SharperDingaan

FFHWatcher: The economics are really more comparable to a drilling company; feast for a period when the commodity is booming & starve when it isn’t. The multiple moves with position in the cycle, industry herding, and the pace of investor turnover from value to momentum. Most would top it out at roughly the directly comparable CFX cap of 346/92M (3.75/Unit). To get more they would effectively need to merge, & do it at a price that also reduces debt ($4.90 for the debs). Were it CFX there would be no tax hit, CFX could make higher distributions, & the CFX cap would rise; were the cap to rise 106M (31%) to 452, SFK would top out at 4.91 (452/92) & the 47M+ of debs would convert to equity. If there’s a 10% (35M) merger premium & a minimum 25M in distributable SFK cash, we’re pretty assured of conversion. Both companies would get more if they sold to a new entity, & that entity used the consolidation/savings to change the capital structure. Given the players involved, & that both entities have to come out of the trust this year, fine minds may well come up with something. Speculation at this point, but it would seem fairly likely that 5.00/unit is quite doable. The real question is whether it will actually occur or not. SD

Myth: A scan through the last years worth of SFK threads, & the Sedar AIF, will give you a fairly good background. Valuation is in the eye of the beholder. SD

"A herd instinct dominates the money management industry. ... if you were among the 5% who went against the herd and bought stock B, and it goes down, everyone says that you are a dummy. The reputational and career risk of being a contrarian is far greater than the risk of going with the flow." Source: The Little Book of Value Investing, Chapt 20; You can lead a horse to water, Chris Browne, 2007 I'm pretty sure I know who the 5% are! SD

Al The working number is roughly 10x FCF of .45/unit, or market cap of 414M. At 5.50 the market cap is > 500M, starts to materially exceed CFX - & changes the buyer/seller. Good/bad depends on how soon CFX comes out of its trust, & in what form. Re SFK, it can only be good. Its highly likely that fine minds will add value well beyond the $5 mark, but the days of < 2.00 are pretty much over. The problem is going to be safely managing the price expansion :'( SD

They will need to bring their 2009 taxable earnings to zero, & do it via reserving or write-offs. Debt defeasement (qualifies as reserves) to retire debt early is the preferable route to draining off excess earnings. They have to come out of the structure by 12/31/2010, & will probably deal with the 2010 build-up as a one-time payout on dissolution. Because they are effectively unable to distribute (covenants), they make an especially good (self financing) takeover candidate. Unlikely we'll see distribution here, its going to be share price appreciation instead. $5-$6 on a take-out is quite realistic. SD

You might want to keep in mind that 'value' benefits are almost always referenced in terms of a compound return relative to the index. Perfectly correct, & looks great, but glosses over the very lumpy & often negative returns incurred along the way. The reality is that you'll make errors, they'll be costly & potentially even fatal; you'll look like a dunce. You'll look like a hero if you recover; & if you're good at recovering you'll look like a hero more often than you look like an idiot. Taleb's just looking at the errors. SD

The reality is that we'd all be a lot better off if the shares traded at about the price of Sched-A banks & the traditional 'widows & orphans' stocks. TSX index membership, broader institutional ownership, greater liquidity, higher float, etc, etc. But it also means change. No more multiple voting stock, less influential control blocks, less family & more public ownership, etc. The baby's growing up & its control structures need to grow with it. An eventual share split is probably enevitable (even BRK split), but in all likelihood a good decade away yet. SD

You might want to reconsider AIG. Selling the parts puts them into stronger hands & increases the competition. Keeping the parts ensures that we continue to get stupid policy pricing for a couple more years yet. At best, constrained top line growth. Costs continue to escalate at inflation+, there is stronger incentive to defraud, & little prospect of industry consolidation. Short-term assets are earning minimal returns, business is not stable enough to warrant mismatching asset/liability terms, & for many (net of investment writedowns) - reserves are on the 'light' side. Yes they are cheap, but cheap enough ? unlikely. Worth writing out-of-the-money puts on ? possibly SD

We would be very dissappointed if CFX didn't place a call, but .... Going from CFX's #'s we'd expect SFK to trade north of $2.00 almost as soon as they announce their Q4-earnings. We'd also expect to see the forward co-generation earnings priced in, & a healthy 'merger' premium attached. Then a discussion starting at something above the $5.00 range, so that deb holders can convert. Most folk would likely sell if they saw $6.00 again by year-end, & use the opportunity to rebalance in 'new' CFX. Leaving a 6 bagger ((6.00-.85)/.85) on the table, doesn't make a whole lot of sense. We're always hopefull ;D SD

Our major omission was in allowing ‘wealth effect’ to over-ride common sense. With concentrated portfolios, a doubling does not automatically mean than 2x exposure to the same security still makes sense. It also doesn’t automatically mean than you need to sell down. SD

