SharperDingaan

Did anyone notice that the press release was more interesting in what it didn’t highlight. (1) Gross margin is now @ 8.6% - & in the low end of their ‘norm’; higher prices & greater throughput should widen it in Q4, & the 10% workforce reduction in 2010 should keep it up. A sustainable 12-13% margin is starting to look feasible. (2) Sales & Admin is again stable at aprox 2.9% of revenue. (3) The FX income & derivative effects are cyclical (as % of revenue), they are now trending upwards, & the adverse impact will further diminish as the revenue grows. EBITA is not just positive. (4) NBSK volume was an improvement over Q3-08, & materially higher than Q1-09. The revenue impact is primarily pricing, & the current Q4 price is now roughly $50/ton higher than Q3 was. RBK volume was lower than Q3-08, but the volume is also materially higher than Q1-09. They are gaining market share, & it is significantly improving the fixed cost/ton amortization. (5) Booking OCI now, versus later, has made the P&L less volatile going forward - & set the FX rate at a fairly high .9327 going into Q4. If the 12/31/09 FX rate is lower, there will be FX gains in both OCI & the P&L (less so as the FX rate is averaged). The BoC has repeatedly stated the current FX rate is a problem, & aggressively brought it back down over October to the 09/30 level. Recent job loss reports would seem to favor a further F/X decline. Lot of core strength starting to show, & the further we get into the quarter the more certain we can be of the FX impact. It will take very little to generate a surprise quarterly EBITA in the 6-10M range. No wonder they’d like to keep it quiet ;) SD

.... the man with affordable debt is king? Ah, .... but only relative to the man with the printing press! SD

Keep in mind that credit ratings are not what most people think they are. They are marketing tools. If the US Fed lost its AAA rating, would BRK really be able to keep its AAA rating? ; or is it more likely that the rating scale would simply be inflated to make the Fed rating the 'new AAA' ? If BRK did not do something to 'weaken' their rating they would be punished for it. SD

Just for balance. If the shares split 10:1, & the major players held their relative positions, you'd simply increase the float by 10x. Whether its 'good' or not, really depends on how that additional float gets used. The wider & deeper the pool of investors the better the pricing, & the liquidity, but there is also more potential for abuse. While a trapped short can be highly profitable, they can also be severely disruptive. Is the long period of distorted pricing better than a short period of severe swings ? .. or does it just move future gains forward? (ie: that bigger take by stringing the short out, was at the expense of a lower future multiple). The bigger the float the easier it is to get out - & for some other idiot to try their luck. Then recall that its also a lot easier to buy back some float ;) should the multiple become silly. FFH has long been criticized for having too small a float; and now that both ORH and NB are gone, the issue has grown worse. A modest share split at some point, has to be almost a given. SD

The reality is that once you get into the low hundreds/share, the share base becomes primarily institutional & a lot less liquid. The closed end fund is really just the markets solution to providing that liquidity - at a very high price. Most companies try to keep their share price within the average range of their perceived peers ... & it tends to ensure that they get the same valuation as their peers (long/short arbitrage within the portfolios P&C allocation). While we think its largely enevitable, we'd prefer they not do it untill after they do another acquisition. There is really no need to wake up Mr Market just yet ;D SD

Did you notice that this is also a bet on a lower USD With exports higher, imports lower, & more production taking place in the US - its highly likely that the volume of goods over these tracks is going to rise, which will also push up freight prices/mile. Pricing power. SD

Universal health care was established in Canada because one politician (Tommy Douglas) called the medical professions bluff, & played hardball. He effectively told the profession that every practioner in his province would have to have a 'practice' licence, and that he would refuse to give them one unless they complied; then phrazed the licence so that if didn't do what he wanted, they were in voilation of their 'oath'. All doctors were free to leave, but couldn't get anything as without the license they couldn't sell their practices (no value). New doctors had to spend their first few years in the rural areas (where there were no doctors, & the province made it worth their while to do so) - & the terms were made public. The rest is history. Then ask why is it somehow more 'acceptable' to force a medical patient to buy all kinds of questionable tests (products) in a one-sided transaction (high pressure selling); than it is to knowingly push sub-prime mortgages on individuals who clearly could not afford it? Time for some change? SD

Get really sick, & the cost of your 'super-cat' is really just the cost of ambulance/flight to another country. Something that every vacationing snow-bird almost automatically thinks of. Medical tourism exists for a reason, & in most of the 'better' Asian centres the quality & reliabilty of the average care is often superior to much of the 'average' care in the US. 'Market' wise I have an incentive to offer US residents health insurance that will pay for those foreign treatments (Fairfax Asia?), but once I achieve critical mass - US insurers will be forced to follow. The recipient countries get state-of-the-art new hospitals to meet the demand, & their medical profession gets to use their perfectly qualified doctors, that the US excludes to reduce local competition. End of the nicely protected US 'monopoly' market SD

