SharperDingaan

Lot of red flags: Despite the fed takeover, they're still keeping reinsurance risk within the group (from one sub to another) ? Either the risk was so toxic for the price, that industry refused it (so they had to do it amongst themselves) - or no-one is looking at the consildated group risk (its only individuals within each sub looking at only their sub). The fed invests 130BB+ and isn't aware they its behind, & not ahead of policy holders ? Or is it more likely that at the operating level AIG's UWs haven't been told that the fed has an override - so they believe they have to write, because they need the premium ? AIGs UW risk has to be rising dramatically - as they're writing for additional premium, and don't seem to be able to reinsure much of it. Assume reinsurance where-ever practical, & their book can only contain a material & growing slug of really low quality business. The securitiation issue again, but this time with insurance vs Alt-A & liar loans ? A super-cat loss doesn't have to be weather related, it could also be the collapse of significant UW capacity - & arguably the risk that AIG is increasingly representing. We know that WEB has been withdrawing from super-cat because the premium doesn't warrant the risk - perhaps this is part of the reason? It cant be easy running AIG, so lapses is corporate wide risk management & communication are to be expected. Hopefully they can fix it before it blows up. SD

This is why you hedge. A net loss of 37c for the quarter - ouch! http://cxa.marketwatch.com/TSX/en/Market/article.aspx?guid=http%3a%2f%2fsystem.marketwatch.com%2fnewscloud%2fdocguid%2f%7bF4F5CCAC-AB36-4634-A55A-6408CD51C890%7d&symb=SFK.U SD

The UW doesn't bother us as FFH doesn't discount the liability, & has a far lower income simply because it isn't chasing yield. Best guess; if that 'measurement difference' is around 5 on the CR, they're actually writing at close to break-even & playing to their strength - investment. We think the bigger issue is the inherent MTM BV volatility, multiplied by the UW exposure. Eg: major flooding/hurricane damage concurrent with a 20% drop in NA indexes - in 1 quarter. Not that long ago no one believed in black swans - but now they show up on a regular basis (AIG?). A non P&C investor is going to take a sizeable discount for the perceived risk. A normal business risk to an experienced P&C investor, & a frustration as we never get to intrinsic value. But if you see the change in BV multiple as essentially being a seasonally driven annual business cycle - then the nature of this investment changes dramatically. If the ROE is 15%, a round trip would generate a fairly reliable 75% of BV [(1.25-.9)x2x(1+.15/2)] vs 15% for a buy/hold - or 5x as much. Even if you only capture 40% of the potential 75% you're still 2x better off. Not an approach for everyone, but it doesn't hurt to be flexible. SD

Couple of thoughts that immediately sprang to mind: Why so few questions. OK partly it’s the day before a long weekend, but doesn’t it also reflect a greatly reduced media/industry interest? If the BV multiple is to rise over the near term, we need more buyers than sellers – so where is that $ flow coming from? Trade versus value play. This is hurricane season, and FFH does not appear to be a market hottie – so why would you NOT expect the BV multiple to drift downward as we move through the quarter? Then if you believe that 1.25x is reasonable & you can buy at .90x (or less) - aren’t you really making your money from trading versus holding? Then doubling it - if you actually see FFH as being a long term value play. Why such UW variation. Lot of possibilities, but perhaps the real issue is that they haven’t bought out other carriers & used their expertise to extract the synergies. Additional float, economy of scale, etc. Buying in your own subs (NB) boosts financial return, but has no impact on the UW. Long term operations. ORH is inherently riskier business, so if you can already lay off some of the non-systemic equity risk (via the publics holding) – why would you want to take it back anytime soon, when even WEB is backing away from cat risk? Alternatively why would you NOT have ORH make other reinsurance acquisitions to grow its entire business? Value Trap. For the foreseeable future FFH is going to be primarily an investment vehicle – so wouldn’t its NAV always be discounted for its UW operation, because it is not directly comparable to other investment funds? Especially as it would seem to be that only with a great effort at the annual AGM – do they get anything close to an insurance coy valuation. Another great quarter, but you have to ask why are we not getting the bounce that we might expect. SD

