Cardboard

Weather they consolidate or not investments where they own a significant percentage does not bother me too much. What concerns me however, is return earned by these businesses. Ridley for example looks terrible so far. It made $3.4 million in operating income in the first half on $271.3 million in revenues and shows a loss in the 2nd quarter. I thought that Lindsey Morden could have been enough of a lesson. What is potentially next in the pipeline after Brick: Mega Blocks, Canwest Global and Abitibi-Bowater. We are talking about companies restructuring their debt, with businesses in secular decline or undergoing major turnarounds. I don't understand how this company can be so successful in the stock market, but when it comes to buying 20% or more of a firm that it almost always turns into a flop. On the other hand, they hesitate to buy something like Odyssey Re which they know inside and out and for which they know their money will earn a great return. They did not lose buying Northbridge you know. What I also find intriguing is some people being all concerned about Fairfax deploying a lot of cash in Northbridge or for Odyssey Re and the impact it could have on depleting the big cash cushion, but they show no concern whatsoever when they plug $500 million into a sink hole such as Abitibi-Bowater. What insight did they truly have into the newsprint business to commit half a billion dollar? Probably one of the worst managed companies I have ever seen. Cardboard

Now, compare it with this offering from Watson Pharmaceuticals also issued today. http://www.reuters.com/article/marketsNews/idINN1856117620090818?rpc=44 Same maturity (tranche two) and same total, but in USD and both unsecured. Watson is paying 6.125% and issued them at $99.796 vs Fairfax paying 7.5% and issued them at $99.639. On top of that, the debt offered by Watson has been rated as junk by Moody's, S&P and Fitch while Fairfax is investment grade. ??? Was this rushed or something? How badly do they need this money? Cardboard

FYI, this debt offering has been more than well received. They priced it at $99.639 and it is already trading above par or at around $105. No wonder that they were able to raise the offering from $150 million to $400 million in less than 24 hours. I hope that they will be receiving something down the road from the various investment bankers for the nice gift: a $22 million distribution cut + $2.9 million in fees. Cardboard

That is a lot of chatter from Prem on the closing of a debt offering. I have looked at previous press releases: 2012 debt exchange offer, Crum & Forster debt issue, etc. and there was not much talk. None at all. "On November 19, 2008, Mr. Watsa had a discussion with Mr. Smith during which he advised Mr. Smith that Fairfax would not be willing to sell its Shares if another party made an offer for Northbridge. On November 20, 2008, Mr. Watsa met with Mr. Smith to share his views on the appropriate valuation metrics for the Shares. During that discussion, Mr. Watsa expressed his view that an appropriate premium for the Shares would be 20% above the most recent 30 day volume weighted average trading price (which represented approximately $36.00 per Share)." What is he trying to do? Bring down ORH share price so he can make an offer for $50? Intentional or not, this extra talk surely hurts the Odyssey Re buyout theory which may have helped this nice and well justified share price advance in ORH due to excellent results and large growth in book value. Prem Watsa is a wealthy man. I am not yet, so I will look for my own interest first and foremost. This means that even if there is no offer for Odyssey Re that I will keep holding my position until I realize at least a decent price. Book value is around $55 today, no longer $51.90 (operating income, unrealized investments gains, buying back shares below book). At $47 and change it is a deal and should not trade there. With Odyssey Re continuing to buy back shares at a fast pace and good results, the pressure is on supply and demand for these shares. Regarding the share repurchase authorization of $600 million, there was only $85 million left as of July 29 or following the July repurchases. That is about 1.8 million shares. Fairfax held 72.5% of ORH as of July 29. Remove another 1.8 from outstanding and they are now holding 74.8%. This means very little float left especially when you consider that many are long term holders. Remove another 3.65 million shares and now they hold 80% and ORH is again part of the Fairfax U.S. tax group. Beneficial or not at this point, I don't know, but it will become a consideration going forward. Cardboard

