Time to buy Fairfax again?

[Packer16]

All you Fairfax bulls please help!

 

Aberhound,

Watsa has prepared Fairfax to thrive in an environment with the following characteristics:

1) Stocks go down and stay down for a long time (with equity hedges that appreciate more than the decline in their portfolio of equities),

2) Treasury yields keep going down (with the 10yr bond yield approaching 1%),

3) And deflation setting in.

If this environment never materializes, Fairfax will make some money imo, but not much.

Therefore, it is simple enough: do you think 1) + 2) + 3) might ever come to pass? Or do you think there is no risk at all?

If the answer is: no risk at all, then stay away from Fairfax right now.

 

Cheers,

 

Gio

 

Gio,

 

I think in the deflationary environment you describe Fairfax will survive but not thrive.  If they have to use the hedges in any major way there exposure to EM (and associated declines in markets and equities) will more than offset any gains from the hedges.  If you look at there investment portfolio they have billions of equity exposure to Greece and India in addition to the businesses they own in the countries.  The hedges IMO are just that, protection against adverse market movements in their distressed investments, but not a proactive bet on a decline like the CDS were.

 

Packer

[klarmanite]

Interesting to note that MArkel sold ALL of their shares in Fairfax in the last quarter, as you can see here: http://whalewisdom.com/stock/ffh

 

[giofranchi]

Gio,

 

I think in the deflationary environment you describe Fairfax will survive but not thrive.  If they have to use the hedges in any major way there exposure to EM (and associated declines in markets and equities) will more than offset any gains from the hedges.  If you look at there investment portfolio they have billions of equity exposure to Greece and India in addition to the businesses they own in the countries.  The hedges IMO are just that, protection against adverse market movements in their distressed investments, but not a proactive bet on a decline like the CDS were.

 

Packer

 

In such an environment imo the contribution from their equities + equity hedges portfolio will pale in comparison to the contribution from their bonds portfolio and their CPI linked contracts.

I might be wrong, though... ;)

 

Gio