txlaw

I believe Lou Simpson owns NRG. I like NRG for the long term, although I don't currently have a position in the company. Their earnings are levered to nat gas prices, but they are diversifying away from this by buying and constructing alt energy plants and through the Reliant acquisition. They are very good with disclosure, and their executives are focused on ROIC. They have a big presence in ERCOT, and they are working with Houston city officials to make the city a testing ground for electric vehicles. In general, they are very involved in the politics of energy and carbon. I think they are trying to be sort of like Brookfield in their joint venture approach to new projects. I kind of think of NRG as a merchant generation-focused private equity company. Oh, and the executives have implied that they would be a good acquisition target for a large European utility holding company in a couple of years.

Myth, I read through the 10-K and am waiting for them to put the conference call online so that I can see if there are any interesting tidbits of info in there. I definitely agree that ATSG is still cheap at this point. By my own quick and dirty calculations, I estimate that they will have a minimum of $65M after-tax owner earnings going forward. Since I'm not taking into account that they won't be paying cash taxes for 3 years, that their 767s undergoing modification will be put into service, and that their ACMI services will be more profitable going forward, I think this is a conservative estimation of owner earnings. Even after adjusting the market price by taking into account long term debt, we're talking about a double digit owner earnings yield. ATSG is now my largest position after the big run up. I'm tempted to take profits, but I really like the business model going forward and the way that management has handled all the adversity of the past couple of years. I think we may have a great business in our pockets here. Congrats to everyone who participated!

Bought more at $2.85. ;D

F--- yeah! ;D I was hoping that this was the reason the 10-K was delayed!

Kapil, the issue is that my parents are considering converting two of their Traditional IRA accounts to Roths, but their household income disqualifies them from contributing money to their Roth IRAs going forward. So once they convert, I don't think they will be able to contribute to the accounts. That actually shouldn't be that big of a deal in their case, but I'm wondering whether they can make a final contribution to their Traditional for 2019 before initiating the conversion process. Any ideas about that?

twacowfca, Do you know whether you are allowed to contribute to your IRA for 2010 before converting it to a Roth? Or do you have to forgo the contribution for this year in order to convert? -txlaw

Thanks for posting, dcollon.

I've actually never done a thorough analysis of LUK, and I've never owned it directly (I own it indirectly via FAIRX). Last year, I did a very simple back of the envelope calculation and almost bought at $16 but then didn't as a result of thumb sucking. Leucadia is much more than just ACF, JEF, and FMG. They have a huge variety of assets, including real estate, stakes in investment partnerships, and stakes in startup ventures. They also have lots of NOLs that will get used up when they start making profits again. Who knows when they will ever pay tax again. But it's too difficult for me to figure out this company. One of these days, I'm gonna try to find and read all their 10-Ks and figure it out, but I don't have the time or inclination to attempt to do so anytime soon. Until then, I'll let Bruce Berkowitz decide whether to put money into it.

For those of you who follow Leucadia. http://www.bloomberg.com/apps/news?pid=20601109&sid=a.SVHtsvhHTI&pos=11

I think it's unlikely that the US will take extreme measures and label China a currency manipulator, institute tariffs, or file a WTO suit. I believe the rhetoric is intended to put pressure on China to resume revaluing the renminbi -- I don't think the US will follow through in a way that leads to tariffs or sanctions or what not. China clearly has to let the RMB appreciate relative to the USD, but the real question is how incremental this should be. The Chinese government cannot just let the renminbi appreciate rapidly because that would cause a shock to their export sector, which is currently sustained off the backs of other exporting nations, both developed and undeveloped. If you believe that people like Edward Chancellor are right about a China bubble (and I do), then the Chinese economy is in a precarious state right now. Whereas before their stimulus program, they might have only gone into a normal recession, they could potentially be in a state where they could enter a debt-deflationary spiral if their asset bubble bursts. Of course, it's unclear to me exactly what happens if their bubble bursts because the banks are arms of the state and might not suffer as much as banks in a private sector system. Still, if the bubble bursts, who knows what the political outcome could be? If migrant workers are thrown out of factories and things get hairy in the big cities, you could have a lot of social unrest. Those Chinese who have shoveled their money into the stock market or property market could be wiped out in a way that causes them to question whether the pursuit of wealth is really the only thing they should be concerned about when it comes to government policy. Since stability is a cornerstone of Chinese government policy, I'm pretty sure that they won't just let the renminbi appreciate willy nilly. And I'm pretty sure responsible policymakers in the US get that (maybe not certain Congressmen, though). But now that things are starting to get a little bit better globally, the Chinese have to once again start letting the currency appreciate -- slowly.