You might want to consider temporarily selling the odd share or two & going the T-Bill+call route. It could be a terrible shame to not take Mr Market up on his offers ;) SD

We think that Uncles should only steer, & not force any given calling. The nephews live across the pond, are aged 11 & 14, & are free to choose whatever they’d like to do. But as a minimum, they will each take the following life skills with them. Wealth & privilege: Wealth is who you are as a person, what’s in your head, how you act amongst your peers (of any age), and how others perceive you. Financial wealth is ashes-to-ashes within one generation. If you had to start over again tomorrow, with nothing & someplace else, would you thrive? Ethics: Live modestly, do the right thing, do no harm, & help others. Buy a bum coffee & a meal – but if somebody crosses you, go to the mat. If I read about what you’ve done in the papers tomorrow, will I be pissed? Ownership: Joint bank account & they write the cheques – mom/dad & I as counter-signers. From that account they’ve bought 100 shares of Manchester United, & units in a music royalty trust. A home football match is a shareholder meeting, and 700 plays on a radio station is a 1p distribution. Heroes & media: The bios/histories of Suleman, Sir Francis Drake, CJ Rhodes, JP Morgan & the odd Mafioso are all required reading. All were bastards, but in their time they were amongst the best at what they did, & the winner gets to write the press. No bubble: Experience how different kinds of businesses are run. Learn how to make friends outside of your circle. Deliberate in your face exposure to life events. Backpack travel abroad once every 2 years. I’m informed that Cairo’s Khan el-Khalili is brilliant. Interesting side-effects: There’s always a swarm of strong minded & fiercely protective girls around these two. I’d like to think their easy leadership is starting to set them apart. The glamour job is ‘Financial Regulator’ …. but in the Drake/Rhodes/Morgan mold. Steal the money back with a privateering license, 10% personal bonus, & 10% to the underworld ;D SD

"Several posters speak in the plural ("We") when talking. Dazel, Sharper, and a few others" Speaking only for myself. I manage the family investments as a sideline, & am training 2 nephews in the darkarts of finance - hence the 'we'. Part of their training is that they can each make a BS/PL 'dance', & that they each have to present a new idea on the back of an envelope every quarter-end. If it survives the 20 questions, we put real money on it (a very small allocation from the main portfolio) ;) They're at the table whenever the major decisions are made, & are there to ask questions & learn by osmosis. Once/year they have to present a business plan to a small businessman, buy some inventory, & then help in selling it through his/her store (preferably something edible in case they screw up) :D Real life experience, with 20% of their gross going to charity and another 20% going to travel. Taxation. They also read this board as well SD

Very nice to see Keep in mind that its not just seasonal 'fudging'. Net asset values are also being inflated (accounting changes). There is also zero mention of the interest that should have been paid on TARP funds this reporting season. Most would suggest that bad news is also being deliberately undereported. Housing is not just overbuilt, its also obsolete. A retiree cant keep such a large house clean, & an illegal worker cant afford such a large space - so who are you going to sell it to? Then add in that the growing army of the destitute all need a place to stay - so why wouldn't they simply squat in the existing foreclosed houses ? It is now almost enevitable that the US is going to have to devalue, & very likely lose its reserve currency status along with it. SD

We use options exclusively for hedging purposes, & almost always as the option writer. As a put writer we generally prefer shorter term options at the money, & write with a view to acquiring the underlying. Greeks are important to us, & the premium is the consolation prize if we fail. We will occassionally sell a position & hold the T-Bill +long call equivalent. Allmost always around binary events where there is an upward bias, but the outcome could go either way. The premium is insurance. We find the biggest advantage of being long the underlying is the flexibility. Certainty, today, every time we do a buy/sell. More secure lending vs premium income. Borrow capacity every time we need it. No forest of potentially adverse forward obligations. We also snore very soundly every night ;D SD

