SharperDingaan

They would be far smarter to simply (1) make it illegal to trade a public coy shares on anything other than a public exchange (2) mandate a derivative market for every public coy. Uptick rule ? - just do bulk sales now, at various points below the current market between private parties; then buy 100 shares at various asks to trigger those disguised shorts. Were these private sales public, this would not be possible. Derivative market ? - if you have margined public coy shares, that margin is effectively a kind of long put with a strike price at the margin call; coy stock options are long calls, etc. All of it should be disclosed, & a public derivative market is the place for it. Simple to do, but unlikely untill markets have stabilized & re-writes of the various investment acts can begin. Then? expect to be forced into the 21st century! SD

Thanks for your responses. In fairness to the downtrodden... the case for DCF! (1) It's a great training tool. It establishes a basic level of financial numeracy, & FS familiarity (you have to find the numbers in the BS and P&L). However ... the real lesson is recognizing its limitations, & why. (2) It generates trading ideas Extended periods of fixed growth assumptions exaggerate the peaks & troughs. They also collapse under their own weight, generating inflexion points. Guaranteed & repeatable volatility & momentum trading cycles. (3) It makes all the $ look the same, & at least gives some sort of crude basis for comparisom. OK if applied only to the more extreme outliers, but don`t try to rank between close alternatives. (4) It can expose the rough magnitude of a hidden Margin of Safety; - FFH: FFH doesn`t discount its liabilities, but its competitors do. Recalculate the liabilities using the competitors discount rate, & the liability difference is a very sizeable off BS asset. Margin of Safety. - Defined Benefit Plans: DB plans typically have ALM duration mismatches of between -11 & -16; ie an increase in interest rate will reduce the PV of the liability 11-16x faster than the asset value falls. Hence a DB plan, currently underwater, can be made whole again simply by increasing the discount rate - DCF gives you a way to calculate how many bp that increase needs to be. If you inflate the US economy by 350bp, does GM`s pension deficit suddenly become solvent again ... & all the fed has to do is print money. On balance not a bad thing. .... just keep in mind that it should be serving you, not the other way around! Cheers SD

As there has been a lot of DCF discussion recently, for easy reference we thought we'd start a seperate string on the topic. Some things that we've noticed: The older you get the less you use it, & you use it differently. - Right out of B-School you know squat, but you can do DCF! DCF crunching substitutes for experience. - DCF is precise, & there is only 1 answer! Dogma can be blinding. - There is only the AIMR/CFA way! Currency devaluation. If you actually understand the business you're looking at, you will instantly recognize that much of its value is actually off BS. Market place reputation, network ability/access to deals, mgmts integrity/smarts, etc. None of it shows up in DCF, & you need maturity/experience to realize that. Real businesses have monthly/quarterly ups/downs, but DCF projections dont. Wise men recognize that a small difference, early, will have a major impact on NPV (DCF end point) & valuation; & that because NPV calculation takes time, time starved market analysts are slow to recognize it. The older you get the more you think like an owner. - For most coy's/industries there is more than adequate published 'live time' information to give a reasonable sense as to whether the upcoming quarters earnings are likely to be better/worse than expected, & why. CF today & in the future. - You also recognize that it is almost impossible to predict how much CF will occurr or when. You`re fairly sure its a good deal (ie: +NPV), but in practical terms CF determination is no more than your best reasonable guess. DCF as a range of values. Hopefully, enough controversy to get things started! Cheers SD

Ubuy2wron, Ecco You may wish to look at the Berkshire Hathaway 'pullback' thread SD

