SharperDingaan

For those of you with an interest in block chain and crypto-currency technology, the below link takes you to primer material from the Bank of England. http://www.bankofengland.co.uk/publications/Pages/quarterlybulletin/2014/qb14q3.aspx The Innovations in payment technologies and the emergence of digital currencies .pdf The economics of digital currencies.pdf SD

I hear you, and I thought the Phd in pictures was spot on! Going by my advisor, I am quite probably the worst doctorate (finance) student ever, and far too commercial for the rarified air of academia. I take it to be an auspicious observation! In my eyes, the biggest finance innovations over the last decade have been the anti-fragility of Taleb, and the block chain. Both are dirty words in many parts of academia. Not invented here. It is probably going to be many years before the masses accept crypto-currency. It is also highly likely that it will be predicated upon successful intermediate implementations elsewhere. As with all currencies throughout history, it will ultimately be managed by central banks. In its present form, block chain capacity constraints preclude its use as a widespread crypto-currency. The highest and best industrial use of the existing technology will very likely exploit its traceability virtue, and be in the food or drug industry applications where transactional volume can be segmented, and is relatively limited. A drug industry application might be 1 chain tracing components through to product manufacture, and a 2nd chain tracing movement of the product by batch, from factory through to end user. All very unsexy. The highest and best arts use of the existing technology will very likely also exploit its traceability virtue. An auction house, or art gallery application, might use 1 provenance chain per significant painting (ie: Mona Lisa) tracing ownership from painter through to current owner. Again, very unsexy. In all these potential applications block chain does not do anything that is not already being done; it just does it differently, and cheaper. The cost per transaction also declines, and system security improves; the more industry adopts the technology. Each successful application, strengthens the case for crypto currency, and its next generation. The underlying concern is the unemployment this technology would create. However, given the growing shortage of working age youth in the west, I do not think it is the problem many fear it is. My interest is in the industrial and arts applications, via the next MicroSoft. Unfortunately, my background in capital markets, tends to push me to the crypto currency applications. All said - you cannot commercialize, until you know exactly how it works … which is apparently the antitheses of the rarified air of academia! ... I also concur that the whole OT chain should be moved. SD

Opinions differ. Agreed the block chain inefficiency is its security, but it is so process intensive that it cannot grow. To get widespread acceptance it has to grow, & do it almost exponentially. The current architecture will not do it - and that is the problem. In todays 2G architecture we need distributed security. Change the architecture to Hub & Spoke, house the hubs at central banks &/or the major financial bodies (IMF, ECB, etc.) - and arguably we get movement again, and even better security. 3G. Even if you put the ultrafast CRAY computers behind the Hubs, they are still limited (though not for a long time). How we deal with it will be the 4G iteration. SD

Cost. There is zero net new benefit to how anybody already does things - and there does not have to be; it just has to be competitive. In practical terms you would simply charge cost, and spread that cost over the total global transaction volume, to drop it as low as possible; you would then split the transaction cost 50% between both buyer & seller. As with music - charge nothing for the new song but a lot for the concert ticket. Nothing per transaction, but a lot for the cyber currency account itself. A vendor currently pays 1.5-3.0% of the transaction (visa card), &/or 25c (debit card) per transaction. In many cases the card holder pays $100/yr + card insurance. If it costs each side 3c/transaction (generous) & $50/yr per cyber account, we will not have plastic for very long. Zero net transactional benefit to the buyer & seller, but now it comes at a far lower cost. The industry moat floats on how well the industry can dissuade would be users, & how strong an R&D option it can get over the tech development process. No different to a manufacturer investing in various platform options so that they can handle future business needs. SD

Agreed that as at today, block chain IS inefficient, and that IS a problem - but it is NOT a show stopper. The solutions mechanics are routinely applied in other applications. SD

