txlaw

Cap and trade will probably reduce domestic demand for coal relative to other electricity generation sources. I think that means that a greater percentage of U.S. coal production will be exported going forward, particularly to emerging markets in Asia. That should directly benefit BNI, which owns a major artery from the Powder River Basin to the major West Coast port cities. So BNI could be a nice hedge against cap and trade, although it seems like coal exports should grow regardless of whether cap and trade goes through. Just read a transcript of Buffett on Fox Business. Check this out: CLAMAN: Cheapest, best way. But then there's cap-and-trade, Warren. Some analysts are very skittish about coal and a possible backlash if cap-and-trade goes through. You mentioned now -- you said, we're going to see a diminishing of coal use. But what do you think cap-and-trade would do to the business if that went through? BUFFETT: It won't change the composition of what utilities are doing tomorrow or next week or next year. The utilities over time are going to use less coal and probably more nuclear. Our own utility, for example, uses wind very substantially in Iowa. So, over time, coal is going to diminish somewhat. Now, I think that will hit Eastern coal more than Western coal, but that's a fact of life over a considerable period of time. And that's true whether there's cap-and-trade or not, yes.

Absolutely. Railroads are sort of like toll roads -- they have the power to price their services in concert with inflation. And if we have inflation caused by rising energy prices, the railroads will benefit even more since they use so much less energy per ton-mile than trucks. Also, although there will always be large amounts of capex to maintain their business, much of the investment in the infrastructure and operational stuff (logistics IT, for example) has been made in a low inflation environment.

Ben, thanks for the response. I didn't realize that prime brokers lend money out to traders at such low rates. I use a discount broker, and I've never actually used margin before, so I'm not familiar with the rates for borrowing against equity or debt securities. So it sounds like you are saying that the prime brokers fund their margin lending operations by borrowing from banks at low rates. Do you know why are they able to borrow at such low rates? I understand that the prime brokers hold the securities as collateral, which sort of explains why they might charge low rates to the borrowing trader. But what makes banks agree to lend to prime brokers at low rates? Do most prime brokers have banking affiliate subsidiaries? This is all very confusing.

Cap and trade will probably reduce domestic demand for coal relative to other electricity generation sources. I think that means that a greater percentage of U.S. coal production will be exported going forward, particularly to emerging markets in Asia. That should directly benefit BNI, which owns a major artery from the Powder River Basin to the major West Coast port cities. So BNI could be a nice hedge against cap and trade, although it seems like coal exports should grow regardless of whether cap and trade goes through.

Quote from Roubini: Let us sum up: traders are borrowing at negative 20 per cent rates to invest on a highly leveraged basis on a mass of risky global assets that are rising in price due to excess liquidity and a massive carry trade. Every investor who plays this risky game looks like a genius – even if they are just riding a huge bubble financed by a large negative cost of borrowing – as the total returns have been in the 50-70 per cent range since March. Non-rhetorical question -- who exactly is lending out dollars at low rates to facilitate this supposed dollar carry trade? Most banks are apparently hoarding cash rather than lending capital to real businesses. They are also apparently investing a good portion of their freed up funds (principal repayments and financial assets sold into the market) into "non-risky" assets like treasuries. Presumably, this means that banks are not lending out money to investors to facilitate carry trades. So if hedge funds and other investors are really levering up, who the hell is funding their leverage? Is it foreign dollar holders? Why would they lend money to hedge funds at this time? Aren't they purchasing commodities and U.S. equities and bonds? Also, I thought that everyone has been delevering, including the asset management industry. Surely, pension funds and endowments are reducing their leverage? Could the hedge fund industry (which includes GS) really be levering up given the havoc that just occurred due to everyone and their mom having too much debt? I don't get how this dollar carry trade is supposed to work. Please chime in to help me understand how this is possible. ------ Another quote from Roubini: The Fed and other policymakers seem unaware of the monster bubble they are creating. This was a totally surprising statement to hear from a well-regarded economist like Roubini. My understanding is that the Fed has actually been counting on financial markets being pumped up with printed money in order to allow banks and other financial companies to unload assets and repair their balance sheets. Aren't our policymakers well aware that they have been pumping up financial assets? Again, my understanding is that reflating the financial markets through printing money (a la Fisher) combined with fiscal spending (a la Keynes) is the medicine that Dr. Bernanke has prescribed for forestalling deflation.

