SharperDingaan

Keep in mind that the deb is a very different instrument, & that you could end with common. Not for everyone ..... but for those so inclined, you might want to look at a long position financed against portfolio margin. ie. If the margin costs 5%; borrow 50 @ 5% & pay 2.5, buy the deb @ 50 & get 7.0, earn a net 4.5 cash spread on zero capital invested. On maturity you'll either have 100 in cash or shares, to pay off 50 in margin. In the meantime you've exposed yourself to SFK's ability to generate CF & leveraged up your portfolio with a positive spread - at the time when your investments are most likely to increase in value. Disclosure: We are long both the deb & the common. SD

The reality is that 5-7 years is about the best that most people can do, even for a BRK. Environments change, dilutive share issues get done, & investments dont always work out or deliver to the level expected. 'Buy & hold' is really about buying into cycles, secular trends, etc. near the start of the trend & selling out somewhere near the top. The bulk of the time investment is in the macro identifying trends, where you currently are within that trend, & the seasonality within the trends. The rest is security/company selection based on various guidelines. Macro for capital allocation, micro for security selection, & extended holding periods for risk mitigation. Once you realize that the extended holding period is really time arbitrage, Mr Market suddenly makes sense, & the power of the approach becomes visible. .... and we have seen many securities on this board where that has been admirably demonstrated. SD

Finetrader: $CDN appreciation will make the returns on the US plants look worse, over & above the margin change on the recycled paper that they are selling. Its not a given - but assume that they lose more from $CDN appreciation than they make on whatever additional volume they've been able to sell. Triedtested: The reference is to the portfolio impact of a large number of shares suddenly pricing at many multiples of what you paid for them. A 50K investment @ $0.40/unit is a modest $ exposure - but 125,000 shares. If the share price suddenly runs up to $2.50 its 312K - & significant $. Most folks see their relationship with their family, peers, community, & health etc. as being their 'wealth' - the size of the bank account, or investment portfolio is pretty far down the list. SD

We're looking forward to us all getting rich ;D SD

We're on the same page. Agreed there's a big default discount in the current pricing, but its too hard to quantify. What is likely though is that as the economy improves, that discount will unwind fairly rapidly (confidence, improved volume, etc.) - but because we're holding so many shares (for us) we prefer to effectively treat it as a moat. If the discount is currently 65% & goes to 35%, we multiply our estimate by 1.86x [(1/(1-.65)/(1/.(1-.35)]. Obviously, a 'healthy' moat. Agreed that over the short-term (Q3 & Q4) the BS will very likely improve, but what it looks like at 06/30/2010 when the interest capitalization stops? - too early to say. Its highly likey to be very much a function of the magnitude of Q4 & Q1 CF. We also put a small probability on SFK doing a deal with someone else next year. Depending on how strongly they come out of it, there may well be some activity where they essentially end up acting as an industry conduit. Very different game if it happens, & another positive - but for now a wait & see. Much the same investment risk as FFH was at $70. 1) The larger risk was in not owning it, versus it going bankrupt. 2) The secondary risk was in allowing the magnitude of the gains to overly influence the ongoing holding decision. SD

For the next 2-3 months we can probably expect all kinds of pleasant surprizes. Purely speculation, At some point there will be the black liquor subsidy announcement. Assuming their share is roughly 3x the St Felicien maintainance capex -about a 15c/share increase. Its highly likely that they are again profitable. We think they are actually a lot more profitable than most people realize as both the sales price & throughput volume have (probably) gone the right way - & significantly. When we see the numbers, it should be quite obvious. Maybe a 30-50c/share increase. Its highly likely that they are building a mountain of cash, from both operations & the interest payment relief. For now they're probably building the stash, but during Q4 we half expect to hear of open market debenture purchases - especially if the subsidy has also been announced. Another 20-30c/share Somewhere around $1.10 to $1.40/share by mid Feb next year. SD

Because the shares are being 'exchanged' (ORH for FFH) there is no 'sale', as only the cost base of your shares has changed. If you take the cash you have sold your shares, & are subject to immediate tax on your gain. There is no impact if the shares are in a RRSP or IRA account, but if they aren't it can wreck your day. SD

Its pretty hard to make your case that you'll only pay $60 when 'the market' is trading at 5% above. The ORH board has to prove their DD to the minority shareholders, & they will be expected to challenge in these circumstances. If you want the minority shareholders gone you have to pay them a premium - theoretically equal to the PV of their lost future benefit before tax. You will actually pay a little more cash as the minority shareholder will have to pay tax if he/she accepts your offer; & you cannot assume that everyone will take the agency shares to get the tax free roll-over. So what if you pay 10-15% more. It's simply the reality of doing deals. And for this particular deal, do you really think its going to matter that much 2 years from now? Don't look the gift horse in the mouth SD

