SharperDingaan

What's not in here, & what all these quants missed is the very high model risk in this strategy. For Taleb to win he needs to able to sustain a cash bleed every day, & then periodically collect big from a wide range of people when there's a market discontinuity - every few years. Academically correct. But .... In the real world he's really betting against very few people (one), & hoping that when the payoff event happens those people can pay up the cash immediately - ignoring the proven reality. He's really short cash & long a long-term unsecured low quality note - if the event itself doesn't first put the counterparty under. Very similar to having AIG as your counterparty on the other side of your CDS trade. SD

Cadboard: Agreed the 'it can never go down sentiment' is built in, but recognize that it's also a time horizon thing. Long term, if the BOC maintains inflation at 2% for 25 yrs the house will sell for 64% ((1.02)^25)-1 more than it will today. Add in a 25yr mortgage amortization & the homeowner is understandably going to feel 'rich', because the house is really a long term savings plan paying you inflation + free accommodation Short term, its an investment that can go either up/down. Buying to fix up & flip to really no different to momentum investing - you just think you know better because you did the work & therefore have some degree of 'control'. Buying in tough times, or when rates are high, is no different to buying a bond & waiting for an upgrade. Different geographic areas will have different preferances, & threfore orientation. To a large degree Vancouverites are pricing in potential gains from renting out during the olympics, and/or selling to others who will use the property as 'cheap' accommodation - no different to Cape Town, RSA with the Soccer World Cup. But Vancouver also has a significant asian buying population which is much more risk tolerant, & access to HK $ which is even more risk tolerant - especially if there is a also a son/daughter on Cdn soil to manage the property. Someone in Halifax, Ottawa, or Edmonton might find that horrifying (less risk tolerant), but those are also long term property holders - so price swings are generally not going to be as extreme as there are fewer risk takers (who need to sell) in those markets. On balance the 'it can never go down sentiment' does exist, but it would seem to be a lot better controlled. Real world diversification that actually works for a change! SD

Keep in mind that the US market went down in large part because securitizers couldn't continue to fund, & walked away. These low DP mortgages are being funded by the BOC through pass-through selling by the major banks. There is relatively low risk, these are amortizing federally insured mortgages (systemic risk is contained - & lowered every time a monthly principal payment is received), & the properties are generally being bought at lower prices than would otherwise occurr were the market in a more 'normal' state. There is only 1 funder, they know exactly how much of this funding is out there, its maturity term, the geographic markets where the funding is, & the % of each market that the $ represent. Very different from the US. SD

Look at the major banks in the area, & sell out-of-money puts with a view to acquiring the underlying. An ivestor might rationally accept the states IOU at a discount because they're expecting a fed bailout, but nobody is going to accept a munis IOU. When the first muni 'hits the wall', financing will close on all them - & the balloon goes up. Either the fed covers the munis directly (unlikely, as it would have to be for every muni in the country), or they cover the muni by directing $ through the state (more likely). Given the states frozen budgetary decision mechanisms, most would count on perhaps 2-3 months for the $ to actually reach the muni. Property values, especially heavy muni services uses (commercial) could expect a temporary hit, which will hit the banks. Geographic concentration, & media hysteria, will make those hits harder. Temporary additional TARP funds to cover the banks liquidity drains, will add fuel - & all bank stocks will trade lower. But ..... it's temporary, as this whole event is only because the state can't make decisions - & that is a relatively easy fix. The major banks in the area end up stronger than they were going in. Not great if you live in this state, but an opportunity if you can tolerate the volatility. SD

If some of those friends think he's talking he's going to have a very short life.

Cheer up, We could all be getting a zillion units (7% dilution) tomorrow at $.22, if the debs pay their interest in PIK ! SD

Agreed there is no 'right' way, & to each his own. Worth noting is that if you sell the underlying & simultaneously buy a long dated call at the market, you get the best of both worlds provided the stock is volatile. At best, either up or down, you lose the premium - which is what you'd expect when buying insurance. Also note this is a trading strategy relying on volatility (not Mr Market selling inopportunely), that works because IFRS accounting drives BV volatility - & P&C's typically value at a BV multiple. Returns are higher than they would otherwise be, but its a trading gain/loss on top of the IV gain/loss. Not for everyone, but something to keep in mind. SD

Been doing something similar for a very long time. That said: (1) Cash is not earning nothing; its also earning you the opportunity gain x the P(x) of the adverse event occurring. You are seeing only the tip of the total return. (2) Reinvesting the cash immediately is doubling risk - unless you're absolutely certain that the investment will immediately move up if your adverse event occurrs. No one can be that certain. (3) This comes from arbitrage & the pressure to 'keep the cash working'. As in the martial arts; redirect vs fight that pressure & you emerge smelling like roses. SD

Couple of critical things being missed: We (this board) may value based on fundamentals & patience, but the market doesn't. Momentum $ flowed in because the realized CDS gains were huge & sexy - they flowed out when players realized it was a one-time thing & a FFH investment became perceived as 'dead money'. We are approaching the riskiest part of their year (hurricanes) & we have an AIG in the marketplace sitting out there with an open (federal) wallet should it turn out to be a bad UW year. Most would be hedging their downside, & inherently limiting the upside over the short-term. Most investors want quick & easy: P/E multiple x fairly reliable earnings (with upside surprizes). But with P&C coys a large portion of the market values at BV multiples - & for very good reason. Deep dive vs surface fluff. Todays accounting magnifies BV volatility, so dissapointment is almost enivitable - exaggerating price swings. Most would expect FFH to return at least a 15% 'buy & hold' ROE/yr over the next 5 years. Few recognize that you could very easily (& fairly reliably) double the return by simply trading the volatility; which you could only do if you have a good understanding of the coy & have been actively tracking for at least 2-3 years. Patience doesn't mean blindly 'buy and hold forever'. SD

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