If this were GM or Chrysler you wouldn't know about it; as US culture is to keep producing - & if you kill a few people its just part of doing business. Toyota shuts down its plants, does a massive global recall, & has its reps out in front of the cameras getting the information out. An attitide that has made them #1, & relegated most US producers to 'also rans'. It'll cost them most of their 2010 profit, but lasting global brand damage ? - pretty unlikely. Most wouldn't try to catch a falling knife, & would let the 'voting' machine feed on the negative hype. At some point it'll find a bottom, & we'll all be shopping ;) SD

Look at the relative size of the total share float outstanding. Where there are only a few shares available, better liquidity just means the price becomes more sensitive to demand/supply. The price gets more volatile, & the changes happen quicker ;D SD

A touchy topic for some, but in case you thought it couldn't happen .... http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/7141221/Banks-told-to-comply-on-bonuses-or-lose-UK-banking-licences-in-shock-FSA-ultimatum.html Then keep in mind that this is the UK, the sovereign is heavily reliant upon its huge financial services sector, & this is that sectors regulator putting a gun to the industry's head. ie: Its my sandbox - you'll do as you're told, or you can leave. Soros has been saying for quite some time that the 'tone-deaf' attitude of I-banks is their biggest liability. It would appear that some of the major regulators agree with him. SD

Keep in mind that this is effectively a mining mutual fund, with a good chunk of its investments in the more illiquid warrant market. Nothing wrong in that; but be very sure that 1) you understand why the business model pushes towards warrants, 2) you fully understand how warrants work, 3) you know the emperical data surrounding warrants, & 4) you've looked at a time series of expected payoffs. When learning most folk are better served by buying the highest quality possible, as the primary risk is that you overpaid relative to the near-term prospects. The solution is often 'patience', & simply holding for a longer period. Your 'moat' is a liquid market to sell into should you need to, & a reasonable expectation that an investment error could cause you to lose no more than X% of your investment. Long term you've probably selected well, but this is not something for the faint-hearted. Best of luck to you SD

IRA accounts can only be held by US residents. The Cdn/US tax treaty requires a 15% withholding tax at source.

Speaking to Cdn - bank owned brokerages The broker has a dividend book for the specific dividend payment, that outlines the share holding by account & account type - as at close of business on the record date. Long, short, domestic & foreign residents are all identified. If a USD div is being paid the amount is automatically converted at the banks prior day posted bid (usually around midnight) & the Cdn equivalent (net of witholding tax) automatically posted to your account that day (usually 12:01 or so). If your account is USD there is no conversion. The broker will either receive the payers USD deposit that morning (12.01 wire), or cash their cheque a little later on during the day - & receive a FX rate a little different to what they paid. The difference is theirs. Similary if the bank needs to collect the div from a short-seller & they pay in USD, the bank will get whatever the FX rate is at the time they receive the funds. After 2 years the accumulated FX difference on all the years dividend books is forwarded to the BOC, & ultimately applied against the nations annual debt service. A stand-alone broker converts at poorer rates as they must pay the banks spread. The bank itself converts at a better rate as they make the market, & have a competitive advantage. SD

Jevco has a lot of promise, but its had Kingsways hands all over it. Did the Lincoln 'reserving culture' spread to this ? & don't I really need to see the loss triangles for the next 8 quarter or so to determine that ? If there are no issues, its probably worth more than what they paid. If there are no further acquisitions, how is value maximized 3 years on ? As a larger specialty division of an existing carrier at 1.35-1.65x BV (current uncertainty has gone), or as a stand-alone company ? Lot of interesting opportunities at 10:1 consolidation. SD

Should think we'll see a lot more of these, as the underwriting dealers tip off the SEC. Standard underwriting practice is to sell more shares than there are on offer, to create a short overhang that the underwriter commits to flattening (guaranteeing bids at the offer price) within 2 weeks of the offering date. As the client, & the buyers, pay a fee for this underwriting committment - it's in everyones interest to remove those who cant play by the rules. SD

On balance this should work out very well for them over time. But it may be a lot more volatile that everyone thinks. Its highly likely that the sale has a regulatory 'dowry' of some kind, especially as Kingsway is also being allowed to take a 40M dividend. Most would also think that 94.5% of BV is over-paying for what looks like a forced sale, so what are they getting for the 'premium'. The sharecount is extremely high, & the shareprice prohibits institutional ownership. A 30% drop in price on news of a reserving problem is not unrealistic, as is a 25:1 consolidation & additional equity issue. Real question is what the exit plan is. Sell the rehabilitated & repaired asset to someone else (wise), or use it to build a new company around (not so wise) ? SD

Very sexy, but please explain why I shouldn’t just look up which are the current worst performing sectors on ‘XYZ’ exchange, & buy that sector (single share, index, or mutual fund). Its highly unlikely that 2 years from now the current sector ‘dog’ will still be on the bottom, & very likely that the next 2 years are not going to economically look like the back-tested data set. SD

