SharperDingaan

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

Couple of things to consider: The average depletion rate for NA gas is currently around 25%/yr. Where it’s all shale gas the average depletion rate is closer to 40-50%/yr. What is being missed is that the basic depletion rate is 6-11%/every quarter. Add winter heating demand to the declining supply, & it doesn’t take much to produce a seasonal change. A new well in an existing field is dirt cheap when you don’t have to build extensive tie-in’s, & the existing collection facility has progressively less gas in it month by month. You keep your lease by having others farm in, & get an immediate cash flow return on your non-cash investment. The ‘why’ you can continue to produce at below the marginal cost of a green field well. Absent the big producers & consumers, who hedge their real need on an everyday basis - & most of the gas ‘market’ is simply the speculative following of the herd. SD

Keep in mind that a DB pension plan typically runs with a duration mismatch of between - 11 to -14 on its bond portfolio; & low yields have forceably increased the absolute size of that bond portfolio. A 400bp rise (inflation bite) would make the average DB plan look very different! SD

Agreed long-term money is cheap but for most firms in the current climate (near-term) you extend term, increase the term/revolver debt ratio, & reduce carry cost - you dont borrow more. You're rewarded for improving the D/E ratio & using the carry saving to reduce debt. If you increase debt, you do it to buy back equity & increase EPS. Agreed there is growing bias towards acquisition, however its only those with allready reduced D/E ratios & longer-term outlooks (exclude market makers). If you intend to hold the target for the long-term, the bigger risk is in not getting the prize versus what you paid for it. View todays P/E paid - as P/E(1+g)^n, & its not hard to see why the major names are in the market. But notice that in both cases it would work a lot better, & more reliably pull in the 'I' spend, after a 'descent'. Assume a bumpy drop, & deliberate 'walkaways' to restablish the penalties for moral hazard, & the incremental cost of QE2 would also fall dramatically. Some of the existing commitments would simply recycle, & the last 18 months of treasury enhanced earned lending spreads in the banking sector would get used. Why would you NOT do this ? SD

If we want the 'I' spend, we need either a crash or a 'managed descent' - & its highly likely that the cummulative 'I' spend would be much larger than any QE2 could be. If the QE2 eased the damage in starting the 'I' spend, no one could argue that it was not a legitimate and effective use of policy. If the 'I' spend also produced employment (new plant) & either increased consumer spending, or reduced bank loans (investors using their sale proceeds), most would suggest that it was also very smart policy. We allready have the 100% writeoff (US) on new plant investment, & the 2 biggest US proprietory traders volunteerly closing their trading desks. How long can it really be untill we start to see QE2 ? SD

Apply the well known economic demand function of D = C + I + G + (X-M) to today’s economic environment & most would argue that the majority of incremental demand (D) can only come from new Investment (I). Hence the repeated calls for business to step up to the plate. As a business you can buy someone else & layoff/consolidate to reduce unit cost, replace/build new plant to reduce unit cost & sell additional widgets, or buy back shares to increase your EPS for a given level of business. Net of inflation, most folks expect the level of business to essentially stay flat over the foreseeable future. Buying someone else to increase market share & reduce cost is good for the ego - but a risky proposition. Buying back your shares is low risk - & makes you look like a hero. Most believe that many businesses (outside of banking) are sitting on excess liquidity – relative to the debt/equity levels of yesteryear. The fact that yesteryears debt/equity levels were probably inflated is a convenient oversight. Assume a business had 100M of debt capacity available, & used it to buy back its outstanding securities. They would want to buy at the lowest cost possible, & whatever common they bought would reduce their debt capacity - as it would reduce their equity base. They would want to buy after a market crash, offer a modest premium, & they would want to buy back their debt & prefs for less than what they issued them at. The business would demonstrate confidence in its long term outlook, recognize gains on the securities retirement, & bonuses would be forthcoming. ....... But nothing would happen until after we have a crash, & the possibility of a crash has been removed. If I’m the investor holding those shares; I’ll simply use the cash to either buy another investment in the secondary market, or retire debt. Both the business & I gain, but in either case the $ don’t go back into the economy. I didn’t invest in a new offering, & companies are repaying debt – not borrowing anew. The unemployed stay unemployed. If you take this view - a crash is largely a given, & there is a preference for sooner versus later. Bonuses pay out at year end, & year-end write-offs are OK if you can show you’ve bought back securities at a premium, & at a gain. The fed has been repeatedly stating in more aggressive tones that they’ll do whatever it takes. The BOC has been repeatedly stating that they have concerns with the near-term prospective outcomes for the US economy. Powerful people expecting difficulties, & incentives to fulfill the prophecy – cannot be a good thing. What are we missing here ? SD

The reality is that all PM’s are adept at both the long & short - & you’d fire them, if they weren’t. A ‘conservative’ portfolio may be 130/30 long/short, with the ‘short’ achieved through an option or futures position. To borrow physical & sell is to actively drive the short, to use an option/future/cash is to passively short (hedge). To actively short, you need the complicity of long shareholders. The longs gets the loan fees, reduced cost base from buying at the low, & realized gains as they squeeze the price back up. The short gets the spread. The bystander gets hit with whipsaw, & the target collapses if you can cut off its market access. Higher gains for both longs & shorts, but when the longs do it well - the shorts get bled white. Short an entire market, & you force passive hedgers to help you - as they can’t sell their underlying physical. They have to buy the options at whatever price, & with the fear in the market – the only option seller is you. The target market gets hit with whipsaw, & the underlying economy collapses if you can cut off its access to cheap money. But to do an entire market you need to spread the short risk (gang approach) & the longs are the globes central bankers. To short at all - you need large amounts of risk seeking capital, you need to tie it up, you need it away from regulators, & you need it tax-free (off-shore). You maintain discipline through the law of the jungle, & you ‘store’ your wealth in trading positions that can only benefit from your actions. You get bigger, you squeeze out your competitors, & you get forced to hold something non fiat – as you’re destroying currency values. Collapse the Euro$ off-shore market, & you squeeze the short capital in jurisdictions where laws are lax. The bigger they are, the more they’re forced to sell which collapses the market – except that this time the market is flooded with off-shore liquidity, & all of it flowing through the globes central bankers. Buy up the market & we’re suddenly back to the old fashioned model - & the ‘right’ shorts getting bled white in some very unfriendly neighbourhoods. The non fiat stores of value collapse as there are too many sellers, & there’s a rush for state protection when the only one selling is the state. SD