SharperDingaan

The bail-outs essentially did 2 things. (1) XYZ industry's write-downs got converted into equity (leaving their equity where it was & not materially lower), & (2) Fed leverage increased as the dung came onto the feds books (TARP assets, etc.). But the overall system leverage decreased ... because the feds leverage is substantially lower than XYZ industry's. Exactly what we pay the fed to do. To get rid of that dung the fed can either write it off (& simultaneously print currency to offset the amount of the actual write-off) or it can try to 'grow' out it by improving business conditions (similar to Japan attempts in the 1990's) to incease its value. Both are structural changes - & the choice is either inflation & devaluation, or an extended period of stagflation. Lot of bankers suddenly talking about pulling back stimulus .... SD

Short futures & go long cash; reverse when they rationalize again. All those storage purchases are boosting spot, & were it not for todays ultra-low cash costs - the volume would not be as high as it currently is. When the buying stops - both spot & the futures should decline, & they'll decline faster if cash costs also increase (as everyone starts selling to take the gains & avoid the additional/alternative carry). Add to it new oversupply & recession driven demand destruction. Interesting .. but risky SD

Seems to us that the various bailouts simply transferred the losses to the global federal governments. The underlying problems haven't gone away, they're just less damaging now because there's less leverage being employed. We see only the NA perspective, but the reality is that China is the 3rd largest economy in the world - & it doesn't need exports to turn itself around. Copper prices have been rising (barometer) & the demand is largely from increased chinese activity. Add to it that both China & India have just redenominated 70B of reserves out of USD & into other currencies (IMF), & the odds of a NA pull-back rise. Why is it that when a SA country is fiscally irresponsible we see what happens to them as being 'right'; but we cannot possibly imagine the same thing applying to the US, when the US is also doing it. There is no difference. Makes a lot of sense to at least hedge. SD

You might want to keep in mind that gas pricing is largely regional, wheras oil is global (as the ability of a tanker to deliver wherever the price is highest permits arbitrage, which is a lot more limited if you're stuck at the end of a gas pipeline/collection system). Re Alta/Henry Hub gas: Almost 45% of existing gas production goes to tarsands; 'green' tarsands by 10% and you've just increased the supply on the local market by 4.5%. Lower prices. Alta shale is relatively untapped & close to existing collection systems. The province needs the work/royalties, & the hookup costs are relatively cheap. They will get drilled sooner vs later, & that new volume will more than offset existing depletion rates. Lower prices. There are few west coast LNG connections, far away, & you've still got to get the gas across the ocean. High frictional costs limiting arbitage. Not terribly promising SD

Woodstove: The indenture permits payment of interest and principal in units, priced at 95% of the units average close price over the previous 20 odd trading days. To modify the terms of the debenture requires a 2/3 vote. Wilscott: The date is significant because this is the debs ex-date for the June-30 interest payment; ie. the debs 'book of record' closes at end of trading on June-26. Given the significance, it would seem likely that debenture holders may see some kind of proposal in the near future. As most folk expect that Q2 results will be brutal, most would expect the June-30 interest payment to be in units. Most managements would want to tell their shareholders directly, before it happened. Shite happens, but we have a capable management doing a solid job in what are truly extremely tough conditions. Let them do what we've hired them to do. SD

Speculation, but over the near term we'd expect 2 main effects. Heavy polluters that would otherwise have shut their doors will stay in business. Pulp prices drift lower as capacity comes out slower than overall demand falls. More sovereigns react with matching subs of their own. The good news is something from Quebec, the bad news is additional capital requirement that will drive down the industy's allready poor ROI SD

Assume that it was a fairly standard business background with a specialty in finance. Like most CFOs he's come to recognize that he can invest the coy's surplus funds as well as/better than most outside council - & he's probably had more than his fair share of success at it. Like anyone else he can be wrong, & will need to periodically talk up his book, but by & large his views are independent. An investment in Clarke is essentially a long-term bet on either a sale of their investments or Armoyans departure, & in the meantime you get fairly well paid. Broadly similar value traps are Viceroy Holmes & Becker Milk. All fairly good coys, but it requires a different approach. SD

