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Fairfax 2018


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As discussed in another thread, the major stock holdings are doing well.  I quickly put this together but need to head off to work.  Only need the share count:

 

Ticker       Shares 11/2/2017 1/10/2018 % increase Increase in BV

BB           96,700,000 $10.78 $14.40           33.58% $350,054,000.00

RFP                 TBD      $5.85 $11.10           89.74%

EGFEY              TBD         $0.44 $0.52           18.88%

KW                 TBD         $19.55 $17.75           -9.21%

IPI                 TBD         $3.91 $4.22           7.93%

USG                  TBD         $34.45 $39.90           15.82%

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And just like that...Fairfax is brilliant.

The key to Fairfax is the $40b investment portfolio...and the secret to the math and future earnings as I have stated many times is Brian Bradstreet and the bond portfolio. He is the best bond manager in history I challenge anyone to refute that with his record. No one other than Mr. Buffett has held massive amounts of cash in their portfolios. They have reached for yield and they are about to get smoked. Fairfax will make a killing on the interest rate spike. As we will be able to secure years and years of cash flow. It’s just the beginning of the bond bear market. As usual Brian and Fairfax are ready.

 

Guns

Gold

And Fairfax

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And just like that...Fairfax is brilliant.

 

 

:) ha!

 

Nice to see that the earnings power of a 2y treasury has doubled in the last year, which basically gives us an extra $250m in potential income off a $25bn cash and bond portfolio without taking meaningful duration risk. Lovely to be at the short end when yields rise! Very impressive switch by Bradstreet considering how long he was at the long end for. (Some idiot will whinge that he was 5 months too early but good luck timing it better.)

 

 

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As discussed in another thread, the major stock holdings are doing well.  I quickly put this together but need to head off to work.  Only need the share count:

 

Ticker       Shares 11/2/2017 1/10/2018 % increase Increase in BV

BB           96,700,000 $10.78 $14.40           33.58% $350,054,000.00

RFP                 TBD      $5.85 $11.10           89.74%

EGFEY              TBD         $0.44 $0.52           18.88%

KW                 TBD         $19.55 $17.75           -9.21%

IPI                 TBD         $3.91 $4.22           7.93%

USG                  TBD         $34.45 $39.90           15.82%

 

From the Q3 report there are 27,940,806 - 166,300 = 27,774,506 effective outstanding.  That adds $12.6 to BVPS.

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I am going to share Bradstreet’s secret strategy that makes him maybe the best bond guy maybe ever.

 

Wait for it....patience....and he has math on his side he misses the bond losses and buys higher rates... I have seen him do this 4 or 5 times...albeit with smaller sums of money...but he has made billions doing it. You note he sold saving billions in cap losses in 2016 a week or two before yields spiked....

 

For the financial industry everyone cheers higher rates but they don’t realize is tHat the immediate effect of higher rates are very large bond losses. The interest rate effect takes time as short maturities

Need to run off and they purchase longer dated higher yield bonds as they do.

 

Bradstreet when he feels he is right sells bonds usually at a profit and goes to cash and short term maturities (where we r now) so when rates spike higher Fairfax experiences small to 0 losses and he reallocates to longer dates high interest bonds. His market timing in this regard is unmatched...he ran into temporary trouble in late 1999...2000 with unrealized losses...these turned into massive gains that likely saved Fairfax from the shorts in 2003. And made me a small fortune(thank you Brad!).

 

He did it again in2008 selling treasuries at the top Andy buying 7% Berkshire guaranteed tax free Muni’s...crazy good.

 

Now with almost $40b I get gitty thinking about what he can do in a rising rate environment. It is not just the cash flow....he has taken shorter term big profits on treasury moves...many times. He is the key to Fairfax $1000.

 

 

 

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One of the questions to Gundlach yesterday in his call was “what bond would you buy today” and his answer was the 2 year treasury.

 

He said if the US 10 year yield moves north of 2.63% then yields likely will keep going to 3% this year. We are at 2.58% today so getting close. He thinks the 3% level is the one to watch on the US 30 year; if yields move higher he said you can call the end of the 35 year bull market in bonds.

 

If is time to review what FFH is doing with their bond portfolio. Their positioning there may be setting them up for the next big investment gain. Everyone is looking at FFH and looking for gains in stocks as the next big catalyst in the share price; perhaps we are looking at the wrong asset class.

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Viking You are.

It’s math....size matters....Bradstreet will be in charge of the bulk of the $40b....he called a Treasury top in 2016...he was right. No offence to Mr.Gundlach (I like him) and he manages more money than Bradstreet but his record is NOT even close to Brads. Check the numbers they will blow you away and that has Bradstreet holding cash for sometimes for long periods of time.