Who knows what the reasons truly are for the $CDN? There could be more appetite for Fairfax debt in Canada. It is led by BMO and all other dealers in the offering except for Bank of America Merrill Lynch are Canadian based. They could also have looked at their debt mix and decided that they needed more CDN$ denominated debt. Believe it or not, this may still have something to do with the Northbridge acquisition earlier this year. Public shareholders have been paid with cold hard CDN$, but some entity within Fairfax could still be owed something. For example, I brought a quote in a different post where Crum & Forster was given a note from NSpire Re to pay for its Northbridge shares. On a consolidated basis, one thing is for sure, you don't issue $362 million U.S. in debt at 7.5% to let it sit in cash, especially when there is already $3.316 billion in cash at the various subs and $271.4 million at holdco (cash only). Cardboard

Sanjeev, this is no junior mining company and when I mentioned audit, I had in mind internal audit. This is a large company that was just freed from an SEC investigation and that admitted to lack of internal control in some derivatives accounting a few years ago. I would think that any document filed with the SEC would be seen by them as a very serious matter. I suspect that the employee who made the error (or accidentally let some information slip?) had a bad day at work today. There is still a possibility that it may have been a simple error. It is still intriguing that the error matches direct ownership of Odyssey Re shares by TIG Insurance Company. Time will tell as to what is going behind the scenes. When there is smoke there is usually fire. IMO, they are working on something big for sure. Cardboard

Looks like that Fairfax has redone its math and has now restated their 13-F to reflect the correct Odyssey Re share ownership. http://www.sec.gov/Archives/edgar/data/915191/000095012309035828/0000950123-09-035828-index.idea.htm That is very interesting to me. Odyssey Re share number has never changed on all 13-F ever filed by Fairfax (started in 2nd quarter 2007 for some reason): 42,399,400 shares held. This is also the first time ever that they issue a restatement to their 13-F. What has created the error? If this was a new holding or one that changes frequently in # of shares it could be a simple typo. Based on history, it is not like they have fat fingers since they have never filed a restatement and their other holdings in common stock vary significantly. It is also hard for me to believe that no one is auditing the 13-F for potential errors before submission. I suspect that something has occured internally preventing the share count to end up the same as in previous quarters, some transaction, something. They wrote the correct number based on some assumptions in the original file and then after a few called IR today, they realized the potential for speculation regarding ORH and have corrected the "error". Cardboard

I have no problem at all defending my comment. $36 or 1.2 times book is about the lowest multiple that Northbridge shares had traded at over any reasonable period of time from the IPO. So called the crown jewel of the Fairfax empire. A company along with Odyssey Re that has allowed Fairfax to get out of the hole (survive?) during the very difficult years. IMO, a very very low offer to a friend who has helped you when you were down. On top of that, done at a time when Northbridge was seeing a very soft market and was trading at a very low valuation. I also have a very hard time with the following comment: "On November 19, 2008, Mr. Watsa had a discussion with Mr. Smith during which he advised Mr. Smith that Fairfax would not be willing to sell its Shares if another party made an offer for Northbridge. On November 20, 2008, Mr. Watsa met with Mr. Smith to share his views on the appropriate valuation metrics for the Shares. During that discussion, Mr. Watsa expressed his view that an appropriate premium for the Shares would be 20% above the most recent 30 day volume weighted average trading price (which represented approximately $36.00 per Share)." You don't need to mention stuff like that to a "friend". That was understood. You make an offer that is acceptable and if it is, a sincere hand shake will ensue. $36 was not a fair offer. There is not a single Northbridge shareholder who would have been happy with such offer. $39 was not great, but it felt fair. Cardboard