A different take; In very general terms, for a basic MBA. The cheaper the education (no residency, internet delivery, write exams at own timing, etc.), the less its valued (perceived reputation, etc.). Its the volkswagon certificate & not glamourous, wheras the 'residency' school is the BMW. But if I just want a ride, ...... I don't care. To sell 'residency' you must 1) unsettle the audience, 2) sell the value add of the 'experience', and 3) sell the alumni 'history' of the school itself. Starbucks salesmanship. Most professional designations include at least 1-3 years of residency. The focus is almost allways on application (not learning), its often legalized slavery (CA articling students), & its usually regional. It mitigates the reality that the majority of the friendships will fade as people settle down & move away. Most MBA classes are the same kinds of people, at the same stage of life (ie: highly filtered subsets). But the most value is when at least 1/3 of the class are 'outsiders' with different experience; & those 'outsiders' are increasingly going the internet route. Schools selling 3) have it worse, as that outside 1/3 also have a very strong incentive to not rock the boat. Most would agree that residency is a very worthwhile experience, but you need to first get yourself as much real world experience as possible. Do it well, & you're that 1/3 - & the one making the choices versus receiving them. SD

Keep in mind that NA really hasn't had a wake-up call in well over 100 years. No bombs/destruction, no mass starvation, no pogroms, no forced fleeing in the middle of the night, no rebuilding from scratch - in short, no growing up. The culture substitutes with isolationism, holywood idealization, 'reality' television, & 'cool'. If you never travel outside of NA, live in comfortable surroundings, & can readily borrow the funds to go to school - you will end up drinking the kool aid. And because everyone else (in your circle) is doing it, it must be right. In the 70's the 'glamour' job was "rock star", today its "investment banker" - & if your ethics slip along the way it doesn't matter, 'because everyone else is doing it'. Mania. The culling of I-Bankers (both real & wanna-be) is well overdue, & the profession is finally getting de-glamourized. Hard to be cool when Failed In London Try Hong-Kong (FILTH) is starting to get publicized in too many of the wrong places! Yes its ugly, but so is taking the drugs away from an addict; but without it there will be no 'after'. Worst case the I-Banker pissed away 10 years of his/her life in a wrong decision. He/she found out they weren't 'perfect' - & join the rest of the world! Most of that innovative industrial R&D research gets funded by private/public partnerships, & many of those folks making the decisions will be former humbled I Bankers. The good news is that maturity does finally catch up with brains. Little harsh on I-Bankers, but richly deserved! SD

Keep in mind that 1) some of this will be an inflation hedge (bonds fall & equities rise), 2) they are not necessarily long-term positions, 3) they very likely also have some down side protection on these positions, & 4) if they got stuck with them - they're generally holdings that you wouldn't mind adding to if the price were right. Relatively little risk. SD

Welcome back. It's been dead boring without you! Cheers SD

Insurance is pushed - not pulled, so a declining premium should be pretty much expected as AIG's best sales people look for greener pastures ..... but look a little more critically at the servicing argument. AIG is pricing down to stem their outflow, but as the insured .. I'm really looking to the US fed to make good on the AIG promises. Comes the first big hurricane payout, that US fed backing is going to trump everything else. SD

New-builds often have an escape clause that lets the new owner out if they cant do the maiden charter at a profit. It allows the owner to take a hard line, puts the construction risk on the yard/government, & typically only occurs when the charterer is either having difficulty finding the volume or is short on liquidity. Lower the operating cost (labour, 'deals', etc.), or swap/sublease for some period [swap your new-built ship for someone else's smaller & used one] with a sovereign, & you can get around the issue. If it occurrs you'll also see a lot of smaller ships suddenly loosing their charters - as its their volume that will getting put into these new builds. SD

Alert. Though we hedged at a much higher price, we hold our residual position in the common for much the same reason. It will not take much for the price to double, & both the deb & the common would benefit from it. Cardboard. Agreed that if this were new $ we'd probably stay in cash untill we saw some early sign of a sectoral improvement, then decide between the two. As we know the coy, & its old $, we're really just repositioning at little cost. Were this a coy we didn't know, we would be out. Oldeye. Consider it tuition. If you bought at $1, & sold at $.25, you'd need to earn 400% on your $.25 just to break even .... but if by wise investment you managed to get $.50 - your task would be much easier, & you'd effectively have earnt 200% on your $.25 investment. Valuable experience. SD

