A_Hamilton

Appreciate all of the responses. This from Bloomberg today: http://www.bloomberg.com/news/articles/2016-01-13/canadians-are-going-loonie-on-social-media-about-skyrocketing-grocery-bills

All, Does anyone know of a way to find a listing of all publicly traded Canadian Prefs (or at least a meaningful list of them)?

Embraer. They compete globally, attract the brightest minds in Brazil and a weaker BRL brings down labor costs.

Question for Canadian Board Members- Have you noticed any durable goods inflation with the weakening of the CAD? Are cars becoming more expensive in CAD? What items are imported into Canada and not produced there that might be subject to this effect if any? Curious to understand how this works in real life versus economic theory.

I thought I'd share the following analysis as it appears that FFH's book value is significantly understated from a relatively new source: Gains from prefs and debt issued in Canadian dollars but carried on the B/S in USD. Questions: 1.) How would one arrive at an intrinsic value of the Pref's/at what yield or discount to book should FFH be trying to repo these (note there are huge limitations here as the pref's trade infrequently) 2.) Will FFH swap the CAD exposure back to USD at any point prior to the call date of prefs or maturity date of debt to lock in gains? 3.) Are there any taxable gains for FFH as these are called/matured/repurchased? 4.) Are these true gains or do these offset Northbridge/other Canadian $ asset exposure and so are truly "hedges"? FFH_Pref_Debt.pdf FFH_Pref_Debt.pdf

Could you elaborate on the SarbOx/reporting stuff? Thanks Pete From what I understood in a W.R. Berkley interview, Sarbane Oxley made the insurance companies less flexible into how they reserve. An insurance company that does not have to comply could over/uderreseve hence reducing taxes more then they should in accident years . Beerbaron I think the bigger issue is they switched to IFRS accounting. In IFRS you are allowed to put in a reserve buffer that is just asking to be used as a redundancy cookie jar. Do you view that as a good thing or a bad thing? My view is anything that encourages management to sock away some reserves in the good years is a good thing (as opposed to maximising profits in the good years and then finding it was all a mirage!). Yes, "issue" is probably the wrong word. I'm fine with exceptionally conservative reserving at an insurer. The notional values are too large to do anything but error as close to the line of intentional redundancies as the auditors and actuaries will allow.

https://www.dime.com/moneymarket2015/c

Could you elaborate on the SarbOx/reporting stuff? Thanks Pete From what I understood in a W.R. Berkley interview, Sarbane Oxley made the insurance companies less flexible into how they reserve. An insurance company that does not have to comply could over/uderreseve hence reducing taxes more then they should in accident years . Beerbaron I think the bigger issue is they switched to IFRS accounting. In IFRS you are allowed to put in a reserve buffer that is just asking to be used as a redundancy cookie jar.

From the Eurolife website: Earnings before tax was Eur 37 million from life and Eur 33 million from General Insurance in 2014. Eur 274 million BV at Life, 76 million at General Insurance (not enough info to know if there are major one time items at General as profit is massive compared to equity base). 14% ROE at life in 2014, 28% at general insurance FFH's 1.13x BV purchase price on 2014 figures looks like a steal if these figures are even remotely sustainable. http://www.eurolife.gr/en/HomeEN/Company/FinancialHighlights

This understates how small the losses were though as you've had price declines in each of the last several years, so smaller denominator in your combined ratio. Meaning revenue has declined but cost in combined ratio points has also declined suggesting that actual $'s of catastrophe loss are down dramatically as well.

