A_Hamilton Posted February 7, 2014 Share Posted February 7, 2014 i think it's too difficult to model the hedges if the S&P starts to drop - it doesn't need to go to 800 - the hedges should start to appreciate? so therefore FFH shares should worth more. but nobody knows if the market is factoring the hedges at 0 at the current price or not. I don't think so. The hedges are for providing losses to temper the gains on the the stocks in their portfolio providing gains to temper the losses on the stocks in their portfolio. Potential upside from equities begins after they've dropped the hedges -- until that point, the gains would likely be on the bonds and other things they may have (like potentially the deflation CPI thingies). That was good. Agree about the upside being muted for now. Still not sure how to assess this. If their value portfolio is good, maybe a 10% drop doesn't mean a 10% loss for their stocks, but means more than a 10% gain for the hedges (the reduction in losses being more than 10%). Options tend to get ahead of the market.... no? Why can there only be gains when the hedges are off? What if they unload them at different times? Unload when hedges seem ok but keep buying stocks if there's a down market. Is it really that complex? Think about the holdings in the background. In a 40% loss scenario needed to bring the hedges to break even (give or take) BKIR, BB, and RFP are gojng to drop alot more than 40%. I would wager 90% on RFP and BB. add to this: In the last major market drop FFh dropped 1/3 after reporting huge earnings. Agree with Dazel. FFh has the best bond group going. Why would you think RFP would drop 90% if the IWM dropped 40%? Link to comment Share on other sites More sharing options...
oddballstocks Posted February 7, 2014 Share Posted February 7, 2014 speaking of deflation do we have inflation? i live in vancouver, bc.... aside from gas and real estate, specialized labour and eating out at restaurants, the price of just about everything else has stayed the same if not less than it was 10 years ago cars - got cheaper clothing - cheaper computer - got cheaper plane ticket - cheaper digital camera - cheaper electricity - same i should add to my surprise my cell phone bill has gone from $25 in school to $85 now in 8 years. and TV/internet bill was $75 in 2008 and is now $150.... Maybe Canada really is a better version of the US, your experiences haven't been the same as mine at all. Reasonably priced used cars aren't available anymore. The gap between used and new has shrunk to almost nothing. Health insurance has climbed like crazy, went up $200/mo two years ago, $100/mo more this year, all for less coverage. Internet, insurance, all cost more. I think inflation is running at about 2% or so, our living expenses have been inflating at about 3-4%, raises have been in the 1.5% range. Big expenditures that rarely occur might be flat, but the things we purchase often are going up. Food is ticking up, and clothes are ticking up. My oldest son can destroy a pair of pants in a few weeks from sliding around. Kids clothes are not cheap, and they don't last either. Link to comment Share on other sites More sharing options...
gary17 Posted February 7, 2014 Share Posted February 7, 2014 speaking of deflation do we have inflation? i live in vancouver, bc.... aside from gas and real estate, specialized labour and eating out at restaurants, the price of just about everything else has stayed the same if not less than it was 10 years ago cars - got cheaper clothing - cheaper computer - got cheaper plane ticket - cheaper digital camera - cheaper electricity - same i should add to my surprise my cell phone bill has gone from $25 in school to $85 now in 8 years. and TV/internet bill was $75 in 2008 and is now $150.... Maybe Canada really is a better version of the US, your experiences haven't been the same as mine at all. Reasonably priced used cars aren't available anymore. The gap between used and new has shrunk to almost nothing. Health insurance has climbed like crazy, went up $200/mo two years ago, $100/mo more this year, all for less coverage. Internet, insurance, all cost more. I think inflation is running at about 2% or so, our living expenses have been inflating at about 3-4%, raises have been in the 1.5% range. Big expenditures that rarely occur might be flat, but the things we purchase often are going up. Food is ticking up, and clothes are ticking up. My oldest son can destroy a pair of pants in a few weeks from sliding around. Kids clothes are not cheap, and they don't last either. I was thinking about this some more - I think this may have to do with the stronger Canadian dollar in the last 10 years - Link to comment Share on other sites More sharing options...
