SharperDingaan

If you think FBK will see IV in 3 yrs, the compound return is above 40%/yr – but you essentially see FBK as akin to a zero-coupon bond maturing at 100. We think IV realization is conditional (share consolidation, merger), but given the type of institutional ownership - reasonably likely. To get 40%+/yr this has to be a pretty special business. We think it is. They hold a dominant portion of the RBK market, & have a significant new product in that market at the beginning of its life cycle. They have a profitable NBSK operation, which will have a material portion of its EBITDA hedged against an independent income within 12-18 months. They have very little debt, free cash flow, & the ability to grow EBITDA at more than 36% - by simply repurchasing shares that nobody wants. They are indeed pretty special. Most folks will not pay $1 today, for $2.50 - 3 or more years out (in spite of it being a 40c dollar). To get the Greenblatt 30% return experience, you have to be 75% confident that you will actually see IV realization within 3 years. SD

Assume the debt has a refinancing penalty that makes it uneconomic - until it rolls-over, there is little they can do. Business wise they are pretty much limited to strengthening their value proposition, & their Balance Sheet, for the next 12-18 months. Depending on the method used, the IV is maybe 2.25-2.75/share. Given that it is highly unlikely the market is going to pay that - the best interim prospect is periodic share buybacks. Buybacks financed with new debt at dirt-cheap rates, repaid from future free cash-flow over the next 12-18 months. If you applied the Greenblatt approach & held for 3 years, most would argue that you could do very well. Taleb (The Black Swan, Fooled By Randomness) would hedge against a lower return higher probability equity. WEB would consider the tax position. Not for the rabbit footed - but if you want to practice applying the craft, there are probably few better places for the price. SD

Not so sure on Germany. It is virtually certain the banks would get nationalized following a Euro haircut, but it is also highly likely that Germany will not permit the degree of inflation that the rest of Euroland will probably use (Weimar experience). CHF or DM essentially become the regional trading currency, & they get to borrow at lower cost. It also means that German industry sets up new plant in the lower cost Euroland (as occurred in the former East Germany)to reduce its costs. Germany remains the global power-house for decades to come, & can use the crises to offset it ageing demographic. SD

Hard to see why the solution is not Germany & France ultimately pulling out of Euroland, & effectively nationalizing their domestic banks. The big domestic industrials get protected, we get Breton Woods 2, & global banking broken into segregated pillars – capitalized according to the risk. Assuming all Euroland does an Iceland, & declares an average 25% haircut ..... things could get very ugly. SD

We think the investment community will need to re-assess. It is hard to make the case that a down-turn in the pulp cycle will hurt, when there is maybe 4-6M/yr of power generation EBITDA coming on stream in 12 months. An analyst cannot afford to ignore its existence, & the valuation hedge that it provides. It is hard to make the case that price driven market substitution to lower grade RBK will hurt, when they have a significant new product in this LOB at the beginning of its product life cycle. Not recognizing that the segments trend may well reverse, & soon, could be a career limiting error. It is hard to argue that the high industry leverage ratio applies to them too when they are cash heavy, their leverage is trending down & is probably at/near the record industry low. If anything, they should be terming out &/or taking on new debt at today’s record low rates. The negative is that < $5/share, FBK is difficult for most institutions to trade. Impossible to take an activist role to force a break up &/or an acquisition, & hard to acquire any meaningful float without driving the price up. In practical terms, you can only buy & hold, & most institutions cannot buy because the price is <$5/share. Their competitors may be dogs – but at least you can trade them! Hard to see why the price would not rise to about the average cost base of the institutions holding it, as the restructuring risk has effectively gone. Long term there needs to be a share consolidation, but we don’t see it happening until the power generation is on line. SD

Nice to see the results of all the changes finally get traction on the financials. http://www.fibrek.com/static/en/PDF/infoFinanciere/rapports_de_gestion/2011_3Q_MDA.pdf Keep in mind that the new RBK product is probably a higher margin product, it hits the market this quarter, & most buyers would probably prefer volume under cost plus pricing if the product is a hit. The losses on the LOB are unlikely to continue, & the business risk is likely to continue declining. Power generation commences 12 months out & is proceeding as planned. Most folks will recognize that the future earnings stream will need to be PV'd into the 1 yr forward earnings projection, & that the closer we get to generation the higher the PV impact will be. Pulp prices have to soften by > 30% to offset the hedge from that future power generation. Elegant. SD

Today’s Lifeco purchase is for positive carry. Simply buying MFC common with 60% margin @ 4.25% will produce a net yield of > 4% on the equity invested. Captures spread & appreciation, but creates an exposure to higher margin rates & a possible dividend cut. Not popular, & over the medium term the Lifeco may not do so well, but it is not really relevant – Brand Name & Quality is. IE: MFC: Take the closing price on its first day of trading, adjust upwards for inflation, & compare it to the price today. Is the 12 yrs of intervening business growth in a name plate OSFI regulated company - really only worth a premium of 11%? SD

