SharperDingaan

Might we suggest waiting untill we actually see the peliminary prospectus (Sedar, website, etc). All that we actually know is that it has been a work-in-process, it now appears to be complete, & we should see the actual details in a day or so. SD

Uccmal: You might want to sell down some Leaps & go long common on a margined basis once we know the outcome of hurricane season. Yes you give up some leverage, & hedging does have a cost, but does it really matter if the whole industry is down 15-20%? SD

Keep in mind that you're really making 3 bets here; The euro players include an FX bet that the Euro will be stronger on repatriation than it is today: ie, a great return on Sanofi could turn into a loss if the Euro materially worsened. If you dont want this risk its US makers only. It makes more sense to allocate > 5% to the sector, & 1 name; a long term warrant, option, convertible that limits the $ investment or reduces the risk. Your premise is that the entire sector will improve; to get a bad result, the individual maker has to perform materially below the average for the group. Somewhat unlikely. 5% spread over 2-3 names is minimally different to the typical index fund. To make it worthwhile you need to do materially better than the indexer to cover your additional cost; if you just do the same as the indexer that is highly unlikely. SD

Couple of possibilities: All CDS's have a maturity date, most don't go more than 6 yrs, they still have the TARP funds, its getting on 2 yrs since the bailout. If 1/3 of the exposure has matured the remaining 2/3 now has 50% more liquidity coverage - significantly reducing the overall risk. MTM's are materially better today than they were when TARP funds were released, even post Euroland disruption. Much of the difference is quasi-permanent, & effectively additional equity; not part of the leverage formula, but acting as though it were - significantly reducing the overall risk. Sell an asset at its MTM, there is no impact on BV - but the remaining assets have more equity backing them, & leverage declines. Swapping debt for an asset spinoff, is the same thing but cheaper. A $ of operating loss produces less of a NI loss - significantly reducing the overall risk. If Katrina II shows up tomorrow what really happens. TARP 'maturities' get pushed out, additional $ get injected, the payout drain essentially flows up to the US Fed - significantly reducing the overall risk. What's left? Lots of potential gain for comparitively little risk - if you have the tolerance. SD

There are at least 5 longer term secular trends: (1) More digital & less print advertising reducing global paper demand (2) More consumer packaging in the developing world increasing global demand (3) Rising fibre costs as trees become worth more alive (carbon credits) (4) Municipally driven green substitution to paper versus plastic packaging (rising landfill fees) raising global demand (5) Rising environmental focus on transport costs/energy usage increasing the premium on nearness. The short game is P&P consolidation into vertical integration - & size matters. Fewer, bigger & greener plants, & multiple ‘other’ income streams. Volume to spread the FC over, & income from both electricity generation & the sale of annual carbon credits. The long game is the paper recycling business, but very different from today. Essentially a few local plants, drawing their SOP from nearby cities, & part of the urban waste collection system. Market rate for the SOP, less a municipally paid disposal fee. Production going primarily to low quality packaging & grocery bags. The plants themselves acting very like utilities in public/private partnership. Obviously we think the NBSK plants should go. They are very good plants, & run by very capable people, but we just don’t think that SFK is really capable enough to give them the support that they really need to move forward. Selling to a US buyer - or diluting to a smaller stake in a much larger but independent entity, makes far more sense. SD

Its worth thinking of the see-saw. Large numbers of fairly well capitalized carriers on one end, all collegially doing the same thing, & progressively moving closer to the fulcrum. Increasing, & additional, risks on the other side moving further from the fulcrum. A small change on either side, producing a disproportional effect. SD

Just to stir the pot! We think it'll be somewhere around .75-.85x BV, with a downward/neutral bias vs upward - & by late October/early November; we also have our full position hedged. An illuminating exercize is to compare the closing price 2 weeks following an earnings release/to the reported BV, for each of the last 20 quarters (5 yrs). Then graph & add the significant events that were occurring at the various times. When Katrina hit the multiple was around .7x We have the gulf coast full of oil slick, its warming up the sea (raising hurricane severity), we're coming into the hurricane season, & the head of Lloyds has pointed out that the industry is unduly stressed. High payouts funded by suddenly less liquid assets (eurobond investments) & delayed reimbursements (BP), is not a good combination in an average year .. & if this turns out to be an above average year? Hopefully it doesn't happen. SD

You might want to listen to what the head of Lloyds has just told you. (1) This "perfect storm" will lower all boats; & do it very quickly if there is even just 'average' hurricane damage in the US Gulf Coast (2) All P&C carriers should expect to trade at lower multiples by year-end. Then keep in mind that oil slicks heat up sea water by absorbing more of the solar gain; & that the warmer the water, the stronger the seasonal hurricane. SD

Nice to see the insider buying just after we rolled some of our debs into additional common ;D Good catch, gordoffh SD

