Cardboard
-
Posts
3,622 -
Joined
-
Last visited
Content Type
Profiles
Forums
Events
Posts posted by Cardboard
-
-
The "value" investors living in a vacuum after having been through 2008 and a crash that only ended 16 months ago make me laugh. To them, macro means nothing, countries always recover, etc. Where is Rome today? The British Empire? And more recently Japan?
Show me your valuations and then we will submit them to a little stress test called a depression. Are you still so sure that the economy means nothing? Why is it that every investing text book data magically starts post World War II?
If you continue doing stupid things for long enough, eventually you get burned. Isn't the lesson from the credit crisis? How long did it take for Watsa, Paulson and Bass to be proven right?
Cardboard
-
While I agree for example with the concerns presented by Misterstockwell, I am confused at this point.
I would think that at every economic depth that people could not imagine a way out: early 80's, in the 30's. Even after the 2001 recession, I had a hard time seeing better days ahead.
On the other hand, there was no "special" program on CNBC at 6 pm on March 9, 2009 to announce the end of the bear market while we had one in early July following a large up day. I see a lot of pumping these days whenever there is a company beating its estimates.
It is also true that valuations on some companies are quite attractive, but so were they in 2008 just before the earnings vanished with the recession. I only have to look at the ECRI numbers every Friday which are now pointing to a recession to question what I am looking at.
I am also confused by Sanjeev. Unless I am mistaken Sanjeev, you sounded anyway quite bearish earlier this year and late last year at about the same level for the S&P. What has changed?
Cardboard
-
Just found that this morning:
"Canfor Pulp and West Fraser Timber announced a US$30/tonne price decrease for August from US$1,020/tonne to US$990/tonne. From the lunatic fringe, Ilim Pulp announced a US$150/tonne price decrease but it appears the rest of the
industry will not follow."
I would expect market valuations for pulp companies to remain depressed as analysts keep expecting the end of the cycle. Is it valid thinking? No one knows for sure, but you can rest assured that they won't pay until they feel more comfortable.
SD,
"Management is incentivised @ 3.50/share, or roughly 2.42 under todays larger share base."
These $3.50 and $5 options issued to management during the conversion are a joke. What is likely to happen is exactly what is happening with almost every corporation where the stock goes down a lot: they will issue themselves a ton of options at close to the bottom price. Expect to see options issued soon at $1 or less based on "management successful and extra effort to orchestrate the refinancing." Typically, the "incentives" are not really hard to achieve. I hope that I am wrong, but I have seen it too many times before.
Cardboard
-
"The NBSK pulp list price for July is unchanged from June at US$1,020 per tonne for North America. Although the global softwood supply/demand balance still favours producers, downward pressure on pricing is currently being exhibited in the market in China. A reduction in market pulp consumption from Asia combined with a typical seasonal slowdown during the summer months, may exert continued market pressure to reduce NBSK pulp list prices over the
next three to six months."
Seems like they are confirming many of the fears from the article that I shared from Paperage.com. Current profitability is fantastic, but what is it going to be in 3 to 6 months?
Have you ever seen producers discipline in any commodity? And many are now armed with cash and stronger balance sheets.
Cardboard
-
I think that there would be a gap of about $15 million or missing to pay off the convertible ($51.749 M) and keep nothing on the revolving facility by year end using your assumption of $15 M generated per quarter. We would also carry $0 cash, but yes could dip in the revolving to satisfy temporary cash needs. The key to get there is EBITDA and pulp prices.
Unfortunately, I am not sure that time is on our side:
http://www.paperage.com/2010news/07_13_2010pulp_db.html
I really hope that these "favored" customers to whom we have given big discounts vs spot prices over the past 6-9 months, will return the favor by accepting higher prices than spot for a while if we have a sharp decline. Not sure how the contracts are structured, but logically we should see something better than spot if prices go down sharply. Like a long term lease vs spot. A sharp decline in SOP cost could also help the profitability of the RBK mills.
That is why I have stretched so much the importance of generating more EBITDA per $ of sale than we have so far. The power contract with Hydro is in that direction and excellent. We need a few more items. Financial engineering can get us only so far.
Cardboard
-
"Better to bet on those with weaker regulation."
Which ones do you have in mind?