Hawk, we’ve done 2 transactions - both in the UK. An X% interest in a relative’s home, with proceeds paying down the mortgage. The interest itself passing through to the kids via a trust arrangement, & a portion of the ongoing monthly mortgage savings going to the kids university funds. Took advantage of an inflated $C, & a fairly highly mortgage rate (variation on a $ saved is a $ earned). A 100% interest in a parental home, less a life lease on the property itself. The interest itself passing through to the family via a trust arrangement. The purpose of the transaction was to take advantage of an inflated $C, release capital, & allow the trust to maintain the property &/or cover some of the monthly upkeep. Were these not family transactions we would probably not have done them. The investment ‘return’ is the reduction of monthly ownership costs, & possibly a terminal inflation &/or repatriation gain when the funds come back to Canada. At some later point we might look at a partnership in a small hotel/apartment in one of the club-med countries, but not for a couple of years yet SD

> 40% YTD About 50/50 split to luck versus skill. Correctly hedged the commodities run-up by moving to 70% cash, but we’ve been slow on the Europe rebound & got hit by FBK. The material majority of our synthetic shorts have been covered, & we’ve added to long positions where it has made sense. We’re comfortable with what we have. Our 5 yr return is not comparable as we’ve more or less held the portfolio to a common size by systematically withdrawing excess capital. Only possible because we’re private money. Withdrawals paying off family mortgages &/or acquire rental retirement income properties in various countries. SD

Nassim Taleb in his book "Fooled By Randomness", includes a clever exercise on what 'average' means to most people - & why that is so wrong. The gist of the example is that if 9 folks have $100K of wealth each, the average wealth per person of this group is $100K. Add 1 'poor' person with wealth of $1 to the group, & the average wealth per person becomes $90K. 9 of 10 (90%) of the group are ABOVE average, & most everyone feels 'great'. Add 1 'rich' person with wealth of $1000K to the group, & the average wealth per person becomes $190K. 9 of 10 (90%) of the group are BELOW average, & most everyone feels 'ripped'. Perhaps the real reason for the anger of the mob ? SD

But did you notice that the 2-3 girls were usually the daughters of engineers, & they all had 300+ brothers! Most folks in NA should not be at a university, but a trade school. They didn't go to the trade school because their parents persuaded them that it was low status - there was no money in it, & that if you went - that hot babe next door wouldn't even look at you. Maybe 50 yrs ago that was true. But in the modern age almost all those programing the factory robots, working the control room, or making the tool dies will make 2-3x what the average university trained joe/jane will make over their working life. When was the last time you came accross an unemployed tool & die maker? The unique strength of NA manufacturing is its ability to think up the game-changers & build them. Lot of other places do the subsequent evolution, minaturization, precision, robustness, & utilitarian far better. SD

A slightly different perspective: We’re (family accounts) retail investors, but we’re professionally trained (CFA, industry experience, etc). We don’t do retail OPM because we don’t have the patience for the whining. Very occasionally we may do the odd special purpose vehicle partnership. We are effectively capital allocators, & prefer to actually run businesses - versus ‘just’ invest in them. We keep our feet in both worlds, & we try to take the best from each. This board is an excellent way of accomplishing that. Investing in XYZ coy on the basis of business merit, is superb training for the business world. You are forced to apply financial understanding (what the financials represent, what they are telling you, & how they can be manipulated), marketing (product lifecycles, penetration, pricing), & business strategy in live time. Do it well, & you will accumulate wealth. Do it really well, & you may end up owning one of those companies. Investing in XYZ coy on the basis of relative valuation, is gambling. If you invest for the long term you are by default- investing on the basis of business merit. You chose Industry A over industry B, because A’s prospects were better. Within industry A you chose XYZ coy versus ABC coy, because XYZ’s valuation metrics were better. If you invest for the short term, you have a different perspective. Do it well & you will accumulate trading wealth, but it is a zero-sum game – trade long enough, & you will eventually lose (commission costs). Every profession/industry needs new people. We try to learn from those before us, & from those who are the masters at what they do. The principles stay the same, but application changes with the times. We post to encourage new people to see through the hype, & invest on the basis of business merit. It used to be that in western societies everybody wanted to be a ‘rockstar’- because it got you copious amounts of glamour, status, drugs & sex. Then it changed to ‘investment banker’ - because it got you copious amounts of money with which to ‘buy’ the glamour, status, drugs & sex. Yesterdays ‘rockstar’ overdosed, today’s ‘investment banker’ is the scum of the earth (Greece). Apparently there is redemption though – the Rolling Stones still play live at an average age of 67+! To everything there is a season. SD