You buy perpetuals when you`re sure of the cash flow, & yields are high (12%+) - in the expectation that the yield will drop over your holding period. They are volatile, & illiquid, so expect life to be awkward at times. We used them extensively when Canadas were trading in the 16% range & did very well - but dont expect to resell them untill yields return to normal levels. The penalty for illiquidity is severe. SD

You take Friday off & look what happens! Its highly unlikely that it'll get done at $60 as short covering will force the price higher. The final number is probably around 10-15% higher ($65-$70). The UW also suspiciously looks like there is another shoe to drop, & that FFH is simplifying the structure for some reason. Agreed that FFH needed the additional LT debt to offset the new equity this transaction will probably generate (D/E ratio) - but in both cases they didn't need to go the more expensive UW route, or pay what did. Especially when they are one of the very good credits issuing (competition). If they paid an average 75bp premium to go the UW route, its significant $, & they'll want something in return. Same thing from the buyers of their recent note issue. A small investment now for a larger return later? SD

Thats what the bankers thought too. A) You can only pass laws pro-actively. The terms of existing contracts (mortgages) stay as they are untill both parties agree to change them. B) The bank can do absolutely nothing as long as the mortgage is in good standing. All they can do is grin nicely when they get a copy of the property transfer for $1 C) The existing bank goes bankrupt, but its mortgagees become solvent. Lots more votes, we get rid of the zombie, & people regain control over their lives - today. And done entirely by the people for the people in states where this will 'play' very well. D) At the extreme - every mortgage in the sun-belt effectively gets written down to zero, new banks spring up like weeds, & employees end up (essentially en masse) in more secure positions in far healthier institutions. Then keep in mind that its very elegant, with clear & immediate benefits. ..... and you don't need many heros to start a run The people doing what the government/lobbyist would not ? SD

During the oil bust in the early 1980’s the Calgary (Alberta) housing market collapsed & most folks were effectively bankrupt - as to get a place they had to buy at boom prices with the maximum mortgage possible. The collective response was to screw the bank, & neighbors selling each other their houses for $1. When a bank did actually try to sell a foreclosed house, folks deliberately refused to counter-bid against the owners $1 offer. Depression style collective social intervention, less than 30 years ago. Bankers assumed folks would never walk away from their houses - & that even if they were effectively bankrupt; as long as they could afford it, homeowners would continue to make the mortgage payment to avoid the stigma of bankruptcy. The first wave of folks really couldn’t pay - the second wave refused to pay because given the times; bankruptcy had become socially acceptable. The only reason the bankers survived was because regulators had forced them to reduce their geographic concentration, & the ‘new normal’ did not spread to other markets. If I live in the US sun-belt & have a prime mortgage; why on earth would I continue to pay my mortgage? 1) I own the title on my property & can sell to whoever I want, for whatever price I want. And if we sell & re-buy from each other for $1 - there is no bank involvement, real-estate fees, or moving costs as neither of us need a mortgage & neither of us is physically moving. 2) As the bank has the financial exposure there is also no actual penalty to either of us – our ex-bankers might want us dead, but each of us now has a house worth substantially more than $1 and a materially stronger BS. We’re no longer bankrupt & our ex-bankers will no longer be a problem should they themselves go bankrupt. 3) Our bankers should have been lending against the 4 C’s (Capacity, Collateral, Character, Conditions). They were actually lending Character & praying that it never changed. There will be new bankers, the neighbour & I will be financially stronger, & the bankers cannot make any money unless they lend. No long term consequence. In the early 80’s the internet was still a novelty, the cell-phone was a ‘brick’, there were no ‘social networking’ sites, & information spread fairly slowly. A very different story today. Beware of falling bankers SD

Cardboard Keep in mind that there is a major difference between a 50% gain in a fundamentally strong coy, & its frothy counterpart. The coy doesn’t need to have a high price, & the gain is very much a function of the courage you had to execute on the opportunity. Those gains occur because you analysed the stock better than the market. Case in point. We recently tripled our holding in SFK common for essentially the same initial investment, & got the huge increase in share volume because the price was so low. As virtually all the literature would deride it as a classic penny stock investment, buying required both conviction & courage – but that original $10 investment now has 3 shares making us rich versus 1. As at close of business today the share price has effectively doubled. There is a reasonable probability that it may well do so again on the Q3 earnings announcement. If it occurs we will be 12x better off for making the decision, within roughly 3 months - & almost entirely because we had the b**** to execute. Put bluntly we put on an offensive hedge, & lucked out on the timing. Don't knock it! SD

Those speculators have just reliably added about another 1/3 to the magnitude of the run-ups when they occurr, & the longer it goes on the more reliable it is as momo takes over. This is when we go to market ;D SD

PDS. Not directly comparable but keep in mind their market position in horizontal drilling - & that to get the most flow from a tight shale field you really need to drill across the pay zone. GW has given them US as well as Cdn contacts, they have the right kind of rigs in place, & idle capacity. When it starts those first to sign up will get rights of first refusal on those rigs - & the most bang for their buck. SD

