Cardboard

If you want interest deduction on a home loan in Canada you have to invest the proceeds from the loan into investments that can earn more than just capital gains: some dividends or interest. So that is investing the equity in your home via a loan. It is an option available to and used by few. Regarding the appetite for debt by individuals in the U.S., we have seen how it turned out and I expect that this will normalize to much less in the future. Both borrowers and lenders will be more careful going forward. I think that your are assuming too much sophistication by home market participants. The deduction in the U.S. is a nice incentive, but even if you remove it (not saying that they should), people would still buy homes in very similar amount. They just want it even if leasing could end up sometimes cheaper. Moreover, for a great majority of people, it is about the only thing of value that they will have upon retirement excluding pensions and 401K. It forces them to pay for something valuable while if renting they would blow the extra money on expenses and gadgets. Cardboard

I think as value investors that we should question why we are so convinced that Apple will eventually falter and the stock price collapse? A thought that seems to be shared by all investors actually since it trades at a discount to the market and a significant one when you consider its cash and growth. You have to admit that there is a massive amount of skepticism here which normally creates investment opportunities. I have not bought Apple yet and I kick myself real hard. I looked at it in 2010 in the $250 range, $330 range in 2011 and it looks like we are entering a new one around $560. Every time the P/E was around 12 and with a mouthwatering rapidly growing cash pile. Every time the worry was about the law of large numbers or Steve Jobs or competition. Instead, I bought garbage like Clearwire and Level 3 Communications! That is right, stocks that are supposed to be worth a fortune based on their asset values and future growth, but that never materializes. Apple on the other hand has delivered on all fronts and I have not seen any indication that it will change any time soon. The upside at the time may have looked larger in the other names, they seemed a lot cheaper, but looking at it now, it is not hard for me to see AAPL at $1,000 in 18 to 36 months. So much cash, such earnings power and growth. A 4 bagger from 2010 is a lot of upside! I am currently exploring a vertical spread that I will likely buy once I free up some cash. Actually, this is kind of stupid since I should free up cash now from these losers and buy it right away! Another one being discussed now on the board that I have owned and actually sold at a small profit is Dell. There you have a big business within the company that is in clear decline and they have not shown much growth at all in overall sales and keep acquiring companies left, right and center. Yes, it is statistically cheap especially when you substract the cash from its EV, but they keep spending a lot on acquisitions that I have no clue if they will ever be worthwhile. It's supposed to morph into some IBM, but when and is it a certainty? On the other thread, it was even discussed some growth numbers extending many years out. How can you be convinced about the growth in a Dell and express so much doubt about AAPL? I am not trying to beat on anyone here, but I realize that I make many mistakes which seems to be rooted in trying to find the cheapest stuff out there while paying a little more could get me into fantastic businesses creating real value for my portolio and really improving my batting average. Maybe that comparing technology stocks is not the best way to look at this issue, but it seems to apply at other sectors as well. It is like a disease from constantly looking at the list of 52 week lows and ultra low P/E stocks. Or because something has gone up it must come down and vice versa. Too quantitative and very little to none on the qualitative side. Cardboard

Judge Kapnick is the same one who is about to decide on the article 78 challenge to the MBIA transformation. She has shown some displeasure and impatience with how the banks lawyers wanted and presented their case. She was not too happy either when the N.Y. state senate talked about an inquiry on the transformation right during her trial. There was discussion that the banks pushed for that. And when I say banks, it is only two or Bank of America and Societe Generale while the others or 16 have already settled. So how do you think she is going to go about this case? While Mr. Moynihan seems to be a pretty good banking manager, I must admit to be scratching my head regarding legal affairs. We remain exposed to very significant risk by trying to save a few billions there and there. If it goes wrong enough, it could wipe out a big portion of tangible shareholders equity. There was some speculation that this was being done to spread payments over time, but the way most cases are now going in court, I see a significant uptrend in how much it is going to cost, not to mention the massive legal costs that must be incurred. So if legal reserves already in place are exceeded by a significant amount, expect the share price to drop significantly which would make an equity issue near impossible due to dilution. That is how bank stocks have reacted in the past 5 years whenever capital had to be raised. That is why I am concerned with BAC and believe that settling quickly some of these important cases which could be used as precedents for other ones needs to happen now. Cardboard