giofranchi Posted February 7, 2014 Author Share Posted February 7, 2014 Here is the problem: I chose the period 2002 to the end of 2012 which gives the greatest benefit to FFH. Their CAGR is 12.8% over the last 11 years. Above mediocre but not stellar. That period includes bond gains, the huge CDS gains, the gains from H&R etc. The stock price mirrors these returns and the P/b in 2002/2003 is the same as today. I made virtually all of my money from FFh on the Leaps, Northbridge, and ORH, almost none from the common. I see no way that FFH is going to return better than 13% CAGR going forward, for the long term. I have never understood why they didn't protect the equity hedges with upside equity hedges at the time, in case the opposite happened, which it did. They could have bought upside protection at say S&p 500, 1600, for virtually nothing, even 3 years ago. In terms of their large business/stock holdings. In a nasty bear BKIR, BB, and RFP would go to cents on their present day dollar. There is no way that in a recession these three big positions wouldn't get slaughtered. So, while the hedges might come to break even, their holdings would get killed. Similarly, The insurers would get killed, except in a deflation. The Wierd stable of private investments would suffer dramatically. FFh stock would get killed, even though they would likely book huge bond gains. The hedges might generate a billion or two to invest in regained losses. If the status quo continues and the bull market persists (see 1973-74 discussion) with mild corrections we have the losses on the hedges being offset by gains from equities. The insurers break more or less even, as they always have, and bonds do their thing. I just dont see alt of near or long term upside. All that said 13% return is better than mediocre, but hardly stellar. Al, I think Mr. Watsa & Co. will prove to be much more flexible than you assume right now. Equity hedges, for instance, are not here to stay. Should the evidence come they are no longer warranted, Mr. Watsa & Co. will remove them, even at a substantial loss. Furthermore, I don’t agree in a recession the insurers would get killed… Insurance is one of the best business to be in a recession… And insurance operations at FFH are getting better and better! Also, though not everybody believe in market cycles, the timeframe you have taken into consideration, to calculate FFH’s CAGR, is absolutely not favorable, because it doesn’t consider the fact we are today at half the present market cycle… In other words, the timeframe you have taken into consideration could be split as follows: 2002 – 2006: FFH was WRONG 2007 – 2009: FFH was RIGHT 2010 – 2013: FFH was WRONG To judge performance you lack the following: 2014 – 2016: FFH is RIGHT Then, at the end of 2016 we will calculate again FFH’s CAGR for the whole period: I guess it will be much higher than 13%! ;) Of course, I already can imagine your answer: 2014 – 2016 FFH continues to be wrong! But let me tell you, I still don’t think so… And if so, that’s when Mr. Watsa & Co. will finally remove the equity hedges, accepting the losses. Gio Link to comment Share on other sites More sharing options...
ERICOPOLY Posted February 7, 2014 Share Posted February 7, 2014 A couple of days ago Citigroup would be trading at 15% operating earnings yield if they can earn 13% return on tangible equity. I see that as the more likely outcome. Plus, the market will put a P/E on operating earnings, so there is a lot of room for valuation expansion. Easy to see 20% returns from Citi for the next several years. I find it much harder to make that sort of case with Fairfax, even if it made 15% returns on book, because the market wouldn't value the earnings in the same manner (due to their nature as capital gains). Link to comment Share on other sites More sharing options...
giofranchi Posted February 7, 2014 Author Share Posted February 7, 2014 A couple of days ago Citigroup would be trading at 15% operating earnings yield if they can earn 13% return on tangible equity. I see that as the more likely outcome. Plus, the market will put a P/E on operating earnings, so there is a lot of room for valuation expansion. Easy to see 20% returns from Citi for the next several years. I find it much harder to make that sort of case with Fairfax, even if it made 15% returns on book, because the market wouldn't value the earnings in the same manner (due to their nature as capital gains). Let me put it this way: if you truly had your “just 10 investments in life” scorecard, and you truly knew the stock market would be closed for the next 10 years, were you still interested in Citigroup? Though I know that mind frame is way too rigid and will surely make me overlook many great investment opportunities (like C probably is today), I cannot escape from it… Guess that’s just the way I am and my brain works… No wonder, Eric, my returns are so much more lackluster than yours! Gio Link to comment Share on other sites More sharing options...
