SharperDingaan

Assume that between 'now' & the 'end state' there's a 1/2 to 2/3 dilution of the existing common share equity (prem's convertible being part of it), the average sale price of the production is roughly 2-3 higher than it is today, & that the existing pre-extraction 'proven' reserve is 25% higher than stated (higher prices make more of an existing field 'economic', which raises the pre-extraction 'proven' reserve). End state is about 10-15 years (until the principal eventually retires). The governing principal is that your smaller stake of the bigger (& hopefully more valuable) unknown company is worth a lot more than your bigger stake of the smaller (& known) existing company. Different kind of risk, but the longer you play the greater the likelihood of it occurring. SD

A time honored custom in the O/G patch is set up your own company, develop your production via either the drill-bit or acquisition, & then sell out to a major. The head-honcho is almost always very experienced, well connected, & just a ‘busting’ at the freedom & opportunity. It’s typically an invitation only network, & a small pool of partners bringing different things to the table. At times it is cheaper to buy someone else than drill. You got the assets because the other guy was over-extended, & he agreed to sell to you. But you’re relying on your solvency to get you through to the point where the production is worth much more than you capitalized at. At other times it is cheaper to drill, & your contacts/know-how will make/break you. They’ve spent some time under the tutorage of some very swift folks in Calgary, & have obviously decided to move forward. Good for them. SD

There's nothing wrong with the business model. The reality is that any kind of lease is only as good as the lessees credit, & a 1:100 year global credit event is bound to have an adverse impact. They've done well to date, & there's little reason to believe that it will not continue for the forseeable future. For ALL lessors (in this environment) the crux is what can you do with the returned assets. A material problem if its shipping or large passenger aircraft (one-off big ticket items), but much less so if its heavy construction (or tar sands) equipment where infrastructure spending is creating a demand for it (used vs new). For the next 12-18 months the European & Asian equivalents to NA's 'Caterpillar' make a lot more sense & at a relatively lower risk. SD

All banks will suffer a lower ROE as the capital requirement increases. While most of the securitization boosts (earned fees on zero 'net' assets) are out of earnings at this point; that wasn't the case 2-3 years ago. Pick your reference point carefully! WEB has pointed out that part of the bailout is effectively recapitalizing the banks via earnings on artifically high loan spreads (courtesy of ultra-low central bank rates). About 6-8 quarters (from memory), so it should stop by the end of 2010. Projecting off 2010 forward earnings could be a mistake. Banks probably are over-priced for the medium-term, but its unlikely to harm them at this point. SD

If the current market is 50 & the option writer writes a short-term call option with a strike at 70, the writer has written a deep out-of-the-money call. If the volatilty is fairly high there will probably be a modest premium. If the strike is far above the current market, & the remaining time is quickly eroding, the odds on the call writer actually getting called are fairly remote. If you are called you have the stock & will make a gain of 20. In the meantime you have the call premium, & that options strike, premium, & expiry date were set by you; as if you didn`t like the terms you wouldn`t write.

ValueCarl: Its too bad that you seem to have a problem with factual accuracy. The actual 'ask', only 2 1/2 hours earlier, was quite a bit different. "Please provide an illustrative example, in today's market where "premiums" received from selling deep "out-of-the-money" calls provide beneficial income at the same time subjecting its underlying owner to losing their stock if it is called away?"

As long as the shares are in a cash only account, & your 'margin' account is in some other institution - you can loan them as you wish. Most often you will not get enough to warrant the risk, & getting them back can be something else (ie: FFH share loans). Its more reliable to write deep out-of-the-money covered calls (long stock, short call). SD

So he's been sued lots of times unsuccessfully & a lot of other suits didn't see the light of day. Do you really want to do business with someone who gets sued this much? Then there's the honesty problem & the slimy business itself. If it really is as claimed he doesn't need my money, & a far better business will drive him out of the market. So why scratch fleas now, when I could invest via the much better business later? Don't need the smell thanks. SD

