SharperDingaan

Their cash position is testimony to how well run this company is. Coy wise its would seem almost a given that the deb will now be converted in some fashion. There will be some kind of equity dilution/consolidation, and some kind of new fibre agreement. Given the times; the pricing will be dirt cheap, & the long term stability extraordinary - but in the short term ... volatility. Most SFK shareholders will have been fully hedged for some time, & the Q1 result was not unexpected. If you're going to be invested in pulp; SFK remains a top pick, & hedge cash is sitting on the sideline. If you hold a long term view, the 'back-of-the-envelope' suggests extraordinary opportunity. Cdn practice is industry/governmental co-operation for the greater good. Quebecs involvement is very lkely along the lines of transferring ABH's cutting rights to SFK, & giving up the first few years of stumpage fees in return for the $78M ABH loss & keeping the local population working. SD

You might want to look a little closer at AIG. We know that AIG has been UW primarily for premium vs profit; meaning they need a 'light/normal' cat year to come out ahead. We also know that counterparties are relying on the US fed - & not AIG, to make good on their claims; therefore as long as AIG bids lower it will always get the business. Media coverage as to pending divisional sales has suddenly stopped, & after the bonuses fiasco - AIG itself seems to now be do everything it can to stay out of the news. If you were one of those execs would you really want to be there now? & if they had left - would you expect the collective degree of risk control to have improved or worsened? The odds would seem to favour deteriation. We dont know how much of AIGs capital is backing their UW, but we can reasonably infer that its < the minimum capital requirement - as the fed has not cut them off. The absence of sale discussion also suggests that they value their businesses well > what others are bidding, & that they are relying on the fed to meet any liquidity draws; on any of their business lines - less whatever premium they can pull in. If 2009 is not a light/normal UW year - this could get very ugly, very quickly. Perhaps worth more or at least as much as a hedge? SD

This entire question could be reframed as "I have a ton of unrealized gains from choosing well, what should I do with it?" But frankly a monkey might have done just as well, if it had bought at the same time. ie: gains almost entirely attributable to market timing. The overwhelming answer has been 'hedge the gain'; by outright sale, option use, etc. Hedging is insurance, and the cost is the opportunity loss if you end up needing to buy back your position for something more than you sold it at. If you buy insurance you expect to pay a premium - & this is no different. If your wealth is doubling every 6 months, & you're hedged against potential loss - why do you suddenly think that you need a new strategy? You are where you are because you were concentrated, you know those companies better than you know the market, and you are hedged against any price drop that Mr Market might suddenly put on those companies. Your only decision should be whether you maintain the same portfolio weighting or not. Both industry & the fed have a vested interest in convincing the market that this rally `is for real`. If they are successfull, bankers might well keep the `too big to fail`card & escape being broken up; the fed will see their stimulus take off & the $ on the sidelines come back in; the industry will see a dramatic rise in fee income, hedge funds will escape redemption requests, & the related service industries will see a material increase in their business volume. Hype. The `funny number` MTMs, `Zombie` banks, collapsing credit, nationalizations & bankruptcies haven`t gone away & may well actually be getting a lot worse (AIG); ie: there is very good reason to be hedged. Just because the siren is slobbering all over your ear, doesn`t mean that you have to act! SD

We have a 60%+ weighting to PD, & have been rolling out of common & replacing with option/T-Bill combinations. Near term we think it'll rise further ... but whether it'll stay there 3-4 months from now, we're not so sure. Keep in mind, that the bigger problem is the rapid realized cash gain. The last time we were here, we scewed up. SD

The fact is MTM accounting is creating material BV volatilty, & with the rules 'relaxation' in the US - there are going to be some unexpected effects. Better to know, than to guess. FFH typically trades at a BV multiple ... but its the market value BV, not the accounting BV. Not a big deal if you buy & hold forever - but it is an issue if you're hedging seasonal volatility. Given what is occurring in the markets, its hard to fault the additional disclosure. SD

With moats its always usefull to keep at least 3 things in mind: You're really looking for an 'idiot' proof moat, & unfortunately it doesn't exist. To overcome the capital 'barrier' you simply require an idiot banker willing to do an over-leveraged LBO. To overcome the off BS business 'barriers', all you need is a short-term orientated incentive system. Both are common. All moats have 'best before' dates. There's always a new technology, new approach, better way - best buggy maker in the land is worth squat, when nobody is buying buggies any more. Softdrinks, tobacco, booze, electricity, etc. may all have great moats - but they also have active social movements (diabetis/obesity, cancer/second hand smoke laws, MADD, conservation/green power) working to shut them down. Eventually the social wins. A moat is simply an investment portfolio of intangible operating assets. To grow the portfolio you freshen your product lines through breakthrough R&D & higher risk marketing investments. You run it down by letting the lines age, & always sticking to the lowest risk highest return strategy. Most companies fail badly at re-invention. SD