Ok, so TIG Insurance Company held the same number of shares on June 30 as it did on December 31. The actual percentage of ownership of ORHC (Odyssey Re Holdings Corporation) on December 31 was 17.8% and 18.2% on June 30 (NAIC filings). It did increase due to Odyssey Re share buy-back program. This is well above the 7.8% ownership mentioned by Odyssey Re on December 31 in its 10-K. That is because this percentage was only for direct ownership of ORHC by TIG Insurance Company. TIG Insurance Company also owns 97.5% of ORH Holdings Inc., a holding company whose only assets is ORHC shares and has no liability. Hence, 7.8% + 10.3% x 97.5% = 17.8% or ORHC shares as of Dec 31. As I mentioned in my previous post, Crum & Forster still held its Odyssey Re ownership as of June 30 as confirmed by its carried value on June 30 in its 10-Q. Actually, there is still so much cross-ownership within Fairfax, that it is no wonder that we have so much trouble getting good ratings. A big drag on loss ratio and on flexibility as to what we can do with investments. Finally, TIG Insurance Group owned around 25 million shares of ORHC on December 31 and is the last possible group that could have created such a change in the 13-F (4,600,600 shares), but there is no way to tell. This company, a holdco, is the parent of TIG Insurance Company and is 100% owned by Fairfax (probably via some other structure). It is probably not that important to figure out since Fairfax in its 2nd quarter report told us that they held 71.9% of Odyssey Re, meaning that no share would have been sold since December 31. The 13-F is filed for Hamblin Watsa Investment Counsel and Prem Watsa. It means that they have investment discretion over the shares listed. What seems to be happening here is that 4,600,600 shares of Odyssey Re still held by Fairfax cannot be sold anymore. They have become like "restricted cash" for some purpose between March 31 and June 30. A key piece to understand is that 18.2% of Odyssey Re shares is a significant asset to TIG Insurance Company and they carry it discounted to market value at $314 million on their balance sheet. A 27% discount and it was the same discount percentage on December 31. If you remove this asset, then Fairfax Inc. guarantee to the California Department of Insurance that TIG Insurance Company would maintain a net statutory reserve to surplus ratio below 3 and a capital level 200% above the authorized control level falls apart. Remember that TIG Insurance Company is in runoff. Also, the Odyssey Re stake is discounted since they are a "publicly traded affiliated entity". It is a discount required by NAIC resulting from the large percentage or ORHC's outstanding shares controlled by Fairfax. To understand what may be going on, I found interesting to look at what happened at Crum & Forster when Northbridge was bought out: “On December 23, 2008, the Company sold its 15.7% interest in Northbridge to nSpire Re Limited (“nSpire”), a Fairfax affiliate, for $248,066 and received a Fairfax Inc. note held by nSpire of equal value. Since Northbridge was accounted for at fair value, no gain or loss was recorded on the sale. “ “In December 2008, the Company sold its 15.7% investment in Northbridge to an affiliated foreign company, which resulted in tax benefits of approximately $51,605 attributable to the utilization of foreign tax credits. “ I don’t believe that the 13-F contains a typo and I also believe that the reduction of 4,600,600 shares is too close to the direct ownership of Odyssey Re by TIG Insurance Company to be a simple coincidence. The discounted value of Odyssey Re shares on TIG’s books, tax implications and the fact that Odyssey Re would no longer be traded (can’t be easily liquidated to pay runoff claims) may have forced some kind of internal transaction explaining the discrepancy. It does not prove Odyssey Re’s buy-out theory, but shares have been "pledged" to facilitate some “restructuring” and very likely at TIG Insurance Company to satisfy the California Department of Insurance. We will have to keep speculating since it is the first disclosure that something is going on with these 4,600,600 shares and there is nothing else in any filing indicating what happened to them as of June 30. Also, Odyssey Re did not receive an offer from Fairfax for sure as of July 29 since they disclosed having bought back shares up to that point. At Northbridge, they established a special committee on November 13 as they received the offer and then announced and made the recommendation on December 1. Could not have bought back shares during that timeframe. Finally, regarding "Fair For Acquisition", please read the "Background to the Offer" in the Northbridge directors circular on the SEDAR website. Effectively, Watsa was trying to make a low ball offer at $36. He only raised it to $39 after a fair bit of arm wrestling. Again, the walk and talk are not totally aligned. Sorry for the long post :-[ Cardboard