A subject we're sure is dear to many hearts! A few initial thoughts, following which we'll post more fully in a weeks time ;) 1) They could really use a better press agent; the numbers are actually quite solid, but you wouldn't know if from the headline. 2) There is 9,082 of very favourable one-time charges in here; 2,097 inventory write-up (Note 3), 2,570 immediate expensing of all deferred financing charges (Note 13), & 4,415 of OCI (IFRS related) which technically didn't have to occurr untill 03/31/2010. Conservative write-offs. 3) The recent black liquor subsidy is entirely off BS. Conservative vs some of the other pulp mills. 4) There's a 4,345 FX loss on translation, & another 4,415 FX loss in OCI? Worth a question! SD

The car sells because (1) it costs less to run (2) it is easy to fill (3) it is cheap, & (4) it is green. You could easily do (1), (2), & (3) by simply putting a windmill up in a rural village - & charging something akin to a more robust version of todays 'tik-tik'. Same principle in the city, just different delivery systems. But you could ALSO get (3) & (4) if you saw the battery the same way that we see gold recycling, & the ONLY place you could recycle at was a state facillity. The battery 'cost' would now just be the cost of financing/re-processng, and the strategic metal in those batteries would effectively be the equivalent of the states 'gold' reserve. .... whole new meaning to 'store of value'. Most would expect the state to monopolize the battery technology, & continually try for as much charge as possible (charge more for the same amount of strategic metal). An arms race that you cannot win. Look at the strategic metal miners. SD

Keep in mind that the US is very new to this, & that health-care in most countries in a moving target. The reality is that there will be rationing, but it will be socially vs market driven. Uthanasia & quality of life is going to make itself felt. When you're 80, in constant pain, & your life is 'making it to the next pill' - you're not living, you're a addict in a pharmacy farm. Fundamental changes to laws, how we see age, & how we see life itself. Folks will still get older, but they will not spend their last 6 months in hospital, & they will not linger when they go. Self rationing. Life-style choices are going to bite. You choose to smoke, & you knew the risks; so when you get lung cancer you may get 1 round of chemo & pain killers, & that's it. Fundamental changes to how we see personal/social responsibility, & social compassion. Social rationing. Put bluntly, whatever we might think of it, darwinism works. Coming to terms with it as applied to people, vs animals, is a whole different thing though! Hardly surprizing that it causes such nervousness. SD

You might want to look at the nice low debt/equity ratio, as isn't this where the immediate benefit of the ORH buy-back really showed up? This is quite the arc. Then notice how little press there is today ? SD

Lot of interesting points; & in many ways the more things stay the same. Happy to see that commodity prices are tied to the government interest in retaining control, & that the lessons from the fall of the old USSR have taken root. We would far rather a bet on the very strong self interest of the party, than the collective ability of G-8 central bankers ;) Dictators exist because in many parts of the world they’re a lot safer than democracy. One strong man who puts down all the others, is a lot easier to isolate than 10 contenders, and relatively simple to remove when the time comes. Fairly common practice under English colonialism, & after doing it to so many - they’d clearly worked the bugs out of it! Kind of nice to see the ‘old-skule’ stuff coming back. SD

Might we suggest that CMC cap their match at $X/contribution ... so that we can do some larger contributions without bankrupting you. It would also be usefull to have a tax number so that we can deduct the contribution. (ie: instead of getting $1, you get $1.30 .. with the extra $.30 being the tax mans contribution ;)). Assuming the market doesn't crash between now & April, there is a strong possibility that this will also generate some significant change. A contingency plan could be very usefull. SD

Even we don't think we'll see .6x BV, but we see the argument. Keep in mind that trading the changes in BV multiple became a lot more dangerous when ORH came back into the fold. With 4 strong coys (FFH, NB, ORH, C&F) now all on the same consolidated Balance Sheet, the elimination of cross-holding committments, & European regulators starting to break up a number of players (ie: ING), there is now a quiet upward bias. One announcement, could well add an instant .3x to the multiple. We covered our synthetic short just after FFH went to market, & are back to our core long position. SD

Agreed re P/B & 'look through' earnings, but keep in mind that it's the long term buy & hold view. As 'Mr Markets' view is typically very short term, the prudent thing is to expect some dissappointment. Nothing to prevent one from taking advantage of the poor fellow though ;) SD

The 700,016 per the 09/30 BS is deferred taxes. See Note 4 4. Income Taxes. Currently, the Trust incurs taxes to the extent that there are certain provincial capital taxes or state franchise taxes, as well as taxes on any taxable income, of its underlying subsidiaries. Future income taxes arise from the differences between the accounting and tax basis of the Trust's and its subsidiaries' assets and liabilities. Deferred taxes are effectively an interest free loan from the taxman, that is never repayable as long as the company maintains its asset base (rigs, equipment, etc). The actual amount depends on the asset mix as different assets depreciate (for tax purposes) at different rates; when PD comes out of its trust structure, there shouldn't be any impact. Then keep in mind that the existing trust structure also requires that they essentially pay out their earnings (why we get a distribution); which they haven't been doing. Expect some big (& very favourable) write-downs in Q4 ;) that bring them back on-side. SD

