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Is mr market expecting a results disaster????


Daphne
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Conaccord took this Q eps down from $12 to -$10 recently. My base case is that the results come in perhaps even worse than that, at perhaps -$20, since the 10yr  t bills yields are up around a quarter point since the last quarter, and they have to mark their sizeable bond portfolio to market every quarter, and their hedges have likely gone sideways as equity markets have been range bound, and I'm anticipating no underwriting profits, as cat losses(western canada fires and recent hurricane losses) wipe out their recently consistent underwriting profits. Their equity holding haven't done particularly well either, but of course with such a diverse portfolio, you never know if they mark to market certain gains etc Quess to offset the losses. Absent the last point, we are likely looking at this dropping a bit further after the results this thursday.

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Bonds are in the worst sell-off in awhile and Fairfax has a lot of duration exposure.

There have been a few catastrophes that could impact insurance profitability.

Recent GDP/inflation data hasn't supported their bearish view and will likely result in markdowns on shorts, TRS, and deflation swaps.

 

 

It won't be a good quarter for them..

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Conaccord took this Q eps down from $12 to -$10 recently. My base case is that the results come in perhaps even worse than that, at perhaps -$20, since the 10yr  t bills yields are up around a quarter point since the last quarter, and they have to mark their sizeable bond portfolio to market every quarter, and their hedges have likely gone sideways as equity markets have been range bound, and I'm anticipating no underwriting profits, as cat losses(western canada fires and recent hurricane losses) wipe out their recently consistent underwriting profits. Their equity holding haven't done particularly well either, but of course with such a diverse portfolio, you never know if they mark to market certain gains etc Quess to offset the losses. Absent the last point, we are likely looking at this dropping a bit further after the results this thursday.

 

Other than that, how was the play Mrs. Lincoln?

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Luckyone,

I too have a sizable long position, but surely that shouldn't prevent one from taking an objective look at the investment profile! These things tend to be quite volatile and Mr Watsa repeats every quarter both good and bad that you can only make sense of the results in the long run. That of course doesn't prevent Mr Market from his manic depressive ways. We should attempt not to be similarly labile in mood. 

Good luck. ;)

FWIW, I think relative to the market, this is a decent buy, and a solid defensive position.

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Yes but in the past both have traded above 2x BV. Just not recently. Arguably those days are over for both as their size has grown, but with both companies buying up whole businesses as subsidiaries and probably having decades long investment runways with management fully alligned with shareholders, surely 1.5x BV is not a stretch in this arguably fully valued market. Especially as they both are with solid insurance/underwriting franchises. In general financials have not traded at healthy multiples of BV since the financial crisis.

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From the Q3 report...  ??? ??? ???

 

Subsequent to quarter-end:

...

* The company has sold approximately 90% of the U.S. long term treasuries in its investment portfolios; as a result, its cash and short term investments will be in excess of $10 billion.

 

Full news release: http://www.fairfax.ca/news/press-releases/press-release-details/2016/Fairfax-Financial-Holdings-Limited-Third-Quarter-Financial-Results/default.aspx

 

Evidently, they sold them all today (hours before the Q3 results) :o

 

From the MD&A

Subsequent to the end of the third quarter of 2016, on November

3, 2016 the company sold approximately 90% of its long dated US

treasury bonds.

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Wow.  That's huge.  Suits me perfectly: the deflation hedges don't involve much risk if they are wrong, but I don't think the same way about a 30-year treasury.  Short duration bonds and big hedges is exactly what I want, given what I want FFH to do in my portfolio.

 

Bit late to be buying SP500 *calls* though!

 

Results better than I assumed tbh but they will take a bit of a hit on the sale, vs quarter end valuation.

 

I recall Prem saying they kept a very close eye on inflation indicators - maybe they think something has changed a little.

 

Also a great quarter from Zenith - they paid well under 10x underwriting profits (i.e., excluding any net benefit of float but also excluding operating cost and tax) based on likely FY16 earnings.  I know it's taken a while but I think that was a very solid deal. 

