SharperDingaan

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

Keep in mind that the FFH float is actually too small for anything other than `buy & hold forever` purposes (which doesn`t require depth or liquidity); they need to be expanding it, not reducing it. It is a lot more likely that they either do (1) some kind of share split (ie: 5:1) CONCURRENT with a buyback, or (2) a bigger acquisition partially funded with new equity. Logic suggests (1) vs (2), & sometime after the AR (at the earliest). SD

Your premise is borrow in Japan AND invest in Japan. If you bought somebody with not much more than a high % of the domestic Japanese health care market, this might make sense (growth from the population ageing), but its a very narrow segment. Its really borrow in Japan AND invest OUTSIDE of Japan. Not said, but fairly obvious, is that fewer goods will actually be made in Japan over time - as there just isn't the workforce. As Japan still needs to import, what goods are made locally must become increasingly higher value, & the competition around those goods is a lot fiercer (Germany). If you continually run your BOP down, your currency must eventually devalue. To hedge the Japan specific risk you really want higher growth (or its not worthwhile), a currency more likely to appreciate vs depreciate (MOS), and to be long in something material/significant that Japan doesn't have (MOS). Borrow in Yen & buy a significant Cdn oil/gas producer to hold over the long term; makes a whole lot of sense. A trade that some folks (JCS Lau/Husky Energy) have been doing for a very long time. SD

You might want to look at what occurrs when you overlay demographics on top of the input/output approach. While social organization remains a factor (usually by replacing tradition with a more 'cash' orientated outlook), there were also just a lot more 'new' people to start with. The forced lower birth rate (one-kid policy), matricidal practice (girl babies are drowned), & hostile work conditions (deaths to accidents, toxic fumes reducing fertility, & accumulated toxins disabling workers early) virtually guarantees that in 10-15 yrs the chinese domestic workforce will be a lot smaller than it is now (assuming no foreign worker imports); & that it will stay low. With fewer kids to take care of ageing parents (tradition), & fewer fertile women to have kids with, material social unrest is almost assured. And the 'party' has historically not reacted all that favourably to unrest. You have to think that the best 'export' will be young people independently setting up (& investing) in the 'West', & that the most prominent 'import' will be the gradual repatriation of the BOP surplus. The best 'investment' is a chinese minority partner in your NA business; and an approach very similar to the 'sea-turtle' reality of Japan. SD

Keep in mind: Recent healthcare reform can only restrict J&J's growth over the next few years. Generic versus proprietal drugs, holistic versus interventional approaches, better & more efficient diagnosis. It’ll be harder to sell an expensive drug/treatment (most of the drug pipeline?), and in volume. Still a good business - but not as good as it used to be, & probably near its fair valuation relative to future prospects. Selling eliminates a lot of risks. SD

No - a government action that produces GDP growth (free trade, hi-tech research, labour force productativity, etc), helps BOTH business owners (make more $ by making increasing the pie), & workers (higher standard of living). Printing money (inflation or deflation) just increases nominal earnings, & often to negative effect (Zimbabwe, Weimar Germany, etc). Make an extra $10 to buy things that now cost $10 more, makes you no better off. Burlington is esp attractive as it is a high FC business with revenues that are largely not commodity driven, & a large chunk of FC (amortization) that doesn't vary much. A small government action (ie: small tax on gasoline to raise revenue) increases volume (truck traffic switches to rail) AND rate, and then magnifies g by the operating leverage in the coy. Lesson: Offer conservative financial leverage, aggessive operating leverage, & the reasonable prospect of positive GDP growth ... and you'll get a high multiple for it. ..... And isn't this pretty close to the value investors definition of a 'good' business? SD

