Earnings are out

[Valuebo]

Idk, maybe they like how Biglari took all control away from shareholders?

[BTShine]

When I saw that filing my thoughts were they arbitraged

[StubbleJumper]

Fairfax has started a position in Biglari.  ???

 

http://www.octafinance.com/top-fairfax-financial-holdings-can-8-positions-in-q2-2015/160266/

 

 

Do not be misled: Bad company corrupts good character.

 

Corinthians 15:33

[Guest Dazel]

 

 

no offence guys but $500k?

 

Fairfax likely had unrealized gains last week of well over $500m.

 

Dazel

 

 

[wescobrk]

 

 

no offence guys but $500k?

 

Fairfax likely had unrealized gains last week of well over $500m.

 

Dazel

 

How do you do the math on $500 million with a company that has a market cap of roughly 800 million?

[mcliu]

I think Dazel is suggesting that Biglari is a small position for Fairfax given that the company has likely unrealized gains of $500 million from Fairfax's various hedges..

[Guest Dazel]

 

 

yes correct...the BH investment is a rounding error.

 

The market does not understand that Fairfax has been prepared to profit off this specific event and its consequences....and hopefully they don't too quickly as i would like to be able to load up while seeing the unrealized gains pile up. Their bond portfolio is surging.

[Guest Dazel]

 

 

http://www.zerohedge.com/news/2015-08-28/nassim-talebs-fund-made-1-billion-monday-how-other-hedge-funds-did

 

 

I am wondering what other derivatives that Brian Bradstreet is using for protection if any...as Fairfax is very much structured for declines like Taleb Nassim?

 

 

[Cageyone]

This prognosis suggests that "Mr. Market" still has a long way to go down!

 

http://finance.yahoo.com/news/youre-feeling-bullish-last-weeks-133916109.html

[Guest Dazel]

 

 

Should be an interesting and profitable quarter....enjoy the hedges and deflation insurance those that sat through the unrealized losses should feel very good! I would expect that hey added substantially to US treasuries as well when they traded down in the summer.

 

Fairfax is and has always been an out performer in the fall.

 

Dazel

 

 

[giofranchi]

 

 

Should be an interesting and profitable quarter....enjoy the hedges and deflation insurance those that sat through the unrealized losses should feel very good! I would expect that hey added substantially to US treasuries as well when they traded down in the summer.

 

Fairfax is and has always been an out performer in the fall.

 

Dazel

 

Yes Dazel! You are right! And, as I had already said before, I feel like the perfect contrary indicator here… :(

 

Cheers,

 

Gio

 

[ourkid8]

Gio, you totally sold out of Fairfax? How is that going with your new positions?

 

 

 

Should be an interesting and profitable quarter....enjoy the hedges and deflation insurance those that sat through the unrealized losses should feel very good! I would expect that hey added substantially to US treasuries as well when they traded down in the summer.

 

Fairfax is and has always been an out performer in the fall.

 

Dazel

 

Yes Dazel! You are right! And, as I had already said before, I feel like the perfect contrary indicator here… :(

 

Cheers,

 

Gio

[giofranchi]

Gio, you totally sold out of Fairfax? How is that going with your new positions?

 

Well, I am still underwater of course… But I was lucky enough to sell FFH before its price went down, therefore I am not sure where I would be if I had held onto my FFH shares…

I agree with Dazel, though, that this quarter looks great for FFH… And, if a bear market has begun, also the next few quarters might turn out to be very lucrative for FFH! ;)

 

Cheers,

 

Gio

 

[Guest Dazel]

 

 

"Anyone that thinks investing is easy is stupid!

 

Charlie Munger

[giofranchi]

 

 

"Anyone that thinks investing is easy is stupid!

 

Charlie Munger

 

;)

 

Cheers,

 

Gio

[Guest Dazel]

http://www.ft.com/cms/s/0/2eea3106-65c2-11e5-9846-de406ccb37f2.html#axzz3n1wwV1S1

 

i would expect Fairfax to be synthetically short many of the companies like Glencore with "large debt loads"...I look forward to some colour on this in the third quarter results. These shares have been pummelled and it is likely that Fairfax had to short the major integrated  companies to get the size of their short position.

 

it will be interesting...as we know Fairfax has talked about China and a commodity bubble since Glendore's 2011 IPO...It has been a painful trade that looks good these days.

[original mungerville]

http://www.ft.com/cms/s/0/2eea3106-65c2-11e5-9846-de406ccb37f2.html#axzz3n1wwV1S1

 

i would expect Fairfax to be synthetically short many of the companies like Glencore with "large debt loads"...I look forward to some colour on this in the third quarter results. These shares have been pummelled and it is likely that Fairfax had to short the major integrated  companies to get the size of their short position.

 

it will be interesting...as we know Fairfax has talked about China and a commodity bubble since Glendore's 2011 IPO...It has been a painful trade that looks good these days.

 

Dazel,

 

How large is their short position on individual names (ie not including the Russel or SPY shorts)?