I read somewhere that the hedge fund king (IMO) John Paulson is short many regional banks for that reason. On the other hand, what is interesting is that he is massively long large U.S. banks. He runs a very large hedge fund empire ($17 billion in assets), but the guy seems down to Earth, a value type, does not trade constantly and likes to put money in his best ideas. So he may be of some interest to the group here. http://www.sec.gov/Archives/edgar/data/1035674/000103567409000008/0001035674-09-000008.txt His large portfolio is essentially in three categories: merger arbitrage, U.S. large cap financials and gold/gold stocks. He has 32% in gold/gold stocks with just over half of it in the SPDR Gold Trust. To me it is just too large a position to ignore. He is not some nutso gold bug. This man was like Prem or one of the very few to predict the financial crisis and to get into CDS and shorts on financials beforehand. Of course, he has a bunch of shorts and hedges not disclosed. Cardboard

So far my investigation on the issue is leading me to TIG Insurance Company. Here are the numbers: December 31, 2008: Odyssey Re had 60,242,949 shares outstanding and Fairfax owned 42,399,400 in the following fashion: "Fairfax owns 70.4% of our outstanding common shares, directly (0.3%) and through its subsidiaries: TIG Insurance Group (41.5%), TIG Insurance Company (7.8%), ORH Holdings Inc. (10.3%), Fairfax Inc. (2.3%) and United States Fire Insurance Company (8.2%)." June 30, 2009: Odyssey Re had 58,980,352 shares outstanding and Fairfax owned 37,798,800. Applying the same percentages, TIG Insurance Company would have held 4,698,950 at December 31 and 4,600,467 at June 30. The difference in the 13-F between December 31/March 31 and June 30 is 4,600,600 or almost identical to what TIG Insurance Company should have held as of June 30. Based on the percentages, United States Fire Insurance Company which is a subsidiary of Crum & Forster is close, but not "identical" to the change that we have seen on the 13-F and Crum & Forster in their June 30 10-Q indicates that they still own the shares of Odyssey Re. I need to find out more on what could be going on however, you guys are correct. Odyssey Re shares cannot be sold without appropriate disclosure. Here is what Fairfax had to announce in 2006 when they needed cash before selling any ORH shares (they were not shares issued by Odyssey Re, but simply sold by Fairfax to the public): http://www.fairfax.ca/Assets/Downloads/Press/fpr2006-11-17.pdf The stuff above is just another reason to integrate Odyssey Re fully within Fairfax. Here is more "spaghetti" for you: "On June 4, 2009, the Company purchased additional shares of Fairfax Asia Limited (“Fairfax Asia”) at a cost of $1.0 million. For common stocks, at equity, as of June 30, 2009, the relative ownership held by the Company was 13.0% for TRG Holding Corporation (which is 100% owned by Fairfax) and 26.2% (economic) for Fairfax Asia (which is 100% owned by Fairfax)." "As of June 30, 2009, Fairfax owned 66.7% of the common stock of Advent, including 14.5% owned by the Company." Cardboard

"Borrow short at 1%, buy long at 5%. Buy a hedge or a swap if you're nervous. Profit." Makes sense especially for agressive hedge funds. If the trade goes kaput, the general partner is organized under a corporation so the managers or individuals are protected from personal liability. For those who protect themselves and their clients with hedges, the question is who is the hedger assuming the risk? The music could stop at some point. The problem that I have is the sheer size of these treasury issues. We are talking $2 trillion in supply for this year alone. For comparison, the U.S. money market is $3.6 trillion in size and there is something like $1.5 trillion in hedge funds. Such supply should create some kind of dislocation, especially since it will continue in future years. It is not a one time event. It is true that prices for bonds have declined since December, but I am surprised how big the appetite is for them. Cardboard