Block chain security derives from storing data over a very large network, & independently checking the existing integrity of the block chain against other distributed data points, prior to adding another transaction to the chain. It is easy to alter a specific copy of the block chain, but to successfully change the systems version of that block chain - I have to alter EVERY copy of that block chains data, EVERYWHERE. The bigger and more distributed the network, the harder that is to do - & the more secure the block chain. Save a copy of the block chain in a secure location, plus add a reference call-up - and that block chain massively shortens. The existing charge card business case rests on the economy of scale of existing entrants. It is too expensive for a new competitor to enter by building from the ground up, & there is too low an industry ROE to support entry by acquisition. As long as the only way you can do your transaction is through either via cash, or plastic, the banks have little to worry about - because to get your cash or plastic, you have to go through them. ie: they control the distribution. BitCoin was essentially an app, that could be accessed by any device. You identified who you were, could see your BitCoin balance at any time, & transacted in Bitcoin. You got the BitCoin by either buying it in cash, or selling goods & services denominated in BitCoin. In the early days almost everybody bought BitCoin for cash as they did not have any; hence it looked very much like a game. Once it got going though - cash purchases were far less prevalent, & transactions entirely within the cyberspace, the norm. In the later days it was possible to borrow small amounts in BitCoin to pay bills. You were able to pretty much do what you could already do with a charge card - albeit not very well. For a proof of concept, 2G application - most would say it did very well. Dad & grandpa use cash & credit cards, younger folks use debit - & many don't even carry cash. You also cannot get a bank account, or any kind of tax slip denominated in crypto currency - so very cool, & very attractive to almost everyone working under the table - or illegally. Every sci-fi movie in the last 30+ years has also indirectly pushed crypto currency; nobody EVER saw the characters use physical cash to pay for anything - its always by debit or credit through some kind of device. Charge card command over the distribution channel is waning, & it is only a matter of time until it is gone entirely. If I attach a P/E of 22x to todays earnings, I am also saying that I expect todays oligarch earnings to continue pretty much as is - for the next 22 years. It is NOT going to take 22 years for a viable & robust crypto-currency to take root in NA - therefore these multiples can only compress going forward. For the charge card share prices to go up, they need earnings growth to far outstrip the future compression rate; an unlikely sustainable occurrence. SD

The best way to research Blockchains is to google .. & go from there. Agreed that what is out there is very promotional, but there are 1-2 good research papers which give the rough mechanics. You will not see anything application related, but you will see who is working on it - & who is backing them. ie: The UK, Level 39 incubator. We routinely use digital currency already - every time we pay with plastic or a debit card. Crypto currency in NA is still alien, but in Europe it is much more accepted. More importantly, it is largely only the cool places (Berlin bars, etc.) that currently accept it. To sell a new drug you sell to the cool people first - & then trickle it out to the masses. Not unlike the speakeasy during the prohibition era. The various payment/clearing systems we currently have do the job, but are largely at their limits; horse & buggy net benefit as compared to the standard gas guzzler benefit we all enjoy today. They are also captive to their oligarchs, & beyond innovation because there is no net benefit to disrupting the status-quo. To make gains here you have to chaotically disrupt the game, then replace it with a better & cheaper technology overnight. And with such a big prize going to the winner, there are going to be lots of wolves eying the sheep. Continuous improvement can only take you so far, & every year the gains diminish; every now & again it is time for a new game, & the US is very good at it. This type of thing is also routine & nothing unusual; the early history of US mortgage securitization being a recent example. SD

Two, simple, banking examples where this is game changing. Securities clearing: Change the currency unit to a CUSIP number (unique security identifier) & add front-end digital interfaces. You have just eliminated most of the trade confirmation & settlement process, cut the staffing component by at least 50%, & transformed the custodianship business. If you are not already in this business, you have no choice but to invest heavily in the option - or lose your market share. Payment clearing: When both buyer & seller use the digital currency, you have just eliminated the need to use the clearing system at all. And as the transaction cost is minimal, every store front merchant has a very strong incentive to move to digital, & move off the clearing system. Widespread job loss, collapse in Visa fees, & permanent value destruction. If you wished to enter banking today; you would do it as an entirely digital business with NO brick & mortar, & very few staff. To get your customers you would target the zombie banks, & offer the regulator a standing option to transfer accounts at zero cost. Retain just 10% of the transferred accounts & you have attained critical mass. SD

Every IT system in the world backs up the days transactions every night & adds them to a master file. The data is typically screened on the way in through a series of buffers to remove the viral threats, then stored in isolated silos; that progressively re-test under tighter criteria, & eventually merge over time (hours to days to weeks to months to years). Static data, isolated, & very hard to corrupt. Intraday transactions are typically stored in buffers, until they back up to the master file. Nothing prevents more frequent back-up, & nothing says the backed up file has to immediately go to the master file. Store the intraday transactions in multiple servers & you have distributed security; change the backup frequency, & you change the security level. Most IT systems (telephone) take data strings, store by component, & reassemble via an algorithm. Nothing prevents storage of multiple versions of components over random servers, & then testing the copies against each other to verify veracity - prior to back up. Routine, automated, tick & bob - that computers are extremely well suited to. Hard to reliably corrupt. This is the simple 3G type stuff - & nothing that we do not know how to routinely do already; processing power is not a problem. SD

