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ERICOPOLY
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Posts posted by ERICOPOLY
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Minimum wage today is $7.25.
Scorpion, what did you mean by the minimum wage is certainly not double the $3.50 number you referred to? It's almost exactly that.
And it's 4.53x the 1974 number.
I guess, being born in 1973, I have always assumed that inflation is a given. That it's just a part of life as I know it. My thinking is always taking into account inflation. This is why I think only a lunatic would buy 30 year bonds at 2.5% or 3.5%. After taxes, that's 2.3% return at best... and who in their right mind is thinking inflation over the next 30 years will be just 2.3%?
I think it's the older folks who have a harder time accepting it. I have trouble believing that Hoisington is going to make a real return after-tax for his investors on that money that he kept invested in 30 yr bonds when the market for them offered only a 2.5% yield late last year. He thinks the yield is going even lower... but if it doesn't he will be depending on the inflation rate remaining under 2.5% for a long time. Seems far too risky.
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I read in a book that some guy made $3.50 in 1976, and that was minimum wage I presume. And today's minimum wage is certainly not double that. What happened to the ravages of inflation over 30+ years? Did productivity gains have such a dramatic impact on the effect of inflation on wages? If so, the future may not be quite as dark as people think.
$0.75 in 1950
$1.60 in 1974
$2.30 in 1976
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Barron's feels SHLD could go down 50%, can't say that
I would argue with them. It is going to be interesting
to watch though.
Barron's also said that SHLD breakup value is perhaps $300 per share... and it hasn't even been two years since they said that
Two years from now I wonder what they will say.
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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
$24.9m cost -- that is 6.225% already that this has cost them, or 13.725% pre-tax over the next 12 months.
Considering that they don't need any more money at holdco per Greg Taylor's Aug 1st comments, that is bizarre.
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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)."
The appropriate fair price for FFH is only about $300, if an offer was made 30 days ago.
Forget tangible present book value (reflecting investment gains since last reporting period) and intrinsic value... that stuff doesn't determine what a fair price is. No, Mr. Market is the analyst to be relied on.
If he pulls that kind of a stunt right now, I'm afraid the buyout price would be about $55... or present book value. Very fair of course!
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Some highlights from these Prem's comments:
- we have increased the cash and marketable securities in our holding company
- These additional funds give us increased flexibility, including the ability to repay debt and other obligations from time to time.
- we are committed to maintaining outstanding financial strength by always having a substantial cash and marketable securities position at the holding company level.
Increased flexibility to do what, eh? Spend a big chunk of the money already in holdco ;) Then, the new slug of money is useful for debt repayement, and other obligations from time to time.
Come on, they just told us (on August 1st) that they were already comfortable with holdco... I call as my witness Greg Taylor:
our holding company liquidity remains very strong, almost no change from the first quarter. We have cash and marketable securities at the holding company up $880 million, $863 million net of liabilities.
This $880 million or the $863 million, just note for you, is greater than the $858 million and Fairfax bonds that are outstanding, very important to note. All of our capitalization ratios remain very strong. At the operating companies, as I have shown you all the companies have very strong capital ratios.
On a consolidated basis Fairfax’s shareholder’s equity increased to $5.6 billion from $4.9 billion at the year-end. That is up 13% year-to-date. As a result, you'll see that Fairfax's debt-to-capital ratio improved to 22.6% that was 23.7% at 2008 year-end.
And then finally our debt maturity profile, you will see that we have no major debt maturities until 2017. Obviously, we have very low refinancing risk in these markets in addition to our very substantial cash resources at the holding company.
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Cardboard, Ericopoly, et al:
While we're talking ORH share counts and conspiracy theories, does anyone have any more insight regarding the big block trade(s) that happened on June 26th, when volume was >2.5M shares? In quarter ending June 30th, it doesn't look like any specific institutional investors added (max +173K) or reduced (min -678K) their positions near enough to account individually for the activity.
http://www.nasdaq.com/asp/holdings.asp?symbol=ORH&selected=ORH&FormType=Institutional
I think if you gobble up 2.5M shares on a nibble by nibble basis, and then sell it in one big block, it shows you having zero net activity in this report.