This is just a bear market rally, & of course - we're not market timers! There is a global & pressing need for a significant market rally, & we would suggest that at least 1 objective of the recent G20 summit was to produce exactly that. Desirable, but dangerous to your wealth. We all acknowledge that these aren't 'normal' times, yet we continue to apply all the 'normal' metrics. - Bear market rally's are typically 15-20% & the deeper the market fall the bigger the rally; so why would we expect this one to not be at least 25-30% ? - Yes, capital mkts do lead main street by 6-9 months; but with the extraordinary amount of stimulus in the system, why would we not expect this to shorten to 4-6 months this time around ? ie: if the 'recovery' is scheduled for Q4 - shouldn't the 'real' rally be late Q2 or Q3, & not now ? Consider that Q1 results are about to be announced - MTM rules have just been changed, & most would argue that the Q1 result is going to be financials looking a lot better than they really are. Did XYZ bank truly make a Q1 profit, or did they get a little 'help' ? - & how much should I discount them for that uncertainty. - During Q1 most commodity prices fell, far less was sold, & there were significant job losses. Net of severance provisioning you would expect that most firms will be reporting only a small profit, or break-even, at best. A reality quite different from the 'hope'. Case in point: PDS. O/G services company that is a market leading indicator. Closed 04/03 @ $C 4.25. - There was a recent unit issue @ $US 3.75 ($C4.25) that caused 30% dilution. For the people who sold it, there is a pressing near-term marketing need to see PDS trade at/above $C4.25. If you believe the 'bottom' was $C3.00 or $C3.50, the current premium is 20-42%. Need + significant premium - PDS's annual high typically occurrs in Q2 following release of the current drilling seasons results. But we know that drilling activity was at record lows, drilling rates were severely discounted, mud season has started early, & that merger integration expenses must be occurring. Why would you not expect a very rude Q1 result ? Reality reality quite different from the 'hope'. Yes there have been some material improvements, but will they survive the expected Q1 'reality check' ? Unlikely. SD

3 basic views to this: Narrow view: At any given time the asset is worth what someone else just paid for it. As evidenced by the last (recent) trade, or what it can be shown to be worth had it traded. The accounting rules lay out what 'recent' is, & specify the order in which you take the price. Unambigious, liquidation value - today. Broad view: The asset is worth what a willing buyer/seller are willing to exchange it at in an orderly sale process; ie: if the other guy was forced to fire sale the asset I don't have to use that price because I'm not willing to sell at that. Accounting rules become wide open to manipulation. (1) Buy a zero coupon bond today at 25, but value it at 100. Because I intend to hold it to maturity, & it will be worth 100 when it eventually matures. (2) My mortgage is 100, my neighbours house just sold at 60, but I'll value at 130. Because I intend to hold onto to it for another 10 yrs & at that point I expect it to be worth 150. 150 discounted at todays discount rate of 'x', produces a PV of 130. IFRS View: The narrow view approach but it effectively 'warehouses' most of the periodic MTM in Other Comprehensive Income (equity in GAAP terms) untill the asset actually gets sold (the cummulative MTM then passing through income in GAAP terms). However IFRS also requires a very full & rigorous disclosure of what's in Other Comprehensive Income, including its sensitivity to some of the major variables. So ... what was really being implied is - We can't get to year-end unless we can fudge the numbers ? - The true losses are so bad that if we actually came clean we'd trigger a depression ? Hardly surprising there was a split decision. SD

You might want to google IAS 39 - how derivative gains/losses will be recorded starting 01/01/2010. It is highly likely that much of the MTM gain/loss will go to Other Comprehensive Income, with the cummulative MTM gain/loss going to 'income', only when the instrument is actually sold. Materially changes income volatility. We would suggest that Mr Market is penalizing for accounting earnings volatility, that may very well largely soon dissappear.

Think long long-dated out-of-money index calls; short long dated out-of-money index puts; long CDS's on his non AIG counter-parties. Set-up investment of maybe 5-10% of capital on hand. Premium on the puts + set-up investment pays for the CDS & call premiums - If the summit works the calls pay off massively & early; 'relief' volatility will put them into the money - If the summit fails the puts give him huge long positions in quality coy's at deep discounts - If counter-parties fail, the CDS's pay cash when cash is king - with most of the actual credit risk likely being on AIG ... & thereby the US fed Trading position. Little real risk. Small wonder he's feeling so upbeat! Classic Soros SD