"if you expect positive GDP growth, the higher the P/E the more of a margin of safety you have". Sorry this was a miss-keying; it should be if you expect positive GDP growth, the higher the GDP growth, the more of a margin of safety you have. The future dated P/E formula is P(1+i)^N/E(1+i+g)^N. P=Price paid today, i=inflation, g=GDP growth, E=current one-year earnings estimate, N=holding period in years. As i is in both the numerator & denominator the formula simplifies to P/E(1+g)^N. I sell a good for $10 that has has a $6 VC; CM is $4. Assume I have 10% inflation & can pass it on to my customer. I now sell at $11.00 with a cost of $6.60; CM is now $4.40. If most of the fixed cost is depreciation or amortization (doesn't change with inflation), & labour cost raises are 'sticky' (usually the case), most of extra $0.40 in CM will flow to the bottom line. Earnings go up. To buy any business is to speculate that its future growth will be at least the GDP growth rate. Buying NT at 120x earnings is to speculate that NT's future earnings are going to 10x what they today (if a 12x P/E is reasonable), & in pretty short order. Ridiculous of course, but par for the course when looking at start-ups! Cheers SD

There were 3 things to note: (1) Doubling or halving the multiple effectively produces the same MOS (barring a very small mathematical delta). ie: The MOS is almost entirely a function of expected GDP. (2) Both inflation, AND deflation, reduce the day-1 multiple the longer you hold; & they do it by about the same amount (slightly more for deflation). ie: The MOS is almost entirely due to the length of the holding period. (3) If todays GDP growth is negative - the multiple is actually much higher than it looks. Here endeth the lesson. SD

Hate to tell you this, but we bought most of our shares in at about the same level - & still have 'em ;) SD

Revaluing or imposing a border tariff achieve the same result, but have very different optics. Can you really see the US government almost instantly raising the sale price on the goods sold at WallMart (which are primarily imported) because they suddenly put a tariff on them? And when those most reliant on those low prices, are the populations in the S & SE who've just lost the Health Care debate? China slowed its roll-overs this week, & the T-Bill market almost went no-bid. If you want to trade; then learn some cultural manners. Employing a little 'face' could go a long way! SD

"Please could you elaborate as it flies in the face of conventional wisdom that the lower the multiple the more the marign of safety" Assume inflation is 2% & GDP is 2%. If you simply bought & held for the entire payback period the P/E you paid today, recalculated at the end of year 12, would fall to 9.51x from the 12.00x that you actually paid. If nothing changed, & you held for the full term, the 2% GDP growth alone would give you a 21% margin of safety [1-(9.51/12)]*100. Recalculate using the same 2 & 2 assumption, & a multiple of 25. Then recalculate using a multiple of 12; & a -2 & 2 assumption. Very different effects. You're looking at what GDP does, deflation does, & the length of the holding period does. Then look at WEBs actual practices ('buy & hold forever' & Burlington Rail). The old guy aint bad. SD

Always keep in mind that even if the P/E multiple (assume 12x) for both a casino operator, and a big integrated oil, are the same; it does not mean that they are priced equally (despite what the textbook says). It really means that if you bought today it will take 12 years to get your original investment back, without regard for inflation (2), and only if the future earnings are the same as todays (1). (1) Earnings volatility. The business cycle produces higher earnings at the peak vs trough; some industry cycles are shorter & more extreme than others, and some industry earnings are more predictably reliable. Your purchase locked you in to a certain point on the business cycle for the next 12 years;tears if you locked in at peak earnings. You also locked in an annual $ amount of earnings, & an early shortfall will hurt; volatility is not your friend. The integrated oil is the better choice. (2) Inflation. Assume average inflation over the 12 yr period of 2%/yr, & GDP growth of 2%/yr. The future value, adjusted for inflation, of today’s $12 investment is $15.22 [12*(1.02)^12]. Earnings should increase by at least the inflation + GDP growth rate, or 4%/yr. The future value, adjusted for inflation, of today’s $1 of annual earnings investment is $1.60 [1*(1.04)^12]. All other things equal the P/E multiple at the end of year 12 should be 9.51x [15.22/1.60]. Points? (A) if you expect positive GDP growth, the higher the P/E the more of a margin of safety you have [ WEB’s Burlington Rail] (B) If you expect deflation (& economic intervention) you want the lowest P/E possible as the future P/E multiple will be less than what you paid; ie: FI becomes the better bet [Hoisington]. The lesson here is recognizing that there are 2 applications; 95% of the population will do nothing more than calculate the industry multiple, develop a company specific earnings estimate, & multiply. Buy if the shares are underpriced, sell if they are overpriced. But maybe 5% of the population goes that extra mile to actually understand the ratio. Nothing magical. Guess where WEB is. SD

