txlaw

Canadian Tire Corporation(CTC-t) might be one. It is fully priced right now though. Just checked out the Wikipedia article on this company -- sounds really interesting. Who would've guessed that a company called Canadian Tire was involved in so many different businesses? Thanks for the suggestion.

Great article. Yet another reason why $65 a share would not even be close to a fair price if ORH were not majority-owned by FFH. Reinsurers benefit from a hard market first, correct? Glad to be able to be on both sides of the deal.

I am not hedged against a market correction despite the fact that I think the U.S. market has gotten above fair value and is due to go down or at least trade sideways for a while. I have a little bit of cash on the sidelines for when the correction occurs, but I am close to fully invested due to large positions in distressed companies (formerly distressed, actually) that have lots of room to go before reaching anything close to fair value. I like companies with a majority of their earnings abroad -- especially those with substantial room for growth of BRIC country earnings -- and real estate (REITs). I also like companies involved in producing energy commodities, but I'm waiting for a correction before I dive back into that market. Hopefully, I won't be waiting forever for a correction. For the long run, the Canadian dollar and the Australian dollar are good places to be for those of us in the U.S., and I am trying to do some more investigation into Canadian companies that have sales primarily in $CAN.

Yup, I agree with this, which is why I am looking at XTO (don't yet have a position). I really hope that the nat gas price collapses and goes to $2 because that's going to cause immense pain in the industry, which will allow companies like XTO to snap up producing assets at fire sale prices. If natural gas does indeed collapse, it would be worthwhile taking positions in companies that have natural gas as a major input for their production and that already trade at a discount to intrinsic value. I'm thinking of fertilizer companies . . .

Here's a Bloomberg article on speculation in the Canadian dollar: http://www.bloomberg.com/apps/news?pid=20601087&sid=aFdI9y_5K3Pw Makes me think that we could have a reversal in the short run, though the long run story remains intact. Also, I went back and found a very interesting thread on the loonie that I skipped over a few months ago: http://cornerofberkshireandfairfax.ca/forum/index.php?topic=610.30

Since I also agree with many about the 20-year time frame, I'll go with some industries/categories that I like for the long run and some companies I like in these industries. Pharma/biotech -- PFE, SNY, JNJ (would go with a basket of stocks for the long run) Energy upstream -- XOM, COP, XTO Electricity -- NRG, BRK (MidAm) Basic materials -- AA, PKX, MT Insurance -- BRK, FFH Banking -- BBV Real estate -- FUR Funds -- FAIRX, LLINX

Instead of gold, why not just hold another currency? The loonie looks like it will be a petrodollar over the long run, so you probably could just keep your cash in Canadian dollars for the long run and be all right. Really? When did you hear that? From the last Brookfield Asset Management letter: "The other 50% of our capital is invested predominantly in three healthy, commodity-based countries where we believe the odds favour the currencies doing well compared with the U.S. dollar. This is as a result of their current fiscal situation, but more importantly because the drivers of their economies (oil, iron ore, coal, copper and agricultural products) should enable them to maintain positive fiscal positions." I believe Buffett has also mentioned in the last two years that he thought the Canadian dollar would be worth quite a bit more than the dollar five to ten years from now. I think he was basing this projection on the Canadian fiscal situation and the backing of the currency by commodities such as the Canadian oil sands. If you're in the U.S. and you're looking to protect your cash from the effects of inflation and U.S. dollar devaluation, you could probably open a Canadian dollar interest bearing account and do fine, I'm thinking. Thoughts?

I agree that gold should be viewed as currency, since the majority of the world believes that it is a store of value unrelated to the whims of the central banks. However, I don't understand why you would hold gold as an inflation hedge when you can buy great companies that generate revenues in currencies that will appreciate relative to the dollar in the long run. Holding gold is like holding cash -- you hold gold so that you can convert it to currency and purchase an undervalued business. But note that it's not easy to convert gold to cash, so even that is a dubious reason for holding gold. Instead of gold, why not just hold another currency? The loonie looks like it will be a petrodollar over the long run, so you probably could just keep your cash in Canadian dollars for the long run and be all right. I'd be interested in hearing what all the Canadians on the board think about the prospects for the loonie.

I'm not sure it counts as market timing if you have a time horizon of 3 to 5 years. HWIC saw the crazy systemic problems we had and capitalized on an opportunity to both hedge against a huge market drop and make a huge profit in case of such a drop. I think this would be a very interesting strategy to apply across the globe in markets where systemic problems are building up. That is, there will continue to be huge bubbles in equity markets that are less developed than the U.S. -- I'm thinking BRIC, Eastern Europe, etc. -- so maybe one could do what HWIC did in these bubble markets when it looks like things are spiraling out of control in terms of the real economy. Of course, I believe it was Keynes who said that the markets can stay irrational longer than you can stay solvent, so you wouldn't want to bet the farm on such systemic collapses.

