Cardboard

I was looking for something else when I stumbled across this bizarre phenomenon. Basically, put options on the VIX or the CBOE volatility index trade at a negative premium. For example, if you look at the January 22.50 strike price puts, they trade at $2.60 while the index is currently at 18.42. So if the index stays flat until next Friday, you will make $1.48 by buying these puts. I repeat, you are buying, you are not writing these puts or creating a liability! If you go to further dated in the money put options the gap gets even bigger. What is the deal here? I know that the majority out there is fearful and likely expecting a return of volatility after having experienced a VIX in the 70's and 80's during the crisis, but this is out of whack. Also, the VIX was trading between 10 and 15 from 1992 to 1996 and from 2003 to 2007. Cardboard

I own some Seaspan and I am likely going to take some profits with this new fiscal year to reinvest in more undervalued companies. IMO, the upside is limited with the $200 million in preferreds due to their convertibility at $15, the need to issue shares to maintain the debt to equity ratio with receipt of new ships and the state of the economy looking due for a slow recovery. Regarding capital allocation, it seems ok to me. Cutting the dividend to $0 would have helped more paying for the new ships, but they would have lost all income oriented investors. You have to pay some attention to who owns your company. So with equity capital raising activities coming, it does not seem like a bad idea to support your share price somehow. Cardboard

IMO, this issue has one point in common with the housing bubble. If you remember, home prices started to come down in 2006, not in 2008. Then came the two Bear Stearns hedge funds that collapsed in the Summer of 2007. It took over a year after this huge warning sign until the market really unravelled. So I think that this overhang of U.S. bonds has the potential to become a huge problem down the road. Most observers dismiss its impact or just like it was for the deflating U.S. housing bubble. The issue for me has been selecting the right instrument. 1- TBT is a 2X short ETF 20 year U.S. treasury index. Recent history has shown that these leveraged ETF's are not good long term investments. If you are correct right away then it will work fine. Unfortunately, if you are temporarily wrong, you could see no gain and even a loss for being right in the end. 2- Short TLT is another option (long ETF 20 year U.S. treasury index, but 1X). Karen Finerman on Fast Money is using that approach. It is not as exciting as TBT and you will have to pay interest to holders, but if you hold longer term, you are guaranteed to match the inverse result of that index. Although, is it worth it? Are the gains going to be big enough to justify getting into this position? Long bonds don't double and triple or come down 50 to 75% like stocks. 3- There are options available on TLT and TBT to augment returns. But, before you augment returns, you have to gain enough to repay your premium which is not guaranteed depending on timing. 4- Constant maturity swaps as discussed by Chou and Klarman seem to be the ticket. They are cheap, long term, but they must require a fair bit of margin power. They also seem available only to institutions. I have checked and I cannot get my hands on them. If one of you has found a way to buy these contracts I would love to know how you did it. So I think that selecting the right instrument is very important to take advantage of this thesis. TBT was attracting me until I started to realize that if the U.S. stock market corrects near term, that long bonds are likely to rally. A knee jerk reaction if you will but, very painful if you are into a 2X ETF. You need an instrument that will fully reflect what will happen longer term and not something that will be wiped out by short term variations. Gold and silver are also alternatives, however they are not 100% correlated to a drop in price of long term bonds. They should be bought on their own merit and they are also likely to correct along with the U.S. stock market if recent history repeats. Cardboard

I don't know about the last 7 trading days, but looking at the chart, I would say that today it had something to do with someone having a delicious breakfast in Vancouver. ;) Merry Christmas to you all! Cardboard

StubbleJumper, Your logic is correct. Overall it should roll-over: some will take cash and move on, most will roll-over and some new players will come in. I think that the problem is not the roll-over of the total amount, but will the terms be similar: durations, rates? Then once you combine this unusual amount of activity with "new" treasuries that will have to be issued to absorb the deficit, I am wondering if we cannot get into some sort of dislocation. Kind of like the roll-over of commercial paper last Fall that came to a halt even for good quality issues. The U.S. deficit was $1.4 trillion for 2009 which ended Sept 30. The forecast is for $1.5 trillion in 2010. Long term treasury yields are moving up quite fast now. I see smoke, but no fire yet. Cardboard