Assume you have a 1 stock portfolio. Your stock (Stock A) has seasonal bias, usually doing well in Q1 & Q2, poorly in Q3, & a crap-shoot in Q4. You’ve noticed that another stock (Stock B) also has seasonal bias, but it usually does well in Q3 & Q4, & more poorly in Q1 & Q2. Stock A & B are in totally different & unrelated industries – & you view yourself as a long term holder of both Stock A & B. The wise man would sell Stock A in Q2 & buy Stock B - then sell Stock B in Q4 & buy Stock A. He would systematically capture the seasonal gains of both stocks, as well as the long-term appreciation which is the reason for his investment. However, the portfolio turnover of 200% translates into an average holding period of 1 quarter. Most would say that you are trading, not investing – when the reality is very different. High portfolio turnover is not necessarily a bad thing SD

We all might want to apply what we know. Most would argue that what Europe does, its timing, & execution – cannot be reasonably predicted. We can say that if Europe comes up with a reasonable plan, global markets will probably rally strongly. We can also say that if it takes a while, the ongoing uncertainty is likely to lower markets. Market timing, & binary outcomes are usually addressed through the use of options/hedging. The longer the investment horizon, the more the mathematics favour an equity versus option investment. The bias is especially strong when the carry cost is low (or can be reasonably expected to become positive) - as the comparable equity is a hedged, & leveraged investment. Most would buy the dividend paying euro equity today, leverage & hedge once the European plan is executing; then sit on the investment for years. Classic WEB. Classic Watsa. A lot of financial services people will very likely lose their jobs if markets do not rally strongly. Most markets are moderately down Year-To-Date. Were there not the current 10%+ rally based on ‘the plan to have a plan’ the Year-To-Date loss would be roughly 13%+ (TSX), & retail would be telling their advisors to sell & go to cash. Promotional self-interest. Assuming the current global economic malaise is (hopefully) a once-in-a- lifetime opportunity – it should not be surprising that the punch cards are out in force. SD

It would appear that story per the financial press, & that of the average greek, are very far apart http://www.thestar.com/news/world/article/1066783--dimanno-will-greek-crisis-end-in-ruin Try as we all might - why is it NOT in the average Greek, Italian, or Spanish interest to simply do a Icelandic default? & move on. World wide, the IMF experience has been that they can only push the recalcitrant so far. Were Greece, Italy, & Spain to act together - they would be the ones COLLECTIVELY dictating the terms, not the other way around. We do not live in dictatorships. Austerity measures have to be voted in, they are widely seen as benefiting only the banks, & it is a small step for ambitious men to adversely sway a populace. The Wall Street 'sit-ins' are not going away - they are growing, & they are being co-opted. Not that long ago, the Greece of the time was Germany, & the crises gave the world Hitler. Record unemployment amongst the < 25 was ultimately solved by war. Guess who dies first. We have forgotten that it is in all our interests to periodically have widespread bank failures. Break the power of the banking lobby, let the governments make depositors whole, & let new state/private banks rise out of the ashes to take over the function. The banker is your servant, NOT your master. SD

We cannot imagine that this is just us ..... But has anyone else noticed that the real money a value investor will make in this market will be simply by trading their position, reducing cost bases to almost zero, & just parking the gains in cash/index puts? Case in point. Last week, the S&P/TSX Index rose 8.95% off its low - on nothing better than 2-3 days of press report respite on the news from Europe. Dexia was bailed out this weekend, & tonight Merkel/Sarkozy negotiate on how the EFSF fund will be used. Of course, the 11 billion Euro capital raise that BNP Paribas & Societe Generale will otherwise require has nothing to do with it? http://www.reuters.com/article/2011/10/09/us-eurozone-idUSTRE7953D520111009. And neither do the highly likely significant unrealized losses sitting in Deutsche Bank &/or the Landesbanks ? So why on earth would you expect that last weeks S&P/TSX Index 8.95% is going to hold - if ONLY these two banks, need to raise even HALF their 11 billion requirement? We live in interesting times!

