Cardboard
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Posts posted by Cardboard
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"it seems to me like these days are gone, and the market is valued consistently higher. "
Well, I thought the exact same thing about net-net stocks reading The Intelligent Investor from Benjamin Graham in 1998. Then a multitude of them appeared in 2008 and 2009. So I would not rule out another leg down say 4-5 years out when earnings will be higher than today, but morale very low and giving you once again 1974 valuations.
Cardboard
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Well unfortunately, I am looking into this again. The issue is about business income vs capital gains or something found in IT-479R of the Canadian Revenue Agency. I am wondering if there is something similar in the U.S. as well:
"11. Some of the factors to be considered in ascertaining whether the taxpayer's course of conduct indicates the carrying on of a business are as follows:
(a) frequency of transactions - a history of extensive buying and selling of securities or of a quick turnover of properties,
(b) period of ownership - securities are usually owned only for a short period of time,
© knowledge of securities markets - the taxpayer has some knowledge of or experience in the securities markets,
(d) security transactions form a part of a taxpayer's ordinary business,
(e) time spent - a substantial part of the taxpayer's time is spent studying the securities markets and investigating potential purchases,
(f) financing - security purchases are financed primarily on margin or by some other form of debt,
(g) advertising - the taxpayer has advertised or otherwise made it known that he is willing to purchase securities, and
(h) in the case of shares, their nature - normally speculative in nature or of a non-dividend type.
12. Although none of the individual factors in 11 above may be sufficient to characterize the activities of a taxpayer as a business, the combination of a number of those factors may well be sufficient for that purpose. Further, subsection 248(1) defines the term "business" to include "an adventure or concern in the nature of trade" and the courts have held that "an adventure or concern in the nature of trade" can include an isolated transaction in shares where the "course of conduct" and "intention" clearly indicate it to be such."
Basically, I am currently unemployed or retired if you will. I have sold a small business in 2011 and now I only have investment income as source of income. Needless to say, and I believe it is the case for the majority out here, overtime the bulk of investment income has come in the form of capital gains. Currently, I would only be able to cover a portion of my annual living expenses with dividends and interest (negligible). It is rare that I find very undervalued stocks paying meaningful dividends and bonds other than t-bills generally never appear in my portfolio. So I do rely on my investment appreciating to live on and if they are not, I will use the capital.
If one reads carefully the IT bulletin from the CRA, I wonder how many on this board would qualify for capital gains treatment or considering that most would fit under C), D) and E) and many partially under B), F) and H).
Basically, this is how I interpret the rules: if you are booking each year large capital gains and it forms a good portion of your income, your stocks pay no or little dividend, you know a thing or two about stocks and buy them based on sound analysis, then you should not be eligible for capital gains treatment. If you manage an investment partnership as some do here, I really don't know how you can avoid business income treatment even for your own stake in the partnership.
The defense could sound like this: the holding period on average is relatively long (a year or more), security purchases are financed primarily with cash, there is no advertising about trading in securities.
Reading the bulletin, I don't even know if having a job or a business means much to the CRA once your investment income, again coming mainly from capital gains, starts to exceed your other sources of revenue. Or if your returns are well above average (15% and more a year) and derived by your activities.
So before I contact an expensive attorney specialized in taxes to study previous cases and figure out my options, I wonder if any of you has been involved in a tax audit with this issue having come up. Or, what have you done already to avoid the issue to arise in the future?
Of course, one could go on and ignore the issue until the CRA shows up, but then they could decide it is business income, charge you for unpaid taxes, assess penalties plus interest and who knows how many years back they could go. The total amount due could turn out to be enormous. The rule is so unclear it is sickening.
Many thanks in advance
Cardboard
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"I believe that if the ABH bid wasn't out there, the current stock price would be above $1.00."
Lucky if it would be $0.75 per share. They would have made that acquisition and diluted the heck of your shares. You would by now be questioning management's judgement and be afraid of constantly declining pulp prices, its effect on EBITDA and potential liquidity issues due to the portion in cash used to finance this acquisition. 2013 is a long way out waiting for potential earnings.