Nice sleuthing. That 500M+ is effectively the amount of 2009 easing - & it is the boost to the money supply that was needed to offset the velocity decline. If all the other participants simply cut back their purchases by a collective 10%, the ease would have to increase by at least 200M (40-50%), & the money supply would immediately inflate (all other factors equal) Not that long ago (15-20yrs) Canada 'hit the wall' & a Federal Cdn treasury auction essentially went 'no bid'. The BOC had to do a similar emergency type purchase, & within 12-18 months Cdn mortgage rates went to 20%+ (from memory) - & at a time when there was very little 'crowding out'. Today everybody needs money, & to get it they will have to competitively increase yield. Rapid rate hikes. The alternate is a synchronized global devaluation, via a global easing big enough to retire the total global easing to date. ie: The entire G8 prints 10% more currency to devalue 10%, & uses the new paper to retire the debt - but there's no internal trade impact on them as they've all devalued proportionately. If you're not G8 you either move with them & risk hyper inflation, or you revalue. We live in interesting times. SD

Keep in mind that if you're going to roll it's highly unlikely that you'll go with anything longer than 180 days; simply because global future rates are expected to be higher than they are today. The bubble gets bigger, the duration shortens, & volatility rises; hence a market distortion is largely enevitable. That 2.5T is also understated. An individual US state that can't roll its debt can effectively refinance with short-term debt backed with a federal guarantee - & some big states are in deep sh1t. We've allready seen sovereigns increase rates (Australia) to dampen inflation, & its highly likely that others will follow within 6-9 months (Canada). Hence the US either raises real rates to mantain the roll-overs, or it prints $ to immediately inflate & devalue the USD (& promote trade). Each has ugly consequences. The cheap money is coming to an end. SD

LNR-T You wouldn't want to touch it untill after their Q4 results have been published (write-downs), but after that you may want to hold it for 3-5 years or so. They are better known as a Cdn auto sector supplier, that is closing plants & getting hammered by the high $C. Lots of resultant negativity. But they also make the very large 2nd generation windpower generators, they have material technological advantages over their competitors, they are the 1st name in this market, & the size of these generators makes it uneconomic to ship from Germany or Asia. Green energy sells at a premium & these things are substantially cheaper on a delivered MW basis, as they can continue to operate in a wider variety of conditions. Eventually the auto-sector side of LNR's business will return, & you'll essentially have this windpower business for free; ideally as a spun-off company. Merry Xmas SD

In the spirit of the Xmas season. Keep in mind that options, futures, index instruments were invented for use by portfolio managers because they typically cannot hold any significant cash (I dont pay a PM to hold cash), and cannot buy/sell the underlying instrument without moving the market. As a retail client you do not have these restrictions. Because you could be wrong, the 'true' hedge is to sell 1/2 the existing position. If you're wrong the additional cost to repurchase is your hedge cost, & you largely control it as its your decision as to when to repurchase. If you're right you'll have a cash gain & a lower cost base. The optimal hedge against loss is to sell the entire existing position & write out of the money puts that you want to get exercized. If successfull you'll have a short gain AND get paid for your liquidity, but its a directional hedge - so if you're wrong you'll have a loss. Know why & what you're really hedging. As options, futures, etc. have embedded leverage (ie: risk), why is that important to you for hedging purposes ? There is nothing wrong with options or futures use as 'entertainment', but know it before you try it. Merry Xmas SD

Keep in mind that this is not a traditional buy & hold business case. SFK must exit their trust structure prior to 2011, the interest rate on their debt significantly increases on July 01, 2010, & they have 30MM+ (from memory) of debt maturing in 2010. They are well run, in a rising commodity cycle, have at most a one-year time horizon under the existing structure, & their investment case has always contemplated an eventual consolidation with some other entity. As soon as they can show a positive quarterly earning, & a fat EBITDA; the current price discount will effectively disappear. A wise man would also expect a merger premium in anticipation of a trust sector consolidation. As soon as they evidence a debt roll-over and/or repayment, pricing should essentially change to some % of BV. As if the bank was not confident that it would be fully repaid under the new structure, it would not roll; therefore SFK must have a solvent future. While SFK has many re-engineering options, whatever is chosen has to be in the interests of their (knowledgeable) investors, it will require at least a 2/3 majority, & it must be completed by Dec-31-2010; nobody is going to be stealing it. Possible extension (REIT), or further FX erosion aside; a fairly straightforward case. SD

Nice touch. There is a variant of this for use on concentrated holdings, where the coy's themselves have significant FX exposure that you don't want. ie: For SFK.UN you'd work out the end-of-quarter nominal USD BS exposure, & the next quarters estimated USD sales; put it into exposure/share terms, & multiply by the size of your holding to get to your share of their USD exposure for the next quarter. Then hedge it as you've described. Although typically restricted to just the corporate playbook (need a big holding) it does have application at times. SD

