Crip1 Posted January 19, 2018 Share Posted January 19, 2018 "SOP" - Pretty sure that's "Sum of Parts". -Crip Link to comment Share on other sites More sharing options...
Dazel Posted January 19, 2018 Share Posted January 19, 2018 Cigar butt you are correct...you know what takes care of the excess capital? Higher interest rates...the world has not only been reaching for yield they have climbed Everest...rising rates will squeeze liquidity and the excess capital will disappear. So it’s not just Bradstreet kicking th bond worlds ass he is the best in the world at accessing credit. (CDs portfolio hit every financial that was exposed and then made I killing on the right Muni’s).... One of the consequence of where we are for those that are paying attention is that for debtors it’s a great time to bankrupt a company. Why? The realization of the remaining assets is high so debt holders will get higher payouts in liquidation then letting a company dig a debt hole into the future they will never get out of. This is a consequence of risng rates and liquidity squeezing....banks don’t want to lose when they see the credit cycle tightening....it will slowly (or quickly) have consequences. For almost a decade banks have not foreclosed because it was worth it to float the zombies with cheap money....that cycle may have changed...with Carillion...Steinhoff was mostly a scam pyramid...(Canadian Pot stock aren’t?!!) This what Fