SharperDingaan

Look at the Dec-31-2009 MD&A, pg 7, Selected Annual Information. Compare 2009 against 2007. Add operating profit to sales for each of NBSK & RBK to get Cost of Sales, & divide incremental sales by incremental tonnage to estimate COS sensitivity to volume. About -1.334 for NBSK, and -.476 for RBK. Look up the list price/week for NBSK & RBK over Q1-2010 & calculate the average for the quarter. About 860 for NBSK and 780 for RBK, depending on assumptions. Assume the NBSK plant ran for 3 months at 90% capacity, less 4 days of downtime. Assume 85% capacity for the US plants. You now have estimated tonnages, you can derive average COS for each of NBSK & RBK, & can calculate estimated CM for both NBSK & RBK. Look at the 2009 S&A, subtract the 2009 charge off, & subtract 1.8 million of 2010 savings; divide by 4. Best guess the Q1 distribution number & calculate the Q1 EBITA. Then compare it to Q1-2007 when conditions were `roughly` similar. Illuminating. Now for fun: Multiple the Q1 EBITA by 4, divide by the number of shares, & multiply by 5, isn`t this pretty much the lower number to beat if they were to be taken out. Now discount the EBITA by 30% (for MOS) & stay with the 5x multiple (additional MOS), isn`t this about where we should be before the technical factors from conversion kick in. Look at the deb - if it converted there would be roughly an additional 10.7 million shares outstanding; price at the lower estimate & what seems pretty obvious. Speculation, but arithmetic works pretty well for everyone. SD

Underlying this entire suite is the inherent conflict of interest between the different sides of the same deal. ... and the SEC getting a conviction against the most conflicted player in the land, will prove it in modern times. Thereafter the logical outcome is to seperate the underwriting, brokerage, & house account trading functions into different `pillars`each under its regulatory regimes; force each pillar to hold the relevant capital needed, & restrict the % of cross-functional ownership that an entity can have. The gorillas break up into smaller pieces, the pillars are easier to control, & we`ll have market driven consolidation into fewer & healthier firms. Glass-Steagall is not coming back, as it isn`t good enough ... but the idea is almost certainly about to get updated. SD

Goldman can fight all they want; but the rational thing is to sue, as in its early stages the cost of a lawsuit is essentially a very cheap call option premium. Untill they do a deal with the SEC their share price is going to drop, & at an accelerating rate as support starts 'backing away' from them. But ... Goldman also has an optics problem in that they can't hedge. Going long puts now, & going long calls just before they deal, will simply prove the allegations true; and given the extremes - the 'self dealing' gains will be in the billions. Competitors of course will be shorting them down, & doing exactly this ;D And .... if they tried their luck with off balance sheet hedges on other peoples books, the fed/SEC will see enough of the trades to go after the hosts ... & spread the tar. Elegant The smart thing is to cave, & quickly. SD

The legal references are to the US Investment Advisers Act of 1940, the US Securities Act of 1934, & the US Securities Act of 1933. The acts have served very well but you cant regulate effectively when you`re stuck with 70 yr old relics. The 1990-2010 `Gatsby`era is over, & the greatest legacy those passing can leave behind is sophisticated & state-of-the-art regulation. We dissagree on reputation. If the fed no longer finds them reputable they`ll lose their primary dealer status & the fees & feedstock that the access generates. If the SEC accusations were criminal, all financial institutions would immediately have to back away from them - & Goldmans would follow Lehman by the end of the week. Goldman thought that if you could not go elsewhere, & they were no worse than anyone else, they were safe. They were wrong. SD