Keep in mind that when its O/G you really need to know your partners, & that the real money is in the future deals that you do together (their expertise & your $). This is a relatively low risk way by which to get their feet wet. SD

Very counter-intuitive, but simply take $ off the table. Buy some other kind of income generating asset in a risk-sharing partnership, or pay off the margin/mortgage. Money should be the servant, not the master. SD

"The most dangerous time for a country with 5 yr fixed rates must be when rates are near all time lows and prices have already risen to account for it. Significantly higher interest rates... can people afford the rate reset?" These are amortizing mortgages, & the rate was set 5 years ago when the 5 year rate was much higher than it is today. As the outstanding is also lower, the significantly higher reset simply results in something close to what you're allready paying. The major risk reduction is from floating rate mortgages suddenly converting into 5yr fixed rate. The home owners additional cash requirement from higher rates doesn't occurr, & surplus cash goes into fixed rate investments (GIC's) earning the home-owner a spread (GIC - mortgage rate). Refinancing volatility safely comes out of the housing market. SD

Stevie is going to have to get used to a gaggle of gutter press in his face every where he goes. The cost of the probable pay-offs is rising, & the strategies 'guarded secrets' appear to be apparently criminal or BJ wouldn't be pursuing it. The emperor would seem to be loosing his clothes, & trying to burn Rome to stop the barbarians from getting to him?

Like Uccmal we wouldn't have done much different. We had the basics right, in reasonable quantities, and at about the right time. We learned that portfolio size is seductive. Walk into a casino with $100, turn it into $1000, feel like a hero, then lose; you lost $100. The wise man who took 1/2 the stash off the table; walked away up $400. Money is the servant, not the master. We learned to change with the times. Trading the FFH BV multiple has been very rewarding, but all good things come to an end. SD

Granted there's nothing to prevent Canfor from taking a shot at it, & in many ways its actually desirable, but it will not be a steal - & given the players, the currency will be CFX stock. I want more because stock is riskier than cash, and because the entire cost will show up as new equity in our new BS, reducing our debt/equity ratio - and significantly improving our financial muscle. Yes we're financially better off together, than alone, but I still need an incentive beyond a tax free roll-over to change. You can afford to, & want to pay more. As a new CFX shareholder I'm going to get stuck with a % of the consequence, there will plant consolidation savings, & new shareholders aren't going to be splitting their investment $ over 2 companies. More demand for the shares, & higher prices. Geographic & market diversification, higher concentration of deep pockets, etc. are additionals. Given that a compromise is probably enevitable, 80-90% of BV seems reasonable. SD

What about .... way south. Rio or Cape Town ? Pepetual summer, cheap currency, completely different, & a choice of oceans to surf upon!

Nodnub Go to a couple of Italian, Greek, & S.American community functions. Give the folks an opportunity to know you, & discreetly let your interest out. It will not be long before you're introduced to the local folks in that community who actually do what you're thinking of. Ethnic communities are notable in that you, vs your money, counts for far more; so a down-to-earth approach will go a long way. The cuisine & entertainment along the way is usually pretty good as well. SD

Because there are so many friends/family the core legal entity should be a Cdn Trust, where everyone owns 'units' that they can buy/sell. The Cdn Trust contracting for services (Admin/Acctg, Ppty Mgmt, etc.) & your admin/acctg involvement is via a seperate LLC of your own..... But frankly, the better option is simply a direct investment in the various public REITs (liquidity, diversification, admin, etc). Next best is a small group buying an entire apartment block/commercial warehouse for retirement income, in some urban centre. A common practice amongst the major ethnic communities, & most will welcome new people who want to learn the nuts & bolts. Best of luck to you SD

Eric. Agreed on the housing, but different logic. Boomer demographics are increasingly moving into the downsizing stage; increasing demand for the more upscale, urban, one-floor bungalow/apartment - & the supply of suburban McMansion. And the suburban McMansions are allready oversupplied, as they were a prime benificary of the credit bubble. Net result is an inventory overhang of obsolete McMansions, & a dearth of one-floors. Limited new-builds and a raft of 're-branded' developments. SD

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