 

Prem and his team will do well but they will not be allocating the amount of capital Bradstreet has and will. This is what Longleaf refers to with Fairfax earnings power being under appreciated because of their large cash reserves. While most refer to Prem as he is the captain of the Fairfax ship...Bradstreet is the key to moving the portfolio needle.

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You can forget book value for Fairfax right now it underappreciates their insurance operations....and the power of the$40b portfolio (that is 43% cash). First Capital was an example of this....was sold for 3xbook....without the benefit of the investments.

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This is what Prem is taking about by the company being as cheap as it has ever been looking at intrinsic value. We will do best if Fairfax stays or falls from here and we get to purchase-shares  until Fairfax becomes fully invested. When that happens the market will realize what is there...they have been swimming with one arm for awhile.

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Chrispy, I agree with Dalzel that in Bradstreet, FFH has one of the best bond managers so at an inflexion point like we are at right now in the bond market (from long term bull to bear market) I think you want to go with the firms that have the best people and trust that they will get it (mostly) right.

 

I have been reviewing what FFH has done with its bond portfolio since Q4 of 2016 and they look like they have absolutely nailed it (shifting out of long dated bonds to short term maturities). Below is the change in US interest rates just in the past 14 months. Amazing. If the Fed raises 4 times this year, yields will be climbing (short and long end). Who is going to want to own long dated treasuries moving forward? I am very interested to see what FFH has done with the Allied bond holdings when they report Q4 results.

 

            Nov 1 2016    Jan 9, 2018

1 year.    0.65              1.78

2 year.    0.83              1.98

10 year.    1.83              2.55

30 year.    2.58              2.88

 

In terms of what bonds to buy today, as I said earlier, Gundlach said 2 year treasury was the place to be. He said the yield differential (2 year versus 10 year) is not large enough to offset the risk of much higher rates (of 10 year). The 2 year has a decent yield; hold to maturity and reinvest in two years at likely much higher rate. You will not make a killing with this strategy. However you will make a positive return. Gundlach feels there is a reasonable chance the 10 bond yields will rise to 5-6% in the next 4 years. If this happens investors who hold 10, 20 or 30 year bonds will get killed. If Fairfax’s competitors are not careful losses on their bond portfolios may be material (potential catalyst for hard market in insurance?).

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While I agree, the change of tone (on the board, not from specific members) amuses me. A year ago Fairfax were investment morons and could do no right. And then 2017 happened...

 

Same people, same philosophy, different years.

 

Next the market will crash and they'll be stupid for having sold the hedges ;)

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Petec, I think the difference is a year later we all have a little more information. FFH has largely monetized ICICI Lombard. FFH has monetized First Capital. I think the size of both of these gains was much, much larger than most expected. I think they may have $2.5 billion in cash at the holding company when they report Q4 results and this is much more than a year ago.

 

FFH India has performed exceptionally well driven by the extraordinary gains of the Indian market. Again, I think performance was much better than most people expected at the start of the year.

 

Many of FFH large equity holdings also outperformed over the year: BlackBerry and Resolute come immediately to mind.

 

The re-positioning of the massive bond portfolio (moving to low duration) continues to looks like a very smart move.

 

The one blemish all year was the underwriting performance of Allied and Brit; This will need to be monitored moving forward. However, if all the hurricanes in 2017 results in a hard market there may be some benefit moving forward.

 

When I weave it all together, from my perspective, a lot of very good material things have happened at FFH in 2017. And as a result, 2017 YE reported book value will be significantly higher than 2016. Perhaps US$435 versus $367?

 

Where have the shares traded In mid January each year?

2018 = US $524

2017 = $470

2016 = $486

2015 = $505

 

And when you look at the FFH of even 18 months ago (and how it’s investment portfolio was positioned with all of the equity hedges) the changes are even more stark.

 

I have been very lucky with my investments in FFH over many years (from 2003 to 2009); these investments put me in a very good situation financially. One of the key reasons I invested in FFH is I felt I understood (somewhat) and liked how they were invested. This confidence allowed me to be patient and take advantage of the volatility (loading up on shares when they got crazy cheap). Since 2012 I have not liked how FFH was invested (especially the massive equity hedges). And yes, this stopped me from holding the shares for many years. Much has changed at FFH in the past 18 months and as a result of these changes my opinion of owning the shares has also changed. I now own a small position. If the shares get cheaper I will likely buy more :-)

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