SharperDingaan

Very nice analysis. Keep in mind that some of SFK's senior management has now retired, & an all-equity takeout would have to have a floor value at a fairly high % of the current replacement cost; especially if there were also material synergies..... And that new entity would be equity heavy, & able to do long-term refinancing at much lower costs; producing immediate & reliable interest savings, & a interest rate cap going years out. Gets more & more interesting each day! SD

Pensions are just deferred compensation. In Canada the public sector worker takes home around 15% less than the private sector, & doesn't get bonuses; they get a gold-plated pension plan instead. Nobody forces you to work in the private sector, & individuals moving to the public sector are just being rational. The economically arrogant typically don't live that long, & their estate typically doesn't get paid the full amount of their actuarial reserve at time of death. It's more for everyone else, & what pays for all the extras. So give those folks an extra six-pack, a 2nd steak off the BBQ, & a couple of cigars. They're doing you a favour! SD

Classic insider trading is to use material non-public information to trade in the market. It hurts shareholders, & is usually punishable by triple damages & the exchange unwinding the guilty party’s trades in Coy X. If you’re told the information in confidence, & act it on it for your own benefit, that is insider trading. If you simply overheard someone else & acted on it, it’s just fortuitous. This board just overheard the information, so there’s nothing illegal to trading on it. A day has passed without a trading halt, & this information came to both this & the Stockhouse board at about the same time. As it’s highly likely that the bulk of SFK’s investors review these boards on a regular basis, this board has a lot of professionals on it - with the inside trading possibility being raised almost as soon as it hit the board, & there has been discussion with management (assumed); the market regulator has opted to let it pass. Essentially, no harm was done. 225000 shares traded yesterday, about 2x the last 5 days average volume/day. NBSK has only been above $900/ton since Mar-09 (Paper Age), & it’s somewhat questionable if Saint-Felicien was actually producing at 96% of its 1040/ton/day capacity for the entire period. They probably have been going flat out, the Q1 results are most likely good, & employee enthusiasm around the restructuring, & the strong market is only to be expected; especially as many are most likely shareholders as well. Hopefully, the protagonists will get off with just a stern warning. Obviously, a very interest quarter coming up! SD

We think it's highly likely that most of this is right. We know that global inventory has been at a record low, its the right decision to open the taps wide, & that demand has been escalating (which is why they can get hefty price increases). Average sell price seems a little aggressive. What bothers us is that anyone trading with this information is effectively 'inside trading', so a trade made now could potentially be forcibly unwound. As it's also material, we would expect a trade halt, & a forced disclosure from management. Thereafter, a run up. While we think the disclosure was 'honest error', there will probably be some consequence. SD

We use something very similar. You buy coy X because its cheap from a business standpoint (place in cycle, bad PR, etc), & you essentially hold it untill the business turns. You then continue to hold if the next 6 months suggest there will be further improvement, or else you at least partially hedge. In effect you do a quarterly EMV assessment, & track it on a graph..... And if you know the company, & have tracked it for a while, your EMV assessment should be pretty good. You use 'value investment' to find coy X; EMV assessment & hedging is essentially a version of Graham; the rest is effectively early WEB. And as you cant predict bankruptcy you rely on a healthy MOS. The hedges also reduce your equity volatilty somewhat. Point? Value investment is just a tool box & an approach, it is not a 'formula' SD

Your kids will think you a bastard but ..... Do nothing other than further their education (university, global travel, etc.) untill they marry, settle down, & have their 1st kid. AFTER they've bought their house, buy out 50% of it with the proceeds repaying mortgage principal; & 'will' the equity stake to the kid. 1) Kids stay 'poor' as long as possible, 2) No money until they settle down, 3) More cashflow when they most need it (babies are expensive), 4) They can't really do anything stupid without your approval (you own 50% of their house), 5) If they divorce simply change the will ...... AND the beauty is that it is entirely the kids decision - as ONLY they can sell you 50% of their house. We've used versions of this to move grandparents to more accessable locations, & to help the parents of our UK based nephews. A timely purchase can also give you an FX advantage (20%+ UK pound devaluation), & drive home the 'money is the servant, not master' ethos. SD

The man was very good. He simply stayed too long, & got captured by the bubble of the times. US society also needs a fall guy to 'blame it all on'. Limited terms exist for a reason, & you extend them at your peril. 10 years on everyone will be saying how great he was. SD

Starting up an enterprize with the proceeds of an illegal activity is a criminal offense, & all she has to do for Stevie to get some jail time is prove reasonable doubt. A good lawyer, & 'insurance' documents spread over a number of places - & she should be OK. Stevie of course will be a lot poorer ;) SD

Just as an add on. When yields are sky high, high quality stocks are beyond dirt cheap. But the optimal allocation is still only around 40% bonds - although it immunizes you, you still need to estimate the average inflation rate over your holding period, & adjust the FV upwards. A crap shoot. Tweedy Brown cites the example of a widow staying in BRK vs going to bonds; the widow does materially better with BRK because it was cheap; the same argument applies to the high quality stocks. TODAY, would you buy a greek sovereign zero coupon bond? Probably not if I'm resident in NA as I expect the currency to depreciate. But if I lived in Greece ? maybe. And if I had only a few more years to live? almost definately. Risk tolerance changes with residency & age. SD

During the early/mid 1990's the Cdn government 'hit the wall' & couldn't borrow from anybody, anywhere. Yields on Canadas went into the 10%+ range, with the major provinces higher still. Everyday 5 yr closed mortgages went up to 19%+ Spending was thought to be out control, inflation was biting, the $C was in freefall, & Canada had a lot of foreign currency denominated debt that was getting far more expensive to service. As the debts became due, foreign creditors chose to roll-over maybe only 75%, & the rest had to come from the domestic market. As the fed sucked out the market, yields rose. It took a long time to cure. The US & the UK are now geting close to 'the wall' (downgrades) & most sovereigns have started moving BOP reserves out of USD & Sterling. Stimulus spending is proving hard to reign in, both currencies are dropping, but so far there's been little inflation in either country. We might not quite see 10% on a US treasury, but it would seem to be only a matter of time for a UK gilt. SD

Wait untill sovereign yields are in the 10%+ range & you want a long dated PO strip. At age 35, your 30 yr PO strip would mature at 100 when you are 65. And be available to you today .... for 5.73 + fees & accumulated interest. No reinvestment risk (as its a zero coupon), guaranteed to reach 100, backed by none better than the central bank of the land, & if held in a TFSA .. entirely taxfree. You buy & sell equities. You buy high quality bonds only when yields are very high, & you hold them to maturity. SD

Good article. SD

Purely academic, but go the 100% commodity route (oil/gas). The reality of a 'lock-up' is that you can always sell your original allocation for cash; you just cant reinvest it in anything else. Cash is effectively the 'default' option; with a holding period from date of sale to the end of the lock-up. Therefore havent you really got a call option with a variable maturity up to the term of the lock-up. Starting TODAY, which is likely to have the highest relative run-up? A 'hedged' commodity position has to be pretty high on the list SD

If you want to play in bonds... be VERY sure that you fully understand bond quotes, compound interest, duration, convexity, convertibles, credit ratings, debt to equity conversion, illiquidity, yield curve & arbitrage strategies. Most bond issues are very thinly traded, & are held by sophisticated investors to offset other liabilities (ALM matches). Most folks would do far better exploiting the failures of issuers (too much, & distressed debt, that depressed their stock price) rather than buying the bonds themselves. Next step up is low priced convertibles (debs or prefs) that are acting like long term options; you have to be comfortable that the coy will not go bankrupt and you expect to either lose your bond investment or get a whack of equity at a very low price. There's a reason for the 20%+ cash yield; any cash interest or resale proceed actually received is bonus. It is possible to profit by buying what institutional portfolios can no longer hold (decline in quality pushed an existing holding out of the 'permitted' universe) - effectively retail/institutional arbitrage, but you better know what you're doing. The classic example is an I-Bank partner buying the 'C' tranche of a securitization with the commission from the sale. Do you feel lucky? SD

This is an average 12,250 ton per month at roughly 90% capacity (generous for a re-start) & most would suggest its highly likely that they will be displacing existing physical deliveries, against short forward contracts. Notable is that May-2010 (when this new production comes on line) is also when the European NBSK forward pricing curve peaks at 958 per ton. If they have to delay, or cannot deliver in full, expect price spikes as they roll their contracts forward. SD

Keep in mind that the FFH float is actually too small for anything other than `buy & hold forever` purposes (which doesn`t require depth or liquidity); they need to be expanding it, not reducing it. It is a lot more likely that they either do (1) some kind of share split (ie: 5:1) CONCURRENT with a buyback, or (2) a bigger acquisition partially funded with new equity. Logic suggests (1) vs (2), & sometime after the AR (at the earliest). SD

Your premise is borrow in Japan AND invest in Japan. If you bought somebody with not much more than a high % of the domestic Japanese health care market, this might make sense (growth from the population ageing), but its a very narrow segment. Its really borrow in Japan AND invest OUTSIDE of Japan. Not said, but fairly obvious, is that fewer goods will actually be made in Japan over time - as there just isn't the workforce. As Japan still needs to import, what goods are made locally must become increasingly higher value, & the competition around those goods is a lot fiercer (Germany). If you continually run your BOP down, your currency must eventually devalue. To hedge the Japan specific risk you really want higher growth (or its not worthwhile), a currency more likely to appreciate vs depreciate (MOS), and to be long in something material/significant that Japan doesn't have (MOS). Borrow in Yen & buy a significant Cdn oil/gas producer to hold over the long term; makes a whole lot of sense. A trade that some folks (JCS Lau/Husky Energy) have been doing for a very long time. SD

You might want to look at what occurrs when you overlay demographics on top of the input/output approach. While social organization remains a factor (usually by replacing tradition with a more 'cash' orientated outlook), there were also just a lot more 'new' people to start with. The forced lower birth rate (one-kid policy), matricidal practice (girl babies are drowned), & hostile work conditions (deaths to accidents, toxic fumes reducing fertility, & accumulated toxins disabling workers early) virtually guarantees that in 10-15 yrs the chinese domestic workforce will be a lot smaller than it is now (assuming no foreign worker imports); & that it will stay low. With fewer kids to take care of ageing parents (tradition), & fewer fertile women to have kids with, material social unrest is almost assured. And the 'party' has historically not reacted all that favourably to unrest. You have to think that the best 'export' will be young people independently setting up (& investing) in the 'West', & that the most prominent 'import' will be the gradual repatriation of the BOP surplus. The best 'investment' is a chinese minority partner in your NA business; and an approach very similar to the 'sea-turtle' reality of Japan. SD

Keep in mind: Recent healthcare reform can only restrict J&J's growth over the next few years. Generic versus proprietal drugs, holistic versus interventional approaches, better & more efficient diagnosis. It’ll be harder to sell an expensive drug/treatment (most of the drug pipeline?), and in volume. Still a good business - but not as good as it used to be, & probably near its fair valuation relative to future prospects. Selling eliminates a lot of risks. SD

No - a government action that produces GDP growth (free trade, hi-tech research, labour force productativity, etc), helps BOTH business owners (make more $ by making increasing the pie), & workers (higher standard of living). Printing money (inflation or deflation) just increases nominal earnings, & often to negative effect (Zimbabwe, Weimar Germany, etc). Make an extra $10 to buy things that now cost $10 more, makes you no better off. Burlington is esp attractive as it is a high FC business with revenues that are largely not commodity driven, & a large chunk of FC (amortization) that doesn't vary much. A small government action (ie: small tax on gasoline to raise revenue) increases volume (truck traffic switches to rail) AND rate, and then magnifies g by the operating leverage in the coy. Lesson: Offer conservative financial leverage, aggessive operating leverage, & the reasonable prospect of positive GDP growth ... and you'll get a high multiple for it. ..... And isn't this pretty close to the value investors definition of a 'good' business? SD

"if you expect positive GDP growth, the higher the P/E the more of a margin of safety you have". Sorry this was a miss-keying; it should be if you expect positive GDP growth, the higher the GDP growth, the more of a margin of safety you have. The future dated P/E formula is P(1+i)^N/E(1+i+g)^N. P=Price paid today, i=inflation, g=GDP growth, E=current one-year earnings estimate, N=holding period in years. As i is in both the numerator & denominator the formula simplifies to P/E(1+g)^N. I sell a good for $10 that has has a $6 VC; CM is $4. Assume I have 10% inflation & can pass it on to my customer. I now sell at $11.00 with a cost of $6.60; CM is now $4.40. If most of the fixed cost is depreciation or amortization (doesn't change with inflation), & labour cost raises are 'sticky' (usually the case), most of extra $0.40 in CM will flow to the bottom line. Earnings go up. To buy any business is to speculate that its future growth will be at least the GDP growth rate. Buying NT at 120x earnings is to speculate that NT's future earnings are going to 10x what they today (if a 12x P/E is reasonable), & in pretty short order. Ridiculous of course, but par for the course when looking at start-ups! Cheers SD

There were 3 things to note: (1) Doubling or halving the multiple effectively produces the same MOS (barring a very small mathematical delta). ie: The MOS is almost entirely a function of expected GDP. (2) Both inflation, AND deflation, reduce the day-1 multiple the longer you hold; & they do it by about the same amount (slightly more for deflation). ie: The MOS is almost entirely due to the length of the holding period. (3) If todays GDP growth is negative - the multiple is actually much higher than it looks. Here endeth the lesson. SD

Hate to tell you this, but we bought most of our shares in at about the same level - & still have 'em ;) SD

Revaluing or imposing a border tariff achieve the same result, but have very different optics. Can you really see the US government almost instantly raising the sale price on the goods sold at WallMart (which are primarily imported) because they suddenly put a tariff on them? And when those most reliant on those low prices, are the populations in the S & SE who've just lost the Health Care debate? China slowed its roll-overs this week, & the T-Bill market almost went no-bid. If you want to trade; then learn some cultural manners. Employing a little 'face' could go a long way! SD

"Please could you elaborate as it flies in the face of conventional wisdom that the lower the multiple the more the marign of safety" Assume inflation is 2% & GDP is 2%. If you simply bought & held for the entire payback period the P/E you paid today, recalculated at the end of year 12, would fall to 9.51x from the 12.00x that you actually paid. If nothing changed, & you held for the full term, the 2% GDP growth alone would give you a 21% margin of safety [1-(9.51/12)]*100. Recalculate using the same 2 & 2 assumption, & a multiple of 25. Then recalculate using a multiple of 12; & a -2 & 2 assumption. Very different effects. You're looking at what GDP does, deflation does, & the length of the holding period does. Then look at WEBs actual practices ('buy & hold forever' & Burlington Rail). The old guy aint bad. SD