From Dave Rosenberg: "We are not sure if this is a well known "fact", but the U.S. government has a record $2.5 trillion of its debt, including bills, bonds and notes, rolling over in 2010. That, my friends, is 35% of the outstanding level of Uncle Sam's marketable obligations having to be refinanced in one single year. " I am not sure where to go to verify this "fact", but it seems unreal in terms of impact. Once in a while, we hear about a "big" $40 billion treasury auction coming out and they are worried on how it will be received. To complete this refinancing, they need to issue $50 billion a week non-stop for all of 2010. Commentators at the moment talk about the yield curve and how big the spread is and how great it is for banks. The 30 year is now at 4.56%. I think that they fail to recognize that it will start to be quite negative for long term mortgage rates. At some point, it will also represent competition to the equity market with a small dividend yield just above 2%. The big question for me: Is the long bond market already pricing in the huge supply coming up or is it just starting to recognize it? Of course, the Treasury could issue more and more short term notes to refinance, but it just seems to delay the inevitable. What do you think the impact of this will be? Is it just noise or is it something equivalent to the housing bubble with real ramifications for the economy that even value investors should pay attention to? Cardboard

For disclosure, I own both SFK.UN and CFX.UN. I think that there is an investment lesson with this case. Common wisdom indicates that you should expect the low cost producer share price to significantly underperform the high cost producer in a commodity rebound. Currently, it is the opposite. CFX.UN is up 6.5 times from its low, while SFK.UN is up 3.2 times. So with SFK.UN, you increase materially your risk of permanent loss with so far less reward. While I agree that SFK.UN could take-off if pulp prices go higher that is asking for a lot. Already, we are seeing some pulp mills restarting and we are not sure how long China will keep buying pulp at the rate they are now. Global inventories remain low, but if you look at the price of pulp, the rate of increase has slowed. So is it possible that SFK.UN is now too far in the supply cost curve in an industry that has changed dramatically in terms of demand (likely permanent) over the last 12-18 months? Something has to change for them to earn good money again. How do you see this evolving? Cardboard

I don't have a brokerage account to trade futures so it took me a while to figure this out. After successful testing, I decided to pass this along which may be helpful to some of you who want to eliminate the USD/CAD$ variation on their U.S. holdings. Basically, what I have done is to buy put options on the U.S. dollar on the Montreal Exchange (www.m-x.ca) at the current exchange rate (today it would be the USX symbol with a strike price of 106) and to immediately sell the same call. Each contract represents $10,000 U.S. At the moment, you can hedge as far as June 2010. The way I have done it, it basically locks the exchange rate at the current rate at almost $0 cost to me with the call writing paying for the put. You will find that there is a tiny cost due to the buying of one and selling of the other with the bid/ask spread, but again it is tiny relative to the protection offered. I never use options from the Montreal Exchange or TMX since they are highly illiquid making the bid/ask spread very wide. However, for that purpose, I found that it does not present a big issue. So what it does exactly? Say that you want to buy 1,500 shares of Kraft or a value of $40,000 U.S., but you are worried about the Fed policies and that a declining USD vs the CAD$ will eat into your potential return. You could do as I mentioned and buy 4 USX puts at 106 and sell 4 calls at 106 of same duration along with your Kraft purchase. If the CAD$ goes up, the puts/calls will create an asset offsetting 1:1 your exchange rate losses on your Kraft shares. If the CAD$ goes down, the puts/calls will create a liability offsetting 1:1 your exchange rate gains on your Kraft shares. This strategy eliminates the guess work about exchange rates. You buy the investment purely for what it is. The issues are that you will need a margin account to write the calls, there is a small cost when you buy and sell the put/call structure, the hedge duration is limited (but, you just have to redo the same thing at the new exchange rate upon expiry) and if your Kraft shares or other U.S. holdings change in price you may have to increase/decrease the number of options to hedge the new value. Finally, it will use up some buying power (margin) when in place. It is effectively covered call writing (the liability is always matched with the asset), but since the value of your shares on margin calculation is worth less than cash, if the put/call structure turns into a liability, it will eat your margin power more than the gain in U.S.$ value of your shares. If you are levered, it could be an issue. Hope this helps. Cardboard