Fairfax saved you big bucks here. While I agree that $1 is too low, it is now up to management to figure out how to get more. If they spend all their time figuring this out instead of ways to do some vertical integration ::) you will likely be pleased with the outcome.
I may actually buy some as a form of risk arbitrage. $0.20 more or a 20% higher bid is $25 million. Only 10% more than the Enterprise Value. When you consider how much is spent between lawyers and bankers during these bids, it is not a huge additional sum for ABH to close the deal. To get more than that, then you need another player to show up and that is again up to management.
Cardboard
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Uccmal,
"The RRSPs are self directed and there are no options allowed in them.
If you are interested, you can buy calls, puts and sell covered calls and even do synthetic puts in your RRSP. You just have to file the needed paper work with your brokerage firm.
Cardboard
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Sorry SD, but I don't see anything illegal done by Fairfax. There has been no insider trading since no share have been traded yet and this is not the first time that a large shareholder tries to block management from doing something they don't like. Fairfax also knew that all this information would show up in the background information of management's circular. It was certainly reviewed by their lawyers and they are no begineers with such process.
I actually think that you guys should be thankful for this to have happened. Fibrek was looking at more shares being issued to finance an acquisition. Right at the bottom or in November! Where would be Fibrek share price had this moved ahead? Fairfax also refused a partial take-over by Abitibi at much higher price than $1. They could have left the game at a much better price with no opportunity for the small guy to get anything. IMO, the information disclosed in the circular shows that Fairfax is certainly not your enemy. Cote clearly did not want to part with any portion of Fibrek. This has now changed weather he likes it or not.
Cote seems to be a clear case of an entrenched manager wanting to keep his job and expanding the corporate empire. Instead of exploring a sale of the RBK business to a company that is already in the tissue business (someone like Cascades) or some joint venture, he is trying to build this from the ground up. Where is going to be the profitability in this with no scale? Competing with Kimberly Clark, P&G, Georgia Pacific and even the Irving family.
Now, maybe that the acquisition was a chip supplier for the NBSK business, but I doubt it since they explored a sawmills joint venture with Abitibi and cancelled the project and I recall a discussion about a year ago about expanding in the tissue business. The fact that they even considered getting into the sawmills business should raise big red flags to most of you. One of the best in the paper business or Domtar is trying to get rid of sawmills as much as they can to focus on the manufacturing of uncoated free sheets and pulp. Do you think that small Fibrek can out do the best?
Another red flag, what are the changes to Cote's employment agreement and for other top executives as discussed in the circular? Cote already has a 3 year severance payment upon change of control. This is as long as it gets.
The good news as I said before is that management now has their back on the wall. Shareholders now want at least $1 for their shares since this is the bid. It now creates a lot of pressure on management and the board to explore alternatives that they did not want to before: "Since the announcement of the Unsolicited Offer, your Board, together with Fibrek's Management, and its financial and legal advisors, have been working to evaluate a range of strategic alternatives that may enhance and crystallize value for Shareholders. Fibrek has initiated contact with a number of third parties who have expressed an interest in exploring a transaction with Fibrek to acquire either all or certain significant parts of Fibrek's business."
That is where the opportunity lies and one can only hope that management won't try to enter into bad deals just to retain their jobs or forcing Abitibi to drop its bid. The formal valuation should help drive some specific moves to get the price there: some deal or force Abitibi to raise its bid towards it.
Cardboard
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"If a Dissenting Offeree has elected to demand payment of the fair value of its Fibrek Shares, we may apply to a court having jurisdiction to hear the application to fix the fair value of the Fibrek Shares of that Dissenting Offeree. If we fail to apply to such court within 20 days after they made the payment or transferred the consideration to Fibrek, the Dissenting Offeree may then apply to the court within a further period of 20 days to have the court fix the fair value. If no such application is made by the Dissenting Offeree or by us within such periods, the Dissenting Offeree will be deemed to have elected to transfer its Fibrek Shares to us on the same terms on which we acquired Fibrek Shares from the Fibrek shareholders who accepted the Offer. Any judicial determination of the fair value of the Fibrek Shares could be more or less than the amount of the Offer Consideration per Fibrek Share paid pursuant to the Offer."