For every trade there has to be both a buyer & a seller. Prospectus rules restrict the primary sale of complex securities to only sophisticated investors, who have both the knowledge & ability to assess the risks. It is both common practice, & a desirable thing to create an underwriting overhang; & a seller will pay the underwriter a fee for the price support that the overhang provides. Had the gain/loss not been so extreme it could be put down to ‘market risk’; because it is so extreme the loss making party is now forced to go the legal route. Sell anything & you’ll incur reputational risk, & the more your involvement in the products distribution or manufacture the more risk you take on. But to make money you need to expose your reputation, & if everyone else is as reckless as you are, isn’t there safety in numbers? Goldman made an error in judgement; & to avoid making another one, they will be forced to cave. This could not have occurred were there a better, & more flexible, investment act. To get there you need ‘notches on a stick’; you start at the top, & you work your way down by ‘rank’ – & let the school yard work for you, in what is a very ‘ego’ driven business. At around the 5th notch the practice changes to ‘stepping back’ from named institutions, & letting fear operate. Healthier institutions, quicker, & ‘entitlement’ earned the old-fashioned way. We think this is the beginning of a fundamental rewrite of securities laws. SD

Now if they were doing this the old fashioned way, the fed reserve would also be suggesting to Goldman that they make a minor show & cave. After all, how much is your primary dealer status worth to you? .... & how could we possibly be seen to be upholding "market fairness" - when one of our primary dealers is being sued by the SEC on very serious charges?? Don Corlieone's world might be messy at times, but there's no doubt that it works. We live in interesting times. SD

More like a seesaw. One end has 80% of the people out a short distance (market view), the other has the remaining 20% of people out a far distance (Hoisington). A small change in the 20% generates a disproportionate effect; hence the once in a lifetime impacts. There's also an element of denial to it. If you grew up in the US & all you've ever experienced over the last 50 years is inflation; deflation, & the US as anything other than the 'center-of-the-universe' is a very alien concept. SD

Re SFK Debs. Cash yield is 7.87% [(7/89)x100]; yield to maturity is around 15% (or higher if called earlier). Keep in mind that in the current climate there is a very good possibility that these debs will get restructured in some fashion; but we don't know if it will happen, or what it will look like. Not a good place for those with minimal tolerance to risk. SD

Little tidbit. The Cdn financial regulator requires all foreign coys to hold an asset position in a Cdn trust account, equal to a minimum 102% of their Cdn liabilities, all at MTM, & reviewed for compliance on a monthly basis. Add in restrictions on the net asset exposure to the parent, & bi-annual ALM reviews, & your annuity (pension) is probably amongst the safest in the world. If the foreign parent bankrupts the cdn liability may be 5-10% underfunded at worst, with a very good chance of it being recovered as the liabilities go through runoff. SD

The Hoisington letter effectively assumes that the spend & benefit are in the same 'period', & that both private & public spend for largely the same reason. Within that framework it's right But ... A government borrowing today to fund investments in 'green' energy infrastructure (ie: direct investments, & paying well above market rate for 'green' energy) is essentially building its future industrial base to create 'green' jobs, new markets, green energy exports, etc. Todays cost does not reflect the future GDP growth, or the revenue from the sale of future carbon credits. The 'collective' corporate world is just rolling over & deleveraging existing debt; its not actually investing. Koo is correct overall, but doesn't recognize that companies will not just delever - they'll also exploit the opportunity to extend maturities & refinance at much lower rates. Companies get a lot healthier & quicker, but there's no benefit to individuals as nobody other than the sovereign wants to borrow. Net result if you believe it, is minimal cost pressure as interest savings offset higher input costs from FX devaluation. But ... if you think global QE cannot be safely unwound, we get higher rates and higher input costs, & every other company going bankrupt as they can't deleverage quickly enough. Once in a lifetime opportunities..... SD

Very nice analysis. Keep in mind that some of SFK's senior management has now retired, & an all-equity takeout would have to have a floor value at a fairly high % of the current replacement cost; especially if there were also material synergies..... And that new entity would be equity heavy, & able to do long-term refinancing at much lower costs; producing immediate & reliable interest savings, & a interest rate cap going years out. Gets more & more interesting each day! SD