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10b in cash and short term stuff? I wonder if this is macro related or if there a major purchase of some kind on their radar. Either way, they have enough to make a dent in something significant.

 

Probably more of the former. Very odd for an insurer to not hold a massive amount in gov't bonds and they haven't sold Treasuries to fund prior acquisitions.

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I find the sale of their long term Treasuries a bit perplexing.

 

Here's Prem on today's earnings call:

"We don't know who is going to win the elections......in the long term we still have questions about [the health of the US economy, I think he means], but we do live in a mark-to-market world and we wanted to take risk out and so we've done that."

 

Since when did Fairfax ever mind so much about mark-to-market on a quarterly basis?  I mean, take Prem's opening statements on the call where he says:

"I emphasize on these calls always, with IFRS accounting, where stocks and bonds are recorded at market and subject to mark-to-market gains or losses, quarterly and annual income will fluctuate widely and investment results will only make sense over the long term."

 

I dunno, seems like at Fairfax there's way too much focus on the investment side of the business.  Compare and contrast with Markel.....

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Here is the full quote.

 

http://www.bloomberg.com/news/articles/2016-11-04/prem-watsa-s-fairfax-sells-90-of-long-bonds-ahead-of-election

 

“We’ve sold 90 percent-plus of our Treasury bonds and we’ve made the point that the uncertainties in the U.S. election are the reason," Watsa, chief executive officer of the Toronto-based company, said on the third quarter conference call Friday. “We don’t know who’s going to win the elections, but you could have significant infrastructure spending, a drop in corporate tax rates, and while we think it might work in the short-term, in the long-term we have questions about that. We wanted to take that risk out."

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Look its pretty straightforward.

 

If you think Trump wins two adverse things will happen that will affect US treasuries : decreased corp tax rate and increased infrastructure spending. Prem says as much. Decreasing corp tax rate to 15% and decreasing highest individual tax rates and lowering number of tax brackets means decreased tax revenue for the gov. I have seen estimate of lost tax revenue of upwards of $9 trillion by 2026.

 

Increased infrastructure spending (military, infrastructure - building of Wall, etc) will be financed by huge bond auctions. When you suddenly triple the size of bond auctions to finance the increased deficit, what do you think happens to IR? Who has the appetite to come for a bid in today's environment (the last time that high a deficit as a % of GDP that needed to be finance was in 2008 ... and everyone participated due to safe heaven status of treasuries during those times)?

 

Avg duration of 30yr treasury is 19 years, so 1% moves results in 19% loss.

 

He wants to take the risk off in-case Trump get elected. Given the depth of US treasury market, he can easily do that and he can always come back in once he has certainty. Trump getting elected may result in other 'un-intended' events which he can capitalize on with his newly acquired $10b+ cash war chest.

 

Makes perfect sense with what he did.

 

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I dunno, seems like at Fairfax there's way too much focus on the investment side of the business.  Compare and contrast with Markel.....

 

Could you elaborate? 

 

When you put together the incredible improvement in underwriting over the last several years plus the huge expansion of insurance via acquisition, it seems clear to me that they are *very* focussed on insurance.

 

They are also, of course, focussed on investing the float.  And they've had a very successful in long term treasuries.  But, they have decided they don't want to take the risk of a yield spike around the election that might not reverse soon because of increased fiscal deficits.

 

I really like this decision for two reasons: they are now a beneficiary of both a deflationary bust and an inflationary bust (up to now an inflationary bust was a risk); and this is fairly clear evidence that they can change their minds if the facts change.  I was a little concerned they had one worldview and would cling to it regardless.

 

Each to their own but they have taken out the one thing that worried me about my position so I am quite happy!

 

 

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Look its pretty straightforward.

 

If you think Trump wins two adverse things will happen that will affect US treasuries : decreased corp tax rate and increased infrastructure spending. Prem says as much. Decreasing corp tax rate to 15% and decreasing highest individual tax rates and lowering number of tax brackets means decreased tax revenue for the gov. I have seen estimate of lost tax revenue of upwards of $9 trillion by 2026.