IMO, the market appears ready for a pull-back. Valuation is no longer that attractive, the dividend yield at around 2% is nothing amazing vs other income instruments and after such a run, people will experience fear very quickly of losing their profits on any sign of weakness. Also, the argument of some investors being late and chasing the S&P performance will disappear after December 31. Finally, on a technical standpoint, the market is completing an almost perfect rounded top since early March. I understand that timing the market is extremely difficult if not a fool's game, but many signs are now present making the market vulnerable. Should it be simply ignored? If not, at the moment, I sit on around 30% cash (looking for ideas) with the rest invested in cheap, relatively small companies. 2008 has thought me that these companies suffer much more in a market debacle, both financially and on a share price standpoint than the S&P. I like the idea of having cash ready to deploy if we have a material pull-back, but I still don't like the idea of seeing my other 70% being decimated. I understand that it should be a temporary "decimation" unless we enter a major depression, but again with all the signs around, should something be done about it? 1- Selling everything and waiting does not seem reasonable. Will I be able to buy the same stocks again at their current price? Still at the moment, all my holdings are being scrutinized. 2- Buying S&P at or in the money puts as some have done does not appear very practical to hedge against smaller companies. What if the S&P goes down 10%, but your holdings 30%? You would need a much larger notional amount of S&P puts to offset your losses and then you are talking a major expense with high risk/low reward. I have not found any index that would come close to the kind of things that I own. Even the out of the money S&P puts (high risk/high reward) are not cheap change to hedge against the low odds of calamity. 3- Shorting an index is a lower cost alternative to #2 and with similar reward if the index does not go down by a lot, say 10 to 20%, but the exit strategy is crucial. 4- Shorting or buying puts on troubled companies can be very profitable and a good way to hedge losses on small caps. The issue that I see is that this starts to work very well once the market has started to come down. That is when real trouble starts to emerge. They may come down 30% on the initial market weakness, but the next 30 or 50% is the easier money, anyway from my experience. Think of GM, FNM, C and others. They decline first following the market, but after that it becomes obvious that their survival is at stake. 5- Loading up on long term treasuries or their derivatives has been a good hedge historically. Unfortunately, if there is no market correction, this stuff could turn toxic with higher interest rates. Also, treasuries may not go up a lot this time around with abundant supply. 6- Gold seems to work well after the debacle not during. What else is there? Cardboard

I am sorry guys, but if you are waiting for the next hard market to make money with Fairfax or any other insurer, then you are due for disappointment. During the last 40 years, insurance has been in a soft market for something like 75% of the time. The soft cycle is extremely long relative to the hard market. It took the disaster of September 11 combined with massive losses in the stock market and years and years of underwriting losses to bring about a short lived hard market. The insurance business may get a bit better in a few years, but I would not hold on for a repeat of the 2001-2005 hard market. For Fairfax, expanding in Brazil, China and other emerging markets is the way to go to gain policies and make underwriting profits right away. Tuck-in acquisitions in NA and Europe could also make sense. The industry is depressed and valuations are low. That is why they could afford to buy back Northbridge and Odyssey Re. As I have mentioned before, I am not a big fan of insurance especially for Fairfax. Regulations, ratings, cash flows force them to keep a very low ratio of equities in their overall portfolio. You end up with a very leveraged structure, exposed to the risks of insurance combined with a terrible industry cycle to have no more equities than you would if you were not involved at all in the business. At times, they may have a bit more exposure to great assets vs their equity, but these periods seem rare and not really worth the risks and constraints. If you think this is crazy, then I encourage you to do the math. Check the ratio of equities in their portfolio vs book value over time. Then check the cost (underwriting losses) over time and add to it the interest cost on the debt that they took to maintain this level of underwriting. You should come to the conclusion that whatever they earn on what is not equities in their portfolio is used up to pay for insurance and debt costs. Cardboard

