ourkid8 Posted September 29, 2015 Posted September 29, 2015 Yup and I am waiting patiently before going VERY large into Fairfax to enjoy the blowout. 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.
Valuebo Posted September 29, 2015 Posted September 29, 2015 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... That would be nice. I sold Fairfax a few days after buying in August because I figured it made more sense to directly short myself and wait for a potential fatter pitch in Fairfax. These days might be coming soon... Spain deflation was -1.2% in August against -0.8% expected.
wisdom Posted September 29, 2015 Posted September 29, 2015 http://www.bloomberg.com/news/articles/2015-09-29/german-inflation-turns-negative-for-first-time-since-january Looks like Germany too was negative.
original mungerville Posted September 30, 2015 Posted September 30, 2015 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 OK thanks.
original mungerville Posted September 30, 2015 Posted September 30, 2015 That is only a measure of duration/interest rate risk and it also assumes a parallel shift in rates. No, not really. The 10- and 30- year yields both moved down 30 basis points in the quarter. Given maturities beyond 10 will account for most of the duration risk in the portfolio, and the 10- and 30-year did shift in parallel, I am not making much of an assumption here on a parallel shift for my duration risk estimate of a plus $200-300M in the quarter. I agree with the rest of your post though.
original mungerville Posted September 30, 2015 Posted September 30, 2015 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 Dazel, Re hedge gains - don't forget that they also hold equities so factor that in and its the differential (hedge gains minus losses) that will produce the net gain for the quarter in relation to equities.
original mungerville Posted September 30, 2015 Posted September 30, 2015 Sorry, I am digging into this now... been here done that (way too many times before with this one) ... so I know I have to look for sink holes on the equity side. First Q3 sink hole: Looks like their Greek Eurobank position is down 180M Euros this quarter (from 0.14 Euros per share to 0.02) so that is about a $US 200M hole. That'll take some of the mustard off of the other M-to-M gains in Q3. http://finance.yahoo.com/echarts?s=EUROB.AT+Interactive#{"range":"ytd","allowChartStacking":true}
original mungerville Posted September 30, 2015 Posted September 30, 2015 Sink hole #2: estimate $120 million loss on Blackberry 1. Blackberry shares down 25% this quarter or about $US2 per share on Nasdaq and they hold 46 million shares or so = -90M 2. Plus losses on the convertible debt ($500 million with call option on stock at strike of 10 I believe, stock went from 8 to 6 in Q3 which means the M-to-M on the imbedded call has to have declined. By how much, I don't know but I would guess 30M for the imbedded call loss. On top of that, the spread has to have widened but I won't factor that in here because I'll assume their other investments have some gains, etc.) More mustard off whatever you expect on the positive side for Q3.
Guest Dazel Posted September 30, 2015 Posted September 30, 2015 OM, Agreed net profits have some holes...Greece and Blackberry have most definitely been a drag....the market is looking at what great capital allocators who did not get smoked this year will do with their cash and profits. Fairfax has both. I am interested to see what the actual number is...as insurance unwriting profits will likely offset mark to market investment losses and hedges will be pure profit. We will see of course... Dazel
original mungerville Posted October 1, 2015 Posted October 1, 2015 OM, Agreed net profits have some holes...Greece and Blackberry have most definitely been a drag....the market is looking at what great capital allocators who did not get smoked this year will do with their cash and profits. Fairfax has both. I am interested to see what the actual number is...as insurance unwriting profits will likely offset mark to market investment losses and hedges will be pure profit. We will see of course... Dazel Dazel, I don't think those will offset (also I sent you an email on another topic).
benhacker Posted October 2, 2015 Posted October 2, 2015 yeah, I think the quarter will actually be so-so. bonds probably show maybe $200-300m in gains. equities look real bad, even with hedging. IRE, BBRY, EUROB, RFP, KW, IBM... I have to go down my list probably 15 deep before I get to something that dropped substantially less than market this Q. Pretty ugly. But I do agree with Dazel that despite my past comments about not being able to predict M-2-Model valuation adjustments in the CPI swaps, I think the move in 10 yr inflation break evens this Q from 2.2% to 1.5% is meaningful from a model standpoint, and should mark the value of those up a few hundred million. I don't know, hard to get excited about the Q. I had sold down a huge chunk of FFH earlier this year and I've built a little piece of it back recently. I think it's a good value, and I do think the insurance results will continue to flow which is still not appreciated... but I don't think a big portfolio (net) move is in the cards this quarter. I'd love to be wrong. :)
giofranchi Posted October 2, 2015 Posted October 2, 2015 Of course, I cannot say how this quarter results will turn out to be. But I think FFH’s macro view is proving to be correct. This doesn’t mean I have any view on the CPI contracts… If they ever will turn out to be profitable or not… But I believe it might be useful to have something that zig, while the others zag, in a macro environment of falling prices. Therefore, I have rebuilt a position after selling some months ago. Truth be told, I still don’t like the business of “macro forecasting”, therefore I’ll take a much more flexible approach to my investment in FFH than I had done in the past. Cheers, Gio
Guest glavacem Posted October 3, 2015 Posted October 3, 2015 Gio, Welcome back. I am in the same boat as with with my opinions of Fairfax changing over time. I can live with the macro calls. What I have a hard time with is the stock picking during a great bull market. Quite frankly, I am a bit concerned about how many large positions have been hammered. Someone once told me with leverage you don't have to hit a home run. I have the feeling that they have been swinging for the homerun lately and missing a lot. I am curios to see what the 5 year returns on the common stocks look like now. I am still being patient, but I am watching and waiting to see if the stock picking improves over time.
