SharperDingaan

Keep in mind that Seaspan is not is going to buy a cheap ship unless they have an immediate time charter for it. Which means that 1) new ship construction is delayed & the use of the cheap ship is so that both the charterer & Seaspan can benefit from lower rates, lower cargo committments, & financing deferrals; or 2) Seaspan has to offer the ship at a cheaper finance rate than the charterer could get - by simply borowing the $ themselves & putting the ship in its own sub. Assume 1) Most yards will allow construction delays for a price, & the closer the ship is to completion the higher the upfront penalty (int on the higher construction debt, discount on deferred profit recognition, etc.). But as even the minimum penalty on a big ship is sizeable $, to make any money you need big savings on a lot of smaller ships, for some time - & your fixed 'saving' is exposed to the higher costs & uncertainty of running this older 'fleet'. Lot of operator risk. Alternatively Seaspan agrees to mothball an existing big ship charter, for a limited perod, at a high penalty - & replace some of the lost capacity with these cheap ships. The charterer essentially breaks even, cargo capacity comes out of the system, & container rates rise from less competition. Seaspan makes a spread, & defers future capital injection requirements. The 'ghost' fleet gets bigger. Getting interesting, but we're still not there yet. SD

What's wrong with treating this the same way that we treat External Audits, External Actuarial Valuations, etc? A once/yr rating. The provider has to meet int'l standards, carry insurance, & have their opinion (& overall coy rating) published in the year-end financials. The company pays, & provides the same access as they would to any other external auditing group. A in-year rating by anyone other than this rater becomes suspicious (how accurate can it really be if they dont have the same information ?), & the rater has an incentive to minimize rating inflation & poorly understood debt structures - because if it blows up they get sued. No more 'miss-understanding', 'inadequate access to financial records', poor 'communication', etc. If you choose to rate, & get it grossly wrong (Canada's Asset Based Commercial Paper) - you're out of business (as you've demonstrated that you're not reliable, as you clearly did not understand the risks sufficiently well enough to cast judgement). 'Shopping' for ratings, auditors, actuaries has the same penalty. Do it too often, you're no longer trust worthy & you've made yourself a short-selling target - except that with no-one believing you, the result is rapid bankruptcy. Darwinism alive & well. Perhaps we'll see just how incompetent most rating agencies are ? SD

A wise man would hedge the SU, & use a few calls to cover the gas spin-off ;) SD

Keep in mind that there are also 'offensive' hedges, & look at UK real-estate. (1) Its cheap & getting cheaper. Various sovereigns & material NA commercial RE coys have quietly started shopping (ie: Birmingham's 'bullring') (2) Brown is advising that the UK will need further stimulus packages for some time to come [additional long term inflation] (3) 4M+ of UK unemployed to force the government hand (4) Long-term UK/USD/CAD FX correction. If you want the FX exposure use a UK property coy. 5 years out you might just be surprized SD

Oldeye, SJ: We really need to see the Q3 & Q4 earnings & cashflow. Untill then its a matter of opinion as to what might/might not happen - if you think these might be solid quarters you're probably bullish, if you're not sure you're probably bearish. Institutional restrictions generally prevent portfolio investments in securities trading < $1/share. At the moment for most institutions that means either CFX common or SFK debs; if SFK common goes > $1/share the dynamic will change - & the magnitude of the 'uncertainty' discount should decline. There is obviously some risk to both the deb & common. If you're not comfortable with it, you probably shouldn't be in either of them. SD

The debs mature 12/31/2011. Principal is repayable in either cash or units at 95% of the 'then' 30-day average closing market price - at SFKs discretion. The expectation is that by 12/31/2011 the common will be materially higher than it is today, & there will be fewer debs o/s than there are today. The higher the share price, the more likely the payout will be in cash. If its a cash payout, the common rises immediately as the dilution uncertainty is removed. Current common pricing reflects the potential size of Q3 profitability x prob x 'uncertainty' discount. The 'uncertainty' discount is high & there's scepticism around the potential Q3 profitability. Once Q3 results are published, it may well look very different.