"There is a place for options (ie: hedging your employment with puts on a competitor of the company that you work for) but it should be a fairly rare event". Some explanation: Virtually all employers treat employee hedging (of their stock) as a firing offence - but it is illegal to prevent an employee from buying puts on a competitor. The typical arrangement is a Memorandum of Understanding, monthly statement disclosure, long ABC coy employee options, and short XYZ coy via the put. You agree to bleed a little every quarter, to make a profit if XYZ coy experiences difficulties - identical to Taleb. Assume that you worked for a Cisco, & per common practice you're awarded 40% of your salary in options. If Cisco does well you will too, but because its a big part of your comp you don't necessarily want it adversely exposed to the market. Nortel is a direct competitor, & pretty much the same business conditions that affect Nortel will affect Cisco, & about the same time. Therefore buy the equivalent number of Nortel puts. Everybody keeps buying tech, the earnings & stock price are up, & Ciscos bonus cash rains upon you. The cash bleed is easily affordable & the puts get rolled up & out to minimize the decay loss. But when everybody stops buying ... Ciscos earnings & share price drops, & it pushes the sectors multiple downward, affecting Nortel. The sectors share prices go into a feedback spiral, & all those employee options go into the toilet. If it spirals long enough; there are eventually mass layoffs, asset sales, & potentially bankruptcy. Except that you got to stay rich because you were hedged, & those same conditions have driven your puts very deep into the money. You also have the exchange as your counterparty, vs someone else in the industry who may not be able to pay. .. And if the scale is big enough, pehaps you even have enough to take out some of those assets ! Old skule WEB

70% of options expire worthless, & most of the other 30% simply breaks even. Worse still is that for every big ‘win’ with a 5-10% P(x) of occurring, you need the win to be at least a 5 bagger just to recover your losses. You sell options – you don’t buy them. A call option is simply a mechanical limit order – so why are you paying someone else to do what you can already do very easily ? And if you already have the cash to buy at ‘X’ - isn’t the return that you’re paying really the premium x 12 months/option period x 70% + the 12 month T-Bill rate. There is a reason to the madness. The best option is often the longest dated option, but you can’t borrow against any interim ‘gain’ & its not liquid if it goes deep in the money. If you’re long the underlying you can do both, & you still have time to bail you out if the price falls the day after you buy. There is a place for options (ie: hedging your employment with puts on a competitor of the company that you work for) but it should be a fairly rare event. Not text book SD

Re Stingy Investor. 'Marketing' returns significantly different from client returns should throw up a bunch of red flags. It can only happen if the 'market' portfolio is either investing materially differently (holding period, asset mix, securities, fortunate timing, etc.), or the advertised portfolio return itself is false. One lacks 'truth in advertising', the other just lacks truth overall. SD

Had an interesting discussion. It turns our that when you ask a Cdn lottery ticket buyer what they would do if they won big, a significant number say that they would continue to work - but on a reduced time basis. The reasons cited being mental stimulation, friends, feeling of worth, etc. What do others think ? If you work 3 days a week, you're effectively voting with your feet - & asserting that the activity (you could work for any employer, not just your current one) has a 60% (3 days in 5) societal value to you, & a 40% (2/5) monetary value. The annualized equivalent is work 7 months/yr (60%) & take 5 months (travel over winter, visit family etc.) off (essentially the 'contract' model of employment). What do others think ? The design 'retirement' age for most pension plans is roughly 65 (Canada Pension Plan). But the reality is that it is age discriminatory & that you can't actually force retirement - you can only pay more/month if the participant retires later, & less if they retire earlier. Here is the rub: If a pension acts like a personal lottery would most people want to continue working either part-time, or on a 'contract' basis, for a couple of years post retirement ? If the answer is 'yes' - you need substantially less retirement capital as you're earning what you're spending, & when you do 'retire' you'll get paid more/month because you deferred the payout. What do others think ? The answer has some major implications; - State social program changes (Employment Insurance, Child Care, Pensions, etc) - Societal 'norms' change ('age culture' vs 'youth culture', long term health, child care, etc.) - Employment practice (full-time/part-time/contract mix, attitudes, work force integration) - Wealth Mgmt restructuring (advice vs transaction bias, product, shorter horizons) What do people think? SD