"Seems more likely that HW has a game changer in mind. The whole hedge fund discount to BV argument is because HW investment performance is outshining the UW wrapper that provides its float. Were FFH a much bigger ‘name-brand’ UW with quality lines - we’d all be valuing at 1.6x BV versus .90x and citing what great businessmen they are. Referencing." I am 100% for the "name brand" idea as a I mentioned in a previous post. However, I am totally against some kind of huge acquisition. Surprises are always negative in insurance and this would likely be no exception: AIG left-overs, government plans... Might as well jump over a bridge. If Prem does something like that, then it would mean that he has not learned anything about the past 10 years. IMO, he would no longer qualify as a great manager since he can't learn from his mistakes and would seem addicted to growing the corporate empire. I doubt very much that he would do something like that, but just the thought is scary. Regarding size, Fairfax already does $4.5 billion in earned premiums each year while Chubb is at $11 billion and Berkshire was writing the same amount of business as Fairfax as lately as 1997. Based on that, I don't believe that adding any more policies will create this "brand". We are big enough and we have enough spare capacity to increase that. Let's integrate things differently, do a couple tuck-in opportunistic acquisitions and the result will be eye popping. Cardboard

http://money.cnn.com/2009/08/13/markets/bondcenter/bonds/index.htm?postversion=2009081317 The bid to cover ratio was 2.54 this time around compared to a long term average of 2.25. Every treasury auction this year appears strong while the amounts issued are unprecedented. There is no shortage of buyers every time and no sign or trend that they are getting full. I know about the Fed quantitative easing program, but it can explain it all. Who are the buyers and why are they so eager to buy? To give you some perspective, Taleb mentioned on CNBC this week that following 911, that it took only $50 billion in stock sales to bring the market down by 12% on re-opening. That is how little it takes to move a market. The treasury is issuing multiple baggers of that in debt and it is swallowed like it enters a black hole. Cardboard

Northbridge was doing 15% ROE and it was debt free. It also had a long history of favourable reserves development while it is not the case at Odyssey. Also, no asbestos and other nasty long tail stuff. If you ask previous Northbridge shareholders they will also tell you that $39 was not that much. I think that the high on the stock a year or so before was around $36. So it was fair ok. I am sorry, but please do not expect 2 times book for ORH since they will not make such offer, if they make one at all. Reinsurers do not trade nowhere near close to the metrics that you are mentioning, so a fair value opinion will never require that. Read the fair value opinion on Northbridge and you will see what investment bankers look at, especially when it is a controlled sub. Regarding funding to buy ORH, what about issuing a portion in FFH shares? ORH is below book currently, while FFH is above (based on June 30 numbers). Something like 40% of the acquisition paid with shares could mean a lower acquisition price since guys like Returnonmycapital would have a chance to continue holding, something considered by boards. Hence, it would be very light on dilution currently and reduce the need to rack up debt to do it all with cash. Regarding timing, they better act fast since ORH shares are starting to fly and once the 13-F is published tomorrow or Monday, folks will figure out pretty quickly where book value really is for both. Cardboard

