SharperDingaan

Most people do not see their homes as an investment. The reality is that you need a place to live, & so long as they can make the mortgage - & still use the space, there's little consequence to freezing in the head-lights. Eventually, next year will be better. To generations of younger folks the only thing stopping walk-aways is the stigma of parental dissappointment, & its rapidly weakening. Does the 7 year credit blemish really mean anything if most of the monthly saving went to consumer debt retirement (improving credit) - and walking away was the rational, & common, practice amongst your age-group, in your area? It's a short step from parental dissapointment to admiration - & a bankers nightmare. The 1930's depression emotionally scarred entire generations of people for life, as they watched their dreams/aspirations slip away from them. Why would you expect it to be different this time? & why would you expect them to ever pay top $ for a house ever again? SD

Too bad its posted by Henry Blodget ..... Grant is pressing because they've lost credibility in their clients eyes, & those clients are now threatening to walk elsewhere for their external reviews & audits. Grant isn't KPMG, PWC, E&Y, etc; all of these firms do not have the credibility problem that Grant does, & they could all do the same reviews without any issue. Yes - you can mislead a board, & make the case that you weren't legally liable (it was a 'misunderstanding'); but none of those folks are ever going to trust you again, & their bad 'word of mouth' is going to poison the well at your potential clients. Kind of like a reporter failing to mention prior prosecutions ? SD

You have to wonder if the 'awkward time' for SAC isn't an approaching redemption window. Run now, while you still can ? SD

Uncommon: - Assume a desirable US street of 100 houses where the average price is USD600,000 each; knocked down from USD1,100,000 because there are no more new jobs being created in this community, & the US is in recession. - I live in hard-currency land & the USD has just devalued 20%. The USD600,000 price looks like USD480,000 to me; my friends & I think its cheap, as we anticipate that at some future point the US will come back. We start competing with each other to buy our US 'summer cottage', & bid USD620,000. Inflation. - Some of the houses are < average, so the homeowner hires a contractor to fix it up prior to selling. As there are only 100 houses, the contractor only works for maybe 2-3 months. Low growth. - If this community does not generate its own new jobs on a sustainable basis, there is no way that it can get past this low growth. Employment. SD

There is no real privatization benefit. The NYSE listing makes it nominally easier to collect the shares from US residents, but that's about it. Keep in mind (1) That with just a TSX listing, FFH will now be a very clear foreign holding in the US institutional portfolio - & at a time where the foreign weighting in the portfolio is being increased. More demand & from a wider pool. (2) They could simply replace the NYSE listing with an American Depository Receipt (ADR). Less cost, greater control, & particularly attractive to institutional investors in Singapore/Mumbai/Emirates. The NYSE's failure to regulate actually makes these more attractive, as its not possible to naked short, & it requires FFH to place a block of treasury shares on deposit - & safely increase the float (buy the ADR, sell the TSX, total new shares = ADR deposit). The reality is that FFH is growing up. (3) The global value investors community is a small one, & there are very few companies that both practice what they preach (CDS/bond bets), & receive the widely available everyday scrutiny (via this board) that FFH does. Intrinsically valuable. (4) CDN based is a major asset. Currency, financial strength, reporting, humility, etc. Valuable diversification. We're looking forward to seeing what happens SD

We're with cardboard, but would add a few things. As a retail investor we flatly will not do a trade that is not on the TSX. Simply because we do not have confidence that we will get fair treatment on the foreign exchange were something to go wrong. No BRK, because it doesn't trade on the TSX. We generally expect our more senior holdings to pay a quarterly dividend. Simply because if the coy doesn't believe that it can pay quarterly, why should I believe in the coy's forecast. I expect to get well paid for exceptions, & I expect to see the cash deferral going into immediate business improvements. FFH is a little different as the div is primarily for comp in lieu of inflated salary/stock options. Its more conservative & we're happy to make that exception. SD

Keep in mind that a NYSE listing exists primarily so that you can issue securities to unsophisticated US investors, & it carries a lot of additional costs with it. Given that FFH issues primarily to sophisticated investors/institutions, & there is no restriction on their obtaining their shares through the TSX requirements, there is little practical reason for the dual listing. The liquidity on the TSX listing rises, there is a more efficient use of the limited FFH float, & there is significantly better market enforcement. If FFH wanted to add float, most folk would also be more comfortable with it being done on the TSX vs the NYSE. SD

Inflation/deflation should really be looked at in 3-4 year tranches, & deflation does occurr, even in the US. The depression of the early 1930's being the classic. The UK is currently in a recession as bad as it was during the 1930 depression, & has not been able to turn it around. The white-house is now warning of a 'double-dip', which implies that the US may not be able to turn it around either. Falling asset prices for some time out is a very real possibility. But where it matters is in the stuff you have to buy (groceries, clothing, etc) & its hard to see why those will not cost more. For the same standard of living, the cheap clothes & food from China & South America can only cost more - simply because the USD is devaluing. To spend the same is to reduce your standard of living; ie switching to the cheaper brands in the grocery store. We would suggest that we will actually have cost inflation over the next few years, but because asset values are flat/falling - it will 'feel' like deflation. Japan disease. SD

