SharperDingaan

There is nothing wrong with ‘skimming’ a universe to ascertain its present state, but an investor cannot substitute it for ‘research’. Jumping straight to metrics, then basing decisions on nothing but metrics, simply proves that the investor knows the methodology - but is clueless as to application. Books & reading teach methodology; experience, an open mind, & open discussion teach application – provided the investor has the common sense/investment maturity to recognize it. The discussion is greatly facilitated when referenced to published facts (10Q’s, AR’s, etc). Most folks are quite willing to share insights, related experience, technical expertise, etc – but don’t expect them to do the work for you. It is one thing to suggest an approach, methodology, etc - but if you’re looking for an adviser you’re in the wrong place. Examples: The real value of NPV is realizing that the precise number is un-important, the true lesson is the timing & magnitude of the cash-flows; but to truly realize that, you have to thrash it out. Similarly - the actual P/E paid is un-important; the real variables are the growth rate & the length of your expected holding period. SD

MFC is fundamentally a wealth management company in an insurance wrapper, & not a valid peer. They are very good at what they do, they offset their riskier profile with higher quality risk management, & their practices are regulated by OSFI. This isn't an overleveraged/overexposed US or European insurer doing stupid things. SD

You might want to keep in mind that this is also often the retail investors biggest 'con'. SD

BP has a cultural 'hubris' problem, that pretty much runs from the top down; were they in Capital Markets we'd be calling them GS. Interestingly they're both facing criminal probes, & have not been able to see their actions for what they really are. The world needs oil/gasoline, but it doesn't have to come from BP. BP gasoline sold through an Exxon station works just as well, but the refining profit goes to Exxon & not BP. Similarly a oil/gas lease doesn't have to be owned by BP. US leases can be retroactively re-assigned, & European/Mid-East leases can be acquired via takeover (Shell). SD

http://blogs.telegraph.co.uk/finance/ianmcowie/100006015/23-billion-shock-for-safe-and-steady-savers/ http://blogs.telegraph.co.uk/finance/rowenamason/100006019/bp-oil-spill-tony-hayward-faces-the-city/ Keep in mind that UK pension funds are holding 23B pounds of BP, & that the BP dividend is roughy 1 pound in seven of the industry total dividend income. Cut the div, or risk the US leases? SD

Assess if pharma is within our competency. If 'no', we'd reduce our sector risk by staying domestic. Do we have all the major 'names'? Are there hybrid securities - convertibles, warrants, options, etc. What fits within our risk tolerance & time horizon, & why. Is an alternate low fee index fund available. We would benchmark against a 5% weighting to the index fund. If we invested directly via a hybrid we'd want a minimum 3-5x the index return. If we could do it via a convertible we'd use margin to neutralize our positive carry, & weight higher. When it's not within your competency, the individual 'name' is pretty irrelevant. SD

Keep in mind that when a 'widows & orphans' stock materially cuts its dividend; the share price usually drops 35-40% - & it stays down untill the CEO is fired &/or some institution (collecting assets from those widows & orphans) commits to a sizeable equity issue. US presidents have often commented that one of their greatest challenges has been the management of American 'bloodlust' following an attack; & if you're one of the millions living on the US Gulf Coast, this slick is an attack. Given BPs safety record, & 'foreign' status; it is very difficult to see why a US president would not force BP to sell their US assets to other US sisters (Exxon, etc) - to appease both the public & the US oil industry. Most would expect a fall of at least another 50% over the next 4-6 months; & more still if there's a feeding frenzy &/or further UK/Euroland economic disruption. SD

You might want to look at the trading volume over the last few days. - If I wanted to buy (in quantity) who would I get the shares from?, & how? - If I really didn't think it a worthwhile investment, why is no one selling? Patience is a virtue SD

