SharperDingaan

You might find the last few pages of this very useful http://www.ciaa.org/Luncheon%20Speech%20Why%20insurers%20fail%20Lessons%20for%20the%20current%20environment%2011May09%20FINAL.pdf SD

Schooling (MBA, CFA, etc) can make you a more effective investor, but you also need the innate ability to come up with your own applications/innovations. You have to have both, & be mature enough to realize it. You also need interest & competency. We’re accidental investors, as we don’t have the capital to buy adequate owner-manager stakes in the companies we like. Taking the business versus investment view lets us practice, & if we’re any good – build the necessary capital the old fashioned way. By extension - we might do well as CFO, but suck as PM; similar skill-sets but different application. SD

Its usefull to think of it in 2 seperate streams. Long-term its pretty clear that FFH will trade higher & double roughly every 4.5 years (72/16). Better than the index, & denominated in CAD. The broadly comparable US equivalent is WEB. Short-term you may want to look at hedging the multiple into the AGM, & covering over the summer doldrums. Just be sure that you're comfortable with the Zenith exposure. SD

Couple of first impressions: - Q4, & 2009, looked a lot worse than we expected - but an awful lot of it is cosmetic. Suspect they've taken every provision/write-down possible to get the taxable income to zero. Great going forward, not so hot for the current quarter/year. - Conversion timing is pretty much dictated by CFX & resources. There are only so many appropriately qualified accountants to go round (200+ trusts converting over 2010), & SFK can't afford to have CFX convert before they do (accessing new capital that will virtually guarantee a raid). - Tone, messaging, focus on charge-off vs capitalization, forthrightness have changed. Long overdue, but judging from the MD&A content its highly likely that SFK is 'in-play'. Too early to assess eventual outcome, but they seem to be listening to this board. - Don't knock the analysts. Worst case we lose $ if we're wrong, they will lose their jobs - a very different risk/return profile. Their impact will become obvious once results start showing. - Interestingly there's no discussion around their sensitivity to interest rates. The conversion timing makes it highly unlikely that they'll be paying higher rates from July 2010 onwards, & virtually all the debt could be refinanced at much lower rates (assumes no major interim changes). Given the demonstrated charge-off vs capitalization preferance, a Q2 'refinancing penalty' charge-off on conversion - & a 75-150bp interest saving going forward? SD

Just back from vacation in the GCC. Will post once we've had a chance to go through the numbers. SD

Much of the reason for the Japanese experience dragging on so long was the refusal to write-off debt, as insisting on debt repayment by force feeding public sector borrowing (koo approach); meant that it took years for private sector liabilities to decline. As debt repayment, & no new borrowing, dramatically increases regulatory capital; there is a growing & more than ample capacity to write off/restructure bad debt. Furthermore there is no income loss if the debtors are forced to issue warrants as part of the price. Do this with AIG & you'll have new owners. Whether you'd do it or not depends on what AIG's existing interests put your way, to persuade you that its a bad idea. SD

Keep in mind that non-owner-occupied is typically a condominium bought off plan with maybe a 30-40K DP (7-10%). The non-owner-occupied bought early (to get the project off the ground), & probably received free upgrades, GST rebates, 1st time buyer (one per kid) credits, & 2 rounds of inflation increases during the 2+ years that it took to get built. There is a strong incentive to buy the biggest/glitziest condo possible, retain it for 6 months following possession, & then sell it off for a tax free gain. At 5% DP the non-owner-occupied didn’t need to put up any additional cash on possession as the initial deposit covered it. Now that non-owner-occupied suddenly needs to come up with a lot of new cash, & the bigger/glitzier the condo the more that’s needed. Either the non-owner-occupied almost immediately prices down & dumps (increasing inventory & deflating the bubble), or puts up more capital/condo (reducing the overall risk in the market). Notable is that the 5% DP still applies to 1st time buyers, but is subject to the tighter means test; so for now - our flipper has a market for their more basic condos at lower prices, but not their glitzier varieties. Once the turn-over has occurred, most expect that minimum 5% DP to change to a 10% DP & a maximum 30 yr amortization; another round of market risk reduction. Very elegant. Of course if you’re one of non-owner-occupied with a big & glitzy condo you might have a different opinion. As might the army of ‘designer’ folk whose job it is to make your place look glitzy. SD

Keep in mind that this debt is relative to income & it doesn't have to be paid back strictly from cashflow; debt to equity swaps, asset sales, & higher income would all contribute to a solution. The issue is not new, & there are many well worn local level solutions. Eg: A common failing in many 2nd world countries is debt overextension by younger couples, buying all the 'must haves' being sold to that generation. Big wedding, Mc Mansion, 2nd car, etc with negative cashflows financed via various forms of credit. The solution is usually a 51% sale to 'family', at market price, with the 'family' paying the bank vs the couple. The couple gets told to put up some nephews (so they can get a job, & pay the 'family' rent) & use their cash flow savings to pay down their debt. The couple either accepts or goes bankrupt, if they change their mind/divorce the 'family' uses the majority control to sell the Mc Mansion. Deleveraging, moral suasion, additional income (nephew earnings), etc ... & the same end solution. Of course the couple isn't thrilled, but the 'family' didn't f**k *p either. SD

Look a little closer at the debt #’s of Greece, & compare them to the State of California - they are effectively the same. Then add to it that Greece’s place in the EU is very similar to California’s place in the US. Virtually everyone recognizes that the Greek standard of living is going to drop, quickly, & with a lot of civil unrest. So why is California so ‘special’ ?? A couple of hedges on Californian banks could be a lifesaver. SD

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