Another thing that I am considering are credit default swaps on Canada bonds. CDS on the Canadian banks could be just as good. We are being told recently that Canada can do no wrong and that our budget/debt looks great relative to others. What happens if China really slows down and that commodity prices plunge? It is not like our workers productivity gap has really shrunk in recent years. And if we have a major decline in housing and that CHMC is stuck holding all this bad debt, isn't the same as taking over Fannie and Freddie and doing quantitative easing at the same time?
IMO, we are doing well because of commodities, housing and low cost of debt which is equivalent to the U.S. doing well during the Clinton years because the stock market and economy was booming along with low interest rates leading to a windfall of tax revenues and low cost to service the debt.
I admit it is a very contrarian idea. However, this insurance is probably at the lowest cost possible at the moment.
Cardboard
-
SD,
Fairfax exercised all their basic subscription rights which gave them 7,635,495 additional shares. Then backstopped for an additional 8,549,506 shares not taken by other FBK holders under their basic subscription privilege minus for those who asked for oversubscription privileges. Fairfax press release below is pretty clear:
http://www.fairfax.ca/Assets/Downloads/Press/fpr2010-07-16.pdf
Cardboard
-
"...bearing interest at a rate of 8.25% per year"
It is a little higher than what I hoped for, but not bad vs company size, cyclicality. Fairfax is also taking on more than twice as many shares as they would have had without the backstop.
What is truly amazing in this market is the resilience of the share price of CFX.UN. This one refuses to go down even in this market while every other pulp producer: FBK, TMB, UFS and MERC are heading down.
What is so special about CFX.UN? It is a low cost producer, but I would say that the current price reflects that. It pays a large dividend, but are investors not worried that its earnings may decline like for the other ones and that it may get cut if pulp prices decline? That thing was at $2 not that long ago.
Cardboard
-
Ubuy2wron,
I don't know the short interest on this one, but my broker is unable to locate any available share for lending at the moment. Have you been able to find some?
Another short idea that I am looking at in Canada are some of the retail REIT's. High leverage, distributing more than generated funds, running out of opportunities to expand in Canada, occupancy as good as it gets, constantly dropping the cap rate that they are accepting on new deals and relying on a very accommodative debt market. RioCan fits the mold. Let me know what you think.
I have been contemplating this Canadian decline in real estate for a few years now. This reminds me so much of no nothing investors coming to me in 1999 and early 2000 telling me that this and that IPO was great, that Nortel was awesome and that I was stupid not to be able to make money. I hear the same today when I question people about the value of a home, condo or cottage that they just bought. Leaving emotions aside, I still think that they are wrong.
This time around, I would like to turn knowledge into a worthwhile return. To do a Kyle Bass type of move.
Cardboard
-
Ubuy2wron,
I have taken a look at Genworth MI Canada as a short idea and still considering.
What is interesting is that they have insured 30% of mortgages in Canada with the rest mostly done by CHMC. That is a 30% share of all Canadian subprime if you will and we know that they are competing with a government backed entity to get these premiums. We also know that they are a spinoff and still 57.5% owned by Genworth Financial which has had issues of its own. It is hard for me to imagine that a slowdown in Canadian residential real estate won't reduce mortgage appetite (underwriting activities) and that it won't cause some of the worst mortgages to turn bad.
One thing I am unclear about is how long they could massage earnings by releasing their reserves: turning unearned premiums into earned premiums. They say that they have actually increased these releases in recent months because they have not encountered much adverse insured mortgages in their portfolio. People still catch on at some point, but it could take time especially when a company keeps paying a fat dividend.
An other issue as a short is that Genworth was debt free. This meant that without a levered structure that you would need a big slow down in their underwriting activities or a big hole in their reserves to make it go down massively. When I looked, it was also trading around book value.
I think the good news is that they were looking at a plan to return something like $350 million to shareholders. Well, they just did!
http://www.stockwatch.com/newsit/newsit_newsit.aspx?bid=Z-C%3aMIC-1740679&symbol=MIC®ion=C
This Dutch auction will probably be financed with their first debt or a $275 million debenture issued in late June. So, it will do two things: leverage the company a bit and increase the share price to make it trade at least above book. Good news if you are looking to initiate a short sale. It is also interesting since they had 2 other choices to return money quickly to shareholders: special dividend or accelerated share buy-back. For Genworth Financial, the option selected is the most advantageous since it will likely be more tax effective, same quantity of cash returning to them and they get to participate at a nice price vs the IPO at $18 and change.
Looking at PMI in the U.S., they did not have a lot of leverage either, but the reserves were so out of whack that the stock completely collapsed since 2006. On the surface, there are some similarities, but it is tough to analyze since they are black boxes. Also, even if the Canadian housing market does not go down a lot, it is hard for me to see it getting much better. There is not much growth available to them, there are new tougher mortgage rules in place and considering that investors were not willing to pay much more than book for this company tells me that the upside is quite limited. Either they are afraid too or they see no growth.
Cardboard
-
Same here. Selling into this rally seems smart IMO. For perspective, BP would be trading around $52 if it had sold off in the same proportion as other large integrateds since April.
So the current gap in the share price vs other majors due to the spill is $13 or $40 billion in market cap. How much of that will end up "real" liability? Who knows? But, it sure does not look like a huge buffer as it did when the stock was in the high 20's.
Cardboard
-
The U.S. has been successful because of innovation and establishing the rule of law. If we get to a point where police officers don't even provide a basic sense of safety to citizens what is going to happen? These guys are threatening, but I think it is more than that since eventually you get down to a lower limit in workforce where you really don't have time to do the job anymore.
I used to think that ardent supporters of the right to bear weapons and stockpiling food and ammo were nuts. Not anymore.
Cardboard
-
"I never knock management for not owning shares."
Myth, I think that you should. As Peter Lynch said in different words: there are many reasons why insiders are selling, but only one when they are buying. I would also like to add that there is a vast difference between organizations with an owner mentality vs those that don't. People act very differently when their own money is on the line and surprisingly it works as well for average individuals in very large companies.
An example close to us, look back at ATSG. Was it dire at some point or what? A big difference that I see between ATSG and FBK is that Joe Hete owned a ton of shares and kept on buying. And he never diluted. Never! Especially not when he saw the company emerging from its troubles. Issuing shares for him was the last thing to do, an act of desperation. He would fight and find creative solutions before doing that. The result is an upside run from the bottom at ATSG that has been nothing short of amazing.
Before the offering, I was able to imagine $5 as a potential target for FBK. Post offering, I think that it would be wildly optimistic since it represents $200 million more in market cap ($650 million vs $450 million). The upside from here still looks attractive, but it competes with KSP, SSW and possibly other stocks that you are looking at.
Cardboard
-
The ECRI on Friday showed a decline of 8.3%. We are now at a level that has always resulted in a recession over the past 40 years. I have also seen a chart of electric power usage in the U.S. and this is not showing growth either.
Maybe it is just a pause following the stimulus or boost and now the private sector will take it from here? One thing is for sure, I want to remain hedged at this point.
I also keep on thinking that no matter what they do that debt has to be repaid by someone one way or another. There is no magical solution. We saw the first phase which was to shift debt from the private to the public sector. In the second phase, there are more options, but none makes the debt disappear. If you inflate, holders of the debt lose as well as the citizens. If you default, holders of the debt lose as well as the citizens again. The pain can be spread over time or over more people, but it seems to me that the overall "pain" of debt repayment remains.
Cardboard
-
"Tax-exempt entities and foreign persons face unique tax issues from owning our common units that may result in adverse tax consequences to them.
Investment in common units by tax-exempt entities, such as individual retirement accounts (known as IRAs) and other retirement plans, and non-U.S. persons, raises issues unique to them. For example, virtually all of our income allocated to organizations exempt from federal income tax, including IRAs and other retirement plans, will be unrelated business taxable income and will be taxable to them. Distributions to non-U.S. persons will be reduced by withholding taxes at the highest applicable effective tax rate, and non-U.S. persons will be required to file United States federal income tax returns and pay tax on their share of our taxable income. If you are a tax-exempt entity or a foreign person, you should consult your tax advisor before investing in our common units."
Sounds like a good opportunity Myth, but I wanted to point out to non-U.S. investors the kind of taxation issues that these Limited Partnerships represent. It also has restrictions for U.S. holders.