We try to use common sense - & not a specific $X, or %BV, price. 1) What is our sense as to the likely market/coy specific trend for the next 6 months of P(x) for +ve vs -ve outcomes. When it becomes net positive, & begins to trend up again - its time to consider repurchasing. 2) We treat it as insurance (& expect a net cost) against adverse events. There is minimal 'opportunity cost' if your default is a repurchase within 2 weeks of the price passing your 'sold' point. 3) On 'average' you have a 1/3 chance of being right (goes up, down, stays the same). Literature evidences that a short position (loss avoidance here) is more profitable than a long one. You enter the transaction because you think the 'down' % is > 1/3. To do it well you need to be able to correctly assess the probable impact of dominant macro trends over the next 6 months. Net direction & a 'sense' as to the potential strength, outweighing specific 'accuracy'. Notable is that if you're good at 'hedging', you typically suck at trading (different skill sets). SD

To use a world cup analogy; How is this any different from the crowd booing the referee for making bad calls in the lead up to the premier game? The refs are effectively controlled/work for a 'union' - the 'union' here is the US gov. The refs are exposed to bribery & game fixing - same thing for a credit rater, its just done differently The crowd has to assume impartial refs - same thing for the market using the ratings When the corruption/intimidation gets out of hand the refs refuse to ref, there's no game, the bookmakers & fans go ballistic, & refs (& their families) receive visits from 'legbreakers' wielding baseball bats. The equivalent is a ratings moratorium (not a problem if no one is actually using them), & threatening lobbyists all over the raters/gov. Hasn't happened yet because lobbyists are more effective than baseball bats? SD

Sell 1/2 the position into the market for cash, & sit on it. Repurchase (hopefully for less) at the end of the hurricane season. The cost is 2 commissions, offset by the cash difference of the hedge gain/(loss). This time around we sold our entire position as (1) we see the P(x) of the industry going lower as being roughly 3-4x the P(x) of it going higher, & (2) we see continuing Euroland disruption over the next 6 months. Essentially we're raising contingency cash & targeting specific industries. SD

WED-T They are a shell that's just bought the former core Cdn P&C business of KFS-T. Bought (cheaply) when KFS-T was forced to sell, backed by hard headed deep pockets, & very likely to resell the business (at a much better price) to another carrier 3 yrs out. Just had a ratings upgrade, some big shareholders (Alta Invstment Management Corp[40%], Goodwood, etc), & a small public float. Lot of possibilities if you're small & patient. SD

It may well be more realistic to think of BP as gone. The administration has the power to force the sale of BP's US oil rights to other players (untrustworthy operator, that needs the $ to fund a cleanup trust), & can choose to stand aside should public anger show up as a 'freedom fries type mania' that produces a boycott at the pump. And one hurricane roiling the water & 'topkill' will have a whole new meaning, complete with lurid media pictures to drive public opinion. 'Blackout' becoming the new BP word for bankruptcy? Let the media do its thing, & then reconsider. SD

You might find the following algorithm usefull: [(((Geology x Tech x Proven Reserve)/Collection )-1)+1)^N x (market price/break-even price)]/PV(COD) = >1.0. Geology is your knowledge of the oil traps characteristics, pressure, porosity, etc. Tech is the reliability & availability of existing technology that can exploit the oil trap. Proven reserve is the total amount of oil that you can actually extract. Collection is the amount of proven reserve you can extract from the trap & deliver to market every year. N is the expected extraction life of the proven reserve. Market price is today’s commodity price. Break-even price is the minimum commodity price you need to make the project viable. PV(COD) is the present value of the future cost of developing the field & bringing the oil to market. Technology is the primary multiplier; until you punch holes into the target zone with successful results, you can’t prove that you have either the geology or an economic reserve. If you’re near an existing collection system that you can tie into, your break-even price & COD drops rapidly. Same thing if you can drill multiple wells from the same central platform. And what you cannot do today you may well be able to do 10 years from now; extract more from an existing field, drill deeper, etc. Market price is only a secondary multiplier. The more above break-even it is, the more $ you can invest in collection; to sell more product into the market, & in additional drilling to increase total extraction. Notable is that if you just buy someone else, the primary risk is market price; the average price/bbl for the proven reserve is enough to pay for acquisition, extraction, & the required return. It can be easily hedged, & most technology advances work in your favour. The deep sea wild-cat is effectively the opposite extreme, & an all or nothing bet. Screw up, & the tendency is to reinvest the high cost of these wells in the least risky alternative. SD

