SharperDingaan

We hear you! 2/3 of our rebalancing is to other cyclicals, & there's lots of quality going very cheap. The rest is looking for a FI home .... & if it takes a year, no big deal. SD

Just because ... Keep in mind that the sovereign needs to reduce its funding shortfall & debt service requirement, when nobody wants to lend new money to it; therefore it can only squeeze existing debt holders (1) On maturity take 80c - or rollover into a low coupon 12yr bond guaranteed by the EU (2) On maturity take 80c - or rollover into a higher yield zero coupon, callable (at a % of the IV), sovereign 10 yr bond. Most sovereigns finance at an average 5-7 yr term; if they get into trouble they extend the average term to 9-12 yrs. Assuming a 10yr term that zero would issue at between 46-56, if the yield were between 8-6%. You would be unhappy, but you’d take the zero because it matures sooner, you don’t need the coupons, & there’s a chance it could get called earlier; but you’d also sell it if you could. Assuming an average 25% liquidity discount these things would trade in the secondary market at around 35-42 Euro + accumulated interest. Because this threatens the integrity of Euro land, & the Euro, most would also expect additional Euro depreciation. If its 10% you’d actually pay 90c in the $, & there would be no repatriation FX risk if the proceeds from the maturing euro bonds were spent anywhere in Euro land (ie: a villa). On day 1 you’d actually buy the zero for 31-38 (46*(1-.25)*(1-.1)=31). If it got called the next day you would make at least [50%] 15+ (46+call premium-31). If it’s called 5 yrs hence you’d get more, get the proceeds when the economy is turning (otherwise the sovereign wouldn’t call), & would be reinvesting when property prices were still low. ..... Gives a whole new meaning to property management. SD

Keep in mind that the cost base, the quality of the security, the amount of run-up, & the degree of overweighting should be the key variables. ie: a 70% weighting to FFH is very different to a 70% weighting in SFK. We hold a very high weighting only because we hold both common & debs, we bought them at close to their lows, & the run-up has made it extreme. We also have a long time horizon & a higher risk tolerance. The only reason we haven't rebalanced yet is because we'll see another 100-200%+ appreciation on our cost base, if the quarter is a good one. SD

First of all, thanks for your analysis on SFK. I truly hope that you will make a killing on this one as you likely helped many board members making a lot on this idea. We've allready done very, very well thanks; if the PIIGS cooperate the 'retirement cottage' could well up being a modest 'villa' on the southern european coast.Whatever additional we earn from new issues/takeouts, etc. will essentially be insurance./i] All that we actually know, per managements statements, is that SFK has been receiving various expressions of interest.Mar-25 Press Release: it is anticipated that the reorganized structure of the Fund as a corporation will attract new investors, including non-resident investors, and provide, in the aggregate, a more active, attractive and liquid market for the common shares of the new corporation (the "Common Shares") than currently exists for the units of the Fund (the "Units"). There was also a reference as to who that might be on one of the other SFK strings (since deleted). Suffice to say this statement could not be made unless there was something to back it. 3 ‘seeds’ in the last 2 weeks Stockhouse Board: 04/07, 10:27, huge profit coming Yahoo Boad: 04/23, 1:31, Buyout rumour mill Stockhouse Board: 04/26, 10:121, SFK Buying Rumours SD

The net thrust of the various rumours is essentially this: (1) The St Felicien plant is sold to Company A (Domtar?) for something (presumably cash?) (2) Majority ownership in the remaining 'shell' is sold to Company B (Boston interest?) for cash (presumably via an augmented treasury offering). (3) The Debs are called in to remove their blocking interest (implied, not stated). All that we actually know, per managements statements, is that SFK has been receiving various expressions of interest. What if it were true? - The shell would have 2 US plants, significant excess cash on hand, & would be entirely equity financed (St Felicien proceeds pay off the existing debt + leave some change; treasury issue further boosts equity) - Given the players, & the legalities, the buyer would have to make a proportional offer to all the existing shareholders; with any share shortfall coming from a treasury issue. - The shell would go shopping for a debt financed acquisition. The outcome is still a re-engineering; & a re-engineering is exactly what everyone is expecting. It just looks different from the expectation. More importantly - there have now been 3 ‘seeds’ in the last 2 weeks; & whatever the plan, it’s starting to leak. No further comment. SD