Some last comments, & we will leave at that. Agreed the current structure is processing intense, but it is not a big leap to materially & rapidly reduce it. Your local telephone exchange already does a version of this, routinely, digitally - & every day of the week. It would be a good intermediate process iteration, but it is not especially efficient. Its notable that the Canadian banking lobby has just recently begun to strongly push the consumer protection side of any financial transactions that may occur on Google - via a blockchain application. Not the kind of thing you would expect of confident bankers. SD

We think of blockchain in terms of currency, because Bitcoin was the first poster-child application. The technology is actually better suited to applications where cheap & reliable traceability is a dominant concern. The food processing, drug manufacturing, & provenance (diamonds, art, etc.) applications - that we are currently very far away from. As blockchain itself is easy to isolate; multiple, & segmented designer crypto currency is no big deal. The currency used to buy coffee, groceries, etc. is not the currency that drug dealers, weapons merchants, or states would use. It is also not the currency that would be used to settle day-to-day business to business transactions. Not because it couldn't be done, but because each application has different requirements. The currency application is very much in the central banking interest, & increases the effectiveness of monetary tools by orders of magnitude; but it would also be incredibly disruptive to banking as we currently practice it. Not an immediate threat, but it is coming. The first internet site as we commonly know it, was created in 1993 or thereabout; 28 years later, can you imagine anything where there is NOT an internet site to go to. We do not wish to hijack the thread; but merely point out that the advantage WEB had way back when - WAS WAY BACK WHEN. In investment parlance this thing has basis risk, & the risk comes with exponential growth. All it needs is for something like a BITGOLD, and a western central bank guarantee, to take off in an India or Africa - where a women's wealth is stored in the jewelry she is wearing, & saved for in little bits. SD

You might want to do some digging into Blockchains ... how they work, features, where they have been used. It is a game changer - right up there with how the internet and computers fundamentally changed the way we do business. The VISA moat is nowhere near what it used to be. This technology has the power to replace the clearing function of all banks at a fraction of the cost, & eliminate all notes, credit & debit cards overnight - with a more secure & better alternative. The distribution channel would be through a Google or Apple, & you would use your smartphone as your wallet. It is worth studying the often cited example of a bill replacement, & thinking along the lines of how many processed foods today have traceability from field to plate. We can do the same thing with a bill - from the source that issued it, through every transaction that bill has passed through - life to date; time in each hand, type of hand, size of transaction ... everything a central banker would love to have - & a bill that is totally FX neutral (no need to ever change from currency X to currency Y & incur the FX conversion costs & risks) http://en.wikipedia.org/wiki/Bitcoin#Block_chain http://en.wikipedia.org/wiki/Blockchain.info http://www.theguardian.com/technology/2015/may/13/nasdaq-bitcoin-blockchain Re disclosure, I am currently doing a research thesis on the currency replacement side of BlockChains. The BitCoin was a proto-type & a simple 2G version of what can be done; the 3G & developing 4G versions are truly game changing. SD

I am probably a very good example of the combined approach, and hold all 3 of the mentioned letters. When you have that combination you don't want to be the analyst, or even the PM - you want to be the CFO. You also don't want anything to do with public companies, & stay out of the limelight. At times ... those dark spaces are pretty crowded! SD

The place for this discussion is the ATF, and not this board. The ATF has the expertise, the experience, and as Fibrek was a Quebec company – the power to look at whatever they choose, to validate the facts. If they thought nothing was there, this probe would not still be alive 9 months later. The ATF exists, in large part, to resolve matters exactly like this – and we are happy to go with their decision. The argument that It was not us, it is the Fibrek board that is to blame - is not valid. Resolute bought the assets AND the liabilities of Fibrek. If the Fibrek board was indeed to blame, that was part of the liability Resolute purchased. All the ATF need do is review the board material, and the minutes to the various related board meetings. Minority squeeze outs are only permitted once minority ownership is below 10%. At the time of the vote, Mercer and all those opposed to the Resolute bid held more than 10%. Most do not dispute that FFH did go well out of its way to help minority shareholders, and that did earn them a lot of good will. Sadly, it would seem that once they signed the lock-up agreement and disclosed it, they did not distance themselves sufficiently from the rest of the process - and it is that, that is costing them dearly. This board flare-up is hard evidence that the reputational damage needs to be addressed. Obviously it is a sensitive issue for many, and better resolved behind the closed doors of the ATF. We would remind all concerned that this WAS a Quebec company, Quebec sons and daughters got run over, the ATF is a Quebec regulator, and that Quebec law is French based; meaning you are presumed guilty until proven innocent. These are proud folks, and they have every right to feel highly pissed. A little contrition could go a long way. We wish all parties a successful outcome, but gentlemen – take it behind closed doors, and get it fixed. SD