I feel like the author has little concept of the CUs. They are the banking equivalent of mutual insurance companies and provide a great service by providing pricing competition. The "profits" made are just partial rebates on the costs of owning a bank and services are limited regionally. I hope technology will allow CUs to thrive again (atm deals aren't cheap). Ha! That was a joke right? On a serious note, Mutual Savings Banks were tax-exempt until the Revenue Act of 1951 changed their status. They now pay taxes along with the banking industry. Credit Unions have also moved away from the purpose of their tax exempt charter. Haha I should have put a little more thought in to the wording of my comment but I still agree with my overall opinion. A lot of this distinction goes back to the restrictions of charters in the past. The govn't choose to specifically exempt CUs in the Rev Act of 1951 because of their local focus and the restrictions on authorized investments. MSBs do not have the same geographical restrictions that CUs have. The current system highly incentivizes CUs to loan at competitive rates within a community even when national banks (or other lending institutions) will not given the lack of other investment options. In theory, because of the highly homogenized customer base, the CU should be able to provide services that better meet the needs of local customers. Without the incentives for CUs to exist we may end up with large geographical areas that are undeserved for banking/credit needs. These areas generally have a higher reliance on local economic conditions which is the reasoning behind CUs. Do you view the "profits" of CUs as representing something other than rebates on the costs of banking/credit services or do you have an issue with tax rebates for this purpose? CU profits only exist because the CU was overly conservative on NPL rates or charged to high of an interest. In a perfectly predictable community, these profits would not even exist. I believe communities deserve to fully pay for their banking/credit costs if they choose to do so. Do you have any sources on CUs moving away from their local credit-providing responsibilities? Can you provide some numbers/justification for your opinion or do you agree with the author? Just like any other NPO classification there will certainly be abuse, but on the whole I think they provide a much needed service. The stated purpose behind the tax-exemption of CUs is extremely similar to the reasons behind Fannie/Freddie existing. I disagree with your view of why CU profits exist. IMO they are run just like banks but benefit from no taxation. They do not strive to have zero profits. Their rates for savings are not materially higher, nor are their loan rates notably lower. They seek profits in order to grow. Many are regional and not local. The credit union I have been a member of for nearly thirty years covers most of California. It has grown to a multi billion dollar assets. It wasn't through raising capital. It was through profits. In fact they nickel and dime their customers just like banks. But it is still limited to serving a local or "regional" membership which "true" banks do not have to deal with any longer. I'm pretty sure a CU charter is the only one that comes with this restriction. Thus deposits within that membership are used to provide credit within that membership (outside a few exceptions and UST investments). I agree that not all CUs act within the spirit of the charter, but to be fair, a lot of banks (not holding companies) do not act as banks. There is no local or regional requirement. I use Penfed for my home mortgage refis, their rates are absurd and you can become a member by making a tiny donation to some military non-profit. It's a total joke. Also, a credit union can be turned into a for-profit and demutualized. There could be billions made if this idea ever gains steam.

No I don't think they do. The conversation stemmed from the widening difference between the price of FFH shares (priced in CAD) and FRFHF shares (priced in USD). They hold no net exposure to the Canadian dollar. They've shorted it all out via CAD bonds and preferred shares.

You're definitely paying over NAV to do so. However, there is likely to be a scarcity premium...how many India only PE-style funds with a value manager that has a track record do you have access to? This is all to say...if you think they will generate great returns and you don't think you can replicate the asset for less it may make sense to buy... All this said, I don't own any directly and 1.5% and a 20% incentive are steep.

Wasn't the U.S.'s main problem sub-prime lending? We didn't have that here, or at least to the extreme as the U.S. The only major economies on the globe that didn't collapse in 2008 were commodity driven (Canada and Australia) riding the China/ high oil price bubble or had a command economy (China). Canada was starting to collapse and then oil prices reversed course in a hurry. I'm not sure there is much Canada can do to avoid it from a policy perspective (in the near term, over 20 years maybe continued diversification away from commodities and banking), but I think if commodity weakness really takes hold the country is going to have a very nasty recession.

I look at it this way: FFH issued these pref's when the market was substantially underestimating the risk of rates staying lower for an extended period (the market became more aware over time which is why the spreads on each series moved up over time), and, they did these offerings when the CAD was near par to the dollar. They likely converted all proceeds to USD immediately upon completion of the offering to hedge Northbridge back to the dollar. Now, with certain series trading at a discount to par, and the CAD trading at a much cheaper price versus the USD, FFH has the option of using some capital to buy these things back through its normal course bid. They are unlikely to call these at par unless they've reduced the number of prefs outstanding to such an extent that it is not worth keeping the issue outstanding, or, the company wants to close out its hedge on Northbridge's activities. The interest rate is just too low for them to call it otherwise! I'll give the hat tip on these pref's to Brian Bradstreet as it looks like the work of his genius, but I'd also be happy to learn that someone else at FFH deserves the credit!