Unfortunately, the increased rancor and partisanship in U.S. politics is itself a systemic problem that keeps the U.S. from being the best it can be. We talk a lot about the systemic issues in the financial system, but there are a lot of systemic problems in the political system as well. Changing this will be very, very difficult. As I see it, there are three separable problems with healthcare in the U.S.: 1. Not everyone has access. 2. Healthcare costs continue to go up well above the general rate of inflation, and we are using more of it per capita year over year. 3. Quality of healthcare technology has gone up while, paradoxically, quality of the healthcare system itself appears to have gone down (hospital bureaucracy, defensive medicine, increased profit seeking behavior of doctors and hospitals, lack of contact with doctors, gatekeeping, shortage of primary care physicians, etc.) ---- Access issues will be addressed fairly soon. We are going to subsidize healthcare for those who cannot afford it, and we are going to require that insurance companies take people who have preexisting conditions. Furthermore, people who do not currently pay into the system are going to be forced to pay healthcare premiums so that risk is spread across the entire population. Note that it is not true at all that we are going to have a "big government" system. A big government system would be an industry where healthcare employees and professionals are employed by the government or where the government is the single payor. Instead, money paid into government coffers will be redirected to private insurers for the most part. The public option will be accessible to only a small percentage of the population, which makes it very hard for me to believe that the government will be able to successfully drive down premiums to the point where the healthcare insurers are losing money. The quality of the healthcare system is something that we are becoming increasingly aware of, and based on my contact with patients (friends and family), doctors, med school students, other healthcare professionals, and healthcare consultants, things are slowly but surely beginning to change for the better in terms of making it a more customer friendly industry. This is definitely a solvable problem, and people are working towards making this a reality. It is keeping the costs down and limiting unnecessary consumption that will be the hard part of healthcare reform, and the government is not doing anything to address these issues. They better because that's going to be a large part of our fiscal problem going forward. Everyone knows this is a problem, but it's hard to figure out how to solve it. If only people would concentrate more on this instead of their partisan bickering.

Here's another thought. There is no way to tell what company will have the best battery technology for EVs taking into account both performance (storage capacity, charge time, etc.) and cost. A company that comes up with the best technology might make money by licensing this technology out or by partnering with a low cost manufacturer in order to sell the entire battery. This is where the labor plus process engineering skill of BYD comes into play. BYD doesn't necessarily have to come up with its own technology to benefit from the switch to battery-powered vehicles. Note that if we take a switchable battery approach as proposed by companies like Better Place, who want to put in infrastructure for switching out batteries in a short time, then being a low cost provider of miles may matter even more.

I thought that was a very funny backhanded comment. He basically called Greenspan a horse's ass and then complimented Greenspan in an exaggerated way for actually admitting it. ;D

Boy, am I glad I don't work for you guys! ;) Management has virtually doubled BVPS in the two most turbulent years in US financial history since the Great Depression. Anybody could have done that, right? Yeah, we need to take away Prem's bonus. What? Prem doesn't pay himself a bonus....oops, sorry. :D Just kidding, OK? Haha. :) My thoughts, exactly. I got the results necessary for my book value "arbitrage" situation to work out, but they're doing such a phenomenal job, I'm not sure I can bear to take the gains off the table. The Fairfax Brazil development plus the S&P 500 hedge make me very happy!

You could be right about that. I actually saw yesterday that Tom Friedman of the NYT essentially expressed that very same view in an op-ed, and he definitely takes into account the plight of the Afghanis.

I do not want Afghanistan to become a colony of the U.S. Nor do I want the U.S. to impose a "permanent self serving authority" in Afghanistan. I want the U.S. government to at least take into consideration the effect it might have on the non-belligerent civilian population if we decide to withdraw from Afghanistan. This is where I disagree with LKY because he seems to think that this shouldn't even be a factor. I feel that some responsibilities attach when you decide to invade countries like Iraq (which was a huge mistake) and Afghanistan. I don't know. Perhaps the best course of action is to pull out of Afghanistan and let them sort out their own issues. Maybe the civilians don't want us there, which would support the side that says we should leave. Or perhaps it would be best to put more people in there to help the civilian government maintain order and protect its citizens from the escalating violence. This is a tough issue with many people on both sides of the argument. On top of this, there's the whole election fraud scandal that has called into question the legitimacy of the government. The ultimate decision we should make is outside of my circle of competence.