I don't know this company as well as you guys, but based on a market cap of $160 million it seems fairly priced relative to free cash flow. If it was consistently growing like Amazon, it could get a higher multiple, but sales and cash flow are quite erratic from year to year. So here is my question, how much of the cash could be removed from the business and not impact their growth and current business? I am asking since there is a large imbalance between current assets and current liabilities if you exclude cash and the line of credit. This reminds me a bit of Danier Leather which always kept a large cash balance to finance its Fall purchase of merchandise. They could have used instead a line of credit, but chose instead a safer method of using cash. How much can be extracted from there can certainly help the thesis around the company. Cardboard

The way it is going, I may have to consider ordering some. :-\ http://money.cnn.com/video/news/2012/05/24/n-doomsday-food-lasts-forever.cnnmoney/ Cardboard

I remember going to Italy just prior to the Euro when the Lira was worth about $0.80 canadian and at that time the CDN$ was worth $0.60 U.S. So the Lira was about $0.48 U.S. Nowadays, the Euro is worth $1.28 canadian and roughly $1.24 U.S. Germany also had a cheaper currency than it is now, but I do not recall the rate in Marks. I remember also going afterwards once the Euro was implemented and the adjustment was painful with many prices going up by close to 50% in Italy. Germany not so much, but still an increase. So, I don't know how it could have lasted so long especially at these very high rates vs the U.S. dollar. I certainly can't call Italians more productive than Americans and I would say the same for the Germans. All these countries have about 6 weeks of vacation for their workers and they do like their coffee break! 40 hours over there is a rough week. True, they have high tech and very specialized manufacturing, but I have not seen a Silicon Valley of innovation over there. What seems needed is massive devaluation. It seems to be happening, but on a very slow pace. They need to boost their exports especially in the PIIGS (exclude Ireland) to reduce their unemployment which will then solve a lot of their issues. Then the U.S. will need to devalue too... Just can't seem to see an end to this depression. It is not a depression, at least not yet, like in the 30's, but it smells awfully bad. Even the BRIC's are now slowing to a crawl and the U.S. unemployment report today was plain terrible. http://money.cnn.com/2012/06/01/news/economy/may-jobs-report/index.htm?iid=HP_LN Cardboard

Sanjeev, With all due respect, I don't understand. Early last Fall yourself and others were buying BAC at pretty much its current price and at one point when these macro discussions were going on you said that you didn't care and were buying anyway. While I understand your need to minimize volatility and possibly meet redemptions isn't 50% cash very heavy considering the amount of bargains out there and the fact that none of us here knows for sure how this will get solved? I own some stocks at 2 times, 6 times earnings and below net cash. How much cheaper should I ask before jumping in with both feet? What about something like SPY Sept puts to offset the panic that you seem to foresee and protect your portfolio? Personnally I am very afraid of the sovereign debt issue, but simply don't know what to do about it. Cardboard

http://blogs.wsj.com/deals/2012/05/08/facebook-roadshow-day-2-without-zuckerberg-video/?mod=yahoo_hs At least, Mark Benioff at SalesForce.com does whatever presentation is required from him to keep interest in his company and sky high valuations. Zuckerberg is a little arogant prick IMO. I don't know why anyone with his right mind would even consider buying into this thing. The guy controls the company and does not even bother attending some of the most important meetings with shareholders. This IPO may end up being the biggest disappointment in a long time. I sense that the big boys are not too pleased with Zuckerberg and recent numbers and that these shares will be off-loaded to unwary retail investors. Looks to me also that some of the momo stocks out there are being taken behind the woodshed or right on time for the IPO. Cardboard

http://www.bloomberg.com/news/2012-05-05/buffett-shuns-22-billion-deal-to-protect-stock-holdings.html The company has $34 billion in cash and $31 billion in fixed income securities. Both must be earnings fairly unattractive yields or I would assume a much lower rate than the considered acquisition. You also have the possibility of borrowing some funds for the acquisition at ultra low rates. While I understand his concept of a fortress balance sheet, I don't think that making this deal would have jeopardized at all his stated mantra of: "Our cheques will clear". Cardboard