Re disclosure We've just found this on the stockhouse board: Posted 04/26 @ 10:12 PM Given that management is currently in Q1 lock-up, we're not going to comment. SD Hi everybody, I have been told that at St-Félicien mill, there is a rumors again that SFK will be buy by Domtar after it become Fibrek INC. Lots of major CIE like Domtar, Bowater were interested in the past to buy SFK, but this was not possible because SFK is a fund. Now with the new Fibrek INC structure, it's gonna be possible. When SFK was created, they bought the St-Félicien mill for 700 000 000 $ but the book value was 400 000 000. So now, 8 years laters, I think the mill itself can worth more than 1 billion $$ + the 2 USA mills (however, value of those 2 mills are way less). So it's a lot of $$$$$$$$$. Only 90 000 000 shares !!!! Do the maths folks.

You might want to look at the better of the PIIGS, particularly in the 4-6yr range, & where there have also effectively been bank nationalizations. Then ask; - Why is it that their economic condition today can only get worse? - Why do you need the coupon? - Why would the sovereign not try to extend maturities with zero coupon bonds, at favourable terms? - Why do you need to repatriate the investment on maturity? If you bought the bond today at 65, & it got re-termed in 2 yrs into a zero-coupon 7 yr maturity at 1.65:1 (165 of ppl on maturity vs todays 100 & bi-annual interest payments), you would have 165 (& a 254% return) in 9 yrs. Would the average residential property in that country have appreciated by as much when their economy was this bad? If you then bought a residential property in that country with your 165 (on maturity), does the FX risk really matter? And if this were your intent; haven`t you really bought that future house today (without the upkeep, & taxes etc) at 40c in the $? SD

Q1-2010 Canfor Results: http://www.canforpulp.com/_resources/news/2010/N100426_Q1_Results.pdf Absolutely stunning. - Higher prices, lower COS, higher shipments, FX offsets; same as expected for SFK - Record production quarter for some mills (tonnes + price); we know St Felicien was going flat-out - Ave price was $880 USD (CAD 916) ton; same as expected for SFK. - $1000 USD ton successfully implemented & they think it'll go higher. - EBITDA up 60% from Q4-2009. - Monthly distribution increased 66%. Similar type increase in distributable cash. SFK's Q1-2010 results are going to be very interesting indeed! May we all do exceedingly well ;D SD

Couple of notables: (1) Time. If you can wait for 'mean reversion' (private $) you'll do well, but if 'marketing' is driving your portfolio you'll get fired (OPM). And it happens because the multiple paid is P/E*(1+g)^n where 'g' is the company specific or industry growth rate (perception of) & 'n' is the number of years. The equivalent OPM market segment is really venture capital. (2) Volatility. If you can tolerate high volatility you'll do well (private $), otherwise you'll get fired (OPM). And the mitigants are your cash holding, the size of your weightings, the quality of your holdings, & the depth/quality/experience of your investment knowledge (ie: its no accident that the 'greats' are old). Notable is that once you have (2), the private $ advantage is a lot more than generally recognized. SD

Look at the recent voting package that we all received; Share Option Plan, p 37 & 39 2.5% of the total outstanding float, vest at 3.50 if there's a termination without cause (ie: takeover). And another 2.5% vest at 5.00. Most would suggest that the minimum price for an interim treasury issue is 3.50, & 5.00 for a takeout. SD

Its correct. For any given quarter look at the holdings that are generating the bulk of the OCI charges, & assess whether those holdings are reasonably likely to be worth more 3,4,5 years out. Guess how much more they'll be worth, & the probability of occurrence. The difference is essentially the MTM 'unrealized reserve release' that would occurr over the period. More important to an insurer than it looks; the MTM 'unrealized reserve release' effectively reduces the amount of super-cat reinsurance the insurer needs to carry, & the 'saved' premium is an annual realized return on this 'unrealized reserve release'. Additional MOS. SD

Viking: Keep in mind that MTM valuation functions in much the same way as the actuarial reserve. Actuarial reserving is proactive & marks once/yr; MTM is reactive & marks quarterly. As the 'reserves' should also be largely uncorrelated (market values don't generally move simultaneously with underwriting markets/natural disasters) there's also a measure of diversification. In practical terms as long as the MTM's were not 'permanent' capital losses, the 'reserve' is going to get released at some future point. ie: FFH financing the Torstar bid for Canwest, & the new entity thriving, produces MTM gains on their direct investment and a recovery of the existing Canwest MTM loss. A small upward market improvement effectively produces steroid results. Given that Mr Market is still fuzzy around the +ve MTM effect, the 'no-name' financials are a lot cheaper than they should be. Hardly surprizing that this board would have them as favourites ;D SD