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Yeah, well like Smazz said, when asked about taking the subs private Prem said something like, "Well why would we want to do that if we already control the float?". I remember a couple of annual meetings back UCCMAL told us about that line.
Then he marches right out there and snags NB at 1.3x. I missed out on the NB takeover.
The saying goes, "Fool me once, shame on you. Fool me twice, shame on me.".
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So I keep all my FFH shares. What do I know is they'll do it if the deal makes sense for FFH owners. If they do not do the deal, I'll still be happy anyway. It's not like their capital allocation decisions universe begin and end with the remaining of ORH.
You are dead right about that. They should invest in whatever they think will put in the best returns. But as long as they are going to be investing in equities, then ORH makes the most sense because they already have ORH's investments allocated to this other universe of best equities that you presumably speak of. So buying ORH is actually the same thing as buying the best things that are not ORH. HWIC is Picasso, and ORH minority interest is more canvas. The paint they will put on the canvas are these other investment opportunities that they tell us they are finding all over the place in the global equity/bond markets. Plus, as long as they are managing the investments at ORH they might as well get the full benefit from it instead of basically providing some of it for free to minority shareholders.
At the end of the day, you issue debt at 7.5% which after tax is 5%. You invest it in ORH where, according to boardmember ReturnOnMyCapital equity is compounding at 20% after tax. These past six months would have provided ripping returns from a buyout that only costs them 5% per annum... waiting and sucking thumbs while nibbiling at ORH shares below book did not pay off in the big picture. They are still bullish about their prospects for their current holdings... this implies the train still hasn't left the station... or at least there is still time to scramble after it and hop on before it gains too much speed.
They are seeing great values in the stock and bond markets today... this is the time you want more float, but the market is soft and they can't grow their float organically... so it must be bought. Or the other approach is to wait until equity markets no longer provide terrific value -- just like buying it today isn't as great a deal as buying it in March, it might be a better time to buy it today rather than a couple of years down the road when the investments at ORH have already delivered terrific returns.
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All jokes aside, I agree with Smazz, if ORH can continue to repurchase shares the way that they have been, FFH may wait until they only need to pay the premium to insider shareholders before taking ORH private.
I spent a long time thinking about that possibility. The self-serving conclusion I dreamed up is that they need to retire shares at a fast enough pace to offset the speed at which the total cost of a buyout keeps rising, driven by HWIC's success at growing the book value at ORH.
Since end of Q1, they have not met that goal. Book value grew by 17% but they retired fewer than 10% of the remaining shares.
They either need to tone it down a bit at HWIC, or take it private soon.
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The other thing I would like to add...
$1,300 invested in FFH will likely outperform $1,000 invested in ORH.
I am happier at the moment to have $1,000 in ORH rather than FFH, because like you said their float looks to be less expensive and on top of that I think the discount to book looks far better. But to have an extra 30% of equity... hmm, I don't think ORH will beat FFH anymore if you handicap FFH/ORH like that with a 30% boost.
FFH dropped with the NB takeover and I expect it will be worse when ORH gets taken over. I think that's because it's better to be getting the premium than giving it. In a post ORH takeover world, FFH will have a considerable amount of goodwill on it's books -- offsetting the ICICI Lombard hidden value.
So assuming the deal was announced this week (in a pretend world), you would be looking at ORH trading today at maybe 92% of tangible Q2 book, and FFH trading at 1.08x tangible Q2 book. That means FFH is trading at a 17% premium to ORH, and that's without even accounting for ORH's fair share of ICICI Lombard hidden value which we need to add to ORH's Q2 book to be fair.
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Eric, FFH has averaged high cost float over quite a few years. ROE at FFH has averaged 14% for just as many. That is why I mentioned dilution by less desirable business returns; both ORH and FFH share the same investment returns (more or less). Add to that $400 million of reasonably high cost new debt capital at FFH and the struggle continues.
As for life companies; please name me one that produces a combined ratio below 100%: Suggesting a cost to their float.
I'm not entirely sure it is my logic that is flawed, but no insult intended.