Jeffmori7, You must be really happy with the two major parties in Quebec being socialist: Liberals and Separatists. Once the housing market crashes, employment goes to 10% and the students and all these union leaders and their members turn against guys like you that have saved any money and been responsible then maybe you will regret supporting dividers like Obama, the 99% and other communist rulers. Cardboard

"We had a much improved underwriting result on increased premiums, but our defensive investment position through our hedging strategy resulted in a small unrealized investment loss as the markets moved higher in the first quarter," said Prem Watsa, chairman and chief executive officer of Fairfax, "and we again finished the quarter with cash and marketable securities at the holding company of $1-billion. We continue to maintain our equity hedges, as we remain very concerned about the economic outlook over the next few years." How can these be called hedges? If the market moves higher, they lose? This sounds more like a net short position or we hope for the market to go down. Cardboard

The rights/warrants thing was to force ABH to come up with a stronger offer than the $1.30 IMO. Now that MERC is willing to pay $1.40 and with ABH stock down significantly and not showing any willingness to improve their offer why not dropping the rights plan? All shareholders except the locked up/ABH would tender and ABH would have to decide if it wants to be a minority shareholder holding FBK. Now that they have accepted the 40 some % of shares, they are just one big shareholder. I guess that is what will happen if the courts keep saying no to the dilutive rights maneuver. Then Steelhead will tender to MERC since they own all of these companies. IMO, they are just trying to extract as much as possible at the moment. Cardboard

"Someone that you have met for 5 minutes and you pop up and say "Hey I have 1.5 million." I'm sure your realize your mistake when she switches from $2 beer to $8 fruity drinks." Unless you like to brag about your money, you generally don't like disclosing what you have or what you make. Hence, it is just amazing to me how little imagination most people have regarding investing and how lucrative it can be. They see your nice car, nice home, you tell them what you do and they can't still figure out that you are essentially making professional athlete income. Sad to say, but the strippers are the ones that I have found realizing the quickest what is really going on. :o Cardboard

Honestly, I can't see one "investing" full time based on my own experience. At times, there is just absolutely nothing to do. Of course, you can keep on searching for better ideas to replace your already good ones, reading more, but it gets difficult after a while. You simply need to let time work for you. Maybe that it would not be so hard if I had just invested before. But, when you work 50 to 60 hour weeks and find a way to cram in there 20 to 30 investing for years, then the adjustment to investing alone is difficult. Plus, I am not sure how you can fit investing into 8 to 5 type of schedule. Sometimes you find an idea or more that you need to research with intensity, then you get back to doing nothing. You have earnings season with its conference calls, tax season, annual reports time and maybe spending 1 to 2 hours a day watching news, news related to your stocks, scaning a few ideas, but the rest or the schedule is very erratic. One big difficulty for me also has been to not watch too much quotations, especially after getting an IPhone. It does not make me sell or buy based on small movements, but it sure does irritate me if things go the wrong way. When I had a full time job, I would see the futures in the morning and my stock quotes at night. Sometimes I would check them at lunch. The ongoing pay also gave me piece of mind. You will likely find out that even at $1.5 million that there is little cash coming out with any regularity. A portfolio of stocks may yield you $20,000 a year in income and maybe less so you will need some recurring capital gains to feel well. If not, you will hate depleting your precious capital and it may make you nervous especially during downturns or after making a big purchase like a car or home. It sounds like a big sum, but it isn't available for spending when invested. Now, if you are managing others people money it will be different. You will need to do marketing or find new clients and there will be some administrative workload. On the other hand, if you have less ambition and just run a small partnership without pushing for new money, you may get into boredom again. Right now, I am looking for a new venture to get me away from just investing. Real estate may be a good fit since you have to go in the field (not just sit at your desk all day long), there is some physical work if you are inclined to and it is similar hunting work as investing. I have other ideas too, but the bottom line is that I need something else. Finding something part time that fits with the investing "schedule" is hard although. Oh! and the other big issue is social acceptance as some touched upon. My close friends have no problem with it, but try explaining what you are doing as a 25 year old investing full time to uncles, neighboors and others. To them investing is pretty much gambling or being a trader. I was in my early thirties so I can only imagine at 25! They won't tell you, but they will also think that you are doing nothing, maybe that you are selling drugs for a living... Cardboard