I disagree with him mostly on his political/foreign policy views. I do not believe we (the U.S.) should just pull out of Afghanistan. I feel that we must try in good faith to help bring about an optimal solution for the Afghani people since we decided to get involved. His view on the subject is too Realpolitik for me, which is probably why he's good friends with Kissinger. Also, I'm no expert on foreign policy, but it seems like it would be a bad idea to risk a destabilization of Afghanistan that could spill over into Pakistan and create even more problems than they already have in Pakistan. I also think that his regime was too authoritarian. He disagrees, as you might expect.

Charlie Rose conducted an hour long interview with Lee Kuan Yew, the former Prime Minister of Singapore, on October 22, 2009. I highly recommend watching it to get some insight into how the global economy will develop this century, particularly with respect to China. I disagree with him on many issues, but he is a very, very smart man. You can find the interview at www.charlierose.com under the archive tab. You can also read the transcript at http://www.charlierose.com/download/transcript/10681.

http://www.ft.com/cms/s/0/6e2dfb82-c018-11de-aed2-00144feab49a.html?nclick_check=1 This is a must read if you're interested in macro issues, particularly with respect to long term currency movement.

Very interesting thread. A couple of questions seem to have emerged: How much will an investment in FFH return in the long run at a price paid of $US 360? Between 12% and 15%, according to Sanjeev. That's actually where I would put it too. Sanjeev is obviously looking for returns greater than 15%, and he sees opportunities in the market to obtain these returns (without leverage, I'm assuming). His investment partners should be very happy with that! Given the above long term return, is it a good idea to buy FFH at current prices? Yes, it would be very reasonable to purchase FFH at current prices if you are a long term buy and hold investor. But you had better be prepared for the lumpy returns that Watsa talks about. If the economy deteriorates (or fails to get any better) equity markets could trade flat or go down in the next 12 to 24 months. In that case, you could see FFH trade flat or even be marked down by the market for that period of time. That won't worry some FFH investors, but others will wish they had gone with companies that were more undervalued given the opportunities available. It sounds like Sanjeev is saying that he'd rather go with deep value stocks he sees right now because they shouldn't be as severely affected by market fluctuations that may occur due to poor economic conditions. That sounds like a reasonable position to me. Also, it's unclear whether the hard market that people are yearning for will materialize any time soon. It could be well after 2010 before this happens. (I'd be interested to hear what the experienced insurance investors think about what pricing will be like next year.) If that's the case, we might have several opportunities to buy FFH at a reasonable price. One last thought. If you know how to hedge your portfolio like Eric, Mungerville, and others (not me), you may be able to avoid the psychological pitfalls associated with market volatility. Would it be wise to put a very large percentage of one's portfolio, say 40%, into FFH? Possibly. But you better know FFH back and forwards given the complexity of the company and the complexity of the industry. Some members of this board do know FFH this well and also know tons about the insurance industry. They probably could do the analysis and be comfortable with FFH being such a high percentage of their portfolio. I'm not one of those people -- I have a lot to learn before I could even think about putting a high percentage of my portfolio into FFH. I would think you would want to know enough to do the "try to kill the company" test before making FFH a large percentage of your portfolio. A lot can go wrong for a pure insurance company. Would owning FFH at $360 be a good short term idea? Okay, no one really asked this question outright. But this was sort of implied by the thread about the upcoming earnings report. I think FFH is a good place to be for the short term. Dazel makes a compelling argument that FFH is trading at a significant discount to current BV. If the market acts somewhat rationally, FFH should at least trade at the new BV after earnings. I own some FFH, but it is sort of like an arbitrage position for me. I'm looking for a nice short term gain based on revaluation after the book value increase. If I get that return, I will almost certainly sell out of FFH in my regular investment portfolio and increase my cash position to take advantage of a market correction. If I don't get that return, no big deal since I own FFH at a price less than BV.

Check out these posts on BYD: http://valueinvestingresource.blogspot.com/search/label/BYD Shai, if you're reading, keep 'em coming. You're on my RSS feed.

I'd add PFE and SNY to this list, though I know many will disagree with me.

