ERICOPOLY

I have a brother-in-law that sits on his ass and does nothing. Oh wait, no that's not entirely fair. He works as a bartender in Big Sky during ski season -- his shift is only 3 nights a week. Then he skis the rest of the time. He lives on an income from a trust but it's only a couple of million. He is 40 yr old and I think the money will run out but I think he's too stoned to do anything about it. The trust is invested in mutual funds that charge more than 1% in fees, and on top of that there's a 0.5% trust management fee. So let's say the fund is invested in 3% dividend payers... right there fully 1/2 of his dividend income go to the fund managers for doing pretty much nothing (it's basically no different from an index fund). He didn't finish high school -- forget about college. Just party party party. The money is 3rd generation, so he is blowing it right on cue.

Yes, I understand the empty nester problem and that they are a huge generation. But how about the young people who are looking about for a nest? Echo-boomer demographics are increasingly moving into the upsizing stage. Perhaps they buy the McMansions at a discounted price, but either way there is a dam of pressure building for family-sized homes. The Echo-boomers ("generation Y") are nearly as big as the boomers, yet were born in a tighter band of years. They range from 18-30 yrs old, and they are 3x the size of generation "X".

Eric, why do you say the levels are unsustainable? With autos, I don't see why we need to have any production in this country. With housing, the current building rate may be unsustainable over the very long term, but I think we have years before the rate would need to increase in order to accomodate new household creation. New cars are being purchased at a rate below replacement needs, that's why I said it. Whatever the long term trend, production fell by 40% by Feb 2009 over a period of just a few months. That's a sudden shock, more than twice the rate of decline in the 1982 recession. Some people who could afford payments on cars could not buy them due to unavailablility of credit -- if the govt pumps money into the financial system so that these able borrowers can buy a car, it's not "unsustainable stimulus". Unless one believes that the "new normal" will be an environment where banks refuse to lend to people who can afford to make the payments... I don't think so. The stimulus buys time for the banks to earn themselves out of their losses, after which they will be able to lend without stimulus assistance. Housing... I think a similar situation. Just look at your brother... he couldn't find anyone to help him build a home even if he wanted to -- he had to set up an LLC to buy the house with a commercial loan. That's not normal.

SD, You are right, a bubble is something that cannot be sustained. You are right, the stimulus cannot be sustained as it would eventually break the government. But hold on there a minute... A simple sanity check would suggest that we are building houses at an unsustainably low pace. There is also an equilibrium level of automobile production, and without the stimulus we were producing cars at an unsustainably low rate. There are unsustainably low levels of activity in the economy that are the very reason why some of this stimulus is necessary in the first place. Are we, with the stimulus, now building cars and houses at an unsustainably high rate? I'd say no. There was a bubble in house construction a few years ago, but today it's quite the opposite. Rather than a downwards correction (what we were facing a few years ago), we now face the inevitable upwards correction... with a couple of years of waiting for the inventory overhang to clear. So I can't agree with you on a bubble being a no-brainer here. The no-brainer to me is that production levels of major sectors of the economy (autos/housing) are operating at unsustainably low levels, not high levels. - Eric

I think gold is currently becoming popular to discuss for the same reason. Looking back 12 months, gold has been no better than AUD. But people must look up the price of gold more frequently or something, because I hear a lot of talk about gold but not much chatter about AUD. Maybe it's because we can't melt our jewelry into AUD. I don't know. http://finance.yahoo.com/q/bc?t=1y&s=AUDUSD%3DX&l=on&z=m&q=l&c=gld

Those are prior to the seven lean years. My point is that, sure, the stock sucked on the NYSE up until late 2006 but these were all lean years (runoff sucked up all profits). Then there was a big restatement in July 2006 that just made people so happy to run out and buy the stock! But then people collected their heads and realized that runoff really was fixed, there was some short covering, and it traded between 1.75x -1.2x book up until August 2007. Then it went downhill but things were no better over on the TSX for NB. Would a TSX-only FFH have fared any better than NB late last year? I just question the theory that FFH is only cheap due to it's NYSE listing. I think if they generate more underwriting profit people will bid the price up. I think MKL's premium is really just due to the generally better underwriting profit -- the market capitalizes that as extra income and it shows up as a premium to book... or so I believe.

