie: long-short gains), & it would appear that most of it (per the universe of HFs) is bull. Given that HFs are consistent targets for most regulators in their ‘new orders’, & that if you can’t beat them – join them; A) How do you short specific types of HF ? B) How do you short the HF industry itself ? C) Why is there no ‘standard’ lot for what would clearly be very profitable ? If you’re the regulator, you can control the industry by simply shorting it - or individual HFs within it. Muscular regulation that results in the regulator &/or central bank getting paid for it if the HF fails, or closes? If the private XYZ HF takes a run at you, all you can do to preserve value is buy puts on your own shares – which XYZ is selling to you. Why can you not do the same thing on XYZ HF? SD

This is where the long view counts. Lots of sovereigns have defaulted in the last 50 yrs or so, & almost all had the same experience. It took a while, but the market started lending them money again, & those original bond holders ended up with what were really equity sweeteners (zero-coupon future dated PIK, etc). Worst case. Greece gets ejected from EuroLand, takes back the Drachma, & tells you that they'll repay 40% of the principal of your Euro Backed bond in Drachma -10 yrs from its maturity date. The trader will take the deal, dump the Drachma bond, & be thankful they're out. The value investor would buy the Drachma bond at 30-50% off its intrinsic value, & buy a greek villa at 20-40% off the market value - financed with a Drachma denominated mortgage equal to the FV of the drachma bond. You get your villa today & a interest only 'rent' cost for 10yrs - that is getting cheaper each month (drachma devaluing). End of yr 10 you pay off the morgage with the proceeeds from your drachma bond. The riviera life style year round for maybe 1/2 the cost of a California condo ? SD

All that happens is that the BS & opening equity gets adjusted downwards. They have allready disclosed how much & where the adjustments will be. Because they wrote down plant there is less to depreciate, so most would expect quarterly depreciation from 01/01/2011 onwards to be lower than the previous run-rate. Improved profitability. SD

NPO's are governed by local state law, but most will follow the same principles. As with any liquidation, asset proceeds pay off liabilities in order of seniority. Any surplus goes to repaying the granters of their various endowments (equity equivalent). In a bankruptcy the liabilities > proceeds, & there will be no return of funds. Sale & leaseback of an asset (ie: hospital wing & all related content) is common practice. Usually the result of either 1) bankers pressing for repayment of outstanding loans, 2) the hospital has a funding commitment that it cannot meet from its endowment structures, or 3) the hospital is expanding & this is funding their portion of some partnership agreement. [Googel P3 partnerships] Given that the state is California, its probably 1) or 2) SD

Makes a good story but no different to your office pool winning the lottery. If you don't have a ticket - quit the whining & get over it! The reality is that there will be a industry demutualizaton. As with the LifeCo's; time limited regulatory protection post demutualization, time limited restrictions on the funds (capital requirements), & a lot of whine because of player containment. When the protection ends there will be consolidation. While those without mutual policy holders may be lunch for those with them, its not a done deal. SD

P (04/08/2011) = 377.99 B (12/31/2010) = 379.46 P/B =1.0x We know the P/B is seasonal for FFH, usually at its peak around the AGM, & it seldom goes > 1.05-1.10x It is very likely that Japan will result in one of the largest reinsurance losses in history. Odyssey Re is in this business, so what are the odds? To provision you have to estimate the total cost to repair. How accurate can you really expect to be at this point? Most would expect the current industry multiple to decline at least 5-10% once the estimates start arriving. FFH gets discounted more heavily because of its investment vs UW source of revenue. Assume a provisioning that drops BV 25 to 354 & a P/B of .9x. Price drops 61 (16%) to around 318 Nothing to do with FFH fundamentals, just the tide falling SD