Eric: You might want to look at how much weighting you have to this, what its purpose is, & what your strategy is wrt this holding. PTY & PHK will fall as rates rise (inflation) & are likely to fall significantly as current rates are artifically low. PFN should stay close to par. You are effectively betting than over the near term both the discount rate & the default rate are going to decline. Trading. Beware of reaching for yield. There are a number of high quality prefs about that offer comparable yields without the same degree of risk. Risk/return. Nothing wrong with the choices. Just be sure they are in sync with your objectives SD

Couple of points, then we'll call it a day; The underlying US problem is continuing denial. The current recession/depression is a temporary thing, very smart people are working on it, but ultimately it'll be business as usual & the market will return to what it was before all this started. That is how we do it here, so get used to it. GM, Chrysler, AIG, Zombie banks, etc. exist only because we can't imagine it otherwise. 'Car' & 'Wall Street' cultures tell us 'this is how it has to be', because somehow only 'they' understand it .... & how dare you question the emperor! But ... when you have some of the most efficient plants & lowest financing rates in the world, and still can't make a profit - that is incompetence; and failing to act early on the legacy issues simply underlines it. 'Car' culture is sick, & needs surgery. When a rich kid gets into trouble, daddy reaches for his lawyer & they argue that little johnny/jenny shouldn't be penalized because it was just a one time thing & they move in different circles; pay a fine & move on. The defence argues that on the other side of the tracks little johnny/jenny's 'one time thing' caused enormous hardship; paying a fine isn't good enough, the underlying behaviour has to change. Millions of ordinary & hard working people on the 'other side of the tracks' are being put out of work because of this incompetence, & John Q Public has had it. Behaviour is going to change. The 'car' solutions have been fairly well 'known' for some time. They weren't implemented because it wasn't expedient to do so, & it was far more profitable to simply continue with 'business as normal'. Whatever the administration does now will be a game changer, & the fact that it was done at all will be almost more important than what was actually done. Camelot is a great place, but stay too long & you get in-breeding. Eventually it falls to the barbarians, they get 'assimilated', & the cycle repeats itself. We're living in historic times! SD

Eric Take two weeks or so off & then come back. Part of why this board works is the wide spread of opinions, & we need at least one other black sheep! That said, one or two humble suggestions. Rarely go more than 2-3 postings on a single thread; it just becomes too hard to follow If the other guy hasn't got 'it' after 2-3 tries; he probably isn't going to Hopefully, we'll see the flock continue to grow. Cheers SD

Assume that Ford gets to pension off workers on the same terms as GM/Chrysler .. in return for purchasing & running a consolidated GM/Chrysler/Ford .... & a whack of tied fed funds/guarantees as a bridal dowry. They would be the most competitive car company in the world. Most would expect they'd also need to raise some domestic capital.

The moral hazard really requires a bankruptcy solution. It would be far cheaper to collapse GM, federally cover the existing warranties, spin out a brand new entity, & offer all workers either early retirement (top off the pension fund) or a job in the fewer remaining plants. Ideally the same with Chrysler. Ford to run the consolidated entity, if only because they've proven that they actually know how to run a car company $ to the workers themselves, new investment $ at the bottom of the market, votes to Obama.

Couple of very simple things being missed: For BNI to go bankrupt they have to borrow & loose a massive amount of cash, run an operating cash deficit every year, exhaust all their capital market access, sell/lease back all their rolling stock, & sell/lease back all their rights of way. Total cash raise of maybe 2-3x the current BV, & all of it invested to earn a minus 100% return ? Not very likely. Trains are green (vs trucking), & capital intensive. Operating cash cost/paid mile is minimal, capacity is easily scaleable (except at choke points), & a 10% increase in paying rail traffic reduces fixed cost/paid mail by at least 12-18%. ie: The more traffic on your rails the less you can charge per mile, encouraging still more traffic at an accelerating rate. A rise in gasoline prices just further accelerates the process. Buy today & you buy when rail traffic is minimal. But in 'normal' times .... wouldn't the average traffic be at least 25-30% higher ? & because of the fixed cost structure .. wouldn't almost all of that incremental revenue flow straight to the bottom line ? A nice bump to owner earnings. Nice business SD