Discontinuing its NYSE listing is just one new thing about Fairfax that I don't like relative to attracting investors. You see, I really don't care about institutional investors. They are the ones playing games like shorting, dumping the stock during periods of redemptions and performing window dressing at the end of quarters. It is true that Fairfax has attracted some very patient institutions, but they are also guilty of negotiating private prices with Fairfax relative to share issues as we have seen in the past. I remember where I came from and at the beginning, an investment of $5,000 was something meaningful to me. I am very much in favour of giving a chance to all the players to participate in the success of a firm and in the process building their own future. That should be a great honor for any CEO to be entrusted the hard earned capital of a small shareholder where strong performance can me a real difference in their lives. That is why I really did not like Warren Buffett's attitude of not wanting to split its stock. If you were a small shareholder starting to invest in the 80's or 90's you were effectively locked out (there was no B shares). So you had to be born in the 40's or 50's to be allowed in? Here are a few things that I think should be considered by Fairfax to become a Canadian "core" holding or a blue chip: 1- Split the stock. People are not all millionaires. If it helps them to be able to invest a portion of their pay cheque on a weekly basis then make the share price smaller. I really don't see the evil in splitting a stock. 2- Pay a quarterly dividend. Northbridge and Odyssey Re were doing such and IMO it helps people figure out what income they can get from their stocks. To pay a big lump sum once a year with no predictability on the amount is silly. 3- Put in place a dividend reinvestment plan. This is a great way for small investors to create wealth over time. 4- Eliminate the dual class shares. Many will not invest in a firm whenever they see that presence. Prem has enough shares that I really don't see why he would be worried at all to have the company stolen from him. 5- Start talking about operating earnings. With most non-controlling interest gone this becomes easier. Analysts have to be spoon fed, so give them a number that they can understand. I believe that none of the things above will reduce intrinsic value. However, I believe that they will make Fairfax more mainstream. If so, then I think that it may increase intrinsic value over time because a higher share price means the possibility to issue shares at an attractive price to make smart acquisitions. Fairfax is not the small, mystical fast grower of the late 80's and 90's, they have grown up. To get people interested again in the company, they will need to do things differently. If all they can attract are value investors then it is very likely that this company will never trade at or close to intrinsic value. Cardboard

It is clear to me based on all the comments that most American investors typically do not buy shares listed on non-U.S. exchanges. It is a very different situation up here in Canada where buying NYSE or NASDAQ listed companies is common occurence. We know the tax implications, we know that they are marginable, we know how to obtain filings/information, etc. The government even removed the 30% limitation on foreign securities held in retirement accounts to encourage global diversification. We are something like 3% of global GDP or a tiny amount, so it is normal for us to reach outside. Also, I would bet that less than 10% of the current American Fairfax shareholders on this board would have ever heard of Fairfax Financial had it not been listed on the NYSE. The fact that they are looking to continue holding the company on the TSX is a testament to the respect that they have acquired over time for Fairfax. Without a NYSE listing, I am convinced that very few new U.S. shareholders will get to know Fairfax. Finally, regarding popularity vs intrinsic value, isn't the earlier that we desperately need at the moment? Fairfax share price vs IV really sucks if you ask me and it has been for a long long time. Why is that? Blaming the shorts does not cut it anymore. Cardboard

I would think that all Fairfax U.S. options will have to be closed out. Since the security for these derivatives is no longer "deliverable" on a U.S. exchange, the clearing process likely stops to work. It is also unfortunate if U.S. holders will be forced to sell due to IRA rules. We do not have such restriction in Canada for RRSP, LIRA and others where we can hold securities listed on U.S. exchanges and even U.S. options. I applaud the idea of cost savings, but IMO we are going a bit backwards. On average, volume on the NYSE was higher than in Toronto. Actually, I would be curious to know at this point the number of Fairfax holders being American vs Canadian. We were also getting a lot of coverage from U.S. investment firms and things such as Motley Fool which were the result of being listed in the United States. Have you ever seen anything in the U.S. on Onex or Power Corporation? It is true that this "coverage" was mostly negative in the past, but has turned very positive ever since the CDS gains. Fairfax was gaining followers and investors down there with each day going by and this process will slow down dramatically without our presence on the NYSE. It will be interesting to see if firms such as JP Morgan will continue covering the company and attending conference calls. Why not delisting on the TSX instead to realize cost savings? Similar savings, no restriction for investors that I can think of and still access to the largest capital market in the world. Cardboard

