SharperDingaan

Vinod Keep in mind that 'bubble' is relative to where you measure from, & the sanity check is whether there is an obvious sustainable economic basis for what's going on. Choosing different measuring points changes the label, but not the sanity check. Most folks recognize that without the one-time stimulus we would not have been at 1000, & that the stimilus (takes 4-6 months to work) was introduced well before the S&P was < 666 (Mar-09). The sanity check would suggest a pretty clear bubble. SD

For most folks it's sell 50% of the vulnerable positions (synthethic short). If you're right you have the cash to buy it back, make a realized gain on the 50% short, & an unrealized loss on the 50% long. If you're wrong there's a realized loss on the 50% short, & an unrealized gain on the 50% long. Buy back the short at no more than your sell price & the cost of the 'hedge' is two commissions - a lot less than a put premium. Most effective if the portfolio is also leveraged. The cash reduces the leverage through the uncertain period & the potential loss that you might otherwise have had. Simple, but very unsexy. SD

Keep in mind that riding a bubble up is momentum investing - as you're confident that there's a bigger fool than you out there. Yes you can do very well if you can catch it early, but you had better know your psychology! An entirely different mind-set from value investing. We actually all know that we're in a massive financial bubble - as we speak. We can 'see' the globes Q4 & Q1 stimulus spending has now hit main street, we've heard the 'pull back' talk, .... and no-one wants to recognize that they can't 'see' what's taking up the slack as the stimilus wears off. Don't jinx it! Value investing is not 'formula' investing, it's critical thinking - & the confidence to back your decisions with ongoing common sense. And it is because it's common sense, that it works in both bubbles & crashes. SD

The reality is that by itself, the move will not do much for immediate valuation ... but going forward an upward bias is probably realistic. How much? is anyone's guess. We know that FFH is not run with a short-term bias. So why the insistance on seeing the benefits from the voluntary delisting in strictly 'now' terms? It's highly likely that we don't have all the facts. SD

Look at the recent debt downgrade. Then ask why are you so sure that you are NOT going to see some unexpected charges at year-end ? SD

Keep in mind that Cdn regulation is a lot more 'hands on' than the US, & principles based. If you're writing too many mortgages in Vancouver you will be made to sell some, & bring your exposure into line with your peers. All 5 banks (versus one) get over-exposed to Vancouver, to the extent that OSFI lets them, & they all get stress tested twice/yr. No surprizes. CMHC insured mortgages generally amortize, & require substantially more CF the lower the DP. They are designed to force the mortgagee to reduce risk buy putting up more equity (amortization & new saving), & reward conservatism (lower premium). The target is 1st time buyers who really want a home.The additional financing cost, & the bank officers moral suasion, tends to keep speculation to the minimum. Within Canada, debt speculation is not treated 'equally' as it is in the US. By & large the riskier end is never allowed to get off the ground, as you can't shop the oligopoly. The 'rejected' see it as 'uncompetitiveness', everyone else sees it as saving their collective arse! SD

Keep in mind that there's an element of affronted pride here...... as a 'Big Board' listing is essentially what capitalists are supposed to 'aspire to'. The voluntary delisting underlines that the NYSE is just the servant, not the master. Were FFH delisting from a 'lessor' exchange (ie: Frankfurt) - there wouldn't even be a discussion. SD

The delisting shifts both share (TSX) & option (MSE) trading onto Canadian exchanges. Higher trading volumes, more liquidity, better enforcement, less hedge fund influence, easier accounting (IFRS vs GAAP), no more SoX costs, bigger fish in a small pond, etc. Daily operational advantages. Investors can buy in either USD or CAD, but see the reporting in USD. To a foreign investor the 15% increase in BV is not going to look like a 5% loss simply because the USD devalued 20%. To the US investor, the 20% USD devaluation will make it look like a 35% return - & they'll be able to over-weight as their portfolios foreign allocation increases. Higher demand. Simplification. 1 company (FFH, NB, ORH, C&F), 2 exchanges (TSX, MSX), principles based regulation, etc. Far easier to expand float, split shares, do private placements - should they wish to. SD

Think along 2 tracks Where's the new money coming from? To buy the foreclosure to rent to others somebody had to put in new equity. Either an investor has to allocate more from their portfolio, a consumer has to have saved it, or a government injects it - & a banker allowed a higher debt/equity ratio. Its going to take a while. Where are the losses accumulating? That walkaway loss is a direct write-off to the banks equity, reducing how much the bank can lend. Fewer loans and/or repayment demands that trigger foreclosures & a new round of write-offs. A death spiral. With so much risk, investors are not going to be allocating much of their portfolio anytime soon. SD

Ericopoly. A really good predatory borrower would be the banks main borrower, borrowing at >125% of equity, & shorting the bank. A simple publicized toss of the equity in a down market, & a handy short cover to make one very rich. Give up the house & buy it back out of foreclosure ;D C'est le vie! SD

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