I don't believe a TSX-only listing is going to solve the valuation problem because I remember NB trading cheap. There will still be times when it will trade at book value, even below book value, same as NB. NB mostly traded above book but only during good times... once the markets blew up it went down to book and even below that. Fairfax was broken during the good times and enjoyed a premium in late 2006 and early in 2007 only to see the premium disappear once the markets blew up. So having a "fixed" Fairfax we only really have late 2006 and 2007 data to go on -- sort of a small sample. The markets I think won't pay a premium until it senses that the next hard market is here. There's no telling how much smaller the insurance operations will be once the soft market is over (it keeps shrinking), and it's these insurance operations that the market pays a premium for (that's my understanding). Personally, I am willing to be patient because we are making excellent money as we wait. Sure, the markets might crash and pull down book value again, but if I sell out and buy something else that isn't going to help me at all with that risk. I hope they boost the dividend again. I feel more comfortable knowing what my actually income is (as opposed to look-through), especially given the turmoil (my other alternative is to use my margin as a pay-day lender, but the dividend is clearly a safer strategy).

So basically they are saying they only expect 5-10 loans to recast all of next year? And why don't they mention 2011? I think there has to be a bit more too it than this. Remember that: 1) they are only talking about the number of loans reaching the 125% recast trigger 2) it's pretty hard to grow the original principle balance to 125% if we're talking about a loan that's only a few years old and where the interest rate was very low to begin with (a very low interest rate means that even if you pick the minimum payment option 100% of the time, it will still take a while for the original balance to grow to 125%). And they do in fact mention 2011. Here is the full quote (inclusive of 2011). I'm also including the part about their portfolio of ARMs recasting: Based on assumptions of a flat rate environment, if all eligible customers elect the minimum payment option 100% of the time and no balances prepay, we would expect the following balance of loans to recast based on reaching the principal cap: $1 million in the remaining quarter of 2009, $3 million in 2010, $1 million in 2011 and $6 million in 2012. In third quarter 2009, the amount of loans recast based on reaching the principal cap was minimal. In addition, we would expect the following balances of ARM loans to start fully amortizing due to reaching their recast anniversary date and also having a payment change at the recast date greater than the annual 7.5% reset: $2 million in the remaining quarter of 2009, $39 million in 2010, $44 million in 2011 and $72 million in 2012. In third quarter 2009, the amount of loans reaching their recast anniversary date and also having a payment change over the annual 7.5% reset was $9 million. They are also proactively working with the obvious train wrecks to keep them on the rails: We also are actively modifying the Pick-a-Pay portfolio. Because of the writedown of the PCI group of loans in purchase accounting, our post merger modifications to PCI Pick-a-Pay loans have not resulted in any modification-related provision for credit losses. We also have taken steps to work with customers to refinance or restructure their Pick-a-Pay loans into other loan products. For customers at risk, we offer combinations of term extensions of up to 40 years (from 30 years), interest rate reductions, to charge no interest on a portion of the principal for some period of time and, in geographies with substantial property value declines, we will even offer permanent principal reductions. In third quarter 2009, we completed 19,148 full-term loan modifications, up from 18,465 in second quarter 2009. The majority of the loan modifications are concentrated in our impaired loan portfolio. As part of the modification process, the loans are re-underwritten, income is documented and the negative amortization feature is eliminated. Most of the modifications result in material payment reduction to the customer.

Is this an IRA account or just an individual brokerage account? Fidelity now has an "international trading" offering in the individual brokerage account. This just went live in the past month. So you can now trade FFH.TO if you want. But you have to enable the feature in your account. You go into the "Account&Trade" menu and choose "Update Accounts/Features". Then "International Trading" is listed 2nd from the bottom. But they still don't allow you to margin foreign stocks.

You've got a problem there. Here is what you get in Seattle for nearly the same price: http://www.windermere.com/index.cfm?fuseaction=listing.listingDetailUpdated&listingID=66377289&paginate=true Awesome city views.

Once supply runs out people will either need to buy whatever is on the market or break ground. Supply will run out in a couple of years because the pace of new construction is too low. A big sore spot in the economy is all the lost construction jobs, and the lost business selling carpets, appliances, etc... So how will the economy look when construction rebounds to meet the demands of the growing country? As far as I can tell, the cost of building a new home is higher than the homes presently on the market. Here is a tongue-in-cheek example from Newport, RI -- only $277 per sqft but look at the craftsmanship and materials. That's a value investor's home: http://www.realtor.com/realestateandhomes-detail/659--Bellevue-Av_Newport_RI_02840_1108974953

I haven't been thinking about it.