Look at it as a - No BS message. Underlined with one head now, Chrysler's in 30 days ?, & both boards in 90 days ? - Trail balloon. Guage the public reaction before they implement. - Quick hit. Validate the current approach. - Precedent. Apply what he does here to the banking sector. Worth noting is that a lot of other sectors are hurting as well, but nobody has their hand out quite like Detroit. Perhaps a little smoking barrel incentive to those CEO's & boards to get their acts together ? SD

Long time ago my coy bought a competitor who had 2-3 major books on which they were loosing $; the books were there for scale & market share reasons, & the companies knew it. 3 days after the acquisition date we had calls to aggressively drop rates or they'd walk away. We wouldn't play & 'fired them'; gave them 60 days to find another vendor, & used the $ to fully repay our acquisition debt. Today I'm often on the other side of the table. Its seen as being something of a 'public service' to hardball AIGs rates aggressively downward. There's little credibility attached to the quotes; but they are accepted because its dirt cheap, & the fed is a better counterparty than anyone else. Recent quotes suggest that they are UW for premium, so expect surprizes to start showing up in 9-18 months. SD

Very simplistic, but think from the ground up: - If you started a new bank today, issued only long term certificates & took in only deposits, you would probably enjoy the best environment that we've had in at least the last 50 yrs or so. Every day, bread & butter banking, with very little real risk. - If you were an existing state but marginal bank, you'd probably be spending a good part of your day dealing with underwater loans with little prospect of change for at least the next 12-24 months. It would be hard slogging for a marginal return, & loan securitization hangovers would make your life very difficult. For many, the right decision should really be whether they voluntarily wind up & start anew. - Conventional thinking is that if you are a money-center bank - wind-up isn't really an option, as you'd effectively have to buy someone else to get market share. But .. realistically this is only true if the 'new' world looks just like the 'old' one, & the bank doesn't get broken up into parts..... & there is a lot of executive & regulatory investment in the 'old world' regime. Different voices speaking to different levels of banking. SD

US & CDN GAAP require you to means test goodwill every year. Specific value streams are quantified & discounted to arrive at today's PV & goodwill is written down to that PV. The write-off is permanent. The dot.com era generated some transitional rules which have now mostly expired. IFRS permits write-ups & treats goodwill the same as any other asset subject to MTM accounting - but with the gain passing directly to other comprehensive income (direct to equity in GAAP terms). Example: Merge coy A & B, quantify the synergy value stream, & discount at a high risk free rate to produce a low PV; but ... if next year the discount rate is far smaller & the value stream essentially unchanged, the PV will be higher .. & will generate a goodwill write-up. Keep in mind that this also applies to capitalized expenses, deferred charges, etc. & that for many companies this might be the biggest asset on their GAAP BS. SD

Focus your attention on the IFRS accounting standards which come into effect Jan 01, 2010 Much of the existing accounting texts, & CFA accounting curricula is effectively obsolete. - The existing BS, P&L, CF statement dissappear entirely & are replaced with 4 new statements. - The BS assets = liability + equity dissappears, & all existing BS & BS/P&L financial ratios will have to be calculated a different way - Acquisitions, good will, MTM, etc. are accounted for differently, & there are transitional rules smoothing the impact of methodolgy changes. - Disclosures is materially improved & much of what is currently off BS will now have to be revealed on 01/01/2010 - 23 new accounting standards that affect pretty much everything. Pick & choose by topic. Europe allready has IFRS & has been using it for some time. Canada goes to IFRS 01/01/2010. US GAAP will be going to IFRS - irrespective of objections. Good thing on balance as all companies around the world will now use the same acounting. A US coy in the same industry now becomes directly comparable to its CDN, European, or Asian counterpart. Fail to move to IFRS, & you effectively relegate your financial system to 3rd world country status. SD