You can take on Cdn real estate risk essentially 4 ways - 1) Chartered Banks as mortgage originators, 2) Life Coys as the buyers of long term commercial mortgages, 3) Ppty Mgrs as building investors/managers, or 4) REITs. Moving from 1) to 4) reduces BOC influence, & multiplies the inherent business risk. It is reasonable to assume increases in Chartered bank provisioning (commercial loans, credit cards, etc), but will it reduce overall profitability with enough certainty to bet on it ? And why is the REIT not the better bet ? Then keep in mind that a ppty manager has an incentive to buy a REITs building, issue the property management contract to itself, & repo the building back to the REIT - with all of it at a rising price. Everyone shows gains, all the buildings get marked to these new prices, & the incentive is strongest when the times are toughest. The bank franchises are extremely strong, deep, & protected. Handle with care SD

He doesn’t necessarily need to sell CAD & buy USD. The smart way to ‘quantitatively ease’ is to fund something massive (ie: nation-wide state-of-the-art green energy infrastructure, buried & super-cooled electric transmission lines, replacement of the power grid, etc.). Very big $ commitments too big for any one or group of provinces, a clear & lasting national interest, & spending sizeable enough to have a material impact on inflation. Then bear in mind that the BOC is legally required to maintain inflation at an orderly rate, would be paying roughly 2% of GDP/year in newly printed CAD notes, & that only the BOC is in a position to control the inflation. No wonder the governor is smiling. No one is going to want to buy CAD unless they have to pay for something, which will drop the currency in a big way - & keep it there. A CAD manufacturer is also not going to export without a solid LC backing the receivable, as he can divert production domestically. Unlike depreciation this is building real & long-term assets, & Canada ends up with both a stronger economy & currency. Very elegant. SD

Keep in mind what wasn't in that analysis (mortgage amortization, mortgage premium income, etc.), & where the analysis originated. The risk is with CMHC (federal government), not the Cdn Banks. The ticking bomb is really the UK commercial property market, as the mortgages (trillions) are coming due in 2009/10/11 at a time when there's zero interest. There will be a rush to foreclose untill the upfront loss exceeds the additional cost on regulatory capital on carrying the deadbeat credits. Being first past the post will have a very real advantage, so expect rapid price erosion. The UK issues will quickly spead to Europe & then the US/Canada. The forced additional commercial mortgage provisioning could well do a number on bank earnings for a good 9-15 months. SD

Keep in mind this is before the Q2 earnings come out. 06/30/2009 debenture interest was paid in cash. 12/31/2009 and 06/30/2010 debenture interest will be paid in shares if there is a material drop in the level of cash on hand. Nothing unexpected. St Felicion will be financing maintenance CapEx from Black Liquor subsidies - which is much more significant than it might seem. Reluctant to suggest more, as we’d prefer not to steal managements thunder. Assume interest will now be roughly 5% on about 166M of CAD equivalent debt – 8.4M/yr. The bankers are agreeing to add this to the debt, & capitalization will increase net earnings by approx 9c/share over the next 12 months. Again more significant than it seems, & we’d rather that management spoke to it. There is an inference, & a growing incentive, to do some kind of equity issue or debt/equity conversion from 07/01/2010 onwards. Reluctant to suggest more but worst case, the debs get repaid in shares when they mature 12/31/2011 All in all, far better than we might reasonably have expected. Management is pretty much earning their pay this year! SD