 

Increased infrastructure spending (military, infrastructure - building of Wall, etc) will be financed by huge bond auctions. When you suddenly triple the size of bond auctions to finance the increased deficit, what do you think happens to IR? Who has the appetite to come for a bid in today's environment (the last time that high a deficit as a % of GDP that needed to be finance was in 2008 ... and everyone participated due to safe heaven status of treasuries during those times)?

 

Avg duration of 30yr treasury is 19 years, so 1% moves results in 19% loss.

 

He wants to take the risk off in-case Trump get elected. Given the depth of US treasury market, he can easily do that and he can always come back in once he has certainty. Trump getting elected may result in other 'un-intended' events which he can capitalize on with his newly acquired $10b+ cash war chest.

 

Makes perfect sense with what he did.

 

+1

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Look its pretty straightforward.

 

If you think Trump wins two adverse things will happen that will affect US treasuries : decreased corp tax rate and increased infrastructure spending. Prem says as much. Decreasing corp tax rate to 15% and decreasing highest individual tax rates and lowering number of tax brackets means decreased tax revenue for the gov. I have seen estimate of lost tax revenue of upwards of $9 trillion by 2026.

 

Increased infrastructure spending (military, infrastructure - building of Wall, etc) will be financed by huge bond auctions. When you suddenly triple the size of bond auctions to finance the increased deficit, what do you think happens to IR? Who has the appetite to come for a bid in today's environment (the last time that high a deficit as a % of GDP that needed to be finance was in 2008 ... and everyone participated due to safe heaven status of treasuries during those times)?

 

Avg duration of 30yr treasury is 19 years, so 1% moves results in 19% loss.

 

He wants to take the risk off in-case Trump get elected. Given the depth of US treasury market, he can easily do that and he can always come back in once he has certainty. Trump getting elected may result in other 'un-intended' events which he can capitalize on with his newly acquired $10b+ cash war chest.

 

Makes perfect sense with what he did.

 

It makes sense, but obviously wished they would have sold back in June/July when treasuries were hitting their record lows and offered less value than after one of hte largest bond sell-offs in history. Granted, Trump wasn't guaranteed the presidency then, but "Brexit" and other nationalistic movements around the globe should have suggested probabilities were strong and the value in Treasuries, even relative value to other gov't bonds, had all but disappeared following "Brexit".

 

That would have been the time to sell...not once bonds returned to pre-Brexit levels.

 

Anyhow, I'm not overly concerned about the move. I just thought it bizarre that they'd sell the Treasuries now and not 4-5 months ago.

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Look its pretty straightforward.

 

If you think Trump wins two adverse things will happen that will affect US treasuries : decreased corp tax rate and increased infrastructure spending. Prem says as much. Decreasing corp tax rate to 15% and decreasing highest individual tax rates and lowering number of tax brackets means decreased tax revenue for the gov. I have seen estimate of lost tax revenue of upwards of $9 trillion by 2026.

 

Increased infrastructure spending (military, infrastructure - building of Wall, etc) will be financed by huge bond auctions. When you suddenly triple the size of bond auctions to finance the increased deficit, what do you think happens to IR? Who has the appetite to come for a bid in today's environment (the last time that high a deficit as a % of GDP that needed to be finance was in 2008 ... and everyone participated due to safe heaven status of treasuries during those times)?

 

Avg duration of 30yr treasury is 19 years, so 1% moves results in 19% loss.

 

He wants to take the risk off in-case Trump get elected. Given the depth of US treasury market, he can easily do that and he can always come back in once he has certainty. Trump getting elected may result in other 'un-intended' events which he can capitalize on with his newly acquired $10b+ cash war chest.

 

Makes perfect sense with what he did.

