SharperDingaan

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

It would appear that inflation has begun ... http://blogs.telegraph.co.uk/finance/edmundconway/100003084/markets-panicked-about-prospect-of-inflationary-spiral/ Notable is the 'so-far' 25% devaluation of sterling, & that this inflation is coming from the higher cost of basic imports (in sterling). Very similar to the US, but maybe 2-3 months ahead? UK gilts (equiv to US treasuries) are now earning -2.4% in real terms. SD

Hate to tell you this, but what you're looking for doesn't really exist. Schools teach technical skills, not application - & there are many different kinds of application in the value orbit. The CFA program is probably the most advantageous over the long-term. While geared to those seeking the charter; if you have no intention of actually working in the industry, the knowledge is more valuable than the charter itself. SD

Keep in mind that Japanese financial ratios are not directly comparable to US ones, unless you make significant BS adjustments for the cultural holding coy structure. 'Actual' ROE is often a little higher than it appears. SD

You might want to recognize that the industry is going to be made to pay for its foul-up. Either all up front at once, or gradually over a number of years TARP funds are demand loans, & they can be deliberately called at any given time. Calling the loans on a Zombie bank will immediately collapse it, & spread the contagion; but this time we dont have MTM accounting, counterparty exposure is far better known, there are 3 quarters worth of earned inflated loan spreads to help absorb industry losses, and the fed has far more leverage over players than it used to. It would be the market solution, brutal, & devastate the industry - but healthy. Alternatively it could be done more humanely over time, through progressive regulatory & social tightening aimed at changing the streets culture. As we dont think the culture will change untll 1:2 is deliberately bankrupted, we prefer the 'controlled' collapse. And if it temporarily spikes the unemployment rate another 4-5%, so be it. Be thankfull its 'Obamatax', ... & not 'Sharpertax'! SD

The reality is that one has to look at the macro. Make an assessment as to where the target industry is in its economic cycle (bust, growth, boom, etc), then how the target coy is lkely to fare should it turn out as predicted. There is extensive literature indicating that the bulk (80-90%) of the eventual gain is attributable to economic assessment, not coy selection. The discussion has value if you apply what you're hearing. At times when there's so much uncertainty, most folk would hedge; how much (if any) depends on your own convictions. SD

Its not over, its just begining. Most folks recognize that if the worlds central banks had not stepped in as they did, we would be in another global great depression. The coffee table discussion would be whether its better/worse than the 1930's were. Central banks have clearly reached their limits. The tool-kits require that you're the risk-free AAA borrower, when your'e only AA+ - you need a new tool-kit & a bigger printing press. The great hope (salvation) is that Chinas (& Indias) population earns enough every year, quickly enough, to buy the majority of Chinas own production (& more). The party stays in power, commodity prices stay as they are/rise, & everyone else (Germany/US) starts exporting to China. Its human nature to WISH it were over, its a marketing advantage to convince you that its over, but how can it TRULY be over when the underlying causes are still here? - & central bankers are now past their limits? At best we're only closer to resolving the causes. SD

A couple more from our favourite comic that are specific to this, & thats it http://www.telegraph.co.uk/finance/alex/ http://www.telegraph.co.uk/finance/alex/?cartoon=6748527&cc=6718600 Enjoy Sd

Governments, & central bankers, can leglislate/impose whatever laws/rules they wish - within their own jurisdiction. All they need is a 'yea' vote to enact the law/policy on the land. I-Bankers are all about capitalism & the free flow of money/talent to wherever it'll earn the most. So if your bonus (& total comp) is reduced to the point where you think that you can do better elsewhere - you should voluntarily move to wherever that 'elsewhere' is. Don't move & you've chosen to accept the lower bonus - & for most people, moving is not practical You have a profit because the government/central bank fostered the environment that allowed you to make it. So why should any government let you keep it ? when frankly a monkey could have done much the same thing. And why is this any different to the existing annual fed/state tax share on a nations GNP? Much more pithy to go the 'sand-box' route! SD

Couldn't resist! http://www.telegraph.co.uk/finance/alex/?cartoon=6943950&cc=6918205

"Should the government have the power to impose limitations on size of compensation between two private parties in the private markets?" The rebuttal is: Its my sand-box - if you don't like it, go elsewhere. Capitalism in action. SD