Yes they were imperial bastards, but they were also extremely good at what they did - & the basic model worked in pretty much any location (India, South Africa, Canada, Hong Kong, etc.) Some of the 'unpopular' but extremely practical legacies, have been English as the 'language of business' - & the 'colonial' universities using the 'English' educational system as the matriculation screen for an extremely limited number of places. Graduate only the best & the brightest, in something very similar to the old Chinese 'madarin' system, & have all your future leaders in one place during some of their cultural 'formative' years. Of course if you're in the 98% that didn't make it - this is a terrible system! Most local indians speak the common language of their state, & English; without English, even talking to the guy in the next state would be extremely difficult. Rather than reinvent the wheel, learn from those who've allready worked the bugs out! SD

Hoisington has a very good article in this month's CFA Institute Conference Proceedings Quarterly that lays out the technical case, in simple terms, for US deflation. While not new to this board, the case is pretty compelling. Even we're starting to see lots of small caps with solid managements & great potential, that are quite literally going for a song. We're also seeing mid/large caps being ignored because investors dont fully understand the seasonality and/or temporary changes in their business (PD.UN). And if even retail can see it? But.... we're seeing very little on the FI and/or cross-currency side. Given that the probability of Cdn rate hikes is now far higher than it was, there should be a rash of refinancing - yet there hasn't been. The $C has appreciated 13% against sterling over the last 90 days - yet there's been no rush to UK gilts. The clear inference is that treasurers either cannot re-finance (unlikely), or they must think that their real cost (rate+sweeteners) will be lower in the future. Same as Hoisington. There's a tendency to see only equities, look at fixed income. You may be surprized at what you see. SD

Keep in mind that P&P is a cyclical commodity business; no different to mining, oil/gas, etc. It is inherently unstable, & you're really investing in the current cycle (point within it, relative strength) versus the individual coy. Its buy & sell; not buy & hold. However were the industry to restructure & consolidate there would be a sizeable & permanent capital gain, over & above this cyclical gain. But to get this gain you had to be institutional, have bought in sufficient quantity to effect change, & bought some time ago. Its a small club, & the players know each other. We`re comfortable as we`ve long recognized that there are 2 cycles here; & todays pulp prices & conversions are making it far easier to execute. We`re not that concerned with todays model (other than its sufficiently profitable at current levels) as we don`t expect SFK to still be independent over the next down-turn. As we can easily hedge, we also don`t need either of a merger or a high pulp price. However, we do need to be able to recognize when the cycle is turning; & we think we have some time yet. SD

We hold both common & debs, in a concentrated portfolio. By definition, we're overweight. The positions were added to some time ago, & we have not added since. SD

In practical terms SFK should move up, simply because of higher pulp prices & the global shortage of pulp. A higher average sales price, & a lower fixed cost/ton from higher throughput; should have increased margin quite a bit. Add the CM from additional volume, plus labour & pension savings, & we should have enough of a good Q1 to go > $2.00/share. But they aren't going to run-up until they can show positive earnings, a healthy EBITA, & an end to the 'kitchen sink' charge-offs. An early end to the charge-offs will a game changer, & go some way to demonstrating managements intent & confidence. We would actually prefer to take CFX stock - but not until we know the outcome of the reorg & whether they've been able to refinance at a lower cost (Q3). In theory a 1:50 yr cycle should have legs, so merging now is to sell out too early; alternatively a merger soon after re-org (for CFX stock) would maximize short-term value (direct P/E comparisom if SFKs post re-org structure is the same as CFX's), & extract consolidation savings/security of supply benefits for all (shareholders, management, & labour force). If nothing changes; > $2/share post the Q1-2010 earnings announcement. If the charge-offs stop; > $3/share. SD

$1,000/ton for NBSK may be a little closer to reality than was peviously believed ;) SD

Isn't this really just a debtor (US) saying to their lender "If I go [because you didn't revalue], you go", & the lender telling the debtor "I'll survive, but you will not". Lots of threats & grandstanding, but behind the scenes ... they eventually reach a compromise. No one can get anywhere by publicly calling the other guy an idiot. SD