Here's what I think Buffett and Munger saw in BYD: -Wang Chuanfu is a chemical engineering/process engineering genius (Thomas Edison/Jack Welch/Henry Ford of China, according to Munger); he's also highly ethical -Process engineering capabilities of BYD are particularly important due to access to cheap but skilled labor; they were able to substitute labor for machines when no one thought that was possible -Vertically integrated manufacturing capabilities is key -Price paid by BRK was very reasonable at the time given existing business; let’s not forget that BYD is also an IT manufacturing company with a low cost provider moat -BYD is likely to be a battery supplier to other automakers (see beerbaron comment) -Access to China market; being largest automaker in China is more likely than being largest automaker in world given quality control issues, but still lots of optionality involved with just the former coming true -Tech transfer will occur and Chinese industry will improve in quality over the years like Japan and Korea -Patents; nice but not necessarily meaningful if emerging markets don’t focus more on enforcing IP rights -Government subsidies to support DV industry; the Chinese will want to cut pollution/climate problems off at the pass given inevitable growth of personal transport in China -BYD company culture and benefits attracts cream of the crop engineering talent (similar to, say, Google) -Currency effects (revenues and costs primarily in Yuan) -Strategic considerations – MidAm has access to battery technology for electricity storage; potential entry point into Chinese electricity market, particularly with respect to renewable generation -BRK gets an in with entrepreneurial/scientific community in China -Opportunity to learn more about doing biz in China ---------- IMO, the BYD investment is one of the best investments Berkshire has ever made. Charlie Munger is the man! Incidentally, the BYD investment is a perfect example of how Buffett/Munger are some of the best macro investors out there. They understand long term macro trends and apply this knowledge when making their hold forever investments.

Ben, You're right to be wary of externally managed REITs. I'm attaching a Moody's handout that discusses the corporate governance risks associated with externally managed REITs. All I can say is that you have to look at the risk mitigating factors, including the management agreement , ownership position, directorship, and fee structure, in order to make your own judgment about whether management is going to treat the shareholders fairly. Berkowitz being on board is an additional factor that makes me think that they will treat us well, but I could be wrong. Don't know much about David Abrams, but since he worked for Baupost, he's probably another good guy to count on to keep management honest. -txlaw

Thanks for the rundown, Myth. Some additional thoughts: Plans/Background -- Ashner and senior management acquired control of the REIT in 2004, with Ashner becoming CEO. At that time, Ashner "entered into an agreement to direct all of my future real estate investment activities, subject to limited specified exceptions, into the Company. Accordingly, as long as I am an executive officer or trustee of the Company, this Company will be the vehicle for substantially all of my real estate investment activities." He does indeed have skin in the game. Ashner's approach for FUR is "opportunistic value real estate investing." There is no focus on geography or specific types of real estate. The trust has invested in property, loans, REIT securities, and mortgage backed securities. Ashner has opportunistically bought back the trust's preferred shares at substantial discounts to par. Ashner also will not hesitate to take an activist investing approach to other REITs. Investments are structure so that they are for the most part nonrecourse to the trust. From the very beginning, Ashner has been planning to use FUR as a vehicle to take advantage of an impending property meltdown. From his first letter as CEO of FUR in 2003: In our view, only historically low interest rates have prevented a wave of commercial real estate foreclosures from occurring. Nevertheless, the fact that interest rates are historically low and there is excessive investor liquidity serve to restrain the great opportunistic investing we enjoyed in the mid-90’s. As my daily reading of newspapers indicates, no one has yet repealed the laws of cyclicality in real estate. Consequently, I remain confident that the future will be rife with opportunity. I would suggest going to the FUR website and reading all of Ashner's shareholder letters first before even considering investing in the REIT. To a large extent, investing in FUR is a jockey-style bet. Concord -- With respect to the Concord JV with Lexington, the value of the platform had to be written down due to the CDO market disappearing in 2008. Like many companies who relied on securitization for long term financing (think ACF), when the securitization markets evaporated, Concord was shit out of luck with respect to the loans acquired through the use of short term warehouse facilities. As Myth pointed out, Ashner is restructuring the Concord platform, with Winthrop participating and Lexington declining to participate. This was a major setback, but I will cut Ashner some slack on this one. At least it was a JV with no recourse to the trust. Price -- As for the current price, I would say based on a very rudimentary breakdown of the balance sheet, taking into account non-controlling interests and the nonrecourse nature of much of the liabilities, the trust is trading somewhere around liquidiation value if not below liquidation value. Mind you, it is very difficult to figure out exactly how much all the assets are worth in liquidation because real estate is hard to value without knowing the details and because FUR owns a bunch of real estate securities, so I'm not saying that my estimate is at all accurate. But you have to start somewhere, and I think the downside risk is low after taking into account the cash that FUR's investments generate. Also, Ashner bought quite a bit of stock as the price of FUR sank throughout 2008, which is a good sign for the "price you pay" factor. You might want to look at the breakdown of FUR's properties in their filings and on their website to get a better sense of the quality of these properties. ----- One more interesting piece of information that will either pique people's interest in Ashner or completely turn them off to Ashner. When Bill Ackman was waging his proxy contest against the TGT incumbent directors, one of his nominees for the board was Ashner. People who followed that contest will remember that Ackman at one time proposed spinning off TGT's real estate into a publicly traded REIT. I suspect Ashner would have helped assess the value of TGT real estate in forming such a REIT if Ackman had been successful. Ashner, for his part, would have the benefit of looking under the hood to see what the real estate of a large company like Target would be worth. ----- There are a lot of very smart people preparing for the upcoming CRE disaster. -BPO has raised money for a U.S. real estate fund. Bruce Flatt and team are among the best. -IRSA (Eduardo Elsztain) has made a strategic investment in a U.S. listed REIT as a platform for entering the U.S. real estate market -Pabrai owns both BPO and IRSA (via CRESY) -Berkowitz is using FUR as a CRE platform -Wilbur Ross is getting ready to buy CMBS when the "pretending" is over and the shit hits the fan -The Chinese are planning to buy U.S. real estate with their dollar holdings (we've been slowly selling off the family farm, as Buffett would point out) And people say there isn't value to be found . . .