Nothing wrong with merit pay, but there's only '1' best. He/she works for XYZ coy, the others don't; & he/she is only there as long as XYZ coy makes an outsized return well above the market. Everyone else is a 'wannabe', & you don't pay 'wannabe's' the premium for 'best'. Supposedly if you don't pay - the talent leaves 'en-mass'; let them! The banks they left collectively return to the mediocre 'norm', become smaller (asset loss to more aggressive competitors), & less risky. Yes, the talent could start up hedge funds - but they'll have a lot less AUM - & even with inflated payouts the takehome will still be less than have now with the bank. Then if you really are so hot, you aren't the #1, & you didn't hit the highest bid within 6 months - you're past your 'best before' date; so why should I pay you? Triple base pay to make the bonus smaller, & fire as soon as the bank fails to make its ROE on the investment desk. Firings will be much quicker as the higher base pay increased fixed costs, & the talent has an incentive to manage the size of their base pay. Here today, gone tommorrow - the capitalism that made the gains in action. London has already been through this, & the talent didn't leave 'en-mass' - so why should a US banker in the same marketplace act differently ? Or is a US banker just more arrogant ?. SD

The reality is that if you want to get green quicker, you replace the coal fired apps with either gas or wind/solar, & add new apps that are some combination. All else equal, the natural gas price should rise as demand increases, & supply depletes. The gas price is not rising as there's a one-time 'new discovery' glut in NA, & you cannot (efficently) arbirtage the physical commodity accross markets. For the UK, a rising & mild above market price for gas over the next 4-8 years is quite probable. PDS market pricing is just mildly less silly than it was. Kind of hard to trade at far below BV when its pretty clear that they aren't going under, & their auditors have just finished impairment testing the goodwill (part of y/e audit). SD

Ubuy: Agreed its highly likely that Vancouvers RE is over-priced, particulary the trendy areas where there's also some olympic impact. When those areas sell off the decline WILL probably be dramatic, and it'll also be much larger than in most of the other areas of the city. Yes, post olympics, most Vancouver RE will go down - but not equally. The points I hoped to get across were: 1) There are multiple markets within any given city, & some of those markets have very little to do with the local employment conditions/affordability. 2) The index can be very misleading, & why. Cheers SD

Keep in mind that there are practical limits to this. To reduce this stuff you really need to materially increase the payoffs to the first ones for talking; which effectively requires the fraud to always be personally massively profitable, otherwise its more profitable to talk. But as with options, the 1st one gets the biggest take ..... the next one less, etc. Wait too long, & you could get nothing. If you're the 'brain' its better that the potential talker have an accident. Of course, if you're good - this can go on for years, & we have entire (global) industries using this as their business model (mafia, drug & war lords, etc). The incentives rise with the increasing 'cost' of business, but you have to be around to collect. And as with any business, if you can improve on the collectability of your debts - you can do a lot more business! SD

Think in terms of the houses on the 'nice' waterfront going for 200K & the average joes house 3 blocks in going for 125K. The waterfront people stop buying; their house now sells for 140K (30% less) & joes house sells for 110K (12% less), the new 'average' price for that city. The waterfront house sold for what someone else was willing to pay (for whatever reason). Joes house sold for maybe 3x the average worker income in that city. The stats themselves ? Pretty meaningless SD

Keep in mind that for many comparitive purposes these numbers are not relevant. The buyers/sellers of houses in the glitzy neighbourhoods of Vancouver, Hollywood, LA, etc. are not what most people would consider the locals. Its often the 2nd/3rd home of some wealthy individual, or its owned by a company renting it out to travelling execs, or movie stars, etc. that for business reasons, need the address as part of the 'image'. Affordability is based on global comparitives (the neighbourhood is cheap relative to Singapore, London, New York, etc.) &/or whether the wealthy buyers in that market view the property as desirable (as they allready have more $ than they could possibly spend, price is not a consideration). Average joe just doesn't come into it. If your city has a lot of these neighbourhoods, and/or the house prices are many times the 'average' price in your city; it will skew the number upward. Average joe interprets it as a bubble, when its truly just a measurement problem. SD