[ap1234]

Dazel,

 

I attended a presentation with Prem and Paul.

 

The question was asked about the composition of their hedges and whether they have been beneficiaries of their bearish views on China.

 

It sounds like their short book consists of individual short positions on some natural resource stocks (BHP, Rio, etc.) as well as highly valued "tech" stocks (Tesla, etc.). They said their gains from the natural resource shorts were relatively small (it didn't sound overly material).

 

The reason they didn't make a larger bet on the China short was that they couldn't find a cheap way to get exposure to the idea. In contrast, they built a large deflation position because they felt the cost was relatively modest in relation to potential payoff if their thesis played out.

 

As an aside, I got the impression that the deflation swaps have likely reversed some losses from last quarter and they are quite optimistic about the value of these positions over the next few years.

 

In terms of the Russell hedges, they are in place not for a 5-10% market correction but because they are worried about a 30-40% correction. They are unlikely to reduce the hedges until we see a meaningful drop in equity prices.

 

They use the Russell hedge for two primary reasons:

 

1. Protect their balance sheet. If you aren't careful you will need money at the wrong time.

2. They worry about a market correction at the same time the insurance cycle hardens and they want to have the capital to double their premiums when their competitors are shrinking. Hard markets don't last long and you need to be in a position to write more business when capital is leaving the industry.

 

Full disclosure: Long Fairfax.

 

Ap1234

[original mungerville]

Dazel,

 

I attended a presentation with Prem and Paul.

 

The question was asked about the composition of their hedges and whether they have been beneficiaries of their bearish views on China.

 

It sounds like their short book consists of individual short positions on some natural resource stocks (BHP, Rio, etc.) as well as highly valued "tech" stocks (Tesla, etc.). They said their gains from the natural resource shorts were relatively small (it didn't sound overly material).

 

The reason they didn't make a larger bet on the China short was that they couldn't find a cheap way to get exposure to the idea. In contrast, they built a large deflation position because they felt the cost was relatively modest in relation to potential payoff if their thesis played out.

 

As an aside, I got the impression that the deflation swaps have likely reversed some losses from last quarter and they are quite optimistic about the value of these positions over the next few years.

 

In terms of the Russell hedges, they are in place not for a 5-10% market correction but because they are worried about a 30-40% correction. They are unlikely to reduce the hedges until we see a meaningful drop in equity prices.

 

They use the Russell hedge for two primary reasons:

 

1. Protect their balance sheet. If you aren't careful you will need money at the wrong time.

2. They worry about a market correction at the same time the insurance cycle hardens and they want to have the capital to double their premiums when their competitors are shrinking. Hard markets don't last long and you need to be in a position to write more business when capital is leaving the industry.

 

Full disclosure: Long Fairfax.

 

Ap1234

 

Recent presentation?

 

Also if their gains from shorting resource stocks is small, the total portfolio of shorts on individual names can not be that large (because resources have been massacred here).

[ERICOPOLY]

2. They worry about a market correction at the same time the insurance cycle hardens and they want to have the capital to double their premiums when their competitors are shrinking. Hard markets don't last long and you need to be in a position to write more business when capital is leaving the industry.

 

 

What if the market hardens when they are sitting on large hedging losses (like right now)?  Doesn't that limit their ability to write more business (than otherwise) into the hard market?

[original mungerville]

2. They worry about a market correction at the same time the insurance cycle hardens and they want to have the capital to double their premiums when their competitors are shrinking. Hard markets don't last long and you need to be in a position to write more business when capital is leaving the industry.

 

 

What if the market hardens when they are sitting on large hedging losses (like right now)?  Doesn't that limit their ability to write more business (than otherwise) into the hard market?

 

Yes but the market is much more likely to harden when equity markets sell-off and decrease capital available in the industry relative to a time (ie past 5 years) when any regular insurance company could make money in the stock market. Insurance cycles harden when assets get hit hard and it hits capital available. Some of the biggest hits to capital have been stock market drops over the past 15 years (along with insurance events of course). But people think its just insurance event related, its not as it doesn't matter if the event is from the asset side of the balance sheet or the liability side.

[original mungerville]

http://www.ft.com/cms/s/0/2eea3106-65c2-11e5-9846-de406ccb37f2.html#axzz3n1wwV1S1

 

i would expect Fairfax to be synthetically short many of the companies like Glencore with "large debt loads"...I look forward to some colour on this in the third quarter results. These shares have been pummelled and it is likely that Fairfax had to short the major integrated  companies to get the size of their short position.

 

it will be interesting...as we know Fairfax has talked about China and a commodity bubble since Glendore's 2011 IPO...It has been a painful trade that looks good these days.

 

Dazel,

 

How large is their short position on individual names (ie not including the Russel or SPY shorts)?

 

I'm staring at p. 59 of the 2014 annual and it looks like its at least $1.7 billion in individual names. Up higher in the paragraph, says they had $6.8 billion notional in equity hedges representing 89% of their equity exposure including equity investments in affiliates.