Granted we may be a little outside the box on this, but consider SFK's options. St Feliceon could afford to pay a slight premium over the current spot, in return for a secure fibre supply over the next 'X' years. Location & trucking costs dictate that the seller would probably use either the ABH lands or something closer. With spot fibre prices this low there will be significant savings, & with local conditions so bad - there will be someone willing to sell, if only to survive..... But this is the MOST that St Feliceon would pay. St Feliceon could also buy the land outright & contract someone else to seasonally cut down & deliver the logs. The fibre cost is now the cost of capital on the acquisition debt + the contactor cost + tree replanting cost (vs cap cost amortization). Given the cheap cost, cheap financing, & local proximity this could well be the LOWEST cost option. A debt/equity conversion could swing it ... but at 20% cost of capital there may be better ways. But if someone else bought the land - & then offered St Feliceon an operating/capital lease with an option to buy, we could have something. And if the buy-out is 5-10 years out - SFK's cost of capital may not only be materially lower then, but they're also financially stronger. St Feliceon is one of the lowest cost plants there is, despite paying some of the highest fibre costs in the industry. Lower the fiber cost & it suddenly becomes very profitable. And if your cost is low enough you can do bulk sales to other suppliers whose costs are higher than yours - & extract the economies of scale .... & in a market that is helping, versus hindering you. This is a simple capital allocation problem, & SFK has master capital allocators behind them. Hard not to be optimistic! SD

Welcome Dealership systems require that a distributor (GM) support the dealer with volume discounts/cheap financing/sales force training (min salary), and the 'brand' through advertising/promo events. The dealers themselves may be either franchised or company owned. To sell a new model the distributor has to pay the huge marketing cost up front, & then pray that they can sell enough cars through the distribution 'dealership' system to recover their costs. Very big $, & applicable to every new model in the distributors line-up. If the business is healthy & running 'normally' - the collective cash recovery (effectively amortization) on the old marketing campaigns will be enough to fund the current years promotion, no new cash is required, & you have a moat that is very difficult for a competitor to successfully cross. However .... if the business has been allowed to run down - then either you come up with lots of new $, or cut brands. GM is cutting. The same mechanism applies to many industries, but in slightly different forms; beverages, newspapers, rail, financials, etc. Then notice how many of these same industries WEB is in. Cheers SD

Keep in mind that there's now a lot going on with SFK. The big mystery is what SFK's Q1 P&L is likely to look like when they're selling down inventory and only producing at 2/3 of 'normal' production, in what is one of their strongest quarters. Cash flow & ratios have probably improved, but the P&L? - maybe a 50/50 bet. The chips will continued to get supplied, but now at a much lower cost, and sooner. The question is whether it'll be through a long term contract, sale/lease back through an intermediary, or via an outright acquisition. Our own inclination is some kind of lease and future buyout. Net upward bias, but expect some bumps SD

Welcome to the site. 3 things you might want to consider: - Don't look at one thing (UW) in isolation. FFH does far better at investing that it does at UW, but there would be no investing were there no UW float. Looser UW produces more float, but as long as the cost of that float is < the cost of wholesale funding - you're better off. - Look at the UW triangles, but put more emphasis on the pre acquisition triangles. They are a 'truer' representation, & given that those bad acquisitions almost cost Prem the company - he's highly unlikely to ever go with such poor quality again. - Everybody makes dud picks, but they are only duds because you (1) either paid to much for them, or (2) they take longer to pay off, & required a lot more work than originally anticipated. It's hard to imagine that those companies will not 'be there' 5 years out, but it's pretty much expected that they will look very different from what they look like today. Cheers SD

Packer You might want to randomly sample some of the UK & French/German financial press over the last two months or so. The banking industry's continuing refusal to lend at the 'high street' level, has started to shutter all kinds of retail stores (a visible face of the recession), & there is a growing groundswell that 'the bankers' are to blame. Still largely random stories of intimidation, verbal abuse, etc. at this point - but its also starting to get uglier (police interventions against attempted car bombings, gangs trashing branch office windows, bank managers being deliberately followed on the streets, etc.). France, Germany, & now the UK; a not-so-quiet, & gowing anger. The US may have exported the credit crisis, but Europe is exporting the social unrest, & the priviledged few admitting they screwed up, paying a fine, & then moving on - isn't going to cut it this time around. Its 'game changing' time, & the 'entitlement' culture has proven itself incapable. No one is expecting the central banks to get it right the first time out; but there is an expectation that this 'too big to fail/too important' shite is going to end, & that major institutions will be made examples of. We will have some kind of 'new deal', that gives most people a fresh start. The US is not an island. SD