"I would argue that a takeover of the remaining shares of ORH should be considerably more expensive than just a 25% premium to its recent market price. If an insurance\reinsurance business enjoys cost-free float over the long-term and has every reasonable prospect of remaining as disciplined in the future, its true value should include float as part of shareholder's equity." There is a precedent here which is Northbridge. It was bought for a 29% market premium and 1.3 times book value. It would mean $61 to $67.50 for ORH. They don't have to offer a lot to take out a subsidiary where they already own 60+ %. All they have to do is to get a fair value opinion from some investment bank. They will come back and say that since most competitors trade at or below the valuation offer that the transaction is fair for shareholders. Where else can you go? It is not like that there will be a competing offer for the sub. The investment bank will also point out that shareholders who refuse to tender will end up with a stock that is extremely illiquid. That is why it makes so much sense for Fairfax to buyout its subs now with P&C insurers valuation being low and that is what they have been doing: Northbridge, Advent... What is missing now is their biggest sub and it is trading on sale! Over all these years, Odyssey Re never traded at a price that would make it interesting for Fairfax to pursue opportunities. The shares could never be used as a currency. People kept associating the company with property and cats reinsurers which is a totally different business. Odyssey Re is very well diversified by business segment, global and never got the recognition that it deserves. Finally, regarding a Chinese acquisition, I suspect that Prem will enter the market a bit slowly or with the help of a partner. Think of ICICI in India. It could be a big move relative to Fairfax Asia, but small relative to Fairfax as a whole. I would be shocked if they were making a C&F or TIG size acquisition in China! Cardboard

First, if Fairfax is truly interested in better ratings, then I think that the last thing one would like to do is to issue more debt or to increase leverage. Assuming it is all held at holdco, we now have over $1.1 billion in cash and investments. Ratings agencies will always assume a low return on that, at least lower than the 7.5% that they are paying even if that is not reality. I believe that there is a grand plan at work here, but we will see. Second, let's explore that a bit: "I'm not sure if I'm right about this, but I suspect if HWIC were managing Chubb's portfolio identically to FFH's then the ratings agencies would cut Chubb's rating due to investment risk (heavily in equities). Can you have both the credit rating and the freedom to go heavily into equities? Or do the ratings people not care (can't imagine this to be the case)." It is absolutely correct that Chubb has a tiny amount invested in equities. It may help their ratings and give them a boost to their loss ratio. For them an underwriting profit is a must. I am not convinced that it is the only reason for the big difference in the loss ratio, but you got a valid point. Also, if you are correct, then I believe it is logical to assume that Fairfax will never show an underwriting profit over the long term. The combined ratio will be too high during good years to absorb the losses of bad years. Then most of the income on bonds will likely be also absorbed by these catastrophes and our interest cost. So what we are left with are the equities in the investment portfolio. So after all this insurance mumbo jumbo, taking all these risks and being levered with debt we end up with less than 30% in equities in the portfolio as of June 30 (and that is after massive appreciation!) or something like $1.07 for every dollar in common equity: only 7% more than they would have in a regular cash brokerage account. I just find the model bizarre: high risk, low reward. A ton of assets, a ton of liabilities and only a tiny portion within assets that can move the needle? I think that there is room for improvement like in any business and that part is not right IMO. Either combined ratios have to get better to generate more income or they need to find a way to increase their equity weighting in their portfolio. 15% growth in book value should be an easy target with the talent at HWIC. It is just the structure that needs some improvement to unleash that power. Cardboard

Prem was comfortable in the past with $500 million at holdco to entertain opportunities and potentially help subs if they were in trouble. That is a number he mentioned at a past annual meeting relative to what he thought would cost a major earthquake in California. I don't see why we need $880 million today which is likely more $1 billion now. All the subs are over-capitalized, debt repayments are far out and well spreaded. By the way, if ORH is hurt badly, it won't be any easier or cheaper to raise cash in the public market being public. We have seen at Fairfax what it is like to raise capital when the Street is scared. So if the company is any good and worth owning for Fairfax what is the difference between owning 80 and 100%? If ORH is that scary, we should only own 20 or 25%. IMO, this offering is as close to tell investors that they will buyout ORH without telling them. Every other action points in that direction. On top of that, ORH is very attractive with a book value of $51.90, now more like $55? And operating income of at least $5. You can buy it without even considering a take-over possibility. Some were not happy when I mentioned that FFH combined ratios were not terrific. The key issue there is the loss ratio which has nothing to do with staffing or overhead. It is pretty much always above 60% and closer to 70% at times. Chubb at their commercial division had a loss ratio of 57% last quarter while Crum & Forster did 66%. Very similar policies, length of tail, etc. Why is that? A possible answer could be due to size, ratings and reputation. If the client has a choice between a Chubb policy and a Crum & Forster policy with same coverage at same price, it is likely that the client will pick Chubb. So to get that business, Crum & Forster has to lower its price. They would still be disciplined but, they are suffering from a competitive disadvantage. With same loss or claims, it means that C&F policies are priced 14% cheaper than Chubb. However, it seems like a lot to me for that reason alone, so they could still be agressive a bit to get that premium to invest since they are so good at it. So what it has to do with ORH? IMO, it would make a lot of sense for Fairfax to integrate its subs differently and develop a strong name. Not 15 odd names, but one. Something recognizable for clients with a strong rating. A brand if you will. It could go a long way to reduce that loss ratio which I believe has something to do with what I mentioned above. These guys are thinking long term and it has to be more than just long term with their investments. They must be thinking about continuous improvements for the insurance business too. Just eliminating public listing costs and integrating overhead are nice cost savings alone following a take-over. Eliminate non-controlling interest, that would be nice. Cardboard

