SharperDingaan

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

Keep in mind that you read only what the press believes will sell in its local market. Those in Europe & Asia are not so sanguine. - The Wisconsin union rallies are only the beginning. They would not be occurring unless those states really were in trouble & cannot pay their bills. Politicians are not in the business of alienating large voting blocks.. - The North-African (& Arabian) regime changes are being driven by inflating food prices & high unemployment. The same thing is occurring in India, China, & Brazil – their poor just aren’t rioting yet because they have more hope. - The new IFRS reporting is going to disrupt Q1 reporting. For those with P&E - the headline is not going to be the strong Q1 earnings, it will be opening (& often materially negative) adjustment to retained earnings. - We know that the Saudi oil production has likely peaked (Wikipedia leaks), & that there is significant dissidence in Saudi (Bin-laden is actually Saudi). When oil is at 140+/barrel, most of the global economies are going to experience some pain. - Why buy now, when the goods may well be on sale within 3-6 months? SD

Not to put ideas in managements head, but …. - Selling St F is not the same as firing the people. It is the same plant, & the same people, they just work for somebody else. Everyone gets to stay in Quebec. - We all get paid for the power deal, all the green projects, & the future production – today. And that future CF is discounted at the lowest possible rate (maximizing todays asset value). - We’re left with 2 US plants, almost 50% of the RBK market, all the debt repaid (assumption), & a wad of leftover cash (assumption). We have strong incentive to change to a US coy, & elminate our Balance Sheet FX translation exposure. - We very likely have a share consolidation, a rebranding, a graceful change in the institutional ownership, & probably a RBK related acquisition financed with LT Debt. The ‘new’ FBK becomes a utility company doing recycling, & pays dividends at a rate that one might expect of a utility. Elegant, best use of capital & everyone gets what they want. SD

Couple of things to keep in mind: - Your nest-egg just gives you choices. You still have to decide what you want to do, & your choice today will be very different from your choice 10 yrs from now. - You don’t choose in a vacuum. It’s you & your spouse/significant others, & both sets of parents, & they all have to be comfortable with your choice. They have to live with you, & your consequences. - You retired, not your spouse/significant other. You do the long vacations on your own, because your spouse/significant other cannot, & it may well not be what they signed up for. - For most couples, the expectation is that they will retire within a few years of each other, and generally sometime after the kids have left home. No kids/teens underfoot, menopause & the mid-life crises are done, etc. Materially change this, & you may well be getting old by yourself. - Like it or not you will be judged. You retired early because you could, but most societies will just see someone who pissed away their opportunities when they were at the top of their game. You can change your game (do something you’re passionate about), but you can’t leave the court. - Work is not just the money, it’s the people you work with, the mental stimulation that goes with it, & the routine of 9-5. Independent wealth just lets you work for only part of the year, & bluntly tell off the occasional a**hole, but work is still a desirable thing. - Just as money is the servant, so is the job. Bhutan’s (Himalayan Alps) ‘Gross National Happiness’ measure is not as dumb as it sounds! SD

IV: The comparisom is that FBK's 36% IFRS based D/E ratio is higher than the 22% it was, but still a reasonable number, re Tembec's 36% GAAP based D/E. As Tembec also has plant that may incur similiar write-downs, it is highly likely that their IFRS D/E ratio is higher than their GAAP based D/E ratio as well. FBK's IFRS D/E Ratio may still be one of the lowest in the industry, but its still at a higher absolute level than most folks were expecting. Can't buy as much when you're allready loaded down - so you either have to sell something, or issue more equity. Our bias, & expectation, is that St Feliceon is going. SD

Under IFRS the only financial reason to keep an asset is because you think the future cash-flow from that asset will grow. You expect to make more widgets from it than planned, or to sell them at a higher average contribution margin than anticipated. Offsetting that windfall is how fast you can wear that asset out, & whether the future discount rate is likely to rise appreciably while you’re doing it. Pre IFRS you kept the asset as long as possible because it was a sunk cost, & the annual cost of holding it was only non-cash amortization. No out-of-pocket cash expense, & the plant was always ready to go anytime it could make a positive contribution margin. Most people would expect the discount rate to rise, at least 200-300bp over the next few years. Over & above the wear & tear - today’s plant will be worth substantially less simply because the cash-flow will discounted at a higher rate, unless production or margin increases significantly. In today’s low interest & high commodity price environment, these plants have to worth about as much as they will ever be. We should be selling. IFRS essentially makes operating assets financially behave like bonds – which is a different mindset. Expect some adjustment. SD

Re IFRS, P29 of the Q4-2010 MD&A: Assets will be written down on Jan 01/2011 by 139.7M because IFRS requires that you present value the assets future expected cash-flow to get to its recoverable value, today, & write-down to the lower of this amount, or book. It is essentially market value. The right hand column of the page shows the Jan 01/2011 Balance Sheet under IFRS. Notable is that the equity is only 283.6M, or a BV of $2.18/share. At $1.45/share FBK is trading at 66% of BV. The Debt/Equity Ratio is typically calculated as [(LTD - cash & equivalents)/Equity] x 100. On January 01, 2011 this will be 35.16% [(118.8-19.1)/283.6]x100 which is the same as Tembec (P32 of the Investor Presentation). End of day, the Balance Sheet is conservatively valued, & any offer for plant at replacement value will generate a material gain. SD

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