 

I believe in a recent quarterly, they said they went just above 100%...so 100/89 multiplied by $6.8 billion we are talking about $7.6 billion in hedges now? Is that right? Of which maybe $2 billion might be individual names? Is that what others have?

 

 

[original mungerville]

Dazel,

 

Earlier you mentioned $500 million in gains from bonds. I don't see it - as of yet (but that may change if the US ISM comes in really weak this week). Here is what I see as of today:

 

In terms of long-bond gains, I am staring at page 99 of the annual report. For a 100 basis point parallel move in yield curve, gain of around $850 million.

 

Relative to June 30 (ie final M-to-M date of Q2 for the bonds), yield on the 10-year and 30-year down 30 bps relative to today. So M-to-M gains on bonds this quarter roughly 30/100 multiplied by $850 or $250 million. With only a couple days in the quarter left, I don't see that going past $300 million.

 

Now, are you figuring that they added to their bond position significantly since the end of the year? I can definitely imagine that as they added acquirees along with their asset portfolios so if they just allocated to various securities in line with their current portfolio - all these numbers are likely up somewhat. Don't see how that gets us to $500 million though - unless they added % exposure to long-bonds in recent quarters beyond the level they would have added by the consolidation of new acquirees' asset portfolios.

 

Am I making sense here or do you see that they have added?

[Guest Dazel]

 

OM,

 

Your numbers are as good as any we have until an update.

 

Bonds-they have other government bonds that are not US treasuries or Muni's...spreads have widened more in those

bonds as the rest of the world looks at cutting rates...so it is a moving target...and yes I do believe they would have added US Treasuries because of the above scenario as US treasuries fell in July (rates rose)....

If you use $300m and add hedges

 

russell 2000 is down 12% since june 30th...I believe the individual shorts would have done a lot better...so hedges gains should be low end $700m...on approx $7b

 

not sure on the deflation hedges as cannot find prices...

 

If history is a guide Fairfax has taken weakness as an opportunity to add to bearish bets....they bought CDS' in 2008...so we will see...

 

cost of insurance puts etc have spiked in the third quarter.....as you can imagine someone trying to offload Glencore exposure with a synthetic short that Fairfax owns...

 

so it is moving target looking forward to an update....

 

Dazel

 

 

 

[TwoCitiesCapital]

Dazel,

 

Earlier you mentioned $500 million in gains from bonds. I don't see it - as of yet (but that may change if the US ISM comes in really weak this week). Here is what I see as of today:

 

In terms of long-bond gains, I am staring at page 99 of the annual report. For a 100 basis point parallel move in yield curve, gain of around $850 million.

 

Relative to June 30 (ie final M-to-M date of Q2 for the bonds), yield on the 10-year and 30-year down 30 bps relative to today. So M-to-M gains on bonds this quarter roughly 30/100 multiplied by $850 or $250 million. With only a couple days in the quarter left, I don't see that going past $300 million.

 

That is only a measure of duration/interest rate risk and it also assumes a parallel shift in rates. There are other risks associated with bonds that would also affect final value - things like spreads, curve duration, etc. Ultimately, Fairfax lost something around $660M in Q2 despite the fact that 10-year interest rates only rose 40 bps. Clearly there was some spread widening since Fairfax's portfolio is in large part Muni's and corporates (like the $500M in Blackberry convertibles). Corporate spreads have widened to the highest level in years.

 

We've reversed about half of the rate rise though spreads have continued to widen. I don't think we'll see a full reversal of the $660M in bond losses this quarter, though we'll see a good chunk of it come back. Maybe $200-300M. A reshuffling of Brit's investment portfolio after Q2 could affect these numbers some, but I'm assuming everything is the same as it was as of 6/30/2015. I'd like to think we'd see a good bit come back from equity hedges; however, their equity holdings in Greece and in Blackberry, two large portions of the equity portfolio, haven't done very well this quarter so I think that will probably negate much of the benefit this quarter.

 

The deflation swaps have probably seen a good run. 5 year breakevens in the U.S. are at the lowest they've been in six years (i.e. 2009). Forward looking inflation expectations aren't good so it's possible we've caught a bid for the deflation swaps and inflation floors. Even another doubling like we saw in Q1 (unlikely) that would add another $250M to the quarter.

 

So 400-450M pre-insurance assuming the equity hedges benefit was negated by the performance of the equity portfolio. Maybe another $150 in insurance earnings depending on exposure to the port explosion in China and any other disaster I'm forgetting. I don't know anything about individual shorts - I know Dazel keeps mentioning them, and I know they had individual shorts/TRS back in 2008, but I haven't heard anything about that in their current positioning and without knowing the sizing, the names, of if they're even doing it, I'm hesitant to make assumptions about what companies they may have been short and how much that would have earned them. I see $600M as the best case scenario for this quarter across everything. Reality will probably put it closer to $400-450M.

 

Still not a bad quarter, but I don't think it will be the blowout we're waiting for. That may have to wait until Q4.