Bargainman, Here is the information that you are looking for: http://www.invest.gold.org/sites/en/why_gold/demand_and_supply/ IMO, the situation is actually simple. You have a fairly steady demand that is roughly growing in line with the world's population. Then you have a gap in supply that has been met by "Net central bank sales" for at least a decade. What happens when "Net central bank sales" become "Net central bank purchases" when you know that: 1- Mining has not produced any more ounces per year since 2000 despite much higher prices. Looking forward, new projects at most miners appear only capable to replace depletion. It also takes around 10 years to put a new mine into production from discovery. 2- While some may be tempted to melt away their family jewellery for a few bucks and increase "Scrap" supply, this is a minority. Also keep in mind that refining has limited capacity. So with supply decreasing, you need a higher price to choke demand. Industrial demand is very inelastic. If they use gold into an application it's because nothing else can do and it is such a tiny amount that higher prices won't make much difference on the total cost of that product. Jewellery demand has already decreased, but the problem is that with a higher price "Investment" demand is likely to keep on growing. People invest and hoard gold, not copper, oil or aluminum. With a higher price comes popularity and greed or like what we have seen with stocks and housing. So we will likely never reach equilibrium. So far the climb has been pretty orderly, but it will likely accelerate upwards until something really breaks down. Cardboard

Mhdousa, There was a thread around those lines recently and these are the stocks that I have found to be large, safe and high quality at quite attractive multiples: JNJ, KFT, BRK, GS, POW (Canada), CVX You won't double your money overnight with these, but you will sleep well at night and stuck in a drawer for 5 years, I would hazard to guess that the return should beat the S&P and I would say reach at least 10% a year. Cardboard

If I was looking to build a portfolio of conservative names that would still deliver a solid 10% a year going forward these two would definitely be in. I think this is a great time for buy and hold investors looking for respectable returns without too much work (little trading/research/taxes) to load up on large and very high quality companies. Berkshire is another one. Both KFT and JNJ are trading at a P/E of 12.4 times 2010 earnings estimates. This is much cheaper than what they have been at historically and their "moat" would call for a higher P/E. Remember that the market or the average stock has been trading at a P/E of 14-15 historically. These are cash machines, safe and their yield has to tempt people hungry for income. It just does not make sense for them to stay at these low level of valuation. I typically invest in smaller companies because I can find much bigger discounts relative to intrinsic value. So "locking" myself into 10% returns is not my game. However, it would not surprise me to see these stocks go up 30 or even 40% in fairly short order to correct this mispricing. They won't be cheap forever. So what I have considered is to buy long term calls (at the money to in the money) on a basket of these to make their return on my cash comparable to my small caps. It is still a working project... Your logic around the currencies also makes sense, although we have seen that even these "safe" stocks come down with the general market and I would be hesitant to assume that there will always be a flight to the USD whenever there is a crisis. Things have changed this past year and these discussions around the USD losing its reserve status are too frequent and coming from too many countries/sources to just be some blah blah blah. Cardboard

That is a very interesting situation Ericopoly. Actually, the divergence between puts and calls is not just for 2011, but for the entire spectrum of options. Even for October 2009. Puts are on average almost twice as expensive as calls. For the calls to be much cheaper than the puts, you would need either negative interest rates (not possible) or a sizeable dividend to be paid out (not the case here, at least I can't find it). So normally, this divergence should not exist due to the put-call parity rule and arbitrage. As you pointed out, it is much more advantageous for someone long SHLD to create a synthetic long (buy call, sell put of same maturity and same strike price) than owning the stock. This current divergence should lead to arbitrage or in this case a reverse conversion: create a synthetic long and short the stock. The only rational explanation why it is not happening in this case seems to be extra high lending cost for the shares as Ben pointed out. I am still planning to check on the availability of SHLD shares next week with my broker and on their lending rate. Since I don't have a strong opinion on SHLD either way, implementing a reverse conversion and collecting nearly risk free money sounds great. Although, I suspect that I will be disappointed. It is also probably worthwhile to reinvestigate SHLD. I like Eddie and he has done wonders for me with Autozone around 8 years ago now. Simply buying out of the money calls which are cheap could turn out highly profitable if the shorts lose some interest or if the company just shows some signs of turnaround. Cardboard