Cardboard
-
There is something wrong with the Canadian market. I know a lot of people who work in the construction industry (residential and commercial) and they tell me that things are slow this year. I also heard from one that renovation work was cut in half this year.
So if demand is slacking off on the construction side, why is it that prices keep on climbing like crazy? I would think that if prices kept on going up due to high demand that building permits would follow.
"The value of building permits for single-family dwellings decreased 6.0% in April to $2.6 billion, a result of declines in Quebec, Ontario and Newfoundland and Labrador. Following a strong gain in March, municipalities issued $1.3 billion in building permits for multi-family dwellings in April, down 11.7% from a month earlier. British Columbia was by far the province with the largest decrease in the
value of multi-family permits, followed by Ontario and Quebec. Municipalities approved the construction of 18,089 new dwellings in April, down 7.3% from March. The decrease was due to an 8.2% decline in the number of multi-family dwellings to 9,237 and a 6.4% decline in the number of single-family dwellings to 8,852."
Looks like a glut of supply to me with people still keeping the ask price really high. I see most of the signs of a bubble.
I am also quite fed up to see these articles saying that Canadian banks are so great. They operate within an oligopoly allowing them to charge more than they should and they never suffered from declining housing values. If the latter changes, they won't look as pretty. Their loss reserve ratios are very low.
If you have short ideas on the Canadian side I am all hears. Discretionary retailers, banks and these "specialized" mortgage lenders like Home Capital may be a good place to start hunting.
Cardboard
-
FYI, you can still receive and exercise FBK rights in the U.S. if you can demonstrate that you are an "accredited investor". It is based on your family income and/or liquid assets.
Cardboard
-
"Trading in the shares of Citigroup, one of the most heavily traded stocks in the United States, was paused for five minutes at 1:03 p.m. after an over-the-counter trade of about 8,821 shares was posted at a price of $3.3174, or 12.7 percent lower than the $3.80 price of the previous trade."
Unless you are refering to the flash crash, I have to disagree with the impossibility of getting the job done. This was a single trade for a sum of $29,263 or a tiny amount of shares and value for a company like Citigroup. Every trade is recorded and all they have to do is to find out who was the bid and ask on this one. What was their intention? How did they succeed executing such out of whack trade?
Cardboard
-
http://www.nytimes.com/2010/06/30/business/30circuit.html?partner=yahoofinance
It may be hard to pin point the exact cause of the flash crash with so many trades, but why is it so difficult with Washington Post, Citigroup and some others? Who is able to enter in the "system" and get executed such stupid trades on such large companies?
This is a crazy phenomenon which I don't recall seeing before on large caps. The only other time that I have seen such crazy trades was the day following the short ban or sometimes in after-hours trading.
It is completely discrediting the American stock market, creating fear, mistrust and dislocation. They need to find the cause and severely punished whoever is responsible.
Cardboard
-
You guys should go to CNBC.com and listen to Gov. Chris Christie of New Jersey who was on Squawk Box just a few minutes ago.
I did not know that there still was any politician left with courage and common sense. He will be hated by public servants and unions, but I guarantee you that within a few years that New Jersey will be able to repay its debts, will have one of the lowest cost of debt in the U.S. and will be growing fast.
If you look at all the problems that the U.S. is facing now, I could probably identify 90% as being rooted in bad policy decisions. The biggest of all is Fannie and Freddie who in later years were setup to artificially lower the cost of home ownership. A Mac mension for all! Eventually, what could be reset to the real level by the market was and what has not will be borne by the American tax payer. Subsidy on a grand scale massively used by both Clinton and Bush to push the economy and garner votes.
Government spending could work if it was allocated properly with arm's length type transaction and a market type rate of return. The incentives are simply not built as such.
Cardboard
-
By the time rights finally show up in our accounts, they may have no value and the stock could be trading below $1.01. It is unbelievable. Even Mercer Int'l (MERC) which is by the way on Forbes top 50 list of companies at risk has not even seen such hammering.
So who wants to subscribe now and even over-subscribe to this rights offering?