Pensions are just deferred compensation. In Canada the public sector worker takes home around 15% less than the private sector, & doesn't get bonuses; they get a gold-plated pension plan instead. Nobody forces you to work in the private sector, & individuals moving to the public sector are just being rational. The economically arrogant typically don't live that long, & their estate typically doesn't get paid the full amount of their actuarial reserve at time of death. It's more for everyone else, & what pays for all the extras. So give those folks an extra six-pack, a 2nd steak off the BBQ, & a couple of cigars. They're doing you a favour! SD

Classic insider trading is to use material non-public information to trade in the market. It hurts shareholders, & is usually punishable by triple damages & the exchange unwinding the guilty party’s trades in Coy X. If you’re told the information in confidence, & act it on it for your own benefit, that is insider trading. If you simply overheard someone else & acted on it, it’s just fortuitous. This board just overheard the information, so there’s nothing illegal to trading on it. A day has passed without a trading halt, & this information came to both this & the Stockhouse board at about the same time. As it’s highly likely that the bulk of SFK’s investors review these boards on a regular basis, this board has a lot of professionals on it - with the inside trading possibility being raised almost as soon as it hit the board, & there has been discussion with management (assumed); the market regulator has opted to let it pass. Essentially, no harm was done. 225000 shares traded yesterday, about 2x the last 5 days average volume/day. NBSK has only been above $900/ton since Mar-09 (Paper Age), & it’s somewhat questionable if Saint-Felicien was actually producing at 96% of its 1040/ton/day capacity for the entire period. They probably have been going flat out, the Q1 results are most likely good, & employee enthusiasm around the restructuring, & the strong market is only to be expected; especially as many are most likely shareholders as well. Hopefully, the protagonists will get off with just a stern warning. Obviously, a very interest quarter coming up! SD

We think it's highly likely that most of this is right. We know that global inventory has been at a record low, its the right decision to open the taps wide, & that demand has been escalating (which is why they can get hefty price increases). Average sell price seems a little aggressive. What bothers us is that anyone trading with this information is effectively 'inside trading', so a trade made now could potentially be forcibly unwound. As it's also material, we would expect a trade halt, & a forced disclosure from management. Thereafter, a run up. While we think the disclosure was 'honest error', there will probably be some consequence. SD

We use something very similar. You buy coy X because its cheap from a business standpoint (place in cycle, bad PR, etc), & you essentially hold it untill the business turns. You then continue to hold if the next 6 months suggest there will be further improvement, or else you at least partially hedge. In effect you do a quarterly EMV assessment, & track it on a graph..... And if you know the company, & have tracked it for a while, your EMV assessment should be pretty good. You use 'value investment' to find coy X; EMV assessment & hedging is essentially a version of Graham; the rest is effectively early WEB. And as you cant predict bankruptcy you rely on a healthy MOS. The hedges also reduce your equity volatilty somewhat. Point? Value investment is just a tool box & an approach, it is not a 'formula' SD

Your kids will think you a bastard but ..... Do nothing other than further their education (university, global travel, etc.) untill they marry, settle down, & have their 1st kid. AFTER they've bought their house, buy out 50% of it with the proceeds repaying mortgage principal; & 'will' the equity stake to the kid. 1) Kids stay 'poor' as long as possible, 2) No money until they settle down, 3) More cashflow when they most need it (babies are expensive), 4) They can't really do anything stupid without your approval (you own 50% of their house), 5) If they divorce simply change the will ...... AND the beauty is that it is entirely the kids decision - as ONLY they can sell you 50% of their house. We've used versions of this to move grandparents to more accessable locations, & to help the parents of our UK based nephews. A timely purchase can also give you an FX advantage (20%+ UK pound devaluation), & drive home the 'money is the servant, not master' ethos. SD

The man was very good. He simply stayed too long, & got captured by the bubble of the times. US society also needs a fall guy to 'blame it all on'. Limited terms exist for a reason, & you extend them at your peril. 10 years on everyone will be saying how great he was. SD

Starting up an enterprize with the proceeds of an illegal activity is a criminal offense, & all she has to do for Stevie to get some jail time is prove reasonable doubt. A good lawyer, & 'insurance' documents spread over a number of places - & she should be OK. Stevie of course will be a lot poorer ;) SD