Well, this is the issue, isn't it? Lots of people on this board, including me, think that FFH is not paying up for the minority interest. Most people on this board do not value ORH based solely on the portfolio holdings at any given point of time, although there is a lot of discussion about what BV is at the moment. Most people understand that ORH provides low cost (and possibly negative cost) float to FFH over time and adds diversification to FFH's lines of business. In HWIC's hands, ORH is very valuable. So are they really paying up for the minority interest? I don't think so. I also think that ORH has been trading at a major discount in the market precisely because of FFH's involvement as an 80% owner. I just sold out of all my ORH. I was leveraged through the February options, and I just feel more comfortable not chasing after a couple more dollars. I think $65 is probably the max anyone can expect FFH to up the bid.

The purchase price of a company should be determined to some extent based on the characteristics of the acquirer if there are synergies involved that make the target company more valuable as part of the acquirer than as a stand alone company. For example, when Berkshire bought Clayton Homes, Buffett knew that even by paying a "fair" price, he was actually getting more for his money than it appeared because Clayton would be more valuable as a subsidiary of a AAA-rated company. If Clayton hadn't been in a distressed state, he probably couldn't have walked away with Clayton at the price he paid. Most acquisitions don't lead to the synergies that management claims, but I think most of us on this board would agree that there are definitely benefits for FFH in controlling all outstanding ORH shares. They will be able to save the costs of having ORH as a publicly listed company, will probably have greater freedom to move cash between the subsidiary and the holding company (not completely sure about this), and will be able to take other actions with ORH without having to consider whether such actions are fair to the minority interest. The situation here is a little weird because ORH is already a subsidiary of FFH. So the proper question in valuing the target should be how much benefit does FFH get out of making ORH wholly owned versus an 80% owned subsidiary? It doesn't necessarily make sense to value the ORH minority interest by comparing it to an ordinary reinsurer that doesn't have the benefits of HWIC because FFH can't (or won't) divest its stake in ORH.

I think Cardboard really helped sell me on the buyout thesis. Anyway, they were pretty full of shit weren't they, but then... they were acting in the best interest of the FFH shareholders. It would be stupid to tell everyone that they want to buyout ORH... so instead you tell people at the annual meeting that there would really be no point to a buyout, and when you raise $400m you issue a press release that it's just for a rainy day, you know. Like I said before, "Fool me once shame on you, fool me twice shame on me." Yes, props to Cardboard, Vinay and probably some others who also pointed out the oddities in Fairfax's recent actions.

The point about ORH's business line is well taken -- I agree that reinsurers should generally get a lower book value multiple. Having said that, I would like to see the offer upped by at least a few bucks, since the value of ORH should be higher as a wholly owned subsidiary versus as a standalone reinsurer. Also, I own the February $50 calls, so even a $2 bump up would be material to me! I wonder how likely it is that the special committee recommends a slightly higher price and then FFH agrees to the new figure as a matter of course?

Well done, everyone. And a special thanks to Ericopoly, whose comments and analysis kept me in ORH when I was on the brink of selling out and moving to FFH.

There may indeed be more oil out here, but the point is the CHEAP oil is gone, new discoveries will have higher production and transportation costs attached. The same is true in North American natural gas.. much has been made of the potential of the recent shale gas discoveries, but production costs will be at least 6.00 bucks per. This discovery for BP is great, but it is very deep and deep well production carries its own cost escalators. Reading further ...production won't commence for another 6 years at least, meanwhile demand is projected to begin rising again. It's true that cheap oil is gone, but there is a big difference between expensive oil, which I think is likely, and supply/demand imbalance such that there is not enough oil to supply everyone who needs it on an annual basis. New discoveries and alternative plays such as the Canadian oil sands will hopefully make sure that there is enough annual oil production to cover increased annual demand, albeit at higher oil prices (perhaps much higher). Additionally, if we are successful in shifting much of our transportation system from the liquid fuels based model to an off the electricity grid model, then demand for liquid fuels won't go up at the crazy rates projected by peak oil people. Instead, electricity demand will go up quite a bit, which will mean more demand for energy sources such as cheap and plentiful coal, nat gas, renewables, nuclear, etc. There will also be increased demand for more and more efficient electricity storage solutions (i.e., battery technology). As for the nat gas productions costs, no one is sure what the exact numbers will be, but Chesapeake in its investor presentation makes the point that shale gas producers will have much lower F&D costs than conventional producers and that these will actually decrease "as efficiencies increase and shale gas resevoir knowledge improves." CHK estimates that shale producers will have F&D costs of less than $2 for several decades going forward. In other words, the economics of North American nat gas is not the same as oil.