Myth, I like your asset allocation approach, though of course I also believe, like Valuegeek, that the structure of one's portfolio can vary substantially based on one's style. It should also depend on whether you are managing your own money versus other people's money and on the individual circumstances of your principals. I manage my own money, my parents' money, and my sister's money, and I have different asset allocation approaches for our different portfolios. My own portfolios tend to be highly concentrated while my parents' and my sister's portfolios are more diversified. I tend to trade more in my own portfolio, and I only use options in my own portfolio. I always take into consideration volatility for my parent's portfolio because of their own psychology and because of the potential that they may need to draw down money from their portfolios unexpectedly. My own regular portfolio tend to be highly concentrated with an emphasis on the deep value securities mentioned in your second category of investments. My parent's portfolios, on the other hand, have more high quality company stocks in them with owner managers at the helm or with great business models that are not dependent on stellar management. FAIRX makes up a rather large part of my parent's and sister's portfolios, as well as my own retirement portfolio. One additional category I might add to your portfolio, perhaps in the first bucket, is high quality company securities entered into at great prices that don't necessarily depend on having good managers to generate lots of cash. Good examples of stocks in these categories would be KO, KFT, or PFE. (I always remember Peter Lynch's thoughts about assuming that sooner or later, idiots will be running your business.) These equities tend to be less volatile and can be sold down at times to purchase deep value companies when the opportunities arise. Of course, that does not necessarily hold true when you get markets that tank like in October 2008 and March 2009. I don't hedge. I don't short. And I've learned that it makes a good deal of sense to set up a specified percentage for my cash position because I have a tendency to want to be fully invested, which could potentially deprive me of opportunities to deploy money when Mr. Market provides an outstanding opportunity. For example, if I didn't have a large amount of cash on hand at this point (close to 20% of my portfolio), I probably wouldn't have been as comfortable adding to my ATSG position last Friday. ---- Your "eww" stocks question is also very interesting. I've been reading some of Michael Burry's posts and letters, and he mentions that he is often interested in "ick" stocks. I'm also quite interested in getting into "eww" stocks, though I often wait until I'm absolutely sure that the sky is clearing up. I tend to miss monster runs associated with severely distressed companies, but I also sleep well at night. Also, it's sort of surprising how often prices will stay irrationally low even after the "kill the company" risk gets taken off the table. Some of my own "ick" stocks: ATSG, C, ETFC, SFK (very small position)

Thanks, Tariq. Nice site. I'd also recommend going to the Scion Capital website and reading some of Burry's early letters to his investors. His primer on his RMBS CDS investments is particularly interesting.

I haven't read any books on the British East India Company, but I have to think that Watsa's comment about his "favorite company" was a bit tongue in cheek. It would be really odd if an Indian proclaimed that the East India Company was his favorite company, since the activities of the British East India Company went hand in hand with British imperialism in South Asia.

Thanks for your input, SD. Will probably just hold on to my position and sell out at $2 if we get there. Does anyone know what FFH's cost basis is for their entire SFK investment?

I'm interested in hearing Sharper's and other people's thoughts about the commodity pricing going forward too. SFK should generate a ton of cash over the next few quarters, and if the market values the company at, say, 8 times cash flow, that would be great -- and ridiculous at the same time. On the other hand, if debt is meaningfully reduced, and industrial capacity continues to be rationalized, then maybe we're looking at a good long term entry point around $1.20. But I'm worried about how low the price of NBSK can go once the cycle turns downwards again. I don't know enough about the worldwide dynamics of pulp demand and supply to get comfortable with adding to my very small position.

Makes sense. Greenberg will now wash his hands of AIG and concentrate on C.V. Starr. See http://www.nytimes.com/2009/10/27/business/27aig.html?pagewanted=2 . The price range involved with the transaction is quite interesting.

Added to my position on Friday. Hopefully, I won't regret it when the 10-K comes out on March 31.

Great thread folks. I initiated a small position in SFK at $1.20 after the capacity in Chile and Finland got taken out. I'm a little worried though about the supply and demand dynamics going forward. Is it reasonable to assume a floor in NBSK price of around $CAD 780. I'm worried that when the iPad and other slate computers start coming out, the demand for "reinforcing pulp" will drop much faster than supply does. Also, do you guys see labor issues being a possible impediment to a combination between say an SFK and a CFX? I don't know much about labor relations in Canada. Finally, how much output do you guys think SFK can sell forward? A whole year's worth? Two years worth?

Best interview with Lewis I've heard so far. http://www.npr.org/templates/story/story.php?storyId=124690424

Gotta read the 10-K before I can figure out my current valuation. After the quarter I lightened up on FUR substantially since it no longer appeared to be as dirt cheap as it was when it was close to $9.

Right on.

Not that I know of, unfortunately.