Just as an add on. When yields are sky high, high quality stocks are beyond dirt cheap. But the optimal allocation is still only around 40% bonds - although it immunizes you, you still need to estimate the average inflation rate over your holding period, & adjust the FV upwards. A crap shoot. Tweedy Brown cites the example of a widow staying in BRK vs going to bonds; the widow does materially better with BRK because it was cheap; the same argument applies to the high quality stocks. TODAY, would you buy a greek sovereign zero coupon bond? Probably not if I'm resident in NA as I expect the currency to depreciate. But if I lived in Greece ? maybe. And if I had only a few more years to live? almost definately. Risk tolerance changes with residency & age. SD

During the early/mid 1990's the Cdn government 'hit the wall' & couldn't borrow from anybody, anywhere. Yields on Canadas went into the 10%+ range, with the major provinces higher still. Everyday 5 yr closed mortgages went up to 19%+ Spending was thought to be out control, inflation was biting, the $C was in freefall, & Canada had a lot of foreign currency denominated debt that was getting far more expensive to service. As the debts became due, foreign creditors chose to roll-over maybe only 75%, & the rest had to come from the domestic market. As the fed sucked out the market, yields rose. It took a long time to cure. The US & the UK are now geting close to 'the wall' (downgrades) & most sovereigns have started moving BOP reserves out of USD & Sterling. Stimulus spending is proving hard to reign in, both currencies are dropping, but so far there's been little inflation in either country. We might not quite see 10% on a US treasury, but it would seem to be only a matter of time for a UK gilt. SD

Wait untill sovereign yields are in the 10%+ range & you want a long dated PO strip. At age 35, your 30 yr PO strip would mature at 100 when you are 65. And be available to you today .... for 5.73 + fees & accumulated interest. No reinvestment risk (as its a zero coupon), guaranteed to reach 100, backed by none better than the central bank of the land, & if held in a TFSA .. entirely taxfree. You buy & sell equities. You buy high quality bonds only when yields are very high, & you hold them to maturity. SD

Good article. SD

Purely academic, but go the 100% commodity route (oil/gas). The reality of a 'lock-up' is that you can always sell your original allocation for cash; you just cant reinvest it in anything else. Cash is effectively the 'default' option; with a holding period from date of sale to the end of the lock-up. Therefore havent you really got a call option with a variable maturity up to the term of the lock-up. Starting TODAY, which is likely to have the highest relative run-up? A 'hedged' commodity position has to be pretty high on the list SD

If you want to play in bonds... be VERY sure that you fully understand bond quotes, compound interest, duration, convexity, convertibles, credit ratings, debt to equity conversion, illiquidity, yield curve & arbitrage strategies. Most bond issues are very thinly traded, & are held by sophisticated investors to offset other liabilities (ALM matches). Most folks would do far better exploiting the failures of issuers (too much, & distressed debt, that depressed their stock price) rather than buying the bonds themselves. Next step up is low priced convertibles (debs or prefs) that are acting like long term options; you have to be comfortable that the coy will not go bankrupt and you expect to either lose your bond investment or get a whack of equity at a very low price. There's a reason for the 20%+ cash yield; any cash interest or resale proceed actually received is bonus. It is possible to profit by buying what institutional portfolios can no longer hold (decline in quality pushed an existing holding out of the 'permitted' universe) - effectively retail/institutional arbitrage, but you better know what you're doing. The classic example is an I-Bank partner buying the 'C' tranche of a securitization with the commission from the sale. Do you feel lucky? SD

This is an average 12,250 ton per month at roughly 90% capacity (generous for a re-start) & most would suggest its highly likely that they will be displacing existing physical deliveries, against short forward contracts. Notable is that May-2010 (when this new production comes on line) is also when the European NBSK forward pricing curve peaks at 958 per ton. If they have to delay, or cannot deliver in full, expect price spikes as they roll their contracts forward. SD