Some good FT articles on "flash trading": http://www.ft.com/cms/s/0/5fbac920-81ea-11de-9c5e-00144feabdc0.html?nclick_check=1 http://www.ft.com/cms/s/0/35d54d32-812d-11de-92e7-00144feabdc0.html Perhaps one of the silver linings of a tiered trading system is that more smaller players will drop out of the trading game and switch to investing. Wishful thinking, I know! It seems pretty clear now that Citadel has made an outstanding play by helping Etrade recapitalize. Not only did they get a decent average cost basis for their position, but they could also potentially get a material bump in order flow for their market making operations. It is also possible that Citadel is planning on analyzing this order flow to tweak their HFT algorithm, but it seems unlikely that they will use this information as flash order information -- I don't think they'd be that stupid given the firestorm surrounding the issue. As for their quick reversal on selling some of their position, I wouldn't be surprised if OTC told Citadel not to go forward with this (Zerohedge also thinks this may be the case). Doing so would put pressure on the market price of the company, which could make a material difference to the health of the company since Etrade may have to raise more equity capital if their loan portfolio deteriorates at a worse rate than expected. And market price can also have an effect on financial companies' credit ratings, as we saw with the investments banks and insurance companies last year. As an investor in ETFC -- I have now initiated a position -- I want at least a higher price than my cost basis for any new capital that is raised and would love for them to go the rights offering route in order to allay any concerns about the banking operations. I have been going through some of the old board posts and I have gotten to the point where there has been a flurry of activity related to the FFH short saga. I am beginning to wonder to what extent shorts may be involved in information disseminated about ETFC. Etrade has one of the highest short interests of any stock in the S&P 500, and I believe the short interest is close to 30% of the average daily float. Thank goodness there has been a naked short selling ban put in place or ETFC may have plummeted when Citadel initially made its sale announcement.

"BP Makes ‘Giant’ Oil Discovery in Gulf of Mexico," http://www.bloomberg.com/apps/news?pid=20601087&sid=adF31W9._rik Packer may have hit the nail on the head here with his thoughts on resource scarcity, at least with respect to energy commodities. How many more huge oil fields like Tupi and this one in the Gulf of Mexico are lurking out there waiting to be discovered by companies incentivized by high oil prices? If we continue to find more fields like these and technology continues to progress at a rapid rate, we may make the transition to renewables fairly smoothly over the next 100 years. Also, we shouldn't forget that the oil sands and other unconventional energy plays eventually become conventional plays over time.

I actually looked at MVC last year. I got interested when I saw that Third Avenue had a position in the company. I was also intrigued by the insider buying by Tokarz. However, like rranjan I also did not feel comfortable with the subjective assessment of fair value for the portfolio companies. That combined with an ugly looking cash flow statement that seemed to show dividends being paid out primarily through equity and debt issuance rather than real profits scared me away. Mind you, I made a very cursory assessment of the company, but still . . . Also, after having read Barbarians at the Gate and Den of Thieves, I'm sort of distrustful of companies run by private equity (LBO) people.

I think I will probably wait before they start deploying money and I can see what their first basket of holdings is. I like the idea of Martin Whitman and people he has screened deploying money for me into debt, but I also feel that there are enough opportunities in the equity market that I want to keep cash on the side to use when we get a correction. Do you guys have any opinions on what type of annualized return one might expect from a distressed debt focused fund?

http://www.forbes.com/2009/08/31/third-avenue-credit-markets-bonds-whitman.html

Well, Citadel has canceled their plan to sell their ETFC shares, and it looks like traders are speculating that there will now be an acquisition of the company facilitated by Citadel. Regardless of whether there is an acquisition, this is good news for investors in ETFC because the worst thing that will probably happen now is that Citadel infuses the banking subsidiary company with more cash in exchange for cheap stock.

Great explanation -- thanks, T-bone! I will check out Zerohedge to get some additional color on the HFT issue.

Anyone . . . anyone? Bueller . . . Bueller?

Those of you who are interested in Seaspan may also want to look into TAL International (TAL), which is one of the largest container leasing companies in the world. They also try to match the duration of debt to the duration of their leases. Their lease terms are very correlated with the price of containers, and there is currently a glut of containers on the market, so their average rental rates are decreasing and probably will continue to decrease over the next year or two. Still, TAL has recognized this, cut the dividend, and is deleveraging its business at the moment. Management has also been using the current environment to retire debt at nice discounts to face value. Bruce Berkowitz used to own quite a bit of this company, sold most of his position last year, and increased his position as of his last SEC filing. I haven't looked into Seapsan yet, but TAL might be a little bit more lower risk if more shipping companies start running into financial problems because it should be easier for them to right size their business by reducing container purchases.

Big pharma, ATSG, RRGB. Looking into ETFC and BBV. Also trying to figure out the best way to take advantage of the coming distressed commercial real estate market (I'm thinking either BAM or FUR).