SharperDingaan

Were Abitibi in CCA, debtholders would essentially need to do a debt to pref share swap to refinance the company. In practical terms only the better assets would be put into new coys & refinanced. The poorer assets would be discontinued. Pension shortfalls would be dealt with through some kind of pragmatic compromise arrangement. At 15.5%, we can reasonably assume that this new debt is secured against the better assets. Each new coy would likely be regional, have a very strong BS, & would probably include seperate subs in 2-3 LOB`s. Providing it was done quickly the coy`s would also be profitable, as all existing Abitibi contracts could now be met through fewer plants - generating higher thoughputs & minimizing fixed costs per ton. 1st stage rationalization. But to get a piece of these coys you would have to be an existing debt holder, & essentially agree to a `pre-pack`. Where Abitibi leads others will immediately follow, & subs in the industry`s various LOB`s will get traded (same as hockey). Fewer, bigger, & the most efficient plants in specialized sectors - owned by coy`s that become proxy`s for that segment. Pure, & profitable, plays that facilitate investment. 2nd stage rationalization. It looks like the long awaited industry rationalization has begun, & that FFH is essentially positioning itself. Hopefully, we`re more or less correct. SD

Apologies if we came off as a little aggressive. Shortly after KFS had their first 'hiccup' we bought in & did well. We made the gain because we got in at a very low price, & essentially got out at what was the best exit point in many years. Management was why we left. The reserving issues aren't new - ordinary errors/re-assessments occurr in normal course business, but extra-ordinary adjustments are just that; extra-ordinary. Sizeable extra-ordinary adjustments year-after-year is hard evidence that key actuarial & executive controls are weak, & that current income is being systematically overstated by under-reserving. Add in evidence of casino betting, & a senior departure, & it becomes fair assumption that there may well also be an ingrained cultural problem of boosting current earnings. You don't change culture by simply changing one exec. The press release suggest current quarter operational earnings in the $44M range. Given the reserving history, & the cultural assumption, the prudent question is why is the current CR not actually <100 ? - in a quarter when there were clearly a lot of internal strife. ie: shouldn't the current quarter's operational earnings really be negative? Granted extra-ordinary charges create noise, but the prudent action is to give benefit of the doubt only when there is evidence of reasonable credibility. Portions of the business aren't that bad, but there is a strong case that they would be far better served were they in another carrier. The business could be turned around, & there is evidence of an attempt - but doing it in a recession with credit markets seized & workforce morale probably near rock bottom, is no picnic. Hard markets will benefit other carriers as well, & at far less risk to the investor. That said, we wish the management well, & hope to see them turn it around. SD

80M in additional UW provisioning, despite reducing the book 43%. So it would otherwise have been well north of 140M [80/(1-.43)] ? & in what is supposed to be short tail less risky business ? 114M of investment losses ? They knew there were reserving issues requiring greater conservatism, but still chose not to hedge the equity portfolio - despite direct & overwhelming evidence of growing volatility ? We've fired one exec, now please believe us ?

Keep in mind that the convertible component is just an option; the principal stays in either fixed income or senior equity. If the common goes up, great. If the common continues to fall, you swap the debt for equity at a lower conversion rate. The `too early` issue is still there, but hedged. Of real time interest, may well be FFH & its debenture holding in SFK. One of the higher probability outcomes to managements recent comments is a debenture to snr equity conversion; an example of the hedge being used. Disclosure: We hold a long position in SFK common. While there recently seem to be more snr equity than convertible debt issues, its more likely attributable to issuers needing to improve BS ratios vs raise cash. ie: Not a reflection of WEBs macro view. SD

Almost never mentioned is that Graham (of Graham & Dodds) almost went bankrupt while applying the methodology. Arguably, untill the recovery actually began, he survived only because he had more money than he had places to put it. Downside volatility. Graham made his money, primarily because he was overweight the right stocks at the start of the recovery, & then held them pretty much through to the top of the cycle. The methodology got him there, but its not universal - it works only in up-cycles. Were today's hedging instruments available at the time, he might well have actually made more in the down-cycles. Almost all value investors have been experiencing extreme adverse downside volatility, & in most cases they made thier money in the up-cycles - classic Graham. A very few have modernized the methodology, largely by taking the opposit side of market hedges (ie: FFH-CDS's, WEB-S&P option puts). We may well eventually conclude that WEB & coy actually had too much capital, & that it effectively drove them into the market too early. They did not risk bankruptcy because they were able to efficiently hedge, something that Graham wasn't able to do. Its not always a bargain SD

Another option is direct investment in some of the stuff FFH owns. You still have some FFH weighting (via FFH's investment in the coy you've chosen) but end up with more chance of hitting a bigger 'X'-bagger. Different kinds of risk, generally higher volatility, & also the potential for discontinuity (FFH is not obliged to bail out the coy if/when it screws up).

Keep in mind that the law of large numbers has been systematically making the ratio less sensitive, and that the GNPs measurement has changed over time. The 75% cutoff may need to be lower. Over the next 6 months GNP is projected to decline. For the trend to continue, the decline in stock price would actually need to accelerate. The graph suggests a buy point at 50%, or less (35% over WWII). To get there the 'average' stock price needs to fall at least 62% [(50-130)/130] from the average 'peak'. Normal curve tails suggests there were will be some big winners & losers, & a way to quantify how many. Bear Sterns, Lehmans, etc. were losers, the equivalent offseting winners are still something of a mystery. A laymans look would suggest that except for a very few stocks, its still too early to buy. SD