You might want to step back a bit: Agreed Q3 is probably a good quarter, but lets be a little more conservative & assume a BV increase of only $40 (ORH offer costs, FX, surprizes, etc). 09/30 BV is 355 (315 Q2 + 40) which equals the present price of 355; ie. price/book multiple of 1.00 To make a quick gain here we really need the multiple to expand, but the headline news is going to be year-over-year comparisom - & unless these numbers are much better than last year; there will be little reason to increase the multiple. The brilliant quarter with lots of 'sexy' gains may well give us a higher BV, but don't count on price/BV expansion. Assume 15% P(x) we get $60, BV of $375, P/B of 1.1. Price is 412.5, 'gain' is 57 Assume 60% P(x) we get $40, BV of $355, P/B of 1.0. Price is 355.0, 'gain' is 0 Last years CDS gains could haunt us. SD

Thanks for your comments We’re pretty much on the same page, but we see the primary risk as being distortion ‘from the times’ - versus the actual business risk itself. We can fully understand no more than 2-3 equities … so as the portfolio grows, (1) either the $/investment increase, (2) the equity weighting declines, or (3) cash/margin changes. Given the times … (2) should be increasing (3) should be modestly negative – & (1) starts looking like an institution. Hence the ‘distortion’ O/G is largely within our ‘circle’, we have experience with the industry, & we have the expertise to hedge the risks appropriately. We also know our competitive advantage, & have the discipline to stay within it. We’re living in truly extraordinary times SD

Our cost base is the mid 4's. We started to roll in during the early stages of the GW acquisition, hedged as financing issues began to dominate, then covered & added at around the time of the Treasury Board acquisition. As our portfolio has grown, the PD weighting has fallen, & we need to re-assess. We believe the risk is substantially lower than it was; 1) Debt is down drastically; lowering both the break-even & go-forward earnings volatilty 2) Business is improving; oil/gas prices are rising, client CF increasing, & decline rates increasing 3) Mgmt is delivering; overall business, & general execution Are we missing something? SD

We'd be interested in hearing the boards comments on PDS, particulary over the next 12 months. Q3 earnings were released this AM ;) We hold a long position with a very low cost base. SD

Look for news footage from around the 70's, where clips from the people who lived through it were being used (ie: the 60-70 yr/old retirees they interviewed).

Need to see the Q3 numbers, but we think its an non-issue. Given the $1 minimum for most institutions; in the current climate its probably pretty hard to convince an IC, with not much more than analysis & choppy trading around the $1 mark. Conservatism dictates a wait & see approach. Re Q4, we're assuming an average 5% higher price, & a 5% drop in the $CAD. Q4 earnings at about 85% of Q3. Gives some room for higher fuel costs & the odd adverse surprize. Per the forecasts, the discount seems to be about 40% ((.5-.3)/.5). Once Q3 numbers are out we'd expect it to roughly halve. Back of the envelope. 40c/yr x 5. SD

When our migrant was making $10/hr & working 12 hours/day he was making $120/day & might have spent $60/day on food/shelter/& 'fees'. The migrant took on significant risk to get that opportunity (border crossing/daily 'immigration' police), & most of that net $60/day went home where he was considered a 'rich' man. The risk was deemed 'worth it', & thousands sought the 'better' life. Our migrant now makes $8/hr & can only find work for 10 hours/day. Rising US hostility has both inceased the 'fee' so that he still pays $60/day, & increased his daily risk significantly, so that he now nets only $20/day - & on most days none of it goes home. The risk is now deemed 'not worth it' & kin are advised to stay home. Keep in mind that the migrant could also be a 'westerner' taking a 2 yr contract in Iraq/Afghanistan for 120K/Yr. ie: Invert. Nothing to do with workforce desperation.

Keep in mind that your deflation is too little money chasing too many services, & can only occurr if all NA spending goes down faster than services. Governments can temporarily print money to plug the spending gap, & NA labour has a significant migratory component. Yes, in the near-term there are too many workers; but farmers aren't going to use pickers if they cant sell their crop, and factories/construction sites aren't going to use migrant labour to do the sh1t jobs if they aren't selling. A migrant still needs to make X$ to live, & if his/her 'in-country' relatives are advising that they can't do it - that person is not going to migrate. If you have $10 & you can buy 10 foreign widgets - you have a lot of 'stuff' but no domestic benefit as the foreign guy got the work. If you now only have $7 & can buy only 5 foreign widgets, or 6 domestic ones - you'll have less 'stuff' but will buy domestic & some NA will get the work. You bought domestic because the value of your currency fell, & not because the production cost of the widget changed. More jobs, more spending, etc. Most folks are missing this. SD