"I would make a leveraged bet against deflation if I could." What you can do is buying GLD calls. If there is any sign of inflation or if the dollar breaks down, gold will surge past 1,000 to probably reach $1,300 to 1,500 an ounce. If you are worried about the economy and carry a substantial amount of your portfolio in cash, putting 5% in GLD calls could be a good idea. It protects against inflation and calamity while cash right now earns nothing. Then if you get deflation, your big pile of cash will gain in value since it can buy more or offsetting the loss of your GLD calls. The fundamentals for gold are pretty good currently with good risk/reward. It is not a total speculation. GFMS announced last week that supply from gold scrap is down over 40% and that Central Banks are likely to sell the least amount of gold since 1994. These two elements are key to keep supply in line with demand since supply from gold mines is around 2,500 tonnes a year while demand is around 4,000. Demand has been growing steadily while supply from gold mines is on the decline. Some say that you can't value gold. I think that you can value it pretty much like any other commodity. It is just supply and demand. Remember also that these folks who tell you that, have probably never bought any other commodity for that matter, but they will not hesitate to buy a nickel or copper producer since it pays a dividend!!! How can you buy a producer, if you can't make a solid investment case for the commodity itself? I will admit that demand is a little tougher to estimate since most gold does not disappear like other commodities, but is hoarded. IMO, hoarding can be estimated too. It is based on global population growth and the fact that always a tiny portion of that population will never trust fiat currencies and will save in gold. This hoarding will never go back to supply unless prices go crazy high or if they needed it to survive. I don't belong to that group, but it is just a reality that they exist so let's not dismiss their importance in the thesis. So scrap, central banks and gold ETF's are likely the drivers for now since most other items of supply and demand are quite stable. Despite higher prices, jewelry and industrial demand have been quite stable over time. Also despite higher prices, mine supply has not increased, but decreased. So it would take much higher prices to bring more mine supply. It is there, it would just take more incentives for miners to develop these new higher cost resources. Cardboard

Does anyone here still own this company? IMO, it starts to look pretty good. Issues are pretty much being all fixed: pilots agreement, auction rate securities, cash to pay the convertible, deal with Northwest/Delta a while ago. There is still this crash investigation, but I assume that most will be covered via insurance. It looks pretty cheap on a P/E basis and if the recession is truly over, then business should get better. Of course, the new pilots agreement will raise costs, but not to the extent of destroying current earnings. I was curious as to what you all think. The stock is up a lot from the bottom in March, but still down relative to when it was discussed heavily on the old board or when they were trying to renegotiate their ASA with Northwest. In other words, going forward this may still be a huge opportunity. Cardboard

Check this out! http://www.sec.gov/news/press/2009/2009-179.htm Looks like that they caught some guys facilitating naked short selling with options. Just like what has been discussed by Deep Capture for Dendreon. I don't know about them, but it would be really nice to expose the ones who facilitated the Fairfax naked short selling. It could help with the court case. Cardboard