Non-recourse means that if the lender doesn't get enough on the sale of your house to repay the mortgage, the lender cannot come back on you for the shortfall. On day-1 I buy a house at 500K & put in 200K as down-payment. I look like a great credit with a 40% (200/500) down-payment 4 years later the house is worth 800K. I see the light, & take out another mortgage for 450K (my 200K down-payment +250K profit) to drive the total mortgage to 750K 2 years later house value collapse, the house is worth 400K, & I choose to stop paying on the mortgage. The bank sells the property for 400K, but is still out 350K on the mortgage. Non-recourse means the banker has no legal claim on me for the remaining 350K, & is forced to take a write-off. The banker will apply moral suasion (credit blemishment, community standing, etc.) to try to get me to keep paying at least 'something' - to keep the loan 'current' & avoid the write-off. If I really like the house I might counter with an unsolicited all cash offer of 375K - but I'm not obliged to. SD

De-leveraging is not the same as deflation. A Central Bank that repays 20% of the national debt with newly printed notes will immediately de-lever, generate 20% inflation, & devalue its currency – all else being equal. High residential mortgage leverage does not necessarily mean high risk. US mortgages are non-recourse, the borrower has an incentive to borrow 100% (or beyond), & gets a risk free tax break. A valuation collapse is the banks problem – not the borrowers. De-leveraging doesn’t mean repay in cash & therefore have less $ to spend; you can repay in equity. A corporation can swap debt for equity. A government can swap debt for a % of the national assets (electric grid, water, sanitation, etc.) This time it is different. 1930’s central bank responses assumed that the future would resemble the empirical past; the result was a nightmare until it was finally realized that the new world really was different. The unparallel 2009 central bank responses are a pretty clear indication that this IS again different; so why would you expect that the new world to exactly follow the rules of the old ? There will be de-leveraging, but it will be because of change in institutional & debt structure. All we can do is make our best guesses. EG: In any given year an investment gain is a zero sum game as someone had to lose for you to gain. Over successive years it is either positive/negative according to the total growth in global trade and/or innovation. An I-Bank could be hugely profitable today, pay all its gains out in bonus, & be bankrupt tomorrow - when it is on the losing end of a trade. Collectively, the I-Banks are trading volatility relative to the stability of the global financial system, & the more volatility the better. Break the financial system (oops!), & the world goes into a global depression If you have a bank parent you can use their stability to cover your loss. If you don’t have the parent you retain bonus to give you an equity cushion. Separate the functions (per Obama) & the I-bank is forced to either do less business, retain bonus, or both. De-leveraging is the consequence. SD

You might also want to look at roughly when the AUM came on, & what the average price level was at that time. There's usually a declining early redemption fee, & less of a discount the more underwater they are (assets are more 'sticky') SD

Assume there were a new federal institution that simply 'bought' the mortgage delinquencies for 65c on the $. They pay with a rolling 5 year note paying 3.5%, & service the debt with new issues of floating rate T-Bills; 100MM of annual spend would allow 2.86B of immediate purchases [(1/.035)x100M], clear 4.4B of delinquent housing stock [2.86/.65], & produce a 44:1 multiplyer. The existing homeowner either pays the utilities & property tax, or gets immediately evicted - 'new deal' FDR stuff. If you can prove you have the cash-flow, & agree not to sell/refinance for 5 years, they will sell you the place at the capitalization of the then floating rate + 3.5% (to defray costs). ie: If they paid 100K for it & the floating rate is 4.00% at time of sale, they'll sell it to you, if can prove that you're good for 7500/yr [7500/.075=100K). To make it easier they allow 2 or 3 joint-owners - more 'new deal' FDR stuff. Then assume that 35% of the total investment ended up as a write-off (trashed/leveled houses, abuse/theft, etc). The 'average' house price would increase at the inflation rate, owners would be building equity, & there would be very little new-build other than re-modelling. You'd save millions of people from welfare, & the 1930's showed that out of sheer gratitude - most of them will continue to vote for you through to their dying day. The world has changed & its hard to see how there can be anything but a very slow recovery when it finally starts to turn around SD

An illuminating excercize is take todays CAD/USD FX Rate, & USD price for NBSK & BHK, then compare it to the same data the week before the long string of price rises begun. In effect you're isolating how much of the price rise is attibutable to USD depreciation, & how much is to the commodities fundamental demand/supply imbalance. Per 'Paper Age' & the BOC. 01/19/2010 the CAD/USD FX rate was 1.0382, NBSK was 842.09/ton, & BHK was 725.97/ton 11/17/2009 the CAD/USD FX rate was 1.0592, NBSK was 818.84/ton, & BHK was 682.66/ton Over the 2 mo period, the USD essentially depreciated 1.98% [(1.0382-1.0592)/1.0592], NBSK rose 2.84%, & BHK rose 6.84%. Or put differently - 70% of the NBSK appreciation (1.98/2.84), & 30% of the BHK appreciation is attributable to USD depreciation, & not demand/supply imbalance. Makes us a very happy SFK shareholder, as irrespective of CAD/USD appreciation our contibution margins can only keep going up - & the US plants are getting fundamentally more profitable at 2 1/2x [70/30] the Canadian plant rate. Fat margins for quite some time to come yet! SD