Among lawsuits, Moynihan needs to settle the MBIA case ASAP. The more this keeps going, the more dirt will be uncovered possibly opening a pandora box for other to sue them. The amount of money involved here is too small relative to BAC to keep going at this and the risk too great. 15 out of 18 banks have already settled the matter. http://www.reuters.com/article/2012/04/09/mbia-restructuring-idUSL2E8F4C3V20120409?feedType=RSS&feedName=rbssFinancialServicesAndRealEstateNews&rpc=43 The remaining banks quote a study from Lehman in their prosecution saying that they were insolvent at the time of the split and that this was hidden from regulators. The irony is that they would not have been insolvent if the banks in question had not fed them with fraudulent mortgages to insure in the first place. For disclosure, I own both BAC and MBIA with BAC being a bigger position. However, I firmly believe that I would benefit both ways by them closing this unhealthy proceeding. Cardboard

One problem that I have seen with bull spreads is of timing. For your example, if BAC goes to $15 much quicker than by the expiration date, the $12 call will lose most premium while the $15 call will gain a lot. The $12 call could be worth something like $3.50 while the $15 call would be worth around $1.75. So your gain becomes $1.75 on a $0.66 investment which is still much better than the common. However, you will still feel stuck to make a decision on when to exit because if the stock remains at $15, you would make more waiting for the expiration, but it could also pull back to $13 right at the expiration date. So there is a difference between the theoritical calculation and how it works in practice. Another issue is the size of the investment. Would you be comfortable to put a lot of your hard earned money in this investment or strategy? If not, then even if a 50% gain in BAC looks much smaller, it could turn out into a much bigger $ gain by plowing more money directly into BAC. Stress will also be much lower since there would be no timing issue. Cardboard

I don't know why they are not more agressive in settling some of their lawsuits. MBI seems like a good one, AIG another. It would certainly help me since I have positions in all three, but I think that lifting some of that uncertainty at BAC would do wonders. I actually like the idea that someone mentioned about BAC buying MBIA. It is cheap and they could make money while resolving that issue at the same time. However, I will likely make more money longer term by them staying independent. Cardboard

I don't think that they are breaching any law. They could actually have sold their shares to Mercer or Abitibi without any offer to minority shareholders and that would have been legal. They simply liked ABH better when both offers were on the table and we don't know how much MERC offered. Then I have a feeling that ABH got wind of MERC's interest and asked for a hard lock-up. Sorry to say but, IMO you guys have been greedy. The stock traded above $1.30 for a while and the offer from MERC never really matched $1.30. However, you guys kept dreaming about that PPA and some fantasy valuations (SD is king at that). If you want the PPA then you need to find a way for both MERC and ABH to go away. What is left for them without that PPA? A negative EBITDA business with pulp north of $900 a ton? The hard part to understand in that story is Oakmont and Pabrai. If they don't hold any ABH, then they are paying a disservice to their own investors by not getting out at the highest bid. Maybe that they were not aware of MERC's interest when they signed. Cardboard

http://blogs.wsj.com/deals/2012/02/23/sears-sells-paradise-and-some-other-locations/?mod=yahoo_hs They got more like $2 million per store for the regular ones. Cardboard