Sell existing common, go long a few debs, & make a guess as to how much existing common those debs might convert into. If the debs do convert - you're synthethic short will be covered by the conversion. Your common position will be protected against a further fall/dilution & a potential consolidation, & while the changes are going on you're in a stronger financial position. The debs are cheap, partly because of the dire CF projection .... but keep in mind that the projection will only occurr if the coy does nothing. The reality is that SFK will react to stem the outflow, & business conditions will improve (albeit very slowly). If St Feliceon were mothballed for a year, it could look very different. There is still an investment risk, but there are ways of mitigating it. If the debs pan out 4-5 yrs hence, they will be 4+ baggers, & at least you know the company. Not for everyone, but if you wish to hold - at least consider hedging. Best of luck to us all. SD

In recognition to some of the other boardmembers following this security, you might want to consider hedging some common against the debs. We know that SFK's CF is getting stressed, the debs are deep underwater, the conversion price is far out of the money, & the chip agreement is triping indenture covenants. There are various possibilities, but perhaps some of the more prominent might be; 1) The debs extend the maturity & accept PIK interest (in deb) at the same rate for a period of 'X' years, in return for a re-priced conversion at around $1.00 (2-3x current market). Certainty returns, CF significantly benefits, the deb price rises, but there's a material deferred dilution. 2)The debs & accumulated interest exchange into new longer term debs at a higher rate - and common. Retiring the old debs produces a material gain, & a portion of that gain becomes attributable to the newly issued common. Certainty returns, CF benefits less signifantly, BS strengthens, the new debs value at about the MV of the old debs, & there's material & immediate dilution. There may also be a share consolidation. 3) The debs & accumulated interest exchange into new common, and shares are consolidated on a 2or3:1 basis. Retiring the old debs produces a material gain, wholly attributed to the newly issued common. Certainty returns, CF significantly benefits, BS materially strengthens, but there is massive dilution. Deb holders essentially own the company. There may also be a chips related acquisition. In all cases we get a much stronger company - but it gets progressively harder on the existing shareholder. Something to consider. This is not intended as a solicitation. SD

We use 2-3 equities, cash, & fixed income. 5 assets. If we really pushed it maybe 1 equity for 40-45% of total assets, but a very rare event. SD

A few pearls picked up along the way: Always remember that a NPO board is primarily a political animal. The folks who do well are those who are very good at getting the right kinds of 'other' people to do the work - & it is a special kind of skillset. While we might question their methods - those folks are essentially salesman, & the 'sale' is a grant or time investment from a targeted donor. Its often wise to diminish the business side wherever possible, & accentuate the 'grunt' part of the work. It's a lot more fun, a true change from your usual activity, and protection against 'expectation creep'. But your an 'X' & we could really use that skill, has a way of very quickly becoming a full time (& unpaid) job. Far better to simply contract out your services for a couple of months/yr. Learn to say no, & be rude. I've done what I wanted to do, you have 60 days to find someone else, & after that - it's just not my problem. There will be no hard feelings, & the good salesman will quickly realize that any further sales effort would be wasted on you. Chalk this one up to experience, & look for something else that exposes you to folks that you perhaps wouldn't normally meet. For the more commercially inclined you might want to look at partnering with your local produce vendor. Volunteer the odd Saterday/Weekend so that Mom/Pop can get a break, & make the odd investment in seasonal stock over the xmas periods. You'll eat very well! SD

We would suggest that the US is starting to approach its borrowing limit, & is now having to compete with the other sovereigns for a shrinking pool of funds.

You diversify because you either have (1) a fidicury duty, or (2) you don't really understand what you've got, or (3) you're not very good at hedging your risk. Because you may not be good at it, limiting your exposure to any one investment has long been recognized as the time-honoured mechanism by which to limit your screw-ups. Small businessman get to be successfull because they've fully understood how their business makes its money, what its threats/opportunities are, & have learnt how to control their risks by adjusting the appropriate variables specific to that risk. The forecasts, budgets, product costs, minimum volumes, demand curves, etc are constantly getting updated in their heads - & they act swiftly as new information comes to light. The size of the business is irrelevant. On main street we call it control; on wall street we call it risk management and return optimization. As investor; my risk management tools are essentially investment training, management assessments, financial analysis, critical thinking, option use familiarity, and tradeable positions. Liquidity & financial tools, versus the more direct 'control' of the small businessman - but the same result. If you hold more than 2-3 equities you're probably overdiversified. Definately not MPT, but effective! SD