So the SEC pressures Grant Thompson to either change its mind & make the client restate, or drop the client. As both external auditors agree there's actually nothing wrong with the accounting, what we really have is a difference of opinion. Why does the SEC want the more aggressive accounting? (1) Did somebody at the SEC take a bribe, in the hope that Patrick would kick up enough dust that nobody would actually question why the SEC wants the more aggressive accounting. (2) Or does the SEC actually need to discourage this conservative approach, because other significant registrants i]need the more aggressive approach ? The SEC forced the funny-money MTM's that produced much of the US banking sectors Q3 unrealized gains, & CIT has just failed. Why do we get the feeling that perhaps CIT owed some significant registrants, & they cant collect unless they can use the aggressive accounting .... so for the 'good' of the system, make it happen? SD

The reality is that SFKs revival isn't going to get taken seriously untill they post a solid quarter of strong earnings and a fat EBITA. The price will jump significantly, & the mantra will be 'how could we have missed it'. Good chance it'll be Q4, but the FX rate is the wild card. We ultimately expect a US Steel type industry wide restructuring. All the existing players selling their best pulp plants into 2-3 Canada wide entities, with governmental assistance in the shutting down of old plant & the retiring of surplus workforce. Something loosely akin to how the East Coast fishing industry was shut down, & the current efforts in the auto industry. The global recession/depression being the driver that finally makes it possible. Nobody is going to be stealing these companies with low bids. SD

Thats why you do DD, & check against a broad spectrum. There's also an underlying reason to that valuation - perhaps the fact that it does throw off flags ? Best of luck to you SD

Lot of red flags just went up. Virtually nobody delists because they do not want to pay SoX costs; most folks do it because they dont want the greater scrutiny, or the transparency that SoX brings. While there are legitimate reasons why someone might want to go this route, its a very one-sided bias. Madoff, etc. Acquisitions can hide run-rate, & they've made a lot of them when most comparative banks were severely stressed. How do you know that the pretty numbers are not simply because they are over-capitalizing ? especially when they seem to have a preferance for weaker controls (no SoX), & why is this one bank so much better than its peers ? Madoffs results were also better than his peers. Legitimacy is assumed, because the fed is allowing them to buy banks? But the fed will allow any US citizen to buy a US bank if there's a reasonable chance that it will 'save' the target bank. Madoff again. Where's the money coming from, & would you not expect this to be a entirely private company, financed solely by sophisticated investors ? - yet one can buy it discreetly, & for a fairly low price/share ? Again there may be very valid reasons, but they had better be exceptional. Some tight DD could save your neck. SD

(1) Relatively stable BV growth of 15%+/year, but expect some bumpiness in the quarterly numbers. Primarily a portfolio consideration, as this allows you to take a reasonable risk elsewhere should you choose to do so. (2) Acquisition. At some point the arc will get built out; when it does so we can expect multiple expansion on all the assets, & it is would be highly likely to happen very quickly. $100's of share price. (3) Post recession 'New World'. Canadian Index & regulatory considerations would be better served if there were a healthy stand-alone counter-weight to the Sched-A banks. Manulife, Sunlife, GWL, FFH, ELF as the insurance weighting is probable; particulary if FFH & ELF also have share splits to enlarge their floats. Liquidity, along with OSFI/BoC as the quiet protector/enforcer. The dissonance here is when the something like this occurrs. That it will occurr, isn't really in dispute. SD

Re ‘slow-steaming’. Not that long time ago this was called ‘tramping’. The ship had a defined outbound schedule, & a hazy ‘return’ schedule based on whatever available cargo was going in the ships return direction. During the tramping stage it was common practice, once on the ocean, to simply switch off the engines as long as the drift was going in your direction. The ships were small (could get into most ports), derelicts, the crews usually worse, slow steam was often the best they could manage, & owners essentially prayed for the ship to sink. When industry slow steams, a number of things happen. (1) A small tranche of very modern high capacity ships does the major scheduled routes on a tight time-frame. JIT drives the schedule, & multiple shippers consolidate cargo onto just that days ship. 1 vs 2 ships leaves the port, it goes at 90%+ of capacity, & shippers pay a premium rate for the reliability & speed. The individual ships are incredibly profitable (highest rates + economies of scale + lowest possible operating costs) - but there are few of them. Fewer ships. (2) A larger tranche of older ships tramps on both an outbound & inbound basis. The bigger ships do the major routes on a slower & more sporadic basis (at a lower cargo rate), the smaller ships do the rest (widest range of ports), & the entire fleet is run down by cutting maintenance/fuel & crew quality. Fewer ships, higher loss of life, & more insurance claims. (3) Surplus ships go to the breakers, & regional cargo capacity permanently shrinks….. But when markets improve rates spike up dramatically & stay up, because there is just no capacity - & the few available tramps suddenly become goldmines (available for any route, & have the capacity). The cargo consolidation of (1) is only just starting to happen, (2) usually follows very soon thereafter. (3) hasn’t really started yet SD

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