ERICOPOLY Posted February 7, 2014 Share Posted February 7, 2014 A couple of days ago Citigroup would be trading at 15% operating earnings yield if they can earn 13% return on tangible equity. I see that as the more likely outcome. Plus, the market will put a P/E on operating earnings, so there is a lot of room for valuation expansion. Easy to see 20% returns from Citi for the next several years. I find it much harder to make that sort of case with Fairfax, even if it made 15% returns on book, because the market wouldn't value the earnings in the same manner (due to their nature as capital gains). Let me put it this way: if you truly had your “just 10 investment in life” scorecard, and you truly knew the stock market would be closed for the next 10 years, were you still interested in Citigroup? Though I know that mind frame is way too rigid and will surely make me overlook many great investment opportunities (like C probably is today), I cannot escape from it… Guess that’s just the way I am and my brain works… No wonder, Eric, my returns are so much more lackluster than yours! Gio Since you asked... how well is Fairfax going to do in a severe Depression if the markets are closed for 10 years and therefore they can't trade their hedges? Do they just expire worthless? How do you make 15% gains in book value when they can't buy and sell equities for 10 years? Link to comment Share on other sites More sharing options...
giofranchi Posted February 7, 2014 Author Share Posted February 7, 2014 Since you asked... how well is Fairfax going to do in a severe Depression if the markets are closed for 10 years and therefore they can't trade their hedges? Do they just expire worthless? How do you make 15% gains in book value when they can't buy and sell equities for 10 years? ;D ;D ;D Ah! Well, you have a good point!! Though, I was thinking more about something like “confidence in the management of a business”… Gio Link to comment Share on other sites More sharing options...
ERICOPOLY Posted February 7, 2014 Share Posted February 7, 2014 Since you asked... how well is Fairfax going to do in a severe Depression if the markets are closed for 10 years and therefore they can't trade their hedges? Do they just expire worthless? How do you make 15% gains in book value when they can't buy and sell equities for 10 years? ;D ;D ;D Ah! Well, you have a good point!! Though, I was thinking more about something like “confidence in the management of a business”… Gio They don't have to be dazzling to earn 13% on tangible equity. As for the risk of them being too aggressive (trying too hard to dazzle), that's where put options are handy. Link to comment Share on other sites More sharing options...
Phoenix01 Posted February 8, 2014 Share Posted February 8, 2014 I have been following this thread and there is a basic fact that seem to be missing. 1) The realized losses on the hedges are caused by the fact that FFH is selling the lower strike price hedges and rolling them into higher strike price hedges (they are also lengthening the duration). Why is this being done? Well...Taxes! As FFH sells off the equities and locks in the profits from the overvalued market, they offset the gains by improving the hedges. The hedges of today are not the same as 3 years ago. This is a tax free way of rolling their equity gains into the hedges. I am fully invested in FFH, as I have been for the last decade. I have not found a compelling reason to sell. If there is a drop, I will go all in, but at this point I think that they will be presenting some really interesting numbers for the start of 2014 and there may not be a sell off. Link to comment Share on other sites More sharing options...
Guest JoelS Posted February 8, 2014 Share Posted February 8, 2014 If you look at the 2013 3Q Interim report, pg 63, you find that the portfolio of hedges states notional amounts: - 3.1bn Russell 2000 - 1.6bn Individual equities - 400mn S&P500 - 200mn S&P/TSX 60 - 140mn Other indices As you can see, the hedges are primarily structured around the Russell 2000, and not the S&P 500. This is an important distinction, since it is the Russell 2000 that is arguably overvalued, while some valuation measures find the s&p500 within an acceptable range. In a recent interview on CNBC posted by another member, Joel Greenblatt's research found that the Russell 2000 "has been cheaper 95% of the time over the last several decades, and when it's been here in the past, the year forward return has actually been a negative 3%. Large caps have better prospects than small caps" http://video.cnbc.com/gallery/?video=3000238465&play=1 So despite losing billions on the hedges to date, it is quite possible that the past unfavourable divergence between Fairfax's equity holdings and the equity hedges as a whole could prove favourable in the future. In fact, as Dazel pointed out, FFH's large holdings (BIR, Blackberry, Resolute) have outdone the indices, so a reversal may have already taken place. As a strategy from 2010, the hedges were a failure. As a strategy from 2014, only time will tell. Cheers Well, JoelS said it much better than I did! ;) Welcome to the board!! :) Cheers, Gio In relation to Fairfax, a Buffett quote comes to mind: "Predicting rain doesn't count - building arks does". I believe people are forgetting this 'Noah rule', and should adjust their expectations accordingly. Link to comment Share on other sites More sharing options...