Keep in mind that 'Old School' practice is to produce as much as possible, force down the fixed cost/ton, lower the sale price/ton - & drive additional volume. Biggest was best, marginal cost of production ruled, but you had to have a sizeable & growing demand. We no longer have the volume. Then came beetles that wiped out the trees & reduced the cost of Western Cdn feedstock to pennies. Marginal cost of production fell again, price/ton fell through the floor, the 'old school' biggest still made some money, & plants starting shutting as the price reduction couldn't generate enough volume. CFX. Then came the 'New School' that uses low cost recycling, swift management, & state-of-the-art plant - because it CANNOT produce as much as possible (limited quantity of economic feedstock). SFK. We may read fewer newspapers but we now use paper vs plastic bags to take home the groceries & that favors the new school (green marketing of recycled paper). You can have a severly damaged industry, but good players within it - as these two demonstrate. Not as risky as first meets the eye ;) SD

People & organizations change over the years. In your 20's the high return 'bet the farm' punt was great, by your 30's you'd either won or learned otherwise, in your 40's it was 'stay rich' vs 'get rich'. Similar thing for companies; but in both cases its really about maturity & learning from your mistakes. Companies are really about people & ensuring that they have the opportunity to thrive at what they do. And our IV derives from the decisions those folks make, not the coy products - which are often commodity items or interchangeable, & perhaps not even neccessary. Arcs are great, but to thrive you need to periodically open the hatches & let a fresh breeze in. If FFH took a chunk of AIG (with partners) we'd be very happy, but we'd also hedge ourselves against a material drop in price of the stock - & keep the hedge untill we saw hard evidence that it was working. We would also expect FFH itself to have done much the same thing, & would see the hedges as overt signs of maturity. FFH has enormous potential, but they will have to continiously evolve. Everyday business risk. SD

Re Compton: Keep in mind that Suncor is in the process of putting a large number of high quality & producing gas fields on the block. Suncor will be fully aware that they will have price down to clear the inventory, & that to pay for it - buyers will have to pretty much immediately put the production on stream. With such a large supply over the near term, it will take very little to shut in a gas well. Comptons game plan was to grow their production & sell to a major. They had the opportunity & turned it down, now they have gas assets that they effectively cant afford to sell, & ongoing share dilution because they left themselves in a liquidity trap. They may have good assets & a strong production team, but there are a lot of others better than them with a lot less risk. SD

Keep in mind that the deb is a very different instrument, & that you could end with common. Not for everyone ..... but for those so inclined, you might want to look at a long position financed against portfolio margin. ie. If the margin costs 5%; borrow 50 @ 5% & pay 2.5, buy the deb @ 50 & get 7.0, earn a net 4.5 cash spread on zero capital invested. On maturity you'll either have 100 in cash or shares, to pay off 50 in margin. In the meantime you've exposed yourself to SFK's ability to generate CF & leveraged up your portfolio with a positive spread - at the time when your investments are most likely to increase in value. Disclosure: We are long both the deb & the common. SD

The reality is that 5-7 years is about the best that most people can do, even for a BRK. Environments change, dilutive share issues get done, & investments dont always work out or deliver to the level expected. 'Buy & hold' is really about buying into cycles, secular trends, etc. near the start of the trend & selling out somewhere near the top. The bulk of the time investment is in the macro identifying trends, where you currently are within that trend, & the seasonality within the trends. The rest is security/company selection based on various guidelines. Macro for capital allocation, micro for security selection, & extended holding periods for risk mitigation. Once you realize that the extended holding period is really time arbitrage, Mr Market suddenly makes sense, & the power of the approach becomes visible. .... and we have seen many securities on this board where that has been admirably demonstrated. SD

Finetrader: $CDN appreciation will make the returns on the US plants look worse, over & above the margin change on the recycled paper that they are selling. Its not a given - but assume that they lose more from $CDN appreciation than they make on whatever additional volume they've been able to sell. Triedtested: The reference is to the portfolio impact of a large number of shares suddenly pricing at many multiples of what you paid for them. A 50K investment @ $0.40/unit is a modest $ exposure - but 125,000 shares. If the share price suddenly runs up to $2.50 its 312K - & significant $. Most folks see their relationship with their family, peers, community, & health etc. as being their 'wealth' - the size of the bank account, or investment portfolio is pretty far down the list. SD