 

It makes sense, but obviously wished they would have sold back in June/July when treasuries were hitting their record lows and offered less value than after one of hte largest bond sell-offs in history. Granted, Trump was guaranteed the presidency then, but "Brexit" and other nationalistic movements around the globe should have suggested probabilities were strong and the value in Treasuries, even relative value to other gov't bonds, had all but disappeared following "Brexit".

 

That would have been the time to sell...not once bonds returned to pre-Brexit levels.

 

Anyhow, I'm not overly concerned about the move. I just thought it bizarre that they'd sell the Treasuries now and not 4-5 months ago.

 

Did you think it was bizarre that they weren't selling at the time, or is this hindsight speaking?  Not getting at you, just interested.  Because while I agree, I wouldn't have got the timing right either so I can't criticise them ;)

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Look its pretty straightforward.

 

If you think Trump wins two adverse things will happen that will affect US treasuries : decreased corp tax rate and increased infrastructure spending. Prem says as much. Decreasing corp tax rate to 15% and decreasing highest individual tax rates and lowering number of tax brackets means decreased tax revenue for the gov. I have seen estimate of lost tax revenue of upwards of $9 trillion by 2026.

 

Increased infrastructure spending (military, infrastructure - building of Wall, etc) will be financed by huge bond auctions. When you suddenly triple the size of bond auctions to finance the increased deficit, what do you think happens to IR? Who has the appetite to come for a bid in today's environment (the last time that high a deficit as a % of GDP that needed to be finance was in 2008 ... and everyone participated due to safe heaven status of treasuries during those times)?

 

Avg duration of 30yr treasury is 19 years, so 1% moves results in 19% loss.

 

He wants to take the risk off in-case Trump get elected. Given the depth of US treasury market, he can easily do that and he can always come back in once he has certainty. Trump getting elected may result in other 'un-intended' events which he can capitalize on with his newly acquired $10b+ cash war chest.

 

Makes perfect sense with what he did.

 

It makes sense, but obviously wished they would have sold back in June/July when treasuries were hitting their record lows and offered less value than after one of hte largest bond sell-offs in history. Granted, Trump was guaranteed the presidency then, but "Brexit" and other nationalistic movements around the globe should have suggested probabilities were strong and the value in Treasuries, even relative value to other gov't bonds, had all but disappeared following "Brexit".

 

That would have been the time to sell...not once bonds returned to pre-Brexit levels.

 

Anyhow, I'm not overly concerned about the move. I just thought it bizarre that they'd sell the Treasuries now and not 4-5 months ago.

 

Did you think it was bizarre that they weren't selling at the time, or is this hindsight speaking?  Not getting at you, just interested.  Because while I agree, I wouldn't have got the timing right either so I can't criticise them ;)

 

A little of both. Obviously, I wasn't forecasting a return to pre-Brexit levels or that rates would move up significantly in the worst sell off we've seen in years, but markets almost ALWAYS overreact and correct in the days following shock events like "Brexit". 30-year Treasuries went pretty close to 2% flat and the yield advantage from overseas investors buying Treasuries on a hedged basis disappeared - absolute value was much changed after a 20-25% rally AND Treasuries lost almost all their relative value on a hedged basis removing demand from Japanese and European investors who had been a major source of demand.

 

I put my money where my mouth was. I owned a 25+ year zero coupon bond fund for maximum duration exposure and dumped it in July. I tend to agree with his macro calls, but dont' mind shorter term trading. Given the reasoning above, I didn't want to be greedy after clearing 20% in a bond ETF in fewer than 6-months so I took my profits and held the cash and waitied for better rates to re-enter the position (haven't done that yet).

 

I'm nowhere near as sophisticated as Fairfax is when it comes to bonds - just seems odd they would sell now instead of bakc then given his reasoning. Brexit and other nationalist movements should have been the flag that Trump had a chance AND the bonds had just gone through a major rally to set record lows in terms of U.S. yields! Record lows! Trump threat? Check. Bonds the highest valued in their history? Check.

 

It's just weird that they held then but are selling now. The only thing that's changed is that bonds have become more attractive.

 

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