I have to disagree here with respect to his universe of investments being very narrow at this time because I think you are not taking into account that FAIRX is now a "go anywhere there is value" fund. Bruce Berkowitz is smart enough to be trusted to use shareholder funds to invest up and down the capital structure of U.S. companies; he has the ability to invest in the equity markets and the debt markets, and he can help recapitalize companies by purchasing new issues or converting debt he owns to equity. In an environment where many companies are overleveraged, this gives him plenty of places to put his money. In fact, by being a big fund and having large amounts of capital at his disposal, he can influence the margin of safety in companies that would normally present no margin of safety for the outside passive minority investor. He can also limit the size of these special situation investments to a reasonable percentage of his portfolio. There are very few other people who I would trust with my money to make these sorts of outside the box investments -- those others would be Buffett, Wilbur Ross, and HWIC to a lesser extent. This is an important discussion because it goes to the heart of the question of whether FAIRX is too big and should be closed at this time.

It actually does not surprise me that Berkowitz has taken a position in AIG, especially given his stakes in Citi and GGP. Underlying the investment is Berkowitz's determination that the AIG common is probably worth a lot more than what it’s trading at if there is a recapitalization of the company. But note that Berkowitz is investing across the entire capital structure of AIG, not just in the common. Remember when Bill Ackman briefly took a position in AIG after the bailout? Why did Ackman take a position only to back out very quickly afterwards? I think the reason is because he probably believed that AIG's subsidiaries were worth more than its liabilities and that even after the massive dilution caused by the government's stake, the common would have been worth more than what it was trading at given a recapitalization of the company or given an orderly discharge/conversion of liabilities within bankruptcy. In fact, Ackman actually tried to get several large shareholders (and WEB) to recapitalize AIG after he took a position in the common. But nobody wanted to participate in a recapitalization in September 2008. On top of that, the government’s plan turned out to be to completely dismantle the company and sell off its various subsidiaries at fire sale prices, which would definitely have made the common worthless. After Ackman saw these two things happening, he immediately sold out. Hank Greenberg, the man who built AIG into what it was and who knows the company better than anyone else, has consistently argued that AIG had a liquidity issue, not a solvency issue. According to Greenberg, the problem with AIG was that the ratings downgrades forced AIG to post massive amounts of cash collateral on the credit default swaps that AIG FP had written, which caused liquidity issues, which caused further ratings downgrades, which required more collateral to be posted, and so on. Basically, the derivatives death spiral that Buffett described in his 2002 letter (talking about Gen Re Securities, which could just as well have been named Gen Re Financial Products) happened to AIG. I suggest that everyone read that description again very closely -- it basically tells you exactly what happened to AIG. Note that at the time of the AIG bailout, the underlying collateral on which AIG FP wrote credit default swaps was not in default. But the Fed nevertheless made AIG buy the CDOs back from Goldman, Credit Suisse, and others at par in order to do a backdoor recapitalization of the U.S. and European investment banks. We do not yet know whether the underlying collateral is totally worthless. As of September 2009, the Maiden Lane III portfolio is still worth over $20 B (according to the NY Fed). In late 2008 and early 2009, Hank Greenberg also expressed disbelief at the government's plan to essentially dismember AIG. He argued, rightfully I think, that AIG the global insurance company -- not including AIG FP and any other non-insurance subsidiaries -- was stronger as a whole than in parts. If you disagree, then you should be thinking long and hard about whether it’s a good idea for Berkshire or Fairfax to continue to diversify their claims exposure abroad. So there is definitely a case to be made that AIG is solvent. Now the question is: What has changed that has made AIG more attractive over the last two months? First, the government has obviously changed its mind about completely dismantling AIG. Although some of its crown jewels are being sold (at fair prices), the plan is to keep the company a global P&C company (Chartis) with a U.S. life insurance and retirement business. Here are excerpts from an article in the WSJ on January 4: American International Group Inc. (AIG) will use shares of AIG common stock in the compensation packages of some of its top employees rather than stock units reflecting a "basket" of AIG companies, as it previously planned. . . . Chartis' spinoff was put on hold as Robert Benmosche, who became AIG's CEO in August, decided to focus on rebuilding the value of AIG units, according to a Wall Street Journal report. It’s very telling that the “top employees” were willing to take common stock instead of a basket of stock units in the “crown jewel” companies. They clearly believe that there is value in the much smaller AIG that will result from its latest divestitures. The second thing is that the capital markets environment has changed completely from 2008. AIG could very well obtain enough capital from the markets in order to pay off some of its major creditors and be put on a more sound footing. And there could be a number of debt holders who would be willing to convert debt to equity. Like Fairholme for one. I believe that Berkowitz is talking about his investments in C, GGP, and AIG in order to make sure that there is healthy interest in the institutional investor community to participate in recapitalizations of these company. He is using some of his reputational capital . . . very much like a Buffett would . . . to demonstrate to the institutional investors that there is value to be had in these companies if they would only help shore up these companies' balance sheets. We are potentially looking at a win-win-win situation, where senior creditors are either paid off or participate in a debt to equity swap, where taxpayers are eventually paid back, and where shareholders are not wiped out.

Excellent interview. Thanks for posting.