mals Posted October 3, 2015 Posted October 3, 2015 Gio, Welcome back. I am in the same boat as with with my opinions of Fairfax changing over time. I can live with the macro calls. What I have a hard time with is the stock picking during a great bull market. Quite frankly, I am a bit concerned about how many large positions have been hammered. Someone once told me with leverage you don't have to hit a home run. I have the feeling that they have been swinging for the homerun lately and missing a lot. I am curios to see what the 5 year returns on the common stocks look like now. I am still being patient, but I am watching and waiting to see if the stock picking improves over time. +1 on the macro comment above (although I can see the rationale their considering their levered structure) and also that they seem to be swinging for the fences - to strike the big wins. But I wonder if that swing for the fences style is a new one or is that what has led to their BV growth over the past two decades?
petec Posted October 5, 2015 Posted October 5, 2015 +2 - I'm far more worried about the stock-picking than the hedging. It wasn't hard in 2009 to load up on epically good companies and go to the beach, but they didn't. That said: they have learned to buy high quality insurance companies at a reasonable price, rather than cheap crap. I think these guys will keep getting better at what they do.
giofranchi Posted October 5, 2015 Posted October 5, 2015 +2 - I'm far more worried about the stock-picking than the hedging. It wasn't hard in 2009 to load up on epically good companies and go to the beach, but they didn't. That said: they have learned to buy high quality insurance companies at a reasonable price, rather than cheap crap. I think these guys will keep getting better at what they do. Well, if you put together bonds + equity hedges + CPI derivatives (which imo are all “macro calls”), they are simply much more meaningful than their equity portfolio… That’s why I said I don’t like their business right now very much: because so much more capital is devoted to their macro views than to investing in businesses… with the exception, I agree, of high quality insurance companies (here the problem, though, is even high quality insurance companies tend to be rather lousy businesses…). Furthermore, I also believe the results of their equity portfolio is affected by their macro views… In 2009 they bought high quality companies that were subsequently sold way too early… I guess because of “general market overvaluation” concerns… But the old Franklin’s adage: There are three great friends: an old wife, an old dog, and ready money. might always be true! And I think I will treat FFH as “ready money” from now on. Cheers, Gio
petec Posted October 5, 2015 Posted October 5, 2015 Well, if you put together bonds + equity hedges + CPI derivatives (which imo are all “macro calls) I don't think you can claim that owning bonds is a macro call for an insurance company!
giofranchi Posted October 5, 2015 Posted October 5, 2015 I don't think you can claim that owning bonds is a macro call for an insurance company! Maybe… But long-term bonds are very sensitive to interest rates… Therefore, you must have a very precise opinion about interest rates to hold them right now, especially because their yield is so low these days… And that is a macro judgement imo. Cheers, Gio
petec Posted October 5, 2015 Posted October 5, 2015 I don't think you can claim that owning bonds is a macro call for an insurance company! Maybe… But long-term bonds are very sensitive to interest rates… Therefore, you must have a very precise opinion about interest rates to hold them right now, especially because their yield is so low these days… And that is a macro judgement imo. Cheers, Gio Yes, that's fair. It's been a while since I looked at the bond portfolio in detail. I suppose some might be liability matched but probably not a large portion given the nature of the insurance book.
TwoCitiesCapital Posted October 8, 2015 Posted October 8, 2015 Looked up the pricing on some inflation caps and floors over the quarter. Chose 5 different floors with a handful of different brokers. Most of the floors are up about 60-70% in value over the quarter. Assuming Fairfax has similar contracts (their's have more duration, so probably did a little better?), and that the deflation swaps are priced similarly, we will probably see about $150-200M from those. That's roughly inline with my prior estimates that were ballparking the returns, so I think i'll stick with my $400-450M quarter. Wouldn't be surprised to see them hit $500M though if the insurance and bonds did slightly better than expected.
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