You can go back to 2001 and see that ORH recorded a 103.1% combined ratio even if you exclude 9/11 and Enron.
You aren't giving FFH enough credit for FFH's turnaround -- focusing on historical cost of float is fair as long as you remember ORH's historical cost of float.
If you exclude a few recent years, ORH doesn't look good historically either.
Having no cost float doesn't make it equity. Their hands are tied -- they can't put it 100% or 80% in equities like they can regular equity. It is there to pay claims and for painfully clear reasons you just can't take on too much risk with it.
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After the quick 30% pop, put it in FFH. That's what.
Regarding your treatment of float as equity. Fairfax has more float per share, you should be happy with the switch. Truly though, I think your reasoning there is highly flawed -- what about a life insurer with a much higher float/equity ratio? Float is not equity.
Eric, you've convinced me. Somewhat.
After a good pop in FFH already I've sold some (15%) and put it in ORH. Mostly common and a handful of Feb 45 calls.
As with you if we get a pop due to a buyback/privatization I will put it right back into FFH. I'm doing this transaction in my registered accounts. I hate friction and I hate paying the taxman too soon. If it doesn't happen I'm perfectly content owning these ORH shares for quite some time. They are a great value regardless.
I hope to end up owing you a beer.
Cheers.
I hate friction and taxes too. There is no certain success here, but I like the odds. Worst case, I pay the taxes and hold ORH long term -- the taxes would erode the gap in value that I presently see in favor of ORH, but it won't completely erode it.
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I mentioned the ORH premium due to high ROE. I also mentioned, perhaps more poignantly, that if an insurance\reinsurance business can generate no cost float, the value of that float should be treated just like shareholders' equity. In effect, ORH's true book value is = float + common shareholders' equity, which comes close to $8 billion. Also meaning that ORH is trading below 1/2 true book value.
I also mentioned precedent with this type of math in the GenRe acquisition by BRK.
I understand that it's nice to see a quick pop in a takeover target's stock price. But, as they say, then what? I would much rather leave my capital in ORH generating tax-deferred returns of 20% per year than have a quick 30% pop and have my capital prospectively diluted by less desirable businesses generating less attractive overall returns on my capital for years to come. If a takeover of ORH should happen, it should reflect such a difference for future years. Prem, of course, knows this. Does no one else?
After the quick 30% pop, put it in FFH. That's what.
Regarding your treatment of float as equity. Fairfax has more float per share, you should be happy with the switch. Truly though, I think your reasoning there is highly flawed -- what about a life insurer with a much higher float/equity ratio? Float is not equity.
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I don't know what's going on with the market for 2011 SHLD puts, but you can effectively write the $40 strike SHLD put and use the volatility premium to buy the same amount of notional upside in the 2011 $330 strike FFH call.
Which is riskier, SHLD at $40 or FFH at $330? At the March bottom SHLD was going for about $35, FFH was about $211.
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Heres how I look at it. Under my base-case scenario, the $40 call returns 0%, vs 78%. I feel $50 is a pretty reasonable base-case assumption given its been trading slightly less than book lately, and book at Q3 will probably be $54 +/- 1.
ORH $40 call $45/$50 Spread
Catastrophe $40 -100% return -100% return
base $50 0% return 78% return
Buyout $57 70% return 78% return
High-multiple buyout $65 150% return 78% return
Catastrophe -- I suppose in that category one can include 20% pullback in the stock markets. That's not a terribly unlikely outcome IMO, and might easily wipe out the $40 call too, however that call doesn't expire until Feb. Personally, I'm in the $40 strike Feb call, but I can afford delivery on 100% of the shares without getting into leverage -- so really I've bought a put at $40 so that I can go 100% net worth notional into the trade without catastrophic risk of loss.
However, philosophically I think we need to separate out buyout from non-buyout.
In the non-buyout case, I think your position is far too risky. You wouldn't normally be risking 100% loss from merely a 10% 3 month stock price pullback would you? Okay then, you would only do this for the buyout scenario -- then in that case, I think the $50 call you wrote weakens your trade. You seem to be making yourself feel more comfortable about your downside, and in the process severely capping your upside if your thesis works out, yet your downside doesn't look safe to me at all.