M, I haven't really put that much effort into finding a mutual fund focused on international equities that would be worth putting my money into. I have too much other stuff on my plate at this time. I probably won't put money into a fund that is focused abroad until I feel I can't find any investments on exchanges I have access to at this time. I respect Southeastern Asset Management and Third Avenue, so I will probably watch LLINX and TAVIX for another few quarters to see what moves they make. -txlaw

See http://www.sec.gov/Archives/edgar/data/37008/000119380509001934/e605912_ex99-1.htm . As I was expecting, Bruce Berkowitz of the Fairholme Fund appears to be using FUR as a platform for taking advantage of the upcoming distress in the commercial real estate market. From the press release: The executive officers of the Company, together with affiliates of FUR Advisors, the Company’s external advisor, have indicated that they will subscribe for a minimum of 500,000 Common Shares of which 225,000 shares are allocable to Michael L. Ashner, the Company’s Chairman and Chief Executive Officer. In addition, the Company has granted an ownership waiver to Fairholme Capital Management, L.L.C. on behalf of its investment advisory clients and affiliates, an affiliate of Bruce R. Berkowitz, our former trustee, which permits Fairholme to acquire up to 24% in the aggregate of our outstanding Common Shares on a fully diluted basis.

mhdousa, I would agree with you that Berkowitz's "keeping fees low" rationale isn't very persuasive. But I'm not so sure that FAIRX has yet reached a size where performance will be materially affected. In fact, if we do have more pain in our future (in the US), we could see him deploy the cash that he gets from new shareholders into more distressed positions and into situations where FAIRX helps recapitalize companies at a large gain. I'm thinking of more deals like the ACF deal from last October and situations like HTZ where the underlying business has a bright future but where there are major debt issues to take care of. Also, there's the whole commercial real estate disaster that's coming up. FUR just announced a rights offering. From the press release: In addition, the Company has granted an ownership waiver to Fairholme Capital Management, L.L.C. on behalf of its investment advisory clients and affiliates, an affiliate of Bruce R. Berkowitz, our former trustee, which permits Fairholme to acquire up to 24% in the aggregate of our outstanding Common Shares on a fully diluted basis. As I predicted in another thread, it looks like Berkowitz is going to use FUR as a platform to take advantage of distress in the CRE market. The only U.S.-centric mutual fund that I will invest in is FAIRX. I'm not sure there's anyone better. -txlaw

Haha, awesome! ;D The Brick O' Cheese plan looks pretty appealing. Who knows? In a couple of years, we might be watching "Flip That Cheese" instead of "Flip That House" on TLC.

Another great conference call. It was particularly interesting to see their discussion about health care reform, as they gave some more detail on what conclusions they've come to after conducting their regulatory due diligence. The brief discussion on PFE also echoes some of the thoughts I had about big pharma in another post a couple of months ago. I'm quite excited for the possibility of an income fund managed by Fairholme. It would be great to have such a fund for my parents' sake.