Always remember that a trader is just an opinionated salesman, but to be a really good salesman you also have to be a sociopath. I am the center of the universe, because I am the best at what I do, I prove it everyday, & all others bow before me. But every trophy wife knows otherwise. 1) Our trader is only good if everyone else chooses to play his game, his way – which is why there’s a rant every time the game changes. 2) Yes our trader really is good; but only so long as his game lasts, & it can’t last forever. So flatter, push, destabilize, & get as much as possible – now. Before he blows up. 3) Her best trade is to short. Get paid from the blow up, & get paid again from the divorce - but to get the timing right you have to stay near him. Taleb’s continuous hedge strategy is a bet on 3), & that it happens every 4-7 years or so. Human nature would seem to ensure that he’ll pretty much always get it SD

25% FI, 20% Equities, 45% Cash, 10% Options. High cash as we’re short puts & are waiting on earnings reports. If we get what we'd like, we will very quickly be negative cash. Happy hunting SD

CIT has just demonstrated that the fed is now letting players go. Given the hard evidence that stimilus spending has now taken hold, & the discussion of 'exit strategies' - one or two failures is actually desirable. Q2 bank earnings are dangerously skewing the market. Deduct interest for the interest free TARP funds, & write-down marketable securities by 10-15% for the 'funny' valuations - & the real position is hugely different. The cleanest way to 'exit' is to issue T-Bills (repaid TARP funds buying bills) & start putting interest expense on the bank P&L. The Cdn regulatory system has been repeatedly held up as a 'guiding' model. Banks require a licence (charter),the ongoing operation is at the discretion of one authority (ie: the pleasure of her majesty), and you get a government sanctioned monopoly. You do as your told or the authority triggers a run on your bank, there are no precedents/appeals/regulations - just 'her majesty is displeased'. Applied to the US, & its goodbye lobbying. The fed/treasury isn't 'protecting', they're simply preparing the next steps SD

Keep in mind that much of the Wall Street 'news' is just posturing. Conveniently ignoring the fact that the frat boys have screwed up so badly that they've lost the franchise, & its not coming back.

FFH is simply being very swift. If they do nothing they will lose their investment but if they keep it alive (1) they will eventually take out a truly extraordinary return (2) they will always have prefered access to all future forestry deal flow & (3) there is little competition, & the additional risk they take on now is relatively small for what they get. The real money is when this industry gets restructured, & that has always been the premise behind their forestry/pulp investments. Long term business decision. SD

Makes a lot of sense but small steps first. Poll for the direction of the major macro variables (inflation, currency, economy, etc) 6 months out - & divide by region: NA, Asia, Europe, etc. SD

Gold is simply the elected hedge against the anticipated change - it could just as easily have been oil. The assumption is that central bankers will use gold as their 'store', because that is the history - & everybody can buy gold. The reality is that central bankers also have the SDR (Special Drawing Right) which functions a lot better than gold in almost every regard - & nobody but a central banker can get them. China pushed hard at the recent G8 for USD reserve status (store of value) replacement with the SDR. As the worlds creditor, & a trading partner with a currency pegged to the USD, the inference was clear. China's USD reserves shift into SDR, & the currency gets pegged to SDR vs USD. Yuan effectively becomes the new reserve currency - as it is the only currency backed by SDR . Goodbye gold Looking backward isn't going to help anyone here. SD

GE is a great buy, but the real money is 3-5 years out once all the write-dwns have cleared its BS. Over the next 12 months they may well come down some more, but long-term the future looks bright. Risk mitigation requires that a investor roll into his/her position over time - vs buy the whole thing right away. The reality is that a large chunk of GE's BS was financed with short-term $; they had difficulty rolling it, & had to go to longer terms with higher rates. The good news is that they were able to roll at the lowest available global rate, the bad news is that their various BU ALM's are no longer optimal. Earnings drag from penalty interest. GECapital is a platform, sourcing funds at the lowest possible global cost of funds; take it away & the other BUs will be far less profitable. More penalty interest & less margin as financing/lease sales evaporate. A value investment, with significant trading opportunities attached. SD