LessthanIV: We’re saying the same thing, but we’ll agree to disagree on interpretation. Per NI 45-101. Rights are being offered to both FFH & the public at the same price. Oversubscription is being offered to both FFH & the public at the same price. If there is under-subscription the UW is required to dump the under-subscription into the market, from which FFH &/or the public can buy whatever they want. Under the standby FFH has agreed to buy the under-subscription out of the market at a fixed price. The simplest transaction is a direct purchase from the UW, versus a matched block trade crossing the trading floor for the entire under-subscription at the agreed price. The market price right after the trade will be the agreed standby price. NI 45-101 is fully complied with. SD

The preliminary prospectus is the bible, there is no ambiguity, & it outlines the details of the transaction. What IR inferred 2 weeks ago is irrelevant, the terms of the offering have simply changed since they spoke. The price is defined by formula. It will be no worse than the lower of the 40 day VWAP, or the 5 day VWAP immediately prior to the filing of the final prospectus (p18). The actual number will be known when they file the final prospectus - & they have untill Oct-31 to file. We know this is the minimum price, because if the shares were trading for less; the issue will undersubscribe, & FFH will be required to buy. You can actually subscribe for 119%+ of your allocation (using up your proportional portion of FFH's ownership position [p19]). SD

We're saying the same thing. Everybody gets to subscribe at the same price; but if there's not enough subscription - FFH will take up the subscription shortfall at 20% off the subscription price, & is restricted from reselling any of these cheap shares back into the market. SD

We’ve looked over the preliminary prospectus at www.sedar.com, & honestly don’t see any issues. The offering record, commencement, & expiry dates are all undefined (p3). The only restriction is that the final prospectus must be filed by Oct-31-2010 (p-18) if the standby agreement is not to lapse. The 40 day record period could start as late as Sept-02. The 20% discount applies only to FFH, only to whatever they take up under the standby, & they cannot resell anything they take up under the standby (p-4). FFH will be paid 400K for the standby, & had no involvement in the prospectus; it intends to exercise its proportional share of the offering, as do most of the FBK directors. The Deb conversion privilege will be re-priced to reflect the dilution, but the call period remains Dec-31-2010. 40M of rights proceeds + 75M of SGF funds + 28M of GECap funds will retire 143M of existing revolver debt. Speculation: Following completion, they would seem to have more than ample capacity to call the Deb issue. If so, the Debs are effectively call options expiring Dec-31-2010 & paying a 7% coupon, that will retire at either 101 (default) or above (in stock). What’s not to like? They can delay the issue long enough to include closing prices that reflect Q2 (& presumably better) results. Same thing if a RBK asset sale is announced over the interim. Reduced dilution & glowing analyst reports to further boost valuation. We’re also seeing evidence of recent insider buying, & declarations of further buying via the rights issue. Again, what’s not to like? SD

We did a surface look at offshore vs onshore drilling, re future (1-2 yr) flow of drilling $. Its very dependant on location, sovereign/culture, & age of field. The Yellow Sea/West Africa is very different to the North Sea & very different again to the Grand Banks/Arctic. Where practice is well established (the vast majority of drilling) we expect continued drilling, but with additional costs (upgraded BOP's, more testing & standby requirements, additional graft, etc). The frontier stuff is effectively dead. We expect cancellation costs to essentially wash. Operators cutting day rates on their SP rigs to keep them working, more/easier holes being drilled in shallower waters to use up the remaining 2010/11 budget, & a 5-10% difference going to land drilling. 2011/12 is the watershed. Medium-term (3-5 yrs) we see the frontier $ shifting to Oil Sands/Coal Research, and an industry rethink/upgrade of existing technology. SD

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