"For Berkshire and Fairfax, by writing long-tail insurance, they also create another near permanent form of capital, where they can do what they want with it for 10-15 years plus. Whether that float is zero-cost or low-cost is irrelevant, as long as the cost is less than issuing debt. Naturally, zero-cost would be preferrable though." That is the problem at Fairfax. They can't do what they want with it. The portfolio only contains 30% of the stuff that they truly love: WFC, GE, JNJ, DELL, ICO and others. I have no problem with float, I think that the concept is great. I am also not suggesting for Fairfax to become a hedge fund. I am simply suggesting to find a way to get float without getting into too much restrictions from regulators and other things. For example, if we were to cut our float by 30%, would we be able to move our portfolio to 60% in stocks and others? By cutting our float, would we be able to be more selective with our policies and obtain a better CR? We could have better ratings. It is all linked. IMO, this is what Warren did instead with insurance (cherry picking) and it has been very successful. Book value has compounded at 15.2% a year between 1995 and 2005. And he did it from a base of $17.2 billion in shareholders equity. I think that Fairfax could do much better than that from a base of $5.5 billion today. It just seems to me that they are a bit agressive to acquire capital to manage via insurance while the benefits are not totally there due to: restrictions on capital allocation, big profit hits during bad catastrophe years and a combined ratio that is too high overtime to generate much if any profits. We manage a ton of capital, but why? It is a case where less could mean more. Cardboard

Hi Yu, I think that you are bit early in both selling your FFH calls and entering your put positions. But, sometimes it is better to be early. Also, if you are obtaining more value with your new long positions than your FFH calls then it makes perfect sense to switch. What is crap for you right now? Looking at the charts, both Fairfax and the S&P have broken out. Fairfax has resistance coming up in the $320 to $330 U.S. range and could well break that level while the S&P appears capable to reach 1,150 to 1,200 by year end. Personally, I was close to market neutral with shorts and short ETF's until Meredith Whitney made her call on GS. The market was heading down since early June, but her call plus subsequent positive earnings reports changed the charts completely and I got out. I also entered new long positions. Glad I did! Charts are useful to me when shorting. Looking at various data, it seems to me that there is a "recovery" in the U.S. Inventories were so low in cars and other industrial areas that production had to restart to simply re-stock to a sustainable level. However, this will not be accompanied by an improvement in employment. At some point (year end?), the market will flat line waiting to see more data in order to determine if we are going to see a real recovery with rising employment or if this was just a bounce from the bottom in economic activity. My guess is that the market will be disappointed with growth indicators and will retreat. I plan to continue trading value, but I may sell some stocks in the next few months as most approach fair value to raise cash. However, I will not enter bearish positions until the market is at least in neutral. It is a freight train right now. I will let the market be my guide in terms of economic forecast (top down) since no one seems capable to do a better job: stagflation, depression, normal recovery, who knows? Cardboard

Misterstockwell, "If we see that FFH can't underwrite business profitably, then is there really any reason to be an insurance company? Why not be a hedge fund? If you are paying for float, why not just borrow money and invest?" Tears are coming off my eyes... Somebody finally got my point. You had Hamblin Watsa predicting the Japanese bubble burst, the Internet bubble burst, the Housing bubble burst and then on top of that... timing exactly when to get in and out of treasuries for each. If that was not enough, they recently picked exactly when they should invest in solid common stocks and bonds... What are they doing in the insurance business? At least in such a dependant way? Follow Warren. Use insurance to your advantage vs the opposite. Cardboard

By the way, my apologies to the Berkshire shareholders... On top of what I mentioned, back in 1995, Berkshire had $275 million a year in profits related to their operating businesses. This means extra cash and profits on top of the gains made with their investments. No difference in the equity or book value that I talked about, but more profits to go along. Cardboard