Anyhow, that's what I think. I'm only being critical because 1) I think you should rethink this and 2) you are advocating it to others
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I wrote the $50's for protection in case the buyout doesn't happen by nov, I still think it will be @ 50 by then. So if it is at $50 and the buyout has still not occurred, I will make the profit and can take the proceeds and reinvest into new options (rather than locking capital into feb's).
I looked at buying deeper in the money calls as you are saying, but thought it tied up too much capital, and there is more downside risk if something like Katrina happens.
The amount of capital being tied up doesn't matter. 78% return on every dollar invested is all that matters.
Katrina will wipe you out 100% -- really believe stock will hold above $45 if Katrina happens? Really??
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Anyhow, I'm not leveraged in my ORH position.
I don't believe in the buyout enough to do that.
I'm curious though why you wrote the $50 strike calls -- if you are bullish enough to risk losing 100% at $45, why did you write the covered calls at $50 strike? Buyout is going to be for at least a 1.1x book multiple, IMO. Under 1.1x book, your move hurts yourself. Under 1.2x or 1.3x, serious impairment occurs. Risking 100% for a max 78% return just seems not the best idea.
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Buy Nov. 45 calls sell Nov 50 Calls. I did this morning for $2.8 each net. Will payoff $5 if ORH is over $50 by November 20 (78% return). Will break even as long as ORH is at $47.8 by Nov 20.
You are going to lose 100% if the stock closes at $45.
Instead you could buy the Feb $40 for $10 and only lose 50% if the stock is at $45.
And gain 72% if buyout at 1.1x, or 98% if the buyout happens at 1.15x book, or 167% if it happens at 1.3x book.
I see more downside protection while at the same time more potential upside.
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Can you expand on this statement?
No need to expand. The feeling is the same I had when I saw Usain Bolt run a 9.58 today and pull up near the finish. Cheers!
I didn't know if you were implying you felt that it was a fraud and the 30% annual gains were not actually there.
I didn't get that idea from his post. Rather, I understood the meaning to be that it took more than just "proprietary trading" to post those numbers -- like he is getting an edge from somewhere else.
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I dont see why when they can continue to buy the company back at 10% tranches should they jump ahead and pay a premium. As Prem said when he was asked again about not buying more of the subs his comment was:
"well, we get the float anyway"
They don't get the float anyway is more like it -- we're talking about buying the part that they don't own.
No his comment was something to the effect that they get the float and Im assuming he means control of the float.
Ah, HWIC is in charge is his point. That's true.
However in the past they have grown their float in soft markets via acquisition. That's what they get from a buyout.
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Perhaps I just didn't understand Prem's comment.
Anyhow, he might have misspoke because he bought NB, despite having the float anyhow as he put it.
Perhaps when you want to acquire a company, you don't tell people ahead of time. Something about tipping your hand maybe?
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I dont see why when they can continue to buy the company back at 10% tranches should they jump ahead and pay a premium. As Prem said when he was asked again about not buying more of the subs his comment was:
"well, we get the float anyway"
They don't get the float anyway is more like it -- we're talking about buying the part that they don't own.
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8. Although Andy has done a fabulous job operationally at ORH, it is Hamblin Watsa's investment prowess that equally (...if not more so) contributed to ORH's gain in intrinsic value and book value. So, a buyout valuation of 1.15 - 1.30XBV range is very reasonable given current soft markets and historical trading range of ORH and likely be considered 'fair' by any valuation committee formed at ORH although somewhat be-grudgingly.
Fully agree. Somebody earlier said that because of ORH's 20% ROE, then it's worth some massive multiple. Well, there's no way that Fairfax should have to pay for HWIC's talent given that they already own HWIC. So you have to back out HWIC's talent from ORH's ROE, then value it.
Hmmm running out of ideas
in General Discussion
Posted
Buffett may have that opinion publicly, however his biggest disclosed portfolio move last quarter was to sell COP and buy JNJ.
I'm only saying that because it doesn't look like he is backing up the truck on metals or commodities. The only move I've seen him make is to lighten up on commodities (oil) via that COP sale.