We're looking forward to us all getting rich ;D SD

We're on the same page. Agreed there's a big default discount in the current pricing, but its too hard to quantify. What is likely though is that as the economy improves, that discount will unwind fairly rapidly (confidence, improved volume, etc.) - but because we're holding so many shares (for us) we prefer to effectively treat it as a moat. If the discount is currently 65% & goes to 35%, we multiply our estimate by 1.86x [(1/(1-.65)/(1/.(1-.35)]. Obviously, a 'healthy' moat. Agreed that over the short-term (Q3 & Q4) the BS will very likely improve, but what it looks like at 06/30/2010 when the interest capitalization stops? - too early to say. Its highly likey to be very much a function of the magnitude of Q4 & Q1 CF. We also put a small probability on SFK doing a deal with someone else next year. Depending on how strongly they come out of it, there may well be some activity where they essentially end up acting as an industry conduit. Very different game if it happens, & another positive - but for now a wait & see. Much the same investment risk as FFH was at $70. 1) The larger risk was in not owning it, versus it going bankrupt. 2) The secondary risk was in allowing the magnitude of the gains to overly influence the ongoing holding decision. SD

For the next 2-3 months we can probably expect all kinds of pleasant surprizes. Purely speculation, At some point there will be the black liquor subsidy announcement. Assuming their share is roughly 3x the St Felicien maintainance capex -about a 15c/share increase. Its highly likely that they are again profitable. We think they are actually a lot more profitable than most people realize as both the sales price & throughput volume have (probably) gone the right way - & significantly. When we see the numbers, it should be quite obvious. Maybe a 30-50c/share increase. Its highly likely that they are building a mountain of cash, from both operations & the interest payment relief. For now they're probably building the stash, but during Q4 we half expect to hear of open market debenture purchases - especially if the subsidy has also been announced. Another 20-30c/share Somewhere around $1.10 to $1.40/share by mid Feb next year. SD

Because the shares are being 'exchanged' (ORH for FFH) there is no 'sale', as only the cost base of your shares has changed. If you take the cash you have sold your shares, & are subject to immediate tax on your gain. There is no impact if the shares are in a RRSP or IRA account, but if they aren't it can wreck your day. SD

Its pretty hard to make your case that you'll only pay $60 when 'the market' is trading at 5% above. The ORH board has to prove their DD to the minority shareholders, & they will be expected to challenge in these circumstances. If you want the minority shareholders gone you have to pay them a premium - theoretically equal to the PV of their lost future benefit before tax. You will actually pay a little more cash as the minority shareholder will have to pay tax if he/she accepts your offer; & you cannot assume that everyone will take the agency shares to get the tax free roll-over. So what if you pay 10-15% more. It's simply the reality of doing deals. And for this particular deal, do you really think its going to matter that much 2 years from now? Don't look the gift horse in the mouth SD

You buy perpetuals when you`re sure of the cash flow, & yields are high (12%+) - in the expectation that the yield will drop over your holding period. They are volatile, & illiquid, so expect life to be awkward at times. We used them extensively when Canadas were trading in the 16% range & did very well - but dont expect to resell them untill yields return to normal levels. The penalty for illiquidity is severe. SD

You take Friday off & look what happens! Its highly unlikely that it'll get done at $60 as short covering will force the price higher. The final number is probably around 10-15% higher ($65-$70). The UW also suspiciously looks like there is another shoe to drop, & that FFH is simplifying the structure for some reason. Agreed that FFH needed the additional LT debt to offset the new equity this transaction will probably generate (D/E ratio) - but in both cases they didn't need to go the more expensive UW route, or pay what did. Especially when they are one of the very good credits issuing (competition). If they paid an average 75bp premium to go the UW route, its significant $, & they'll want something in return. Same thing from the buyers of their recent note issue. A small investment now for a larger return later? SD