Fairfax will then have a chance to acquire a massive block or 39.6 million shares at a low price of $1.01 since no one with their right mind will subscribe if the stock is trading below the rights subscription price on July 15. Cheaper to buy on the market! However for Fairfax, that is something they cannot do without moving the price up with such low volume. It is also the case for big holders, but who is that? Who will be interested to plow more money into this company with a continually declining stock price, with no liquidity and no say on where they are going?
This will give them 43.85% of all shares outstanding and effective control of Fibrek. They will own 57 million shares at an average cost of around $120 million.
They could not have predicted such outcome with any certainty, but I would bet that someone at Fairfax had likely compiled a list of previous rights offerings on small cyclical and resource companies and figured the odds of something like that happening in this environment with this type of pricing. They were part of the negotiation after all. They had to handicap the odds of them having to put up $40 million more into this venture, the likely dilution, consequences of taking control (equity accounting, consolidation), can't get out by selling stake on the market, the end game and resulting return.
Cardboard
-
Uccmal,
I am still holding because it is cheap AND pulp is still high. Day by day FBK is getting stronger, but we need a lot of days! My main concern right now is macro and its impact on pulp prices in coming months/quarters. If fundamentals deteriorate and pulp goes back down then you can be pretty sure that we will have a round trip with this one. You have been through it with them before, so you must be sharing similar concerns, no?
What I have tried to do to hedge against this macro risk is to short bad/overvalued companies in order to retain companies in my portfolio that have high upside if macro remains flat to better. Unfortunately, it is not a perfect hedge since they are not even in the same industry.
Cardboard
-
All players involved in pulp have come down since their April/May peak: TMB -31%, MRI -32%, UFS -31%, CFX -9%, FBK -43% (-41% adjusted for rights).
It seems that the only reason why FBK has declined more than the average is the dilutive effect of issuing more shares. While CFX has declined less because of dividend hungry investors who always stick around until it gets slashed.
The way I interpret this is that investors have applied a hair cut to the entire industry for the risk that pulp prices decline due to a weakening economy.
If I am correct, then the fact of the rights being out there has no to little impact on the share price currently. The cash will come into the company one way or another with Fairfax backstopping and the number of shares is now known. So, I would not expect any kind of pop post July 15 due to that alone.
What has not changed is that we are still undervalued relative to the industry, but we are a high cost producer mainly due to our RBK production. Conversely, we are also likely overvalued if we are to see a repeat of 2008. Bankruptcy may be off the table with the rights and with some cash on hand, but how much is worth a company producing losses?
IMO, there are two ways to make money with this company:
1- Pulp prices remain high for 1 to 2 more years and we accumulate enough cash to turn essentially debt free. It is a case of Enterprise Value shifting from the debt holders hands to shareholders. You also see earnings improvement with less interest charges over time.
2- Assets are sold giving us more cash upfront than they can generate in the near to medium term. Unfortunately, options are very limited for this company. There are 3 plants. You can sell 1, 2 or all. That is it! Considering that they are all higher cost it is not like you have buyers salivating at the door. Especially when players are worried like investors that we could see a 2008 repeat.
Cardboard
-
"PIX remained at us$1012.09 in the U.S. and rose to us$975.70 in Europe for NBSK."
I am questioning myself constantly as to why I am still holding this position? I am wondering if I am not playing the greater fool game considering the slowdown that seems more and more real with every piece of data that gets released.
Of course the price looks cheap and the upside looks high, but that is assuming pretty high pulp prices. What are you guys assuming as an on-going price for pulp, say the average for the next 3 years?
Unless we can get rid of this "hot potato" to an acquirer who does not mind buying a high cost producer over the next few months (another greater fool?), I think that we will need to figure out the answer to this question.
Cardboard
Disconnect Between Corporate Earnings & Market Sentiment
in General Discussion
Posted
http://seekingalpha.com/article/215792-foreclosures-should-continue-to-pressure-housing-as-modifications-grind-to-a-halt?source=yahoo
That chart on ARM resets was presented a while ago by Whitney Tilson. This is not opinion or a fancy interpretation, it is a fact. As the next few months arrive, there will be more and more mortgages reset to a higher interest rate. It simply means less money available to consumers. Less money to buy gadgets and restaurant meals.
Stuff like that has to impact the economy and your companies in some real way at some point. It is macro, but I guess smart macro to consider.
Cardboard