SharperDingaan

Look at convertible arbitrage ;) SD

Given the times we would prefer not to post the actual numbers. 2009 YTD we’re > 100%, & we expect the trend to accelerate. 1) We’ve hedged very well - both defensively, AND offensively. 2) We know our relative strengths/weaknesses, & we haven’t strayed outside of them. We have found that we also have a size constraint, as at best we can only truly understand 3-4 companies in different industries. Not something that we expected. SD

Given that CFX is getting $122.2M, it would look seem that we might do rather well. http://www.canadianbusiness.com/markets/marketwire/article.jsp?content=20091009_133507_10_ccn_ccn SD

When you run the coy, a union is a terrible thing. Like the law they stop you from doing whatever you want; but unlike the law, they do it in live time & can shut your plant down immediately. When you flip coys for living, unions are anathema. They prevent the more extreme corner cutting that maximizes earnings, & can kill your deal by suddenly striking; i.e. they take away your control to gouge the buyer. When you own the coy, a union is a good thing. It forces your management to unlock the potential of your work-force (the intangible ‘value’ in your coy), & gives you a bargaining chip when you need industry changes. When you work for the coy, the union is often a good thing. You get the funds to upgrade your skills, & stay current; but if you don’t like the environment you’re free to leave. You’re also forced to save via a pension plan. If you choose to ‘war’ with your workforce, your competitors win & your owners hedge their holdings via shorting. Eventually the plants go out of business, management & the workforce lose their jobs, the community loses some of its tax base, & the owners walk away unharmed. Always think about whom is doing the talking. SD

Results were as you might expect but were slow to occur, & they were very much a function of the BS currency and coy’s client/trade structure. In today’s wired world it would happen much quicker. If your books were denominated in sterling you took a hit as P/E ratios collapsed as soon as the announcement was made. If you were a UK exporting multinational with BS assets & liabilities both denominated in sterling there wasn’t much BS effect (offsetting MTM gain/loss), but higher future earnings because you sold more (Vickers, Leyland, etc.) – but it took a while for markets to correct. UK multi-nationals with a UK denominated BS, US denominated assets & UK liabilities did extremely well (BP, Asian, ME, & African ‘charter’ coy’s, etc.). Share prices initially fell, then rose quickly as foreign (US) buyers realized they could both extract the BS impact & buy at an even deeper discount to the market. In US terms: 1) US markets take a hit as soon as the ‘reserve’ change is announced. 2) Look for US denominated BS with foreign denominated assets and US denominated liabilities SD

Keep in mind that there is (1) before inflation, & (2) after inflation. (1) If you know your accounting, & are fairly sophisticated, look at long out-of-the-money LEAPS on USD denominated Balance Sheets, that are investment coys and/or exporters. When the UK Pound lost its reserve status in 1967 the net devaluation over a 1 year period was around 25%; the devaluation alone will drive the LEAP into the money, subsequent FX acquisitions &/or export sales will push it further in-the-money. (2) When nominal interest rates are in the teens, long-dated zero coupon treasury bond strips are pretty hard to beat. They are dirt cheap to buy, there is no credit risk, inflation does eventually normalize, & you walk away with a healthy gain - for doing little more than sit on your ass! SD

Ragnar Keep in mind that the US has effectively allready lost its reserve currency status. Were that not the case there would be no discussion about it at all - versus a discussion (G20, Oil States, etc) on what the replacement should be. It would seem that it'll be a 'basket of currencies', the USD will be part of that basket, & that the fed intends to transfer its execess treasury holdings (versus sell them) to whatever the new authority is. US M1 is so high because its compensating for the lack of money velocity (i.e: lending relative to prior years). But the reality is that its less 'fear of lending', & more not enough 'truly qualified borrowers'. If M1 weren't increased, GDP would take a material hit - which implies that the US has been well above the 40% hyper-inflation tipping point for some time. The good news is that as it gets harder to ignore the reality, however unpleasant, the sooner we get to working on the mitigation. SD

Just keep in mind that there's an awful lot of rocket fuel sitting on the pad; so when it lights, a lot of good things are highly likely to happen very quickly. The trick(s) are going to be (1) not getting ahead of oneself, & (2) managing ones greed. Both items being something that we don't have a lot of experience with. Always willing to learn though ;D SD

Look at what happens to Cape Town (South Africa) after the 2010 World Cup. Its a useful 'lab' with a lot of similar relative characteristics to Vancouver (economic & physical 'place', cosmopolitanism, etc.) SD

- Why do you presume BRK will remain as is ? Is is not far better that it breaks up into 4-5 seperate companies each headed by an existing manager ? - no more size issues, greater flexibility, etc - & less concentrated risk from fewer buy bigger deals. - Why do you also presume that everybody will want to stay as is ? Without the great one(s) its just not the same - so why wouldn't most of the crew not simply 'turn the page', & retire ? - or spread their wings & all turn into swans ? Hopefully, not too many black ones! Just enjoy the time that they're here. SD