Keep in mind that PDS is also converting, its one of the top 3 for horizontal drilling (shale & fracturing), & natural gas may well become scarce by the end of the year. Its also highly likely that there will be more post conversion strength than many realize. Long PD.UN SD

Keep in mind that a public sector objective is to employ as many as possible; so that they can gain work experience & move on to a better job if they so choose. 'Productivity' in the private sector sense, has very little meaning. SD

It should be incremental tonnage/incremental COS. ie: For NBSK, every additional 1000 tons sold reduces COS by 1334. Compare pg 7 to pg 11 (operating loss of 52,584) & you'll notice that this COS number actually allready includes Distribution, S&A, & Amortization. Calculated COS of Total Sales - Total Operating Profit (pg 7) is 441,883; Total COS per Pg 11 is 346019. COS is 27% overstated [(441883/346019)-1] & projected EBITDA is higher than you think. Additional MOS. We do a very rough back-of-the-envelope calculation every quarter, test it against the scuttlebut & determine a probability. The outcome decides if we hedge (positive or negative) or not. We're only more attentive than normal as our weighting is getting extreme. Ordinarily we'd be rebalancing. No counting chickens untill we see them hatch! SD

Look at the Dec-31-2009 MD&A, pg 7, Selected Annual Information. Compare 2009 against 2007. Add operating profit to sales for each of NBSK & RBK to get Cost of Sales, & divide incremental sales by incremental tonnage to estimate COS sensitivity to volume. About -1.334 for NBSK, and -.476 for RBK. Look up the list price/week for NBSK & RBK over Q1-2010 & calculate the average for the quarter. About 860 for NBSK and 780 for RBK, depending on assumptions. Assume the NBSK plant ran for 3 months at 90% capacity, less 4 days of downtime. Assume 85% capacity for the US plants. You now have estimated tonnages, you can derive average COS for each of NBSK & RBK, & can calculate estimated CM for both NBSK & RBK. Look at the 2009 S&A, subtract the 2009 charge off, & subtract 1.8 million of 2010 savings; divide by 4. Best guess the Q1 distribution number & calculate the Q1 EBITA. Then compare it to Q1-2007 when conditions were `roughly` similar. Illuminating. Now for fun: Multiple the Q1 EBITA by 4, divide by the number of shares, & multiply by 5, isn`t this pretty much the lower number to beat if they were to be taken out. Now discount the EBITA by 30% (for MOS) & stay with the 5x multiple (additional MOS), isn`t this about where we should be before the technical factors from conversion kick in. Look at the deb - if it converted there would be roughly an additional 10.7 million shares outstanding; price at the lower estimate & what seems pretty obvious. Speculation, but arithmetic works pretty well for everyone. SD

Underlying this entire suite is the inherent conflict of interest between the different sides of the same deal. ... and the SEC getting a conviction against the most conflicted player in the land, will prove it in modern times. Thereafter the logical outcome is to seperate the underwriting, brokerage, & house account trading functions into different `pillars`each under its regulatory regimes; force each pillar to hold the relevant capital needed, & restrict the % of cross-functional ownership that an entity can have. The gorillas break up into smaller pieces, the pillars are easier to control, & we`ll have market driven consolidation into fewer & healthier firms. Glass-Steagall is not coming back, as it isn`t good enough ... but the idea is almost certainly about to get updated. SD

Goldman can fight all they want; but the rational thing is to sue, as in its early stages the cost of a lawsuit is essentially a very cheap call option premium. Untill they do a deal with the SEC their share price is going to drop, & at an accelerating rate as support starts 'backing away' from them. But ... Goldman also has an optics problem in that they can't hedge. Going long puts now, & going long calls just before they deal, will simply prove the allegations true; and given the extremes - the 'self dealing' gains will be in the billions. Competitors of course will be shorting them down, & doing exactly this ;D And .... if they tried their luck with off balance sheet hedges on other peoples books, the fed/SEC will see enough of the trades to go after the hosts ... & spread the tar. Elegant The smart thing is to cave, & quickly. SD