Keep in mind that GS common is only attractive - if its future actually looks something like its past. The current financial reforms are changing the playing field, & most folks would expect multiple rounds of reform versus just one round. We know there are clear conflicts within this firm, those conflicts are representative of the street, and regulators need an example. We know that GS made a trading profit on every day of Q1, at the same time that many of the trading calls they gave their clients went south. Most would suggest the either the GS 'house' calls were better than they were giving their clients (so what were their clients paying for), or GS was betting against their clients (by breaking client confidentiality, &/or insider trading against their clients positions). We know that the extraordinary accomplishment also occurred while GS was undergoing an SEC originated criminal probe of broadly similar circumstances, & that GS has chosen a negotiated settlement with penalties alleged to be $1B+. If GS is broken up, as part of an industry restructuring, prior metrics are pretty meaningless. The good news is that it threatens the PAR repayment certainty of the prefs; driving up yield & magnifying the volatility. The offset is market rate resets that put a floor value under the pref. SD

The % is principal based vs codified. Would a prudent person deem your ownership % a material consideration (disclose) or an investment (don't disclose)? Own >5% of a Sched-A Bank, major life insurer, & you'd probably want to voluntarily disclose (or risk OSFI making the institution involuntarily disclose it). In most other cases about 10%, subject to whatever you're allready disclosing in your own literature. SD

You might want to consider that we don't measure 'opportunity cost', & we don't pay our advisor for it. We pay only for realized & unrealized (MTM) gains. Opportunity cost is nice but if you ultimately didn't invest in the opportunity - what's the point SD

We need to recognize that the RBK plants were an opportune investment, but they don't really reach their full potential within a cross-border ownership structure. They would be better off under a US buyer, & SFK wouldn't have the debt load - or ongoing quarterly FX impact. The real question is what is the highest & best use for the NBSK plant. (1) Buy up woodlots to drop the fibre costs & operate as stand-alone plant ? or (2) Vertically integrate into another Cdn producer at the top of the cycle ? Long term, vertical integration is a lot more certain & less risky. We know there are moving parts, they have master capital allocators behind them, its a small community, & mgmt is incentivized to get over $3.50-$5.00. There is growing evidence of share movement into stronger hands (todays early trading), & increasing conviction that Q2 may well be a blowout. SD

You might want to think these through.... As a NA investor we recently looked at NBG versus a dominant European property firm; an 8 yr euro holding, over different ends of a higher risk spectrum. We found that it was effectively a bet on macro events. For NBG: (1) Continuing & worsening Euro disruption, (2) Euroland restructuring & sovereign ejections (Greece), (3) Successful capital controls & loan principal redenomination, (4) Bank of Greece support, (5) Subsequent Greek high street inflation, (6) Current & future FX rate. We concluded that 8 yrs wasn’t long enough, & that even if NBG were 60% cheaper – you still couldn’t compound at enough to make it worthwhile. You were better off temporarily investing your $ in a petro currency (Canada) & buying NBG ‘X’ yrs from now; the same $ investment buying 1.5-2.5x more stock. Surprisingly, except for (4) & (5) the same things applied to the property firm; the only new factor was the current commercial debt refinancing crunch. It was also better to make the investment through someone else (ie: FFH), versus directly. The wildcard was how the domestic populations of crowded Euroland might react when unemployment rockets, social safety nets are cut back, generational aspirations are crushed, & the more radical elements manipulate social tensions for political gain. The current Greek & French riots could seem pretty tame, & Europe doesn’t have a great history (Bosnia, run up to WWII, etc). How much is the exposure worth to you – when it’s essentially all left tail risk? SD

Agreed. The good news is that the macros (euro disruption, chile pdtn, etc) are now forcing events, & all parties need a practical solution. Nobody can afford to do nothing anymore. SD

A little too raw for our tastes but if you're nimble - look at NBG (TSX) We dont think the Euro will collapse; but everytime a 'fix' goes in this thing jumps $.40-$.50, then falls back on coverage of the increasing street protests. Hard to see how it cannot trend down a lot lower over the next 6 months or so. SD

Technically every time you switch currencies, you've sold currency X & bought currency Y. Each currency is treated as though it were a security, the FX rate forms part of the cost base & the sales proceeds when you sell your security. You pay tax on 50% of the total gain which is effectively the FX profit. The reality is that CRA effectively ignores it as it is hard to track & costs more to enforce than its worth. If the average FX difference is $0.03, you need to have shifted around 666K - & not bought anything with the funds. Most folks are not going to be doing that. SD

Keep in mind that; You need to do better than your next best benchmark. For most folks here that is probably a 100% investment in FFH; hedged (sold) down to 50% over the higher risk summer months. Add in their 15% ROE, & the typical seasonal variation in the BV multiple, & you get around 20%. Not risk free, but not especially risky either. Very few of us here are going to do 20%+ as reliably, every year, with as little volatility, in all kinds of conditions. We might do better when markets are buoyant, ... but when they aren't? At times its just better to invest with HW, rather than alongside. Before they found this board, most common sensical laypeople might have averaged maybe a 6%/yr average return when the 5 yr Canada was around 3%; or about the 5yr Canada rate + inflation + GDP growth. If FFH is your benchmark; today your spread is maybe 17% (20-3), or > 5x what it was. Do you really need the additional risk? SD