I have also some trouble with buying right now. Generally, bargains nowadays are more expensive than they were 6 to 12 months ago and when you find a really cheap one then the quality is not there. I would not say that the market is expensive, but the gap between intrinsic value and trading prices has shrunk dramatically. This may not apply to you if you are a buy and hold type investor with stocks such as JNJ, BRK, FFH, GS and others still attractively priced. They won't double overnight, but should provide attractive returns. For the more agressive value hunters, this market looks more tricky: a really cheap stock may only be cheap if the economy recovers. If there is a hiccup, then buying now may prove painful. I realize that I cannot predict the economy, but I can't help myself and keep thinking about this second wave of mortgage refinancing that is coming up. We hear very little about that currently and the size in $ is as big if not bigger than subprime. With unemployment at 10%, higher costs for various necessities and interest rates on loans going up, I have to think that it will hurt somewhere. Then you have the unknown impact of stuff like that: http://money.cnn.com/2009/10/08/news/economy/bernanke_fed_balance_sheet/index.htm?postversion=2009100818 Who is going to buy such massive quantity of garbage from them? They can't really pull out, can they? My guess is that they will have to wait for these securities to reach maturity since selling would hurt the recovery process. Then try to imagine what happens with a double dip recession or a very very slow recovery with such a balance sheet and the Fed rate already at 0%. Cardboard

8% on the overall Fairfax portfolio is what I like to use. I understand it is below the 9.8% that they have achieved historically, but based on how much they hold in cash and bonds it is seems about right to me. Then JNJ, WFC, USB, GE and KFT is almost like holding the Dow. Together, they are unlikely to deliver 20% a year even at current level. To go beyond 8%, they will either need to increase their equity exposure or to find some low capital/high return tool like the credit default swaps. The latter are very unique opportunities and don't come very often (once a decade?). So I prefer to be on the conservative side, but I also think that 8% is realistic based on their asset mix, HWIC skill, portfolio size, typical holding period, etc. Cardboard

Relative to gold, I would like to mention the following facts which people somehow ignore: 1- Gold does not need inflation to go up in price. It did go up during the Great Depression and I have seen a study previously showing poor correlation between inflation and gold at least in the short term. 2- Gold did go up dramatically in the 70's and somehow the U.S. dollar is still in existence today. In fact, compared to most major currencies, there is not much difference between the relative value of a USD in 1970 vs what it is at today. Gold is a commodity and its price will be based on supply and demand. Fear of inflation, fear over the USD, fear of competing currency debasement, fear of negative real interest rates will simply fuel investor demand for gold helping one side of the equation. Right now we are seeing a deficit with production/scrap being insufficient to meet demand by quite a margin. It has been like that for many years or a result of the long bear following the peak in 1980. The deficit has been met by Western central banks selling in the market. This is no longer working as stockpiles are being depleted, some are reconsidering this strategy and some central banks (China and Russia) are now strong buyers. The price will likely overshoot until it attracts enough supply or until enough buyers turn into sellers. It is true that over the very long haul (50 or 100 years), that it may match very well with inflation, or with real estate or with suits however, we could be dead before we are able to find out. IMO, that is not what the game is about here. Cardboard

The purpose should be to make more money. Odyssey Re is Fairfax's division with the highest return on equity and its largest. Buying more at a reasonable price can only make sense. I am kind of surprised at this dilution fear while IMO, Fairfax shareholders should rejoyce. The offering was done at $347 U.S. which is quite above the $315.90 book value at June 30. It is a given that book value is higher now, but I figure it is around $335 to $340 looking at various markets impacting their assets and taxes. Odyssey Re book value is likely around $55 now. Even if we are more optimistic and assume that Fairfax issued shares at exactly their current book value, the maximum cost above book to buy the rest of ORH is only $155 million (15.5 million shares x ($65 - $55)). It means a pretty good investment just on cost savings alone which should be around $20 million a year. You also have to admit that ORH book value has to be more valuable than the book of something like their runoff. To me dilution is not buying a terrific asset at a reasonable price, but issuing shares below book to survive. Like we have seen during the 7 lean years. And to issue shares to keep it in cash. IMO, this is where Fairfax shareholders should pay their attention at this time. As I mentioned before, it would be great if Fairfax could deploy their $1 billion of cash at holdco in a more efficient manner: 100% in their best ideas (equities or others) and hedged if needed for a rainy day. This way you would get great returns with this money and still solid ratings. It may be part of the grand plan. Once the structure is simplified, which fully owning ORH allows, they may feel more comfortable to do something like that. I think that many fail to realize how much leverage was still present within Fairfax when considering that TIG and Crum & Forster were themselves major holders of ORH. Then you have Fairfax Asia, TRG Holding and Advent with spaghetti ownership. There is definitely some opportunities here to do something pretty smart. Cardboard