At $50 the stock was a marginal long-term investment. But ... change the framework & it looks very different. - Most would sell at $50 & take the quick $20 gain on the short-term investment. The long-term investment then gets reconsidered (wait for more certainty, sell a $50 put to reduce exposure, roll-in over multiple small purchases, etc). The $20 'risk reducing' cushion will not just bias the new decision towards purchase, but also how that purchase will be made. - The textbook example was the day FFH fell $140+ from manipulative shorting. 50% returns in mere hours was common, & successive short-term rollovers were the norm vs the exception. If you had acted on that day, the hold decision was much easier as there was allready a substantial cash gain in place. It also allowed you to be more objective after the fact. - Worth noting is that the 'mental accounting' is much stronger when the portfolio is concentrated - making out of the money calls or puts/margin calls more of a requirement (rude recognition that your beloved assumptions are sh*t). SD

Its better to think of now through Oct'09 ... & then the 2009/10 drilling season. Assume that from now through Oct'09 Capex is 25% of run-rate, with the difference going to debt reduction. The only new-build being horizontal rigs, which should now cost less. Model the drilling season on different rig counts (-20%,+20%,+40%, etc) & different drill rates. Assume a wider P(x) spread for the various options, & that their market share remains constant. Rig count will be driven by oil/ng prices, state/provincial stimulation packages, lease requirements, etc. Then keep in mind that o/g service coy valuations are characteristically volatile because the business can change so rapidly.

He's actually a very swift individual, but just marches to a different drummer; & if he doesnt need a huge income to be happy, the more power to him. Because its counter-cultural to the average NA mindset we see it as controversial. A long time ago this might have been Jobs or Wozniak. Then they got a real job!

Much more elegant to nationalize Chryslers Cdn plants at $1 each, use the dies to make Chrysler knock-offs, & the cash received to make electric cars, buses, etc. (Zen, etc.). Hardball is so much easier when you bring a shotgun to the rabid dog party ;)

Myth Our intent is only to highlight the opportunity. While we hold a long position in PDS we would prefer that folks do their own DD, & that we not talk up the book. Overall we see the GW acquisition as being a good thing, but recognize that the timing couldn't have been worse. It'll be talked about for years - but the real value add is the fact that they went ahead with it. O&G is a small community, with long memories - & like an UW paying out out a big claim, being seen to make good on your commitments (when it clearly hurt) will take you a very long way. Goodwill that doesn't show up on the BS. At todays price the risks are pretty much priced in. If it goes to $35-40 a share, paying $3-5 today really doesn`t matter. Best of luck to you SD

The critical things here are (1) Industry Circle of Competency and (2) Investment Circle of Competency. A Canadian investor also really can't afford to ignore the O/G sector, & for many that means developing (1). Most folks haven't realized the BS devastation. 1,000,000 bbl @ 60/bbl & 50% LTV produces 30M of LV; a senior coy might typically borrow 2/3 of the LV (20M), a junior might borrow 3/4 (22.5M). The same calc at 45/bbl reduces LV to 22.5M, leaving very little borrow room for a senior & nothing for a junior - & all this before depletion & marginal production cost considerations. Very few funds available. Most folks haven't realized what drill-it-or-loose-it really means. For many - if they dont drill the leases, the alternative lease write-downs are big enough to adversely affect debt ratios & trigger early debt repayments. Upcoming 2010 IFRS reporting is having an impact, & while depletion/depreciation can fund some of that drilling, you really need new capital (Alta Treasury Board). Robust floor level. Most folks haven't realized what the Tar Sands greening implications really are. - 40-50% of produced Alta ng goes to Tar Sands. Change the furnace fuel source & this will immediately displace into the market. Extended periods of low & stable ng prices. - One of the quickest hits is high temp waste oil & plastics inceneration. ie: Burn the garbage, blow air/oxygen into the fuel stream to increase the temp/efficiency, & get paid to take it away. - One of the best long term hits is nukes in the lower territories. Extremely stable geology, electricity to open up the North & feed the upgrader H requirements. Newfoundland & James Bay all over again. - Green infrastructure, funded independently, & with very real industry impacts. Lots of opportunities, but it has to be viewed a little differently ;) SD