Tough to say what the judge will decide. It seems that the worst case is likely the offer price or below if he considers the bid to be above fair market value. That is where the stock traded before the offer. Time to judgement is also hard to assess. Also, if Abitibi does not apply to the court within 20 days, you are the one who will need to initiate the judicial process as I underlined above. I would imagine that this could be costly. However, if you don't do anything then you are guaranteed the offer price. Might be worth a shot if the bid is not improved.
Please keep us posted if you dissent as I would be interested to learn more about this process.
Cardboard
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"The reality is that we will over shoot again and start forgetting what happened in 2008/2009. We will start valuing finance companies on what they can earn again. Financial history says as much."
This is true, but the issue is timing. It may take 30 years to get there again. That is what history says too. And Moore_Capital, you should know that too well only looking at gold.
IMO, banks will look like regulated utilities for the next 10 to 15 years with decent ROE and low growth. Back in 06, they were earning such high return on book value that only a multiple of earnings made sense to value them. That is why no one looked at things like tangible book value. It was a warning side. If the ROE is now 10 to 12%, then trading above 1.5 times book will look silly. That ratio will go hand in hand with P/E, so people will keep looking at that ratio for a long time.
Cardboard
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Well, I have been looking at it for a long time. I would say that I thought more and more about it over the past 2 weeks. I got especially interested when it did hit $5 since it was the only one of the U.S. financials that I follow hitting a new low. The gap to intrinsic value compared to the others now just seemed too wide.
Honestly, I should have bought right around $5 since I could. I guess that seeing more positive U.S. data this week, a "favourable" settlement and the realization that buying such a franchise in a business that is likely to look similar in 20 years from now at such discount can't come too often. Buying at $5.40 vs $5 makes me feel a bit foolish, but if I am right and many here, this $0.40 will look trivial in not that long.
Cardboard
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I got compelled to buy in today!
Cardboard
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Racemize,
Make sure that you weigh in the risks as described by Uccmal very carefully. Then go in slowly to experiment for yourself if you still want to do it afterwards.
The second article that you highlighted finishes with a statement that Buffett is one of the largest put seller in the world or as some endorsement. Well, selling puts on world markets is a lot different than for individual companies and even now, looking at the European situation, who knows how that will end up. So it is tricky business even for the best.
Another strategy that I am exploring for put selling is when you are looking to sell a stock and it has not quite reached your price. If you subscribe to the logic that if you hold something that it almost means willing to buy it at this price. Then selling the stock and a slightly lower strike price put with short expiry may make sense. You were willing to hold the stock at that lower strike price, so why not now? You could sell a put with a 1 or 2 month duration, get the premium or boosting your effective selling price and the worst case is that you end up back with your original stock below the strike price. The risk is always that you got that extra small boost and the market drops sharply right after and other deals may now be much better than your stock. You can't buy these deals because your cash is now tied up in your original company.
There is just no free lunch. All these articles about options never highlight all the possibilities and consequences of these strategies.
Cardboard
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I agree with folks that you definitely need to keep the cash in reserve to buy the notional position. Things tend to evolve in ways that you can hardly forecast when you enter such position. Even some blue chips that may look like very low risk could do things such as large acquisitions, run into a scandal or you could be selling these puts just before a market meltdown.
Two problems with selling puts is that you need to follow the company as well as if you owned the stock outright and you will not participate in the full upside if you are right. Due to this, I am exploring the possibility of buying half my wanted position in stock and half via selling puts which eventually may result in my acquiring my full exposure.
The reasoning is that I tend to get excited when I discover an opportunity and rush to buy in my full position. More often than not, the stock drops another 10, 20% or more after getting in. Sometimes I also discover new things that I did not find in my original research or that I did not consider as important as I should have. So this strategy would allow me to stage my purchases and reduce my cost basis.