I believe this now represents a fair offer. It is not a huge price vs current book value, but better than what Mr. Market is willing to pay for ORH. It is also in line with what another reinsurer would likely offer for ORH. I also believe that this represents a terrific deal for Fairfax when you look at the earnings that Odyssey Re generates, the structural simplification of Fairfax that it will allow (TIG, Fairfax Asia and others), reduced costs (public listing), ratings upgrade that has been received already and new long term friends that have joined with the share issue. The situation now looks near identical as Northbridge with same premium and same procedure of acquisition except for one detail, Odyssey Re is American. The only support that they have as of now is Marshfield Associates. They are the largest minority shareholder of ORH with 2.7 million shares, but it is only 17% of these 15-16 million shares. They need 50% of shares to be tendered for the merger to go through. It was something to expect that they would be approached to bless the offer since they are "friends" of Fairfax with one of their former investment manager now working for Hamblin Watsa. Again, I think that the offer is fair and that there is no conflict or anything, but please bear with me. IMO, due to the appearance of conflict, it is quite possible that a fair bit of noise will come out next week: lawyers looking for a cause, maybe a hedge fund complaining, etc. We know that Fairfax has some enemies. I don't expect the offer to be increased again, but with the latest after hours stock trade at $64.85, it would not take much for ORH to trade above $65 early next week. Anyway, probably worthwhile to be on alert next week as an Odyssey Re shareholder since selling in the market might turn out better than tendering. Cardboard

I am wondering how much longer we are going to have to wait for this special committee or the board of directors to make a recommendation. If you look at the sequence of events at Northbridge, we should have heard by Monday. Either the negotiation to raise the price is dragging on or it is Sandler O'Neill that is taking way too long to come up with their fair value opinion. It would be interesting to know at what point Odyssey Re is forced by regulation to publish third quarter results. At Northbridge, the deal was announced on December 1 (with a reco to approve) and the shareholders vote was held after December 31, but they did not have to publish year end results. As Viking mentioned previously, Odyssey Re shares will have to trade at or close to $60 on their own merit in the near future. Book value keeps growing almost daily, they will keep buying back shares and since Andy says that business will remain flatish in the near term we may even see a special dividend or debt/preferred buy-back. Cardboard

I hold a good size position in CFX and a fairly small one in SFK. IMO, both companies are suffering from a commodity that has come too late to the party. Copper, oil and others have started to rally much earlier than pulp. So we are way behind the stock market and even further away from other commodity producers. If the economy shows any sign of not recovering, pulp prices will return very quickly to non profitable levels. In the short run, not a big deal for CFX, but likely R.I.P. for SFK. The upside is still attractive which is what kept me there for now, but the risks are very high. There are also quite a few announcements of pulp mill restarts despite a pulp price that is less than mouthwatering. Then you have this CAD$ to worry about. It is a terrible business. It just convinces me even more that one should always stay away from a business impacted by a secular decline: decline in paper usage. It may turn up good again, but only when the "survivors" face little competition from mill restarts: become so old or expensive to run that they are scrapped. U.S. railways became attractive to invest in again, but it took over half a century for it to happen. Cardboard

When I think about some of the poor FFH holders who were crying about the dilution created from the ORH deal. You get the crown jewel back, massive simplification of Fairfax financials and internal structure, new friends/supporters from the equity issue (see the article) and now a ratings upgrade due to the deal. Oh yeah! $60 a share for Odyssey Re is really expensive. I mean 1.16 times June 30 book value (more like 1.09 now, but let's not tell them). I would much rather see a huge share buy-back. Buying this China insurer for over 3 times book was a much better deal. Anyway, now that we are stuck with this rotten deal, let's try to screw these minority shareholders as much as we can and let's threathen them to abandon the deal if they say a word. Maybe that we should also bribe the bankers doing the fair value work to ensure that they don't get a penny more. Then they can pay the income taxes in full on their capital gain. Ah, ah, ah... I am glad it is not you guys leading Fairfax because it would be Sell, Sell, Sell combined with the sound of the guy that is falling from a bridge and also the sound of a train wreck. >:( Now that I have vented a bit. It looks like that Moody's may have received a target range from Prem for cash at holdco: "substantial holding company liquidity (in the range of $750 million to $1 billion)" Cardboard