Don't fall in love, take gains off the table, limit the unrealized gain to X%, increase the position hedges to 50%+, move up the quality curve into marginable securities, increase liquidity to minimum 50%. Recognize that insurance costs; commission & opportunity costs rise, but liquidity rises & volatility declines. The more uncertain the environment, the higher the cost. Recognize that the strategy change over time; when times are hard one plays defensively with a few breakouts here & there, & reinvests in quality at cheap prices for the long term. Recognize that liquidity is cash + unused borrow capacity; cash is best, then securities that are 70-90% marginable, small caps < $3 are worst. Move up the quality curve & liquidity can improve dramatically, with no impact on cash. SD

Just to tie some things together. Both CFX & SFK are coming out of their trust structure. Within the trust framework CFX is fully priced, SFK is underpriced. Per SFK's management, the conversion is expected to add market demand/liquidity/depth to the float. The conversion effect should increase the share prices of both SFK & CFX. The SFK price should increase more as it's trading at more of a discount. 150M of conditional debt refinancing has been agreed to. A conditional 40M rights issue is planned, there is an agreement with FFH to backstop the issue, we know the broad terms. The existence of the conditional refinancing agreements & equity backstop are material facts, & have been disclosed ahead of a material vote. IR replies suggest that the rights issue is a work in progress. A final prospectus is expected within a reasonably short time after shareholders agree to convert. The FFH backstop agreement suggest a timing within 2 months of conversion. That's what we know, anything after that is really a speculation. SD

Grenville: This reference is from the standby agreement with FFH, & applies only to any shares that FFH has to buy over & above its entitlement. One of the other posters advised that they had received confirmation from SFK`s IR department to that effect on Sunday. We think the conversion is going to let some US buyers buy what they presently cannot. They will be new & marginal buyers, both CFX & SFK are very cheap (by US standards), & we think their collective impact on the limited float will be enough to move the market. It may take a little time, & our little `puddle`may be in rough equilibrium, but we think its about to get swamped by the broader ocean. - Mgmt has made repeated refs to broader liquidity, wider mkt, etc; higher demand for the same supply. - The unusual structure of the equity offering itself implies higher prices. - The smoke of the rumours hasn`t gone away & consistently pointed to higher prices. SD

Do you think the trading period will end after Q2 is announced or before? We think the trading period ends before the Q2 announcement, but the rights are 'live' over the announcement period. Doesn't mean we're right - but part of the elegance is that the deal concentrates market speculation onto the rights issue, over a strong quarter (assumed), which dramatically reduces the odds on FFH having to backstop. SD

LessthanIV: If you think the rights are going to be fairly hot items (ie: leverage); the market will take up all the rights sold, & FFH will not have to backstop anything; if its really strong FFH could even be selling its rights & diluting its position. Keep in mind that the 20% is only if FFH has to buy-in beyond its entitlement - if they dont have to buy-in; the 20% doesn't kick in. Cardboard: Agreed the dates are 'stickier' than we'd like, but we don't see this as being a whole lot different than the typical 'grace period' after failing to make an interest payment. Yes, you haven't strictly met the terms - but if you have a very valid reason for it, we'll give you an extra day or so of 'grace' to rectify. Ideally SFK/FFH will better clarify the intent over the next few days. Once we see how it trades post conversion, these issues may well become moot. If the price is materially higher (expected) the rights will have a +ve value, & much of the uncertainty will dissappear. SD

Couple of relevant add-ons: We expect that FFH will end up with minimal, if any, backstopping on the rights issue (hence the 20% discount is effectively irrelevant). They will essentially get 400K to reduce their cost base. We think the rights are going to act as options on the Q2 results, & as every speculator will want the embeded leverage; the rights should drag the stock up. Gravy ;D Elegance. SD

Agreed they want the conversion asap, & the preliminary filing will be May-27 or abouts. But there is nothing that says you have to start on the Final Prospectus immediately thereafter; it's only the common practice because it reduces the associated uncertainty. In this case the existence of the proposed offering is a material fact, ahead of a material vote; they're pretty much required to disclose its existence. Assuming conversion is voted in tommorrow & that day 1 is May-19; 40 trading days later is around Jul-15. If you accept that the early disclosure is neccessary, but disruptive, you also accept that you need to mitigate it; a 6 week delay in filing the final prospectus to obtain a minimum trading record under the materially different structure, is not unreasonable. Everything about these transactions screams 'fairness', but it's because its 'too' clean relative to market expectations that we're having this problem. Mr Market would seem to prefer that it remained hidden, because that's the norm? SD