That's indeed what I tell myself. But still, I think it's healthy to remind myself once in a while of how hard this activity is. Liberty, I know you are aware, but the chart you ran in Yahoo is way off given that their S&P isn't total return, and, Berkowitz has to payout capital gains. Much closer using M* http://quotes.morningstar.com/fund/fairx/f?t=fairx

You can buy 30 year zero coupon treasury strips. Or if you want to go the etf route, something like ZROZ.

Agree. Failed investments should be highlighted by FFH. How about Greek debt that they took a bath on but no one really talked about.

I assume the thought here being that a decline indicates deflation?

Don't take my word for it, but I believe the $17 / share cost was prior to the convertible investment, which again (just my rough guess) is probably showing $300m of (paper) profits. They did sell some common at a loss as well, so that has to factor in, but I think they are close to breakeven. I don't think the $17 includes the losses they took on total return swaps in BBRY before converting it into common. Without digging through right now, I believe cost is closer to $25 per share when including those losses.

Because I am getting nervous… During the last few weeks we have witnessed a short market correction… Which nonetheless was painful enough to prompt the FED into saying it is ready to stop the slow unwinding of QE and therefore to resume its stimulus… And the market promptly recovered… I like it less and less… And I demand more and more protection, meaning insulation from the general market. Gio Saw that too. Planning on a substantial increase in my FFH position come the new year when I roll my Roth 401k into my regular Roth IRA. Things haven't felt right to me for awhile - but seeing the reaction of general markets to a small correction was certainly disturbing and suggests that we are in fact addicted to the sugar high. Further, deflation in Europe appears even more likely than previously thought and small caps are better positioned for a fall than they've been previously and their bonds are killing it. What's not to like at roughly 1x book? Hey Zach, Did you buy the pinky? What custodian are you using, if you don't mind me asking? I wonder if they exempting the shares from the withholding tax (as they properly should) in your Roth? Thanks. I use TD Ameritrade for my Roth and own FRFHF in it. They do not take out the withholding tax. I get the full $10 per share.

They refile this every year.

I've sold the banks. I've been early. What's interesting is that CMHC insurance in force had been holding steady, and actually has been shrinking a little recently. CMHC historically has been about a 10% ROE business (your banks thank you). So someone has been willing to take in less premium to insure riskier than normal mortgages these days. More evidence of irrational behavior. The government effectively underwrites. Look at Tangible Common Equity / Assets and then Tangible Common Equity / Risk Weighted Assets in the Canadian banks and compare to JPM, BAC, etc. Canadian banks have some of the thinnest direct capital levels of any financials on the planet. The question is if/when the Canadian economy faces a recession, will the banks be bailed out of mortgages at par by the government or will they have to raise capital. If a large hit to real estate happens nationally I think the public outcry would be that shareholders are no longer entitled to 20-30% ROE's on obscene amounts of leverage on tangible common. I'm short the Canadian dollar...looked at the banks several times and the fact is if no recession/decline in housing happens in Canada you can get hurt very quickly. As an aside FFH has hedged all of its Canadian exposure back to USD.

A separate question. If one believes that Canada's housing market will have significant delinquencies in the future are you better off shorting the Canadian banks or shorting the Canadian dollar given the large linkages the banks have to the central government via CMHC?

Are there any thoughts from Canadians on this board in regards to Calgary/Edmonton? In a slowdown what happens to Canada's basic materials economy? I've thought about Houston in the early 80's a good amount and wonder why the same bust won't come to these cities. Would 25% vacancy rates really be that hard to believe if you had oil prices fall 30-40% and stay down for a few years (this is something everyone tells me cannot happen...which in my mind means the inevitable next step is that it will happen)?