Partner24 Nice choice on the BEK.B. I would expect that these things are closely held ? & that the common trades rarely - if at all? Thanks SD

Keep in mind that the best & most effective solution is to deliberatly put BAC & C into bankruptcy, then immediately spin out the 'good' assets under brand new, & smaller banks. The existing boards dissolve & their directors/management either get cashiered or given new directorships in the new entities. The capital market version of GMs trip through bankruptcy. These are all big boys; there are no 'rights' - there is no 'discussion' - there are no 'choices'. They will do as their told, when they are told, or they can immediately go bankrupt - one choice. For many in the public eye, the optimal solution is a few of these directors tossing themselves off the roof top. There is zero tolerance for directors/senior officers when they have demonstrated this level of collective abuse & incompetence. Nothing establishes discipline like heads on a stick. Time to start on round 1 We're feeling a little bloodthirsty! SD

Look a little closer at the marketing. Most would think that there's more than a little gaming going on - 04/20 PDS announces new financing that will add 84M shares [35 issue+15 warrant+103/3 rights] Another 30% dilution. Yes - expenses will decline, but not by 30% - 04/21 CIBC released a bullish analyst report. 3 others released similarly bullish reports on the same day and the price increased $CAD 0.75, which reversed the prior days loss of $CAD 0.50. Notable is that these underwriters (who sold the last issue at 4.25, & then saw it drop < 3.00) were not involved in the 04/20 financing. - 04/22 PDS releases Q1 results. As expected, they weren't good. Yet the price closes up at $CAD 5.50 & suddenly we're hearing 2:1 deals (cause 5.5+3.0 right = 4.25 = same price as the last issue ?). The 50 day technical trading signals over the last 4-5 days are illuminating. - PDS just sold 30% of themselves at 3.00-3.25 - or about what it was actually going for before the runup began. Perhaps the message they were meant to hear is that if they'd listened to their underwriter, maybe they could have sold at 5.50 & only had 20% dilution? This only works if nobody 'calls' the underwriter, by selling in quantity through either the physical or derivative markets. PDS may well be turning around and warrant a premium over the 3.00 rights price, but 10% (3.60) is about the limit for a 2:1 deal (3.6+3)/2=3.30/3.00-100% = 10% Happy hunting Cheers SD

Just keep in mind that Q1 results get released tommorrow, & there's very little reason why you'd pay more than the CAD $3.00 you would pay if you got them through the rights offering. SD

Life Insurance has large payments (high $/payout x few payouts) x a small prob of occurrence, spread over a long period of time. The long term liability being matched against generally illiquid long term assets. A 'run' suddenly increases the number of payouts, makes them all immediate, & drops the premium cashflow to almost zero. If you can't sell your more liquid assets & repo your less liquid ones, you will rapidly burn through your credit lines & run out of cash. Bankrupt. To some extent, Confed Life went under because weak derivative 'settlement' controls triggered a 'run'. A valuable lesson. Cheers SD

Keep in mind that when this money comes in it will have a portfolio impact of at least 15-25%. Nobody is going to tolerate that kind of handicap unless they're sure the recovery is real enough to warrant a long term equity investment. SD

Supplier agreements are swiftly re-negotiated (to supply at a lower price) when the seller is supplying goods to the now bankrupt buyer. In this case, ABH is the supplier (wood chips)- & at what is understood to be fairly high price/ton. SFK's Q1 report is coming up, so expect some kind of 'monitoring the situation' comment. Down the pike a new (& longer term) deal, with lower prices/ton, & the dropping of any 'take or pay' conditions. Net +ve for SFK SD

Very simplistic, but the general approach; DIP financers provide a line of credit secured against the operational A/R. As cash is collected it is applied to the credit line. At $50M it'll be secured against maybe $60M of A/R (120%), at $150M maybe $240M of A/R (160%). High fees & relatively low risk. Bondholders/shareholders do a deal. Secured holders take secured paper equal to the current liquidation value of their securing assets, and some kind of unsecured bond/equity with a NPV about equal to their unrealized BV loss. If they take bonds they can amortize the loss forward, if they take equity they have to book the loss immediately (an issue if these bonds have not had a regular MTM) Unsecured holders take primarily new equity, & a small slug of new unsecured debt Shareholders get a very small slug of new equity. Bond holders convert into massive amounts of the current shares (dilution), & then the current shares get consolidated on a 20-40:1 basis into 'new' shares. Lots of positioning SD