There is no denying the lock-up premium was beneficial, but when it was over - there was a 2nd HIGHER bid on the table, FFH was on both sides of the table, & they forced the firm into taking the related party LOWER bid. What one thought of the Mercer bid is really irrelevant; the fact is it existed, it was live, and it was the higher of the two bids. Because of the overt ability to influence, a higher standard of care exists of related parties. So much so, that External Auditors are required to make clients disclose (& validate the accuracy of) the nature of, activity, and names of any/all related parties the firm has dealt with over the preceding year. Sh1te happens, but related party abuse is not slap on the wrist stuff. Conrad Black WAS a related party abuser, but he is one end of the spectrum. It is very likely that in the heat of battle, FFH truly & unintentionally tripped the related party wire - & thereby represents the other end of the spectrum; but it is still related party abuse. When good people do nothing, they feed the negative perception. There is nothing to say that the other end of spectrum could not be perceived positively, it just takes the courage to have the discussion. The monkey is not going away. SD

We don't think we'll ever see a dime on this - but we're inclined to go with the ATF on this one. Big or small, the same rules apply to everyone in the sandbox. Agreed that FFH's involvement was beneficial to SFK/FBK shareholders, but you cannot be on both sides of a transaction - and then use that influence to force acceptance of the LOWER of two bids. THAT was the abuse, & it deprived ALL shareholders of the difference in value between the two bids. Make shareholders whole, evidence contrition, pay a modest fine for appearances sake, & this whole thing would very likely drop away - for good. It is not a lot of money, most would value their reputation more than the fine, & there is clear first mover advantage. But insist on being stubborn .... & you end up looking like Conrad Black and Hollinger. Rich men who forgot the company wasn't theirs, and couldn't see that what they did was abusive - even after it had been pointed out to them. SD

The fact that this thing keeps periodically reappearing means the fire is not out. Add to it that it is now 9 months later- & it may well also indicate that ground is being prepared ahead of some possible future action. Most folks acknowledge this thing WAS abusive; its just how much so - that is up for debate. They need to have a discussion, & agree to a neutral solution. There are many possibilities, but it is probably in their interests to initiate. SD

This is when you put on the long term hat, and DO NOT take the short-term advice. Even if you don't think you did anything wrong, when the perception is that you did - whatever you think is irrelevant. You win by demonstrating leadership, class, and going the extra distance. The benefits come back to you, over and over, in spades. The best public example is perhaps how Manulife’s Dominic D'Alessandro handled the scandal that arose from Manulife selling the mutual funds of a provider that ultimately turned out to be less than honest. Manulife had nominal financial exposure, but immediately announced that it would cover all of its clients to whom it had sold the funds. Took a lot of courage. They were not pushed, & took a lot of heat for it (changed the way the game is played), but it was the right thing to do, & protected their reputation. Ultimately it cost them nothing, but that goodwill …. went a long way to saving their ass later. SD

I did my CFA later, but spent time in the industry before doing the CFA. The CFA itself is just a toolbox, but you get most value out of it if you are NOT in the industry. The reality is that a industry CFA is primarily a sales person. In NA he/she is there to write market blurbs to support the team, accompany the team to lend credibility to the client visits & hospitality events, & to come up with on-the-spot market changers that impel clients to transact. Very little original share analysis involved. The CFA designation has also debased in great measure - as while everyone has the same skill set, we do not all live in the same place. You can routinely buy the CFA skillset in Asia at 50% of what it would otherwise cost in North America - and yes, the resultant report (in whatever language you want) will have grammatical errors; but it is nothing that an hour of local editing cannot fix. Somebody else does the analysis. An industry CFA is hired on an up or out basis. To create the space for the annual new entrants, you need bodies; 15% annual attrition over 5 years - means 44 survivors out of an original cohort of 100. Its a high stress business, participants age very rapidly, there is preference for youth, and a strong survival bias towards herding. The bulk of older folks do not make it past years 3-4. SD

Go by the textbook, & you cannot know where you are in a cycle until it is over. Look more critically- & you will notice that the metrics were calculated on trailing earnings because they are verifiable, & the article was written from an academic viewpoint. Cycles do exist, we are all aware of them, & most of us actually do have a pretty good idea of where we are in them - we just don't act on it. The problem is that we could be wrong (so do high, medium, low), & that we have little confidence in our number - because we cannot verify it anywhere else. An analyst cuts his/her employment risk, by staying within the herd consensus - even if he/she thinks the consensus may well be wrong. A PM has a similar problem, but more flexibility. While individuals do not have the restriction, most do not have the background or ability to do the projection either. Look at forecast forward earnings, adjust for the possibility that you may be over/under optimistic, & it becomes very obvious. Nobody knows the future, but we all take our best guess - from there its just our confidence in our own decisions. SD