We have been quiet buyers at < .75-.80. As long as you dont have to sell & can take a long view you will do very well. Buying (today) in a TFSA account, & contributing (later, & at 1.25+?) to a RRSP account, is the obvious choice. But not a fan otherwise. There are so many other very high quality choices out there right now offering div yields > 4%, &/or P/E's < 5.5-6.0, that FBK is pretty far down the list. SD

Agreed with Packer. But would add that wherever possible 1) you buy the major makers of things that are really needed, 2) where there are clear & favourable demographic trends, 3) you receive a dividend, & 4) you plan on holding for 5-10yrs. IE: The major food & drug coys (everyody, world wide, has to eat - & everybody gets sick). Asian & Indian auto companies. North American long term health care. If in 10 yrs these companies are an average 4x higher than there are today (growth + inflation), & you receive income each year that you are waiting, you will do very well. SD

Keep in mind that there is not 'one' inflation. We have simultaneous asset DE-flation & consumer price IN-flation. We got asset deflation because everyone rushed out & bought the same assets - at the same time, on margin. Because there were more buyers than sellers - prices kept rising, & the price rise kept pulling in still more speculative money. Asset producers ramped up production & the result has been warehouses of inventory valued at nosebleed prices. Now everyone is trying (or being forced to) to sell, when there are no buyers & a material inventory overhang - asset deflation. We got consumer price inflation because monetary authorities, world wide, flooded markets with liquidity & debased their currency. Grain, gasoline, groceries, etc suddenly cost $2 vs $1 because the amount of currency òut there`doubled - consumer price inflation. SD

Very informative & entertaining http://www.businessinsider.com/what-the-world-can-learn-from-icelands-default-model-2011-8 Lot to be said for it. SD

Keep in mind that BP is a somewhat unique case. Demand can vary, but the supply from each cheap oil/gas source falls every year as the field plays out. To meet the supply shortfall the world taps successively higher cost sources, & keeps increasing the base price paid for the product. A decline in demand just means that the world taps the higher cost sources a little slower. The price actually paid reflects the fundamental crude specific demand/supply (Brent, West Texas, etc), futures speculation, & currency change (USD devaluation). Buy BP & you buy skeletons, government sanction, access to cheap oil/gas sources, & the ability to reinvest in tertiary production at the lowest possible cost & greatest certainty (know the geology, location, etc). For someone else to access the goods, it has to be another sovereign company/fund & sanctioned by both governments (UK & ME). Does happen (Saudi-Aramco), but not often. Its cheap because some of the skeletons came out of the closet (Gulf disaster) & global crude demand is perceived to be falling, but nothing else has really changed. SD

Completely agree on the 1929-1932 scenario. Not so sure on total risk, simply because we expect that a stable transference cannot be done without taking big write-downs (actual write-offs, valuations, etc). We essentially end up with everything being worth less, & investing at a lower cost base. Less risk. Nice thing about most of the names is that they are also capital intensive, with high depreciation & no-where for the cash to go. Sadly though, it is effectively industrialized hostage taking - & you get rewarded (buybacks, div increases, etc) for doing it. SD

You might also want to consider that many of the worlds premium companies have implied sovereign guarantees on them - especially those that employ a lot of people. - GECapital - assistance rolling their commercial paper during the credit freeze - GM/Chrysler - auto industry bail-out - Japanese electronic manufacturers, BP/Exxon/Elf, etc? In todays world of every-day state intervention, there may well be a lot less risk than everybody seems to think. SD

T-Bill/Leap Strategy As seller of a covered LEAP, the objective is to mimic buying the share today (at maximum margin) & selling in X yrs at the stated strike price. IE: The seller sells the right, but not the obligation, to buy today’s $30 share at $50, 2 yrs out, for a premium of $3. The premium of $3 is the carry cost on the margin + a pricing adjustment for the greeks (volatility, time, etc) The seller accepts the LEAP obligation, & uses the premium to buy a similar term (or roll shorter terms) T-Bill on margin. IE: Cost of $98, margin of $95, equity of $3. In 2 years .... • The T-Bill will mature at $100. $5 of net gain to offset 2 yrs of carry cost. Positive carry. • 30% chance of a $20 profit on the share already owned (70% of LEAPS expire worthless) But during the 2 years the seller significantly reduces his/her risk ... • If the seller did nothing, he/she would have a 1 asset $30 portfolio, exposed to the entire market risk on that share • If the seller sold the covered LEAP, he/she would have a 2 asset $128 portfolio ($30 + $98 T-Bill) that is only 23% (30/128) exposed to that single share. Most of the (corporate) share risk changes to (sovereign) T-Bill risk, & the seller gets the diversification benefit. If the T-Bill was actually a UK Gilt or a German Bundt, that benefit could be considerable. Obviously not for everybody, & there are many variations, but something that you should be aware of. SD

Most often you will be either rolling 'Up & Out' (higher strike, & a maturity period longer than you previously did), or 'Down & In'. If the existing position is in the money you will have to sell, otherwise just allow it to expire. For even the most liquid LEAP, liquidity will evaporate as soon as the long/margin equivalent becomes cheaper. Consequently, most strategies use T-Bill/LEAP combinations & hold to maturity. SD