Good underwriting at Fairfax means a combined ratio of 95% and that only happens in good years. In Asia it has been different from the start so maybe there is something special there. So when I hear and read things like: "It's all about underwriting profitability with good reserving." It is true in some ways since they are trying to be under 100%, but they are certainly not trying to be best in class as others seem to. It can't be the sole focus. Or if that is truly the best that they can achieve then what is the explanation for the weakness? Is the business that different? So I have no problem with them writing business at close to 100%. However, I have a problem with the kind of statement that are being presented to investors who often don't spend enough time to understand and compare with what is going on elsewhere. Crip and I go back a long way in terms of following Fairfax and he has been a shareholder of Markel as well from which he can observe differences. So IMO some further clarification seems needed. Maybe that it will be hard to explain to non-insurance people, but I think it would be worth trying than just coming out with these statements that do ring hollow after a while. The other issue that I have is that past results are not indicative of future results and what has made Fairfax better than other insurers over time are investment results. While book value has grown at quite a rate when you look from the depth of their issues, it is not phenomenal since the start of 09 even after factoring in dividends that have been received and likely some residual gains from 08. And remember that since early March 09, that the stock market had a phenomenal run. So if you exclude their major bond gains and the CDS bonanza before 09 where do we stand? Even Bill Gross seems to have lost his touch with treasuries and rates. Can it happen to Prem and Co.? Assymetrical bets and wins are also rare. I have had some and I can tell you that it created for me a psychological issue of wanting to repeat again. So unless there is some huge gain coming due to deflation, the current structure and equity/business exposure combined with poor underwriting results will make it near impossible to achieve their stated goal of 15% growth in book value per share over the next few years. The other lever that could change that is being able to acquire businesses with stock. This is what has helped Buffett achieve such numbers, but his stock has been trading much higher than book for a very long time allowing him to use his "expensive" currency to then growth Berkshire per share book value. This is not an available tool to Fairfax currently and may not be for a long time. Where it is available now is to try to buy insurers trading below book while they are just above book. Tough to do IMO unless they are in deep trouble and I don't think that they want to repeat this experience. It is all about the price you pay and what they should be able to achieve. You should see a decent return going forward. I simply see better values elsewhere. Cardboard

I may get some flak for this, but this is simply not accurate: "Fairfax's combined ratios aren't high simply because of losses, but because they don't fire employees left, right and center when pricing is not good...so the the actual operating and administrative expenses is what piles onto the loss years. When business improves, you will see very good combined ratios." They never had good combined ratios, other than in Asia. One only has to compare with Chubb's U.S. division that does commercial insurance and Crum & Forster. I did not see them terminating much people at all during this soft market and I bet you that their combined ratio will only get better with the hard market, by the way they are already well below 100%. So on the underwriting side of the business, one has to admit that Fairfax is agressive. The primary goal is not to make an underwriting profit, but to have lots available for investment purposes. Anyway, after many years watching them and seeing results from many other in the industries, that is my conclusion. Regarding the hedges, it supports my thesis above. Since they generally do not write profitable insurance business on its own, then something has to protect the downside from investments. I guess that at the end of the day it is a balancing act. If you are too strict on the underwriting side, then you let go a lot of funds to invest. They have been pretty good at balancing that so far. However, there is a major problem IMO. If you look at how much money is invested in common stocks, associates, hedge funds, shorts and derivatives (or the stuff that should make big money), this amount is inferior to shareholders equity. And the income coming from cash and bonds is basically used to cover the shortfall from interest expense, corporate costs and underwriting losses. So the structure is not really ideal vs say a hedge fund or even Berkshire Hathaway. For example, if you look at Berkshire Q3, they had $160 billion in common equity and about $220 billion invested in common stocks and non-insurance assets. So unless bonds keep going up in value which IMO is a macro bet or not unlike what a Ray Dalio would do, then someday results could be disappointing because they won't have enough into productive assets vs shareholders equity. What they seem to be doing is keeping a lot in cash, bonds and derivatives to try to make another coup and then will switch over to more stocks which will solve the issue that I mentioned above. However, isn't some sort of market timing? Cardboard