giofranchi Posted February 8, 2014 Author Share Posted February 8, 2014 I have been following this thread and there is a basic fact that seem to be missing. 1) The realized losses on the hedges are caused by the fact that FFH is selling the lower strike price hedges and rolling them into higher strike price hedges (they are also lengthening the duration). Why is this being done? Well...Taxes! As FFH sells off the equities and locks in the profits from the overvalued market, they offset the gains by improving the hedges. The hedges of today are not the same as 3 years ago. This is a tax free way of rolling their equity gains into the hedges. I am fully invested in FFH, as I have been for the last decade. I have not found a compelling reason to sell. If there is a drop, I will go all in, but at this point I think that they will be presenting some really interesting numbers for the start of 2014 and there may not be a sell off. This is important. :) Thank you, Phoenix01! Gio Link to comment Share on other sites More sharing options...
gary17 Posted February 8, 2014 Share Posted February 8, 2014 I threw in 5k in fairfax ... We'll see if I'm a millionaire by year 30 if they do 20% over the long term as they claim ;D Link to comment Share on other sites More sharing options...
giofranchi Posted February 24, 2014 Author Share Posted February 24, 2014 Euro-Zone Inflation Falls At Record Speed http://www.marketwatch.com/story/euro-zone-inflation-falls-at-record-speed-2014-02-24?link=MW_home_latest_news Gio Link to comment Share on other sites More sharing options...
petec Posted February 24, 2014 Share Posted February 24, 2014 I have been following this thread and there is a basic fact that seem to be missing. 1) The realized losses on the hedges are caused by the fact that FFH is selling the lower strike price hedges and rolling them into higher strike price hedges (they are also lengthening the duration). Why is this being done? Well...Taxes! As FFH sells off the equities and locks in the profits from the overvalued market, they offset the gains by improving the hedges. The hedges of today are not the same as 3 years ago. This is a tax free way of rolling their equity gains into the hedges. I am fully invested in FFH, as I have been for the last decade. I have not found a compelling reason to sell. If there is a drop, I will go all in, but at this point I think that they will be presenting some really interesting numbers for the start of 2014 and there may not be a sell off. This is important. :) Thank you, Phoenix01! Gio +1 Very interesting. Link to comment Share on other sites More sharing options...
mcliu Posted February 24, 2014 Share Posted February 24, 2014 I have been following this thread and there is a basic fact that seem to be missing. 1) The realized losses on the hedges are caused by the fact that FFH is selling the lower strike price hedges and rolling them into higher strike price hedges (they are also lengthening the duration). Why is this being done? Well...Taxes! As FFH sells off the equities and locks in the profits from the overvalued market, they offset the gains by improving the hedges. The hedges of today are not the same as 3 years ago. This is a tax free way of rolling their equity gains into the hedges. I am fully invested in FFH, as I have been for the last decade. I have not found a compelling reason to sell. If there is a drop, I will go all in, but at this point I think that they will be presenting some really interesting numbers for the start of 2014 and there may not be a sell off. This is important. :) Thank you, Phoenix01! Gio +1 Very interesting. I'm don't get it. Aren't these total return swaps? Link to comment Share on other sites More sharing options...
Guest Dazel Posted February 28, 2014 Share Posted February 28, 2014 http://finance.yahoo.com/news/mattel-buy-canadas-mega-brands-111216049.html Another Fairfax win! Link to comment Share on other sites More sharing options...
Redskin212 Posted February 28, 2014 Share Posted February 28, 2014 At 12/31/13 Fairfax held 27.4% of MEGA brands with a carrying value of $88 million. At a sale price of $460 million it looks like Fairfax will receive about $125 million earning a 50% return. Not to mention any interest they earn on any debt they issued to MEGA ( I can't remember the details), Well done Fairfax team!! Link to comment Share on other sites More sharing options...
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