Keep in mind that the worst deal in the world will still get done, provided the fees are high enough. Then add to it that there is no such thing as a bad deal - just a bad price. There is a reason why you do your own DD. SD

Look at the land based drillers with significant market share in the shale gas fields. As scorpion says, there are still many great opportunities around - if you're willing to hold for a time SD

Most would argue that we are only where we're at today because of the massive intervention. Its now > 6 months on, that intervention has now taken hold, & yet the greatest amount of stimulus in history can only only produce this? Commercial real-estate is rinky-dink, the US powder keg is municipal debt. Worst case a few developers can't sell their buildings to repay their debt, & their funders can't afford the additional provisioning requirements that those fire-sales force upon them. At the end of the day the bankers get forced to roll the loans, and the whole problem dissappears. But munis either have to legally balance their books, or borrow the new shortfall. And because of the rising risk, I will not lend without a fed guarantee - so the muni is going to cut its capital spending (buses, sewer, water, etc.) & cut its services (work 3 days/week, bare essentials, etc). 10-15% of the workforce working only a 3 1/2 day week (to cut benefits) & minimal capital spending is way, way more damaging. Worse still is that even the fed has a finite borrow capacity, beyond which they no choice but to open the presses & introduce stagflation. SD

Keep in mind that there are many kinds of hedging, & a Klarman investor has proficiency in all of them; 1) Defensive hedges. Intuitive, protection against downside loss. 2) Offensive hedges. Less intuitive, protection against the stock 'running away on you' 3) Capital hedges. Non intuitive, protection against moderate adverse changes. Most folks know 1), less used is 2), & least understood is 3). Type 3) hedges are typically against macro variables (liquidity, inflation, FX, volatility, loss of job, etc.) & can be thought of as risk management overlays - there should be a cost to them, but often there will not be. A typical liquidity hedge would be a long T-Bill/Cashl+long call. You're in a hostile down market, but you think that for the stock in question there may be a change - & if it happens there will be a significant bounce. You have upside but you retain very high liquidity untill you choose to use it. SD

You might want to consider that if FFH did go for ORH, most of the consideration would very likely be paid in FFH common (tax free roll-overs etc.). If theres a lot of new FFH equity out there, FFH is going to need some more term debt to keep the ratios in line. SD

Flip side is that residents with a hard-currency income paid outside the country live very well, as desperation artifically lowers the USD prices of goods & services. We're told its a similar experience in other countries with inflation issues. SD

The Zimbabwe experience: 3 cash markets develop; local currency ($Z), hard currency (USD), black. Harsh central bank foreign currency controls. All foreign currency export receipts exchanged at the central bank for $Z at the 'official' rate. Currency evasion, & inducement, becomes an art form. Salary is paid in $Z with raises every few weeks, but its preferable to take it in hard goods (fuel) for onward sale in USD. The same work paid in $Z, costs multiples more than it would if it were paid for in USD. Survival depends on how good a 'facilitator' you are. Property & mortgages value in USD, with re-appraisals at least annually. Monthly USD payments, low L/V ratios, mortgages are floating rate demand loans. $Z mortgages or payments convert at the 'official' rate. Different appraisal values, L/V ratios, exchange rate conversions available for an inducement. Plastic is denominated in USD. 1st question asked is 'How are you paying'. Hold up your Visa/MC/Amex & have a pleasant experience. Say $Z & expect the accountant to immediately sit next to you counting up the notes. Those on a fixed income get devasted, & need to sell some kind of hard good on the street every week. Usually kids selling on behalf of grandparents, & not something to wish on anyone. SD

Look at the seasonality of the drilling business vs the individual companies. As with asset allocation most of the money will be made because you bought at the right time, the specific (seasoned) companies themselves will not add that much. SD

Keep in mind that career risk is the biggest risk for a PM - as the industry pushes the PM to always be 'all-in', & rewards only short-term gains. So long as the fund does the same as the herd, & loses less than its benchmark, the PM will be OK. The promotion is a low risk gamble & if it pulls in additional $, everyone gets paid more. Your interests as investor, are pretty much irrelevant. If you really believe inflation is coming, simply mortgage your existing house on a long-term fixed rate & put the $ into a long term floating rate Treasury. You are your own renter, & you're paying because you need a place to live. If the expected inflation occurrs the floating rate on the treasury will simply increase, the principal will never fall much below 100, & you retain a liquid asset that can repay the mortgage in full. When the inflation occurrs you get paid out a rising spread, every month, & in cash. Inflation becomes your friend! SD

You might want to look at some of the current bank Q2 results - equity as reported on the FS, & the MTM disclosure around other comprehensive income. Learn how a bankrupt can be made to look solvent ;D SD