"Can someone poke some holes in this thinking? " Nothing wrong with it - it's the conclusion that's disturbing. When the US sees itself only in isolation, has a demonstrated xenophobic bias (1940's 'isolationism', colour barrier, etc), & the vast majority of the population never travels outside of the US, the obvious solution is to deliberatly inflate. Asset values rise, home-owners have ATM 'equity' to spend again, US employment rises (USD devaluation made foreign goods too expensive), the troops come home (& stay home) & any politician citing 'buy America' has a very easy sell getting re-elected. Nirvana. But don't ever refer to the US as the NA 'banana republic', mention the cultural revolution taking place, or use the FX rate as a 'proxy' for US 'influence'. SD

Viking: Keep in mind that the 'wise' man in a mania is the one with the story that nobody wanted to hear, & that these statements are coming from a G8 central banker who cut his teeth at Goldman Sachs. May we all enjoy the ride, & put a hedge on a 1/2 hour before the devil knows we've covered :-* SD

The market fantasy is that when the global rate increases start to happen, they will be sedate so as not to risk collapsing the stock bubble built on stimulus money. Yet a G8 central banker has just stated that policy matters, 2% inflation is the target, a powerful & sustained recovery has begun, he may need to act sooner vs later, & the efforts required of us (to control it) will be historic? What do you think will happen to equity prices when the dominant media story from the "Great Recession" becomes the "Great Bear Trap" ? Direction and timing of rate increases. The three R's http://www.bankofcanada.ca/en/speeches/2009/sp280909.html “ the Bank's judgment that our policy rate should remain at 1/4 per cent at least through the end of June of next year in order to achieve our 2 per cent inflation target. This conditional commitment does not indicate what will happen following the end of the second quarter of 2010, …. it is an expectation, not a promise.” ... “To conclude, one lesson should be clear: policy matters. A powerful and sustained restructuring of the global economy has begun. Canada is entering this period with many strengths, but the efforts required of us will be historic. As I have reaffirmed, our principal contribution will be to consistently achieve our inflation target, so Canadians can plan and invest with confidence. “ Potential magnitude of those rate increases http://www.canada.com/story_print.html?id=1976736&sponsor= SD

Keep in mind that the Bank of Canada has 'suggested' that when they hike, they will be aggressive, & rapid; 75-100bp at a pop. End of party for equities. SD

We would suggest that the reluctance to publish may be because some of the 'really bad' are 'high-street' banks. One wrong 'perception', & there is a bank-run on the institution that drains the nations deposit insurance -& triggers a panic. Add in that NA 'crashes' have often occurred around September/October

Keep in mind that Walmart only looks good to a US investor, & only over the near/medium term. Even if it grows @ 10%/yr, if the USD also devalues by 10% - to a non-US investor it is at best, a break-even proposition. Most of their goods sold are imported, but with the USD devaluing those goods either have to sell for more/unit - or Walmart gives up margin. A few richer folks 'sluming', may not be enough to offset the effect of a lot more poorer folks simply 'not buying'. The buybacks are a direct recognition that they have more capital invested than they need going forward. In effect they are winding up a part of their business, & using the proceeds to reduce their share count & raise EPS. Nothing wrong in that - but the opposit of a growing business. Its always nice to have a cash cow. SD

Keep in mind that Seaspan is not is going to buy a cheap ship unless they have an immediate time charter for it. Which means that 1) new ship construction is delayed & the use of the cheap ship is so that both the charterer & Seaspan can benefit from lower rates, lower cargo committments, & financing deferrals; or 2) Seaspan has to offer the ship at a cheaper finance rate than the charterer could get - by simply borowing the $ themselves & putting the ship in its own sub. Assume 1) Most yards will allow construction delays for a price, & the closer the ship is to completion the higher the upfront penalty (int on the higher construction debt, discount on deferred profit recognition, etc.). But as even the minimum penalty on a big ship is sizeable $, to make any money you need big savings on a lot of smaller ships, for some time - & your fixed 'saving' is exposed to the higher costs & uncertainty of running this older 'fleet'. Lot of operator risk. Alternatively Seaspan agrees to mothball an existing big ship charter, for a limited perod, at a high penalty - & replace some of the lost capacity with these cheap ships. The charterer essentially breaks even, cargo capacity comes out of the system, & container rates rise from less competition. Seaspan makes a spread, & defers future capital injection requirements. The 'ghost' fleet gets bigger. Getting interesting, but we're still not there yet. SD