If you take it that a USD & GBP devaluation is almost unavoidable, the only question becomes what the other countries do about it. The historical approach has been increasing central bank intervention culminating in formal 'resets' every 15-20 years, along the lines of Bretton Woods & the Plaza Accord. So long as the devaluation is discreet it can be managed. But all it needs is for someone to 'feel lucky' & try making a name for themselves by calling the US feds bluff - and win. Soros did it with the Bank of England & is forever remembered for it, so it CAN be done. How middle america reacts to the devaluation, will be key. SD

Keep in mind that the $CAD is a petro currency, & that Canada increasingly makes more from its net energy - vs manufacturing exports. Higher energy prices will tend to strengthen the $CAD, ... & if the $USD, or GBP simultaneously weaken, the CAD FX rate will rapidly rise. The BOC can/will moderate the volatility, but they cannot prevent it. CAD is going to appreciate, but the real question is where is the new 'real' ? If S&Ps UK downgrade were to extend to the US we could very quickly get back to 1.10 - but if at the time it occurred oil/gas were also strong, maybe the CAD FX rate spikes at 1.20? Premature hedging in anticipation of BOC action - could be a very expensive opportunity cost! By downgrading, S&P has effectively said that the UK government cannot pay its bills without printing money (quantative easing) - & the resultant inflation will devalue the currency. To mitigate FX volatility the BOC would essentially have to inflate the CAD money supply at the same rate (or faster) as its major trading partners. To diffuse the inflation Canada would then need to either do foreign acquisitions, or experiences a domestic property boom. The decisions are just as tricky north of the border. SD

When ABH went into CCRA, SFKs remaining contracted $20/ton discount became an unsecured liability. SFK essentially lines up with every other ABH creditor, in the hope of geting an eventual payout of cents on the dollar. ABH is one of the 'special' Quebecois coys, has a damaged reputation & is trying to offer a huge volume at spot, in a down market. A deal will get down, but expect it to be somewhat controversial - & convoluted. The deb pricing essentially assumes the wipe-out of all existing equity & the liquidition of all 3 plants for scrap, net of costs. Most would think that a more realistic outcome, would be PIK interest payments and some kind of negotiated debt to debt & equity conversion. Re disclosure. We hold long positions in both the deb & the common SD

It is usefull to think of KFS as essentially being a ponzi scheme, where the objective is to raise as much UW float as possible in the hopes of a 1 year investing/UW performance that hits it big. A casino bet on your number coming up & paying out at 32x the ante - and as long as there are enough new buyers to replace the sellers, the game can go on indefinately. They have a book, but they have such a poor UW reputation that a buyer would have to heavily discount its value to get rid of the fleas ... & you can never really get rid of the fleas. Not good news for a shareholder. In many ways they're really worth most as a casino bet but only when there's nothing else worth buying. When there are a smorgasboard of higher quality & better choices for about the same price - guess which one is on the bottom. Easy to get in, but to get out - you need a rising price to bring in more buyers. If you effectively cannot sell the book, & are stuck with the culture, you pretty much need to turn yourself into a 'momentum' stock - & rely on there always being a greater fool ready to buy, at any price. The .com era proved that this can work very well for a time. There are far better places than KFS. SD

Their cash position is testimony to how well run this company is. Coy wise its would seem almost a given that the deb will now be converted in some fashion. There will be some kind of equity dilution/consolidation, and some kind of new fibre agreement. Given the times; the pricing will be dirt cheap, & the long term stability extraordinary - but in the short term ... volatility. Most SFK shareholders will have been fully hedged for some time, & the Q1 result was not unexpected. If you're going to be invested in pulp; SFK remains a top pick, & hedge cash is sitting on the sideline. If you hold a long term view, the 'back-of-the-envelope' suggests extraordinary opportunity. Cdn practice is industry/governmental co-operation for the greater good. Quebecs involvement is very lkely along the lines of transferring ABH's cutting rights to SFK, & giving up the first few years of stumpage fees in return for the $78M ABH loss & keeping the local population working. SD