A few things we have learned along the way .... Think less in terms of %, & more in terms of ships on the sea. If you have to hold XYZ for 2-3 years, most would want a 7 digit value when its done - net of 15% off the assumed selling price; work that back to todays $, & you get the size of the required investment. After that it is all about how you manage the risk, or whether you need to scale it back. Most of us will only be right 1/3 of the time, so to be reasonably sure of reaching the 7 digit value - we need 3-4 equal size & independent positions, made today, & each with about the same prospects. We then need to periodically rebalance our risk/return - as our position risks will evolve at different rates. You only need 1 ship to come in, but you need many ships out there - and every success you have will usually spawn 3-4 new investments. Your systematic approach is essentially akin to spreading a virus - & the more successful infections, the richer you get. The problem is that the virus also infects the host, producing stupid decisions; this thread is evidence that many on this board are aware of this. Successful casino players all systematically take $ off the table. There are various ways to do it, but ultimately the ship reinvestment goes into T-Bills - & not new equity (ie: new ships). Over time - total equity (ie: ship) investment fluctuates, but remains largely the same; at least one new ship reliably arrives every year, & the T-Bill investment continues to grow - steadily reducing the risk of the portfolio overall. The basic principles are ancient and have been practiced by many a trade merchant, all over the world, across the centuries. We simply adapt them to fit our specific application. SD

You may want to keep in mind that shale wells deplete very rapidly, and most need $45-$55 to be economic. A material portion of new NA production is simply replacing depletion on existing old wells; stop drilling, & we will all see just how big that depletion rate actually is. The world belongs to the o/g drillers & servicers - not the producers. Alberta crude is increasingly dirty oil, land-locked & without new pipelines it isn't going anywhere - re its environmental label. But refine it into gasoline, in Alberta, & the issue largely disappears; value add, jobs, cleaner exports, fewer environmental issues, etc. Naturally there will be strong resistance - but how far away can the 'peoples' oil refinery coy really be. Great future, but it is not going to look anything remotely like the past. The future never does. SD

We moved a chunk of our non $C funds into NBG - just before the extension was agreed to; a supposedly very high risk proposition. For us, not so much; as the USD were originally bought when the $C was well above parity. Currency matters. Every nation runs on its major banks; because if the people cant get their cash out of the ATM - you get instant riots, and new politicians. Hence the major banks of every nation are protected species - DSIB's, GSIB's, etc. Most would consider all the names mentioned, DSIB's. If there's an exit, it is fabulous business as almost every domestic banking transaction is going to pass through these gate-keepers. If there is no exit - its mostly the same process, but slower. Hold a gate-keeper & you have an unlimited long put on exit, and an unlimited long call on grinding recovery. No roll-over concerns, exceptionally anti-fragile, the only issue is the premium paid. For a large and rising number of the population it makes a lot of sense to exit. There are enough folks today to vote in a leftist party, but tomorrow it will be the majority and with a focus on attempting to direct the outcomes as much as possible. The tipping point has already been crossed. We wish them all the luck in the world. SD

Keep in mind that oil is an intra-government currency. In the short-run, marginal cost has very little to do with it. You buy my oil, I buy your weapons is a common petro $ recycle. You support my cause, I give you my oil, etc. Oil sands get developed because it is in a nations economic interest. The high cost limits the competition, ongoing technology & increased throughput lower the per barrel cost over time, & tax on the resultant economic activity exceeds the cost of temporarily subsidizing production at > market price. Same process applies to oil substitutes - shale, biofuel, solar, wind, etc. Cash pays bills, not revenue. So long as market price remains > cash lifting cost there is incentive to keep producing. The P&L loss destroys the BS & continues until creditors eventually foreclose on their debt covenants, & shut the firm. Degree of leverage trumps cash cost. QE is not limited to just cash, it can be done through commodities as well. An awful lot of people are benefiting from lower fuel prices, & many would argue that its economic benefit exceeds that of QE. SD

Came across a clever card that sums this up very nicely .... Some learn by reading, some learn by observation, and some just have to pee on the electric fence. No matter how much you read you have to road test your understanding of it. Preferably via someone else! Happy New Year SD