Keep in mind that its not just CAD strengthening, its also the USD weakening. A 12% increase in CAD fundamentals, & a 13% worsening in the US position - is a 25% total change. Plus side: Rising demand as a reserve currency against anticipated home currency devaluation Cdn oil/gas replacing ME oil/gas. Secular volume & price increase in CAD demand Aggressive BoC will hike rates to quell inflation. Higher rates on Canada's pulling in more CAD demand Most sectors are now at/near pre-recession levels Higher CAD lowers the cost of imports & inflation Minus side: Pending US muni-debt crunch. Flight out of US investment. USD oversupply US inability to raise rates without blowing the recovery. USD outflows going to higher yields elsewhere QE3 +++. USD oversupply. SD

"How much higher do board members see the CAN$ going?" We expect $1.15-$1.30 within 18-30 months - primarily from rising oil/gas prices, & export volumes, driving up CAD demand. We also expect rate hikes to kill off inflation (increasing CAD demand to buy Canada's) but it should be dampened somewhat by the higher CAD (lowering the CAD price of food imports). Ontario/Quebec is not that big a problem. Just let the FX rate rise slowly, & offer tax incentives to replace equipment &/or set up service industry in the provinces. These are borderline line 'have-not' provinces, & workforce aging is allready rapidly reducing the labour pool. With a potential 25% CAD appreciation - dominant USD revenue streams, or USD denominated equity, has to be a concern. If you can hold until CAD returns to parity you will not be affected ..... but it could be a very long time. SD

Tax treatment differs north of the border. Everything is 'deemed' to have been sold on the day you died, whether it was actually sold or not. While in probate the resultant tax, funeral, accounting & legal bills, etc. are paid by the estate, following which the residual is distributed to the heirs. If there is insufficient liquidity (unlikely if there's life insurance) estate assets are sold off to raise the necessary cash. You receive the asset at market value, & the estate takes the tax hit. Obviously there is room for tax planning, but the taxman still gets his lb of flesh. SD

The object of the tax is to trigger accumulated unrealized gains/losses, not redistribute the wealth. The "inheritance tax" is the subsidy you've been receiving each year because you've been able to defer the asset sale. The resentment is because the subsidy became an entitlement, paying it back was never really in the plan, & the 'heirs' are going to get less because of it. The retain/sell decision is your heir's, not yours. SD

We’ll be the heretic …. You die, your estate sells all your assets & ends your tax deferrals … as they are your assets & liabilities, not your kids. Calculate tax the normal way & the “inheritance” tax is what your estate paid the year you died – less what you paid the previous year. Great grandpa passed along the farm in 1935 (depression valuation) & you pass it to a grandkid in 1990 – 55 years later (your ghost reads this board). Nothing but rocks & a hay crop once/yr. Except …. This farm is now in the city which has grown up all around it (bubble valuation). Highest & best use is to plant condos on it (assuming you can sell them). Lots of jobs, & short/long-term economic activity for all …. but nothing can happen until you plant. Grandpa, dad, & I are farmers … it’s what we do … this is where we farm! … it’s good land!! It may well be. But the fact is you would be better off selling that high priced high quality land, buying similar but lower priced quality elsewhere, & investing the difference in machinery to help you farm better, more effectively, etc. If the estate does not want to sell it can borrow against the land to pay the tax, & pass both the land & the debt on to you. The cash debt service cost is the monthly cost of your decision. Time/progress moves on; if you want to stop it - you have to pay for the privilege. SD

" So my question is why is a house on a small lake in Canada worth more than one on the ocean in California? pricing is wrong somewhere...my" Earthquakes. That beachfront property could vanish into the ocean, & the cliffside property could well fall off that cliff. Total write-off if it occurrs, & lots of TV coverage to prove that it can/will occurr. State of California finances. If taxation doubles because they need the money, you cant pick up your house & go someplace else. Increase the cost of ownership, & you're carrying a smaller mortgage. Add in Canadas free health care as you age, & a generally lower cost of living (fewer restaurants, shows, etc.) .... & the numbers start to rapidly change. Vacancy/foreclosures,etc. Maybe 1 in 5 houses on your block ? or neighbourhoods in your city? Pack everyone together & it's noticeable - plus the guy breaking in doesn't have to walk far to the next one. If the next house is on the other side of the lake .... its a lot more work. Potential + live vs visit. Eye of the beholder, but you can always add another/better house around that lake ... not so much if there's allready a house there. Yes, the pricing may be off a little, but its really telling you just how bad a shape California is in. If you think that it may take a long while for California to come back, shovelling the snow off your rock doesn't look so bad. SD