This comment from Cote tells me that Fibrek is wide open to accept a superior offer from ABH: "If Abitibi wants the warrants to go away, all they have to do is make a superior offer to the Mercer offer." So the door is not closed and it sounds to me like MERC would be happy to simply walk away with a cool $8.5 million. And it is hard for me to see MERC entering a bidding war with the kind of results they just published and the fact that they are looking to sell the RBK business at an uncertain price. Also, forget about the PPA. Even if it occurs, I doubt that the two bidders will put much value on that considering recent pulp industry results. There is already too much risk for them on the table and FBK has telegraphed that recent results are not good. MERC $1.30 bid must consider the PPA in some ways. We also have a pretty good idea as to the maximum potential value of the offer or $1.45: "Despite the results of an independent formal valuation that puts the value of Fibrek shares between $1.25 and $1.45 per share, and in the face of a significantly superior offer at $1.30 per share from Mercer...". That range has been put forward in front of shareholders many times now. If the final bid is within that range, the Fibrek board will consider that they have done a tremendous job. They can increase that range if the PPA is received, but are bidders going to oblige? How superior to $1.30 to consider it superior remains the question? However, currently we have two offers on the table: $0.99 and $1.27. They keep talking about $1 and $1.30, but about half of the value of the offers are shitty stocks. Sorry for the expression, but MERC and ABH are not cash and in pretty bad industries. Your only advantage to stick around is to save on taxes in a tax free exchange for the shares, but is that worth it? Are ABH and MERC the best opportunities that you see currently in the stock market or is this tax advantage enough to make them the best? The stock is at $1.32 currently and I would imagine that if ABH comes out with a bid that truly delivers $1.35 that they will win the auction. Even $1.40 if you will. That leaves very little money left to grab and there is a risk that the stock falls back to $1.25 or a slight discount to the $1.27 offer if ABH pulls out. MERC may even go lower in that scenario since there will be a foreseen overhang of shares from Fairfax, Pabrai and Oakmont. IMO, the quick and easy money in that situation has been made. I think that there is more risk now and that it is likely better to put my money in undervalued opportunities that will deliver a much higher rate of return, although over the longer term. Cardboard

Your logic on FFH and ABH is mostly right since it is neutral to FFH one way or the other. However, MERC can't afford to pay more, at least not much more. Their share price is currently sinking like a rock on Nasdaq and their bid is now only worth $1.265. I have not looked at their financials in a while, but this used to be a very highly levered player. I would have prefered to receive a mostly cash bid from a very well financed company such as Domtar. Or even a mix of shares since they are cheap, have a fortress balance sheet and are in the right products: low cost and leader in uncoated free sheet and market pulp. Cascades would have been better too since they are a leader in recycled tissue. Cascades could have come up with an interesting transaction by retaining the RBK side of the business and selling to ABH, St-Felicien for pretty much the full cost of their acquisition. Finally SD, I think that you have to admit that you have been way too enthusiastic with all your estimates on Fibrek and before that SFK since the beginning of our discussion on this board. You did talk about $5 and even $10 a share values... I mean what is the purpose of that if there is no way for these targets to ever be achieved? Recently, you mentioned something around $3 while the bid out there was $1. You have made money by buying at much lower prices than now and that is very good for you, but by putting out there these numbers you discredit your otherwise very sound analysis. Cardboard

"+ the 20% of the incremental gain on ABH's improved offer. " Only if the improved offer by ABH or someone else is not approved by Fibrek: "The special warrants are also redeemable by Mercer or Fibrek in certain events at their subscription price, including in the event that Fibrek receives and supports a superior proposal." I am afraid that ABH may walk here with that thing. I think it is Fibrek's management that is being greedy with this condition. ABH is forced to make a superior offer, how superior is dependent on Fibrek's management judgement and bad blood looks like is there now. If they just try to match, they may garner enough votes, but then will have to pay an additional amount or the difference between the new bid and $1 for the 32 M additional shares. Not sure that this thing is legal by the way. I have not seen this done before, so I have a feeling that this may go to Court. I am also puzzled by the need for Fibrek to get more cash on hand. It may just be fake explanations to justify this poison pill or it may not be. If not, their financial condition is much weaker than we thought. Cardboard Cardboard

- $8.5 M breakup fee may really hurt ABH improve its bid much past $1.30. Had to be expected, but it just makes it tougher. - If this offer with Mercer does not go through or there is no higher bid, then Mercer will be holding 32 million shares bought at $1. Seems like a poison pill to me since if Fairfax and others reject Mercer then they will have to deal with one large shareholder. Smells to me. Spinning off power assets as some have suggested and selling the other assets could have created much more value. They have not been very creative here. It seems now that the only viable option is for ABH to match or just slightly exceed $1.30. They could argue that ABH is more liquid that MRI.U for Canadian investors and with the support of major shareholders should get enough votes to pass. Cardboard