However, it is not bullet proof. If I am right and the market agrees with me quickly. I will regret not buying the full position. The put "income" will look like pocket change. Also, I am still committed to buy the other half, if the price drops, and if things evolve way worse than I expected, I am still screwed. I would have been better to just buy half, wait a few months to see if everything goes per plan and buy the second tranche at possibly way lower prices than the strike minus the premium or not at all.
Cardboard
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Valuecfa,
Well at least, the bond buyer will be left with something valuable other than toilet paper when it is all said and done. ::)
I have been looking at this for a long time, but I have not done it yet, nor found the instrument that I like.
What are you shorting exactly? Bass said that he is not using CDS for the Japanese situation. Have you read somewhere what he may be using?
Cardboard
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Well, that is exactly why I said that an adult needs to control the White House. Someone who won't care so much about what people want, but that will make the right calls to straight the ship for the long term. A dictator if you will, but one that will surrender his power 4 years afterwards.
No one wants to pay higher taxes. Tell Buffett that going forward, unrealized gains will be marked to market at the end of each year and that taxes will payable on them or as they are in Canada for insurance companies. Things are going well in Canada after all Mr. Buffett so why not reapplying? You will hear a bunch of: hmmm, well, hmmm and few coughs in there. Well, you need to do your part too Mr. Buffett, your real part. Not just a higher tax percentage on the income of a minuscule portion of your wealth. Then, we will be able to really compare your taxable income with your secretary.
Equally, no one wants their entitlement cut.
So who will go in there and change the retirement age? Deny social security to anyone above a certain income? Reform medicare?
These are things that certain European countries are now forced to contemplate because they were not proactive. They waited for the crisis to occur and now it may already be too late.
Cardboard
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http://money.cnn.com/2011/12/07/news/economy/obama_taxes/index.htm?iid=Lead
"But one thing is a sure bet: The president will be sounding the theme many times over in his re-election bid."
The U.S. has high unemployment and people with lower education are certainly the ones bearing the worst of it. And all that we hear from the President is that the rich should pay more. Make them pay more and move on! This issue certainly won't fix unemployment and the very large deficits. I am sure that the vast majority of millionaires, would prefer to pay higher taxes than being stuck with this stagnant economy forever.
Let's look at rough numbers. He is talking about 25% of millionaires. Well, that is about 1 million people. For the sake of it, let's just say that as a whole they would pay $100,000 more a year in income taxes. That is $100 billion in additional revenues. Maybe a step in the right direction to reduce the deficits, but still a tiny step. There is nothing in there that will help the economy or the poor.
That is why I am saying that he lacks imagination and worst, by keeping the issue solely on that, he has created things like OWS and likely bigger and much more maligned protests down the road if things don't get better.
I don't care if you are democrat, republican or other, but this is a joke. An adult needs to get control of this White House sooner or later and try to address the big issues in a meaningful way.
Cardboard
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LVLT???
Cardboard
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Cascades is an interesting stock at current price and pays a nice dividend. They have always managed to remain profitable/breakeven during down cycles due to lower waste paper costs. However, that variable has changed somewhat with much higher demand for waste paper during downturns due to China. On the other hand, capex for projects remain high and debt is also high above book.
I like their insiders ownership and the company is buying back shares. All kinds of things that you never saw at FBK.
There was someone on this board who was working for Cascades, but I can't recall who that is. Always nice to get a sense of how the people working there feel about the company.
Cardboard
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Well Sanjeev, my Bennett Environmental may soon be at net cash. It is very close anyway. And they are supposed to make a nice profit next year. People are just giving up since nothing has happened yet with the new board and CEO on the acquisition front or on other potential moves. That is the sense that I am getting from the Stockhouse board.
Uccmal does not like it however as explained on the thread, due to various reasons and he may be right. Others must also think alike looking at the stock movement.