Prems admission to their mistakes is hard evidence that their investment style remains 'healthy' - & that they haven't been drinking the journalistic cool-aid over their CDS wins. Nice to see. SFK/Abitibi/Canwest are essentially vertically integrated forestry investments, built around newsprint. They may well still work out, but it'll clearly be a lot more work than was originally thought. OK, so the sun dont shine everyday. We can only see newsprint ... but maybe we should be looking at the humble paper bag. Grocery bags were replaced in the millions by plastic, because they were cheaper, lighter, & less bulky to store. But today NA/European municipalities are banning them from landfllls, you pay 5c/bag, & you pay again to get rid of it. That paper bag is recycled fiber, almost entirely 'green', uses up a fair bit of pulp, & has a steadily/rapidly growing market attributable to municipal regulation. Moats. Perhaps these investments may also turn out to be a lot better than everyone originally thought ? Cheers SD

This is a Chinese made (& government supported ?) green car that is relatively cheap, selling to a local market, that is one of the most populated on earth. Embedded car culture, no different to what GM/Ford were to the US in the 1950's. Hurdles: production volume, buy 'china' pride, tarrifs/foreign assembly plant requirements, etc. This will be a massive employer, & in the near/medium term its job will be to employ as many people as possible, & not mechanize. Hurdles: mega project status, high employer/government influence in a recession/depression, etc. Just as US/Cdn auto makers hid behind tarrif walls to protect what was once 'their' biggest car market in the world, BRIC countries can/are doing the same. Except their consumers are at the begining of the product marketing lifecycle, & the US/Can are at the end. Makes a lot of very good sense to have a toe in the water. SD

mpauls: Thanks for the reference, as we're not that familiar with BRK's financials Comment still stands though. The gain/loss on the trading portion of the derivative net book is going through income as we've suggested. The changes in fair value of derivative contracts that DO NOT qualify as hedging instruments for financial reporting purposes are included in the Consolidated Statements of Earnings as derivative gains/losses The gain/loss on the hedging portion of the derivative net book is going direct to equity as we've suggested. The changes in fair value of derivative contracts that DO not qualify as hedging instruments. Given BRK's transparency, it's probably possible to get a rough idea as to the % of the net derivative book that has been nominated as 'for trading'. The lower it is, the greater Mr Markets 'miss-match' will be. Happy hunting SD

Look at the FASB classifications 'held for trading', and 'held for hedging'; then step back. Most money-centre banks hold their Derivatives/CMO's etc. in the 'held for trading' bucket - which requires them to MTM and immediately book the unrealized MTM gain/loss through income. The mark was at the most recent trading price (liquidation value) & the lower the valuation the greater the adverse hit to income. If the mark is low enough there may also be an impairment hit. Volatile income & tier 2 capital. WEBs Derivatives/CMO's etc. are not intended for trading, & are in the 'held for hedging' bucket - which means the MTM goes direct to equity & is offset with the MTM on an opposing asset/liability. No P&L impact & a much smaller 'net' impact on equity. Minimal volatility, no tier 2 capital consideration (as BRK not a bank) The market is seeing all Derivatives/CMO holdings through the money-centre bank lens, & is penalizing everyone for the income volatility - BRK included. But .... as BRK's holdings are in a different bucket (& accounted for differently), Mr Market is mistakenly offering you BRK at a sale price. Classic WEB ? You might reasonably expect the MTM 'ammendments' to boost BRK's price, but expect the 'boost' to be temporary. These 'ammendments' are being resisted in many quarters & may well only end up being applied to US flagged companies; foreign buyers of US equity taking a discount for the sub-standard accounting. SD

NPV is a long term valuation, but the price of a WFC share is what someone else is willing to pay for it today. As at close of trading 04/09, USD 19.61, following a USD 4.72 (31%) rise attributed to a press release. The USD 8.00 price was just over a month ago. At close of trading 04/08 WFC went for USD 14.72 - up 70%+ in a month; & most would suggest because of improving business conditions. If thursdays close holds (& perhaps even rises) the short term price gain will be well > 100%. The point being made is that to many folks, the magnitude of that short-term price gain is unsustainable. Agreed that long term WFC is a buy, but short term - you might well be able to buy it for 30% less

Ben, Basl1 Bear in mind that you're looking at different investment horizons. - Long term WFC will very likely do quite well, & WEB's purchase is a recognition of that. Value investors shouldn't be particulary interested in todays price, unless they are planning to add to their position. As Brox points out, we don't know if WEB has bought all that he is planning to. - Short term, WFC's actions are looking suspicious enough to consider hedging. Depending on your view the hedge could be a short put, outright sale & repurchase, or a long put. The 'bear case' essentially rests on the P(x) that should be attached to the 'good' outcome, & the potential incremental price difference that it will generate versus Friday's close ie: if there is a stongly +ve EMV there is a reason to hold. - There is little confidence in both the P(x) & the incremental value (rests on the press releases credibility), and the likely outcome would seem to be either a strong rise or a steep drop from Fridays close. Hence hedging would seem appropriate. No pushback, resistance, etc. Just different considerations. Cheers SD