What's wrong with treating this the same way that we treat External Audits, External Actuarial Valuations, etc? A once/yr rating. The provider has to meet int'l standards, carry insurance, & have their opinion (& overall coy rating) published in the year-end financials. The company pays, & provides the same access as they would to any other external auditing group. A in-year rating by anyone other than this rater becomes suspicious (how accurate can it really be if they dont have the same information ?), & the rater has an incentive to minimize rating inflation & poorly understood debt structures - because if it blows up they get sued. No more 'miss-understanding', 'inadequate access to financial records', poor 'communication', etc. If you choose to rate, & get it grossly wrong (Canada's Asset Based Commercial Paper) - you're out of business (as you've demonstrated that you're not reliable, as you clearly did not understand the risks sufficiently well enough to cast judgement). 'Shopping' for ratings, auditors, actuaries has the same penalty. Do it too often, you're no longer trust worthy & you've made yourself a short-selling target - except that with no-one believing you, the result is rapid bankruptcy. Darwinism alive & well. Perhaps we'll see just how incompetent most rating agencies are ? SD

A wise man would hedge the SU, & use a few calls to cover the gas spin-off ;) SD

Keep in mind that there are also 'offensive' hedges, & look at UK real-estate. (1) Its cheap & getting cheaper. Various sovereigns & material NA commercial RE coys have quietly started shopping (ie: Birmingham's 'bullring') (2) Brown is advising that the UK will need further stimulus packages for some time to come [additional long term inflation] (3) 4M+ of UK unemployed to force the government hand (4) Long-term UK/USD/CAD FX correction. If you want the FX exposure use a UK property coy. 5 years out you might just be surprized SD

Oldeye, SJ: We really need to see the Q3 & Q4 earnings & cashflow. Untill then its a matter of opinion as to what might/might not happen - if you think these might be solid quarters you're probably bullish, if you're not sure you're probably bearish. Institutional restrictions generally prevent portfolio investments in securities trading < $1/share. At the moment for most institutions that means either CFX common or SFK debs; if SFK common goes > $1/share the dynamic will change - & the magnitude of the 'uncertainty' discount should decline. There is obviously some risk to both the deb & common. If you're not comfortable with it, you probably shouldn't be in either of them. SD

The debs mature 12/31/2011. Principal is repayable in either cash or units at 95% of the 'then' 30-day average closing market price - at SFKs discretion. The expectation is that by 12/31/2011 the common will be materially higher than it is today, & there will be fewer debs o/s than there are today. The higher the share price, the more likely the payout will be in cash. If its a cash payout, the common rises immediately as the dilution uncertainty is removed. Current common pricing reflects the potential size of Q3 profitability x prob x 'uncertainty' discount. The 'uncertainty' discount is high & there's scepticism around the potential Q3 profitability. Once Q3 results are published, it may well look very different.

Keep in mind that 'Old School' practice is to produce as much as possible, force down the fixed cost/ton, lower the sale price/ton - & drive additional volume. Biggest was best, marginal cost of production ruled, but you had to have a sizeable & growing demand. We no longer have the volume. Then came beetles that wiped out the trees & reduced the cost of Western Cdn feedstock to pennies. Marginal cost of production fell again, price/ton fell through the floor, the 'old school' biggest still made some money, & plants starting shutting as the price reduction couldn't generate enough volume. CFX. Then came the 'New School' that uses low cost recycling, swift management, & state-of-the-art plant - because it CANNOT produce as much as possible (limited quantity of economic feedstock). SFK. We may read fewer newspapers but we now use paper vs plastic bags to take home the groceries & that favors the new school (green marketing of recycled paper). You can have a severly damaged industry, but good players within it - as these two demonstrate. Not as risky as first meets the eye ;) SD

People & organizations change over the years. In your 20's the high return 'bet the farm' punt was great, by your 30's you'd either won or learned otherwise, in your 40's it was 'stay rich' vs 'get rich'. Similar thing for companies; but in both cases its really about maturity & learning from your mistakes. Companies are really about people & ensuring that they have the opportunity to thrive at what they do. And our IV derives from the decisions those folks make, not the coy products - which are often commodity items or interchangeable, & perhaps not even neccessary. Arcs are great, but to thrive you need to periodically open the hatches & let a fresh breeze in. If FFH took a chunk of AIG (with partners) we'd be very happy, but we'd also hedge ourselves against a material drop in price of the stock - & keep the hedge untill we saw hard evidence that it was working. We would also expect FFH itself to have done much the same thing, & would see the hedges as overt signs of maturity. FFH has enormous potential, but they will have to continiously evolve. Everyday business risk. SD

Re Compton: Keep in mind that Suncor is in the process of putting a large number of high quality & producing gas fields on the block. Suncor will be fully aware that they will have price down to clear the inventory, & that to pay for it - buyers will have to pretty much immediately put the production on stream. With such a large supply over the near term, it will take very little to shut in a gas well. Comptons game plan was to grow their production & sell to a major. They had the opportunity & turned it down, now they have gas assets that they effectively cant afford to sell, & ongoing share dilution because they left themselves in a liquidity trap. They may have good assets & a strong production team, but there are a lot of others better than them with a lot less risk. SD