SharperDingaan

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

Appreciate for input. SD

Perhaps a little hard to do, but; 1) Given the once/yr published BS, how do you deal with inside knowlege in India ? (ie: you know that XYZ did a favourable deal 2 quarters ago, that will have materially changed the BS - what is the customary Indian business practice in these instances?) 2) Given that reality that bribery is endemic, & that it is how one typically gets things done in India, do you typically need to make any additional adjustments to the P&L to recognize its presence? (ie: is the customary Indian business practice to deduct a few extra bp off a reported margin?) We suspect that you really have to know your partners, local knowledge has a very high premium to it, & that you cannot assume that what happens in Delhi, happens similarly in Mumbai. SD

To get a commodities crash we essentially need 2 things 1) An end to stockpiling. There are various 'reports' that Chinese coys have been using their stimulus to buy up stocks of key commodities; when the stimulus stops, the buying will stop & inventories will run down - leaving an extended period of low demand & a price crash. 2) Reduced global demand > new BRIC demand. Make anything & you use up a commodity, & the more you can sell the more of the commodity you will use. In the short-term the demand shortfall may well be true, but over the long-term the positive wealth effect on that growing BRIC population is likely to be overwhelming; a lot of cheap goods made by, & sold to, the BRIC adds up to a lot of commodity. Then keep in mind that the price risk is actually beneficial as it slows the ascent of the CAD, & dissaudes the BoC from acting. Cheers SD

Keep in mind that you need to make money on the hedge to offset the expected domestic loss The reality is that global indices are now correlated. So an index investment (TIP, ETF, etc.) is a really a bet that the bought index will outperform the US index (DOW, NASDAQ, etc) over time - it is not a diversifier. The basic hedge overlay of long CDN asset, short US liability produces a leveraged return. ie: Assuming parity; if you have USD1 of asset, then add CDN1 of asset and USD1 of liability - you have $2 of assets and $1 of liability. 50% leverage. You need short, medium, & long term strategies.ie: (1) If China (trade) & the Middle East (petro $ recycling) pulled their USD pegs & placed them on some other currency (SDR), the USD would immediately devalue - you'd sell some CDN assets & buy US assets (2) over time global commodity prices would rise as the BRIC starts producing - you'd start taking $CDN profits & moving slowly to USD, & (3) the US economy would eventually settle, the exchange rate would find a 'run-rate' level' - & you'd repatriate the remaining funds. A Cdn chartered bank, oil/gas producer, & a strategic miner would be high on the list; CDN coy's with material US business would be a close 2nd. The intangibles (tighter/enforced regulation, IFRS reporting, transparency, & access to information) also favour Canada. Good hunting SD

There's never a short when you want one!

While your significant other will have some input, simply paying down your housing line of credit is usually the best. You also get a tax gain as interest is paid with after-tax $. SD

Recognize that if the $C goes up 12% to $1.10, these US companies need to rise by at least that much, and within the same time frame, just to break even. But ... if you bought these companies when the $C was at $1.10, & the $C then fell to $.97 - you would earn an additional 10% for literally nothing. IE:You buy $US cash when the $C is rising, & spend that $US cash when the $C falls. The investment decision itself is the same on both sides of the border. SD

Unless you're paying tax in the 75%+ range, the tax-tail should not wag the dog. When you are in the 75%+ range you don't give a damn - as when you have a loss, the taxman is your 75%+ loss-sharing 'partner' ;) SD

Keep in mind The US ‘attractiveness’ is because post-devaluation, the US will be forced to buy more of its own versus foreign goods – meaning more US jobs, GDP, tax revenue, & a cost push inflation that will help increase selling prices. The USD share price of a US coy selling in the US should do well. But what is not understood ……is that you could substitute ‘Mexico’ for the US in the above, & get the same effect. But as a foreign (ie: US) buyer of Mexican stock – would you really buy anything other than perhaps Petromax & a few very select others? And is it not more likely that too many $ chase the select 20% & inflate those valuations, at the expense of deflating the valuations of the other 80%? What is also not understood … is that it is the economic activity that is ‘attractive’, & that the activity will not stay within the US border. To make more you need more materials, energy, etc - & those additional resources will come first from the US (if available), & then from the existing supply chain. Buy America. You don’t have to invest in a US coy to get USD exposure. A CDN coy doing most of its business in the USD, is a far better bet - & your profit is in hard currency. SD

txlaw: You might want to look into these. 15% PIK yield, & at least you still get to eat if you screw up! http://www.monfortedairy.com/monforte-subscription-offering.html Cheers SD

Another way of looking at it: In todays environment, if you were one of the very few with surplus cash - & everybody was asking you for a loan; why wouldn't you be asking for a high rate of return because of the risk that you're taking on (credit, repayment, inflation, etc) ? And why would you not get it, when there is so much demand for your cash ? If I want 5% for the risk & the borrower is only offering 1% - there are only two ways by which I'll lend; 1) I'm sure there will at least 4% deflation; & I can more or less make that happen by refusing to roll the loans as they come due. Or 2) I intend to seize the borrowers assets via a debt/equity swap at a distressed valuation that will earn me well above 4%. Alternatively the borrower could short-circuit me & just print 4% more money as the loans mature, & there would be nothing that I could do about it. Hence the 'true' inflation rate for any given period should really be what I'd expect to get paid - less what the borrower is currently offering me. If I re-lent to the same borrower, in the same currency, that 'true' inflation would never show up as the bond has effectively been rolled. But if I re-lent, in another currency, that inflation would suddenly go 'hyper' - as I now want both a HIGHER return for the rising risk AND a premium for the expected 'easing'. Deadly game. SD

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