The legal references are to the US Investment Advisers Act of 1940, the US Securities Act of 1934, & the US Securities Act of 1933. The acts have served very well but you cant regulate effectively when you`re stuck with 70 yr old relics. The 1990-2010 `Gatsby`era is over, & the greatest legacy those passing can leave behind is sophisticated & state-of-the-art regulation. We dissagree on reputation. If the fed no longer finds them reputable they`ll lose their primary dealer status & the fees & feedstock that the access generates. If the SEC accusations were criminal, all financial institutions would immediately have to back away from them - & Goldmans would follow Lehman by the end of the week. Goldman thought that if you could not go elsewhere, & they were no worse than anyone else, they were safe. They were wrong. SD

For every trade there has to be both a buyer & a seller. Prospectus rules restrict the primary sale of complex securities to only sophisticated investors, who have both the knowledge & ability to assess the risks. It is both common practice, & a desirable thing to create an underwriting overhang; & a seller will pay the underwriter a fee for the price support that the overhang provides. Had the gain/loss not been so extreme it could be put down to ‘market risk’; because it is so extreme the loss making party is now forced to go the legal route. Sell anything & you’ll incur reputational risk, & the more your involvement in the products distribution or manufacture the more risk you take on. But to make money you need to expose your reputation, & if everyone else is as reckless as you are, isn’t there safety in numbers? Goldman made an error in judgement; & to avoid making another one, they will be forced to cave. This could not have occurred were there a better, & more flexible, investment act. To get there you need ‘notches on a stick’; you start at the top, & you work your way down by ‘rank’ – & let the school yard work for you, in what is a very ‘ego’ driven business. At around the 5th notch the practice changes to ‘stepping back’ from named institutions, & letting fear operate. Healthier institutions, quicker, & ‘entitlement’ earned the old-fashioned way. We think this is the beginning of a fundamental rewrite of securities laws. SD

Now if they were doing this the old fashioned way, the fed reserve would also be suggesting to Goldman that they make a minor show & cave. After all, how much is your primary dealer status worth to you? .... & how could we possibly be seen to be upholding "market fairness" - when one of our primary dealers is being sued by the SEC on very serious charges?? Don Corlieone's world might be messy at times, but there's no doubt that it works. We live in interesting times. SD

More like a seesaw. One end has 80% of the people out a short distance (market view), the other has the remaining 20% of people out a far distance (Hoisington). A small change in the 20% generates a disproportionate effect; hence the once in a lifetime impacts. There's also an element of denial to it. If you grew up in the US & all you've ever experienced over the last 50 years is inflation; deflation, & the US as anything other than the 'center-of-the-universe' is a very alien concept. SD

Re SFK Debs. Cash yield is 7.87% [(7/89)x100]; yield to maturity is around 15% (or higher if called earlier). Keep in mind that in the current climate there is a very good possibility that these debs will get restructured in some fashion; but we don't know if it will happen, or what it will look like. Not a good place for those with minimal tolerance to risk. SD

Little tidbit. The Cdn financial regulator requires all foreign coys to hold an asset position in a Cdn trust account, equal to a minimum 102% of their Cdn liabilities, all at MTM, & reviewed for compliance on a monthly basis. Add in restrictions on the net asset exposure to the parent, & bi-annual ALM reviews, & your annuity (pension) is probably amongst the safest in the world. If the foreign parent bankrupts the cdn liability may be 5-10% underfunded at worst, with a very good chance of it being recovered as the liabilities go through runoff. SD

The Hoisington letter effectively assumes that the spend & benefit are in the same 'period', & that both private & public spend for largely the same reason. Within that framework it's right But ... A government borrowing today to fund investments in 'green' energy infrastructure (ie: direct investments, & paying well above market rate for 'green' energy) is essentially building its future industrial base to create 'green' jobs, new markets, green energy exports, etc. Todays cost does not reflect the future GDP growth, or the revenue from the sale of future carbon credits. The 'collective' corporate world is just rolling over & deleveraging existing debt; its not actually investing. Koo is correct overall, but doesn't recognize that companies will not just delever - they'll also exploit the opportunity to extend maturities & refinance at much lower rates. Companies get a lot healthier & quicker, but there's no benefit to individuals as nobody other than the sovereign wants to borrow. Net result if you believe it, is minimal cost pressure as interest savings offset higher input costs from FX devaluation. But ... if you think global QE cannot be safely unwound, we get higher rates and higher input costs, & every other company going bankrupt as they can't deleverage quickly enough. Once in a lifetime opportunities..... SD