It does not hurt to stay until you at least see the Q1 results. SD

Keep in mind: Boomer retirement. If you were born in the 60's you are the apex of the baby boomers, & in your 50's. In 10-15 yrs you will be retiring & selling your mansion to downsize - but who are you going to sell it to? If if takes 10 yrs to work off the existing cheap inventory, boomer net selling will be just in time to ensure that pricing stays low - for an additional 10 yrs. Great if you want to live in the place, not so hot if it was supposed to be an investment. Vacation home. Add up the property tax, upkeep & maintenance costs, driving cost to/from, & divide by maybe the 3 weeks/yr you use it? For most folks the cost/day is > the cost of a hotel room - which could be anywhere vs the same place year after year. To work - this has to be either an investment, or your future retirement home. If there's questionable appreciation, it can only be a transitional thing. Inflation/deflation. We all hope its inflation, but if we're wrong ? Inflation is too much money chasing the same supply of goods - but it assumes that everyone still wants those goods. If you allready have what you need/want (or are buying the 'experience' vs 'goods') you're not buying those goods, & have just increased the supply of those goods for everyone else - making inflation harder to achieve. Recent retirees 'keep up with the Jones's' by buying cruises - not houses - & they're selling houses (downsizing) to pay for those cruises. With multiple hits against inflation, & in rising numbers, how do you get inflation ? Demographic. Young growing families buy new/bigger houses, aging ones sell. To get housing inflation when more are selling than buying, you have to be where those other sellers want to live - ie living in a local bubble. You also need the right kind of dwelling - if you aren't as mobile anymore you want a large & swank apartment, with someone else to shovel the snow &/or do the maintainance; not the multi-level townhouse &/or condo. Obviously bubbles do exist; Vancouver, California, Hong Kong, etc. but there aren't many of them. If your 2nd/3rd home is the right kind of dwelling, & located in a bubble - all the power to you. But if it is not, expect tears. SD

Keep in mind that much of the Cdn/US difference is structural 1) US mortgages are often non-recourse, in Canada its recourse. Walk away from your house & we'll take your savings, car, etc. until your debt is fully repaid. 2) Cdn mortgage interest is not tax deductible. As there is no government subsidy to help you carry the maximum mortgage possible, you will carry a lower balance than your US counterpart. 3) Cdn gains on a housing sale are tax free, in the US they are not. In the US a $ is a $, in Canada you're paid to hold your property - substantially reducing your risk. 4) Cdn regulation is much more robust than the US, which materially reduces the extremes There is still abuse on both sides of the border (house as a ATM, inflated valuation, etc.) but its much easier to deal with it north of the border. SD

A demultualization is the policy holders receiving shares & the P&C's treasury almost always doing an equity issue to provide the market float. A parent has no say if it agrees to demutualize a P&C sub, & can only offer to buy back the shares (at a control premium) if it wants to go back to 100% ownership. A parent also cannot reject demutualization when the P&C's competitors are doing it - as to do so will force the parent to put up the additional capital, vs the public. The P&C will get the new capital, the value of all P&C's will temporarily rise, & UW profitability of most P&C's will drop as participants price down to vie for market share. Buy, sell, & hold are all possibilities. In fairness to other board members who are in the industry, other than highlighting the pending development, we would prefer than all do own their DD. SD

Very likely more than a passing interest for one or two of the companies on this board! As always, do your own DD http://www.canadianunderwriter.ca/issues/story.aspx?aid=1000405671 http://www.insurance-canada.ca/business/canada/2010/Economical-Mututal-Intention-Demutualize-1012.php SD