Thats what the bankers thought too. A) You can only pass laws pro-actively. The terms of existing contracts (mortgages) stay as they are untill both parties agree to change them. B) The bank can do absolutely nothing as long as the mortgage is in good standing. All they can do is grin nicely when they get a copy of the property transfer for $1 C) The existing bank goes bankrupt, but its mortgagees become solvent. Lots more votes, we get rid of the zombie, & people regain control over their lives - today. And done entirely by the people for the people in states where this will 'play' very well. D) At the extreme - every mortgage in the sun-belt effectively gets written down to zero, new banks spring up like weeds, & employees end up (essentially en masse) in more secure positions in far healthier institutions. Then keep in mind that its very elegant, with clear & immediate benefits. ..... and you don't need many heros to start a run The people doing what the government/lobbyist would not ? SD

During the oil bust in the early 1980’s the Calgary (Alberta) housing market collapsed & most folks were effectively bankrupt - as to get a place they had to buy at boom prices with the maximum mortgage possible. The collective response was to screw the bank, & neighbors selling each other their houses for $1. When a bank did actually try to sell a foreclosed house, folks deliberately refused to counter-bid against the owners $1 offer. Depression style collective social intervention, less than 30 years ago. Bankers assumed folks would never walk away from their houses - & that even if they were effectively bankrupt; as long as they could afford it, homeowners would continue to make the mortgage payment to avoid the stigma of bankruptcy. The first wave of folks really couldn’t pay - the second wave refused to pay because given the times; bankruptcy had become socially acceptable. The only reason the bankers survived was because regulators had forced them to reduce their geographic concentration, & the ‘new normal’ did not spread to other markets. If I live in the US sun-belt & have a prime mortgage; why on earth would I continue to pay my mortgage? 1) I own the title on my property & can sell to whoever I want, for whatever price I want. And if we sell & re-buy from each other for $1 - there is no bank involvement, real-estate fees, or moving costs as neither of us need a mortgage & neither of us is physically moving. 2) As the bank has the financial exposure there is also no actual penalty to either of us – our ex-bankers might want us dead, but each of us now has a house worth substantially more than $1 and a materially stronger BS. We’re no longer bankrupt & our ex-bankers will no longer be a problem should they themselves go bankrupt. 3) Our bankers should have been lending against the 4 C’s (Capacity, Collateral, Character, Conditions). They were actually lending Character & praying that it never changed. There will be new bankers, the neighbour & I will be financially stronger, & the bankers cannot make any money unless they lend. No long term consequence. In the early 80’s the internet was still a novelty, the cell-phone was a ‘brick’, there were no ‘social networking’ sites, & information spread fairly slowly. A very different story today. Beware of falling bankers SD

Cardboard Keep in mind that there is a major difference between a 50% gain in a fundamentally strong coy, & its frothy counterpart. The coy doesn’t need to have a high price, & the gain is very much a function of the courage you had to execute on the opportunity. Those gains occur because you analysed the stock better than the market. Case in point. We recently tripled our holding in SFK common for essentially the same initial investment, & got the huge increase in share volume because the price was so low. As virtually all the literature would deride it as a classic penny stock investment, buying required both conviction & courage – but that original $10 investment now has 3 shares making us rich versus 1. As at close of business today the share price has effectively doubled. There is a reasonable probability that it may well do so again on the Q3 earnings announcement. If it occurs we will be 12x better off for making the decision, within roughly 3 months - & almost entirely because we had the b**** to execute. Put bluntly we put on an offensive hedge, & lucked out on the timing. Don't knock it! SD

Those speculators have just reliably added about another 1/3 to the magnitude of the run-ups when they occurr, & the longer it goes on the more reliable it is as momo takes over. This is when we go to market ;D SD

PDS. Not directly comparable but keep in mind their market position in horizontal drilling - & that to get the most flow from a tight shale field you really need to drill across the pay zone. GW has given them US as well as Cdn contacts, they have the right kind of rigs in place, & idle capacity. When it starts those first to sign up will get rights of first refusal on those rigs - & the most bang for their buck. SD

Keep in mind that the worst deal in the world will still get done, provided the fees are high enough. Then add to it that there is no such thing as a bad deal - just a bad price. There is a reason why you do your own DD. SD