I remain curious about yours. I screen a lot of stocks and follow quite a few and I see nothing fitting your description. A Canadian, liquid, microcap at net cash and breakeven is highly unusual. If you share someday, I will certainly analyze it in detail to see how I did not find it with my screening process and what is so special to keep it at such valuation.
Cardboard
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SharperDingaan,
"Per the Q3-2006 acquisition of the RBK mills, St Felicion made up roughly 74% of the capital assets at that time. If MV approximately equals BV, & the mills have been maintained, then St Felicion is worth around 274M +/- as at Sep-30-2011."
You can look at book value all day, but it means squat. The only value that is worth something is what a party dealing at arm's length is willing to pay for an asset. There are plenty of examples of companies selling their business for less than book value. ABH will simply book as cost whatever they are paying for FBK and the difference will simply disappear. Just an accounting entry. If no one else shows up with a higher bid or if management does not find a way to extract more money, that is all you are going to get.
Cardboard
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"We own about 4% of a micro-cap company that is completely liquid, is trading at less than plain cash on hand, and at a 35% discount to plain cash and cash receivables! "
That is net of any debt? Are they burning cash?
Usually, the ones I find are quite to totally illiquid. Sometimes I do find high tech or biotech microcaps that are liquid and below net cash, but they are burning it.
Sounds like an interesting case study in any case.
Regarding the equity market, it may not be that cheap overall, but you can't call it expensive either. The 100 year P/E average is around 15 times. To see the "death of equity" again, I think that we would need to see a massive number of hedge funds to fold. Retail investors are mostly gone from the game since quite a while and it was likely the case also in the mid 70's. When and if that will happen I don't know, but there are certainly pockets of the market that are really cheap now such as financials and some high tech. One could argue that there is money to be made by entering and exiting these air pockets or large dislocations as this "death of equity" may eventually come.
Cardboard
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As a suggestion, if you find the puts too expensive which as you know is due to high implied volatility, look at buying a put spread: buy a put with strike close to current price and sell a put with a lower strike. The volatility being high for both, the sale will reduce your cost. However, it will also limit your potential upside.
Cardboard
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Well, I am very glad that I sold this thing completely after the disappointing Q1. These guys always had an excuse at every quarter to miss on something: inventories not sold, wastepaper high prices, maintenance, etc.
However, right now I think that value may be better realized, especially at this price. The guys at the top now know that the game is over for them. They either need to create a lot of value or find another job. They could create value by doing what many have been calling for here for a long time or trying to split the company and then sell both or only one piece. This is not easy to achieve, but that is why people like this dear CEO is paid the big bucks, no?
Based on earlier research, I think that Domtar could be interested in them. I also think that Cascades could be interested in their recycled pulp making. Finally, Tembec is a big Eastern player in NBSK pulp and has been selling some non core assets recently. So there are options available. They needed a solid kick in the ass to finally look at some options.
Doc 75,
"Couldn't just have invested in CFX.un. No. That would've been far too simple & smart!"
I think that many here including myself share the same problem, we are "greedy" and we always search for the cheapest stock available. This leads us to the stocks with the biggest discounts, but where behind it lies a lot of hidden trouble which eventually destroys that value gap. I am starting to learn slowly that number 2 and 3 on the list, may be better than #1. Kind of like BAC vs C vs JPM vs WFC right now. They are in order of apparent cheapness, but which one is going to make you the most money or best return? With fewer headaches?
Cardboard
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Sun Life may cut its dividend, but then consider it a stupid act or for show. They pay out $600 million a year in cash dividends, the other $240 million is via dividend reinvestment plan, so it is not paid out in cash. For a company with a book value of over $14 billion and $216 billion in assets, saving $600 million a year is not going to do much for the company. The issue is a fundamental one for the company, can they honor their liabilities under the current investing environment? We are talking much more than $600 million if the model has failed.
Personally, I believe that there is an over-reaction out there. If things stabilize they will do just fine even if interest rates remain close to these levels. That is the question, where are we going? The same question should apply for BAC or any other financial stock.
Cardboard
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I used the term global depression, but really I have no idea what it would like exactly or where it would hit the worst.