Ok.. let's back up a wee bit here... It was humor. The rest of what you said is true, I agree with all of that. I guess you didn't catch my sarcasm. The funny thing (to me anyway) is the line about the big bad bank bully who wants to take advantage of me by offering me super low rates with no money down.

There is the $9,000 or so standard deduction that a married couple foregoes in order to chase the mortgage interest and tax deductions. For a median home, it's nearly a wash.

The present situation is not pretty. You're right, people can easily find an extra $1,000 in their pocket each months from just walking away. I find the term "predatory lending" to be curious... it would seem that the lenders were the rubes here, and the zero-down I/O crowd are the savvy ones who are taking no loss. Predatory borrowing is perhaps more like it.

Reasons for not walking away from an underwater mortgage (from my perspective): I simply don't like renting. I like to be an owner. I want to cut down that tree that blocks my light, buy furniture that suits the home, put in the patio that I want. I don't want the owner calling me one day and say "I'm selling the house out from under you. Pack your bags, you have 30 days to get the hell out of my house. Meanwhile, I'm listing the property right away and you are going to have realtors walking clients through your home. So sorry!". Last... Many Americans had all of their "savings" plowed into their home and today if they walk away they "lose" it all... you could rightly argue that it's already lost but... they are still in a home they own (benefits of which I listed above). Once they walk away, they have no down payment for the next house because they don't have any meaningful savings outside of their home. It's either stay in the house they love or go and rent and be treated as second class by the landlord who tells you he is selling too (a month after you move in no less).

Here is my advice: 1) Move to Interactive Brokers 2) Buy FFH puts to raise your margin borrowing capacity to a safer level (when they expire worthless you at least have a tax loss) Other ideas to further reduce your margin risk at Interactive Brokers: Sell your energy holdings (assuming no taxable gain): A) replace them with deep-in-the-money LEAPS on those same energy names (if available). OR B) replace them by writing deep-in-the-money puts on those same energy names (the money you get from writing the puts helps count towards your total margin equity, thus increasing margin borrowing capacity and thereby reducing margin risk). You also benefit by not actually borrowing any money, so no margin interest expenses, but you miss out on a dividend which will be partially if not completely (and then some) offset by the volatility premium in the put contract you write. Downside is that soon you won't be able to buy puts anymore on FFH, and if you write deep-in-the-money puts the volatility premium tends to virtually disappear as they go further into the money (increasing the chance of somebody putting the shares to you at the very time you least want them to -- when the shares are crashing... and that's why it's annoying that Interactive Brokers won't grant you a stay of execution and allow you to handle the margin call yourself).

I think a better way of handling this would have been for Fairfax to give us all more time to arrange our affairs. Why the rush?

:D We can increase home prices by destroying current homes or asking teenagers to cohabitate earlier. There’d be a lot of young men who would take that deal.

Selling stock at below IV -- not a great option. Getting a cash dividend means realizing 100% intrinsic value -- best option. People are always bitching that they can't sell FFH at intrinsic value, but taking cash out is getting your intrinsic value piece by piece. Of course, I live on my investments so my perspective is different. When I had a job and didn't need more taxable income, I felt the same way you do. Plus, the market is soft right now anyhow -- paying this dividend does not impact the size of the remaining insurance operations. Instead, it increases float:equity leverage slightly so the equity left behind will compound a wee itty bitty amount faster.

It was worse than that because you are looking only at the pre-tax yield.

I read somewhere yesterday when I opened my Interactive Brokers account that US investors are not allowed to (SEC restriction) trade options of stocks not listed on US markets. Did I understand that correctly? If so, it's a big disappointment I can no longer use options to hedge FFH. I rather like being able to just buy some puts as a means of diversification, rather than reducing my allocation size. And, of course, it's nice to buy some at-the-money calls when it tanks rather than leveraging up via borrowing money (riskier).

Get an account with Interactive Brokers. They give 30% initial and maintenance margin on Toronto FFH. http://www.interactivebrokers.com/en/p.php?f=margin That looks like it's a viable alternative, thanks for the help. I opened an account with Interactive Brokers last night. One thing I learned about their margin program is that they do not have margin calls... instead they just start selling your stuff immediately. So, that's likely a big part of why they allow more liberal margin -- it is inherently less risky for them. Now if delisting from the NYSE makes the FFH stock trade below book value less often, then that lower the risk of this ever being a problem in the first place.

Skates on thin ice... declined!

I read that WEB's credit score is 740 or something. Mine is higher. Got you wondering now eh, how much money does ERICOPOLY have? Better credit than WEB????