Your broker is suggesting to you that you re-purchased these things within 3-6 months of selling them, which you haven't disclosed. SD

Look at the latest investor presentation deck. How much came from pension adjustment & property revaluation. Statement on 2011 earnings. Understanding the conglomerate business model, & Jardine's place within it, will take you a long way. Investment in BrasCan (Cda), Canadian Pacific (Cda), HK Bank (Hong Kong), DeBeers (S/Africa), GE (US), etc. works on very similar principles. 1 company, that is the economy of the region. To do well you must fully understand currencies (spot vs PPP), index arbitrage, & be prepared to hold for the long haul (P/E paid reduces by the compounding growth rate differential [(1+(g.asia -g.home)^n])). Not for the faint of heart. SD

BOJ pumped 85.5B USD (Yen equivalent) into their economy yesterday, & most see it as just the 1st round. 95% of japanese debt is funded by japanese savers, who are about to start spending those savings en masse. Where did they get the 85.5B from ? & where are they going to get the money to roll over the existing debt ? The global cost of funding just went up, & dramatically, as borrowers are about to experience crowding out. Japan drops 20% & the Dow hardly reacts at all ? Spain gets downgraded (credit crisis), Bahrain (Oil) occupied, & global diesel fuel supplies get severely restricted (Libyan oil) ? & the Dow falls only modestly ? Most would suggest its denial, & the same sort of denial that couldn't recognize that US mortgages were collapsing. We are globally linked. Why would drops in Asian markets not feed into Europe, then the US, & back into Asia ? SD

Wait untill after friday prayers & the day of rage highlights just how weak Saudi & Bahrain really are. Everybody & his/her uncle will suddenly fall back in love with producers at $120+ oil ...... :P SD

You should note that selling down a position, is not the same as selling out of a position - we still hold a high weighting in FBK. The funds were moved into PD for diversification & a more reliable chance of doubling. SD

"He likely bought our shares...we have sold half our position...we see better opps elsewhere...nice to see management out their money where their mouth is..." So you were the other guy that was selling at the same time we were! .... We reached a similar conclusion & have taken our gain to date off the table. SD

Keep in mind that investments are just that. They are servants to the core business of insurance, & exist to earn a return above the cost of float. - Return is not cashflow. These investments exist to provide cash in times of need, so they need to be either liquid or paying a dividend. You get paid to give up liquidity, & you don’t wait ‘forever’ to test if you can actually exit. - An investment is < 20%. Go much over that & the tail wags the dog, as accounting forces recognition that this supposed ‘investment’ has really now become an indirectly controlled sub. - Size matters, & the bigger you are the more the game changes. The prudent buy out insurance books, put the float into long-term infrastructure (utilities), & earn a reliable cash spread. They don’t need/or want the risks of growth anymore. The reality is that FFH’s significant investments are venture capital investing, & they require a different mind-set/approach to do well. They really need to put them into a separate & independent sub, take back an annual cash dividend, & give their talent a more hands-on opportunity. SD

"I agree with you on most of the rest. Also what large companies / industries are switching to IFRS?" - Every publicly listed company in Canada was required to move to IFRS accounting commencing January 01, 2011. With most Cdn miners, foresty, oil/gas, tech, & manufacturing plants having material P&E (or equivalent); what do you think is likely to occurr when most of Corporate Canada reports an opening equity adjustment (assume its negative) - at the same time ? "SD I think you are dead wrong on Wisconsin". Agreed there is a political element; but very large numbers are going to see reduced work-weeks &/or lay-offs unless they agree to changes, & are states/municipalities really in a position to foreclose on property owners (& make it worse) - just because they didn't pay their taxes that were increased by 10%? Public sector 'austerity' cuts in the UK, Ireland, Spain, etc have beeen in the 10-20% range, & workers get paid in cash - not IOU's. Politicians trying to get re-elected are going to try to be seen doing whatever they can, & as early as they can. Lots of nice companies out there - but when the above happens. most would think that they are going to be on sale SD