Today, we have Europe entering a recession, it seems to me like China will have a hard time orchestrating a soft landing (has it ever worked?), the U.S. is improving very slowly and Japan is still in deflation. So we have the largest economies at best flat overall and this is in a time of peace where no big shock has occured yet. Things are kind of moving a bit and we already have OWS. What happens if unemployment creeps up and it is starving people now showing up on the streets? What happens if there is war with Iran? What happens if the terrorists resurface? What happens if a major earthquake destroys L.A.?
I was running a bit on callable margin and then I started to wonder about the impact of such catastrophes. Even if I had modest leverage, there was a chance of wipeout. Then you combine this with what Oddballstocks as mentioned:
"Cool post, if I can boil down the essence, you're saying invest with a margin of safety, and I mean a real margin of safety. To me this is investing in companies with slugs of cash that have been proven to survive past recessions. A margin of safety isn't estimating that a DCF values the stock at $80 and it's trading at $50. A margin of safety is that the company can take a 35% hit in sales and still operate cash flow positive, or they have enough of a war chest to last a few years of down earnings. Another margin of safety is a bonified moat."
I realized that seeking the highest potential returns likely lead me to the highest potential risks in my portfolio. Howard Marks explains it well in The Most Important Thing with his modified chart of risk vs return.
So I think that asset quality is simply becoming more important to me. Accepting 20% a year may now be acceptable vs reaching for 30% and the famous "guaranteed" 50% by Buffett. I realize that these are high objectives, but I always thought that to achieve a certain result you had to aim for more.
So this whole discussion may be more about asset allocation and risk adjusted returns. Asking myself why guys like Buffett, Klarman and others go into distressed bonds while at the same time I am finding much better opportunities in stock? How is my portfolio structured to deliver risk adjusted returns? Is it that I have just been lucky in the past?
I could still invest a major chunk of my assets into cyclicals, turnarounds and levered asset plays if I had that perfect hedge to protect them against catastrophe, but I have not found it. So what are the options?
Cardboard
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I think that Microsoft will take care of a good chunk of its cash pile in short order. Apparently, bids have been requested for next week for Yahoo by its advisors and they apparently signed an NDA with Yahoo which they originally did not want to. In any case, Yahoo has to get going since Dan Loeb will likely offer his own slate of directors and the deadline is January 7.
When I look at this, I would certainly prefer MSFT buying back its shares than something like Yahoo. Even a special dividend factoring in the tax implications remains a better option. Of course Yahoo, may turn out like a good deal, but the risks of: execution, monetizing or using patents and what to do with Yahoo Japan and the stake in Alibaba are very large IMO.
Cardboard
Taxation dilemma
in General Discussion
Posted
Thanks guys for the responses, that is encouraging! You bring up good points.
Not being a lawyer, I simply hate this type of language that the CRA is using. The whole bulletin is a mess. Even short sales of Canadian securities can be counted as capital gains if you file the T123 election. And if you read further, then the election is more or less meaningless since it is kind of applicable by default. Same for stock options (both buying and writing) that can be treated as capital gains if you are consistent from year to year. ???
The problem is that this is the law and you have to follow it. However, you just don't know what to follow! That is why I would still be curious to find out about someone who went through this ordeal or a Court case of Canada vs some individual.
It is true that they have to prove it, but I think that it should be pretty easy. By simply having the Court demanding you to submit your PC and IP address, they could find out how much time you spent on various sites and see Excel, Word files and other documents that you have downloaded. CRA agents could also ask a few of your neighboors and friends to find out what you are doing during the day. Well, maybe that I have watched too many episodes of 24!
Anyhow, this whole thing reminds me that I should stay way from stressful things such as stock options and margin debt and to stick with plain vanilla fully paid for value stocks. Also, that I should find another venture since you truly can't spend all day looking over your stocks and new ones without going nuts. Most of the time, there is simply not much to do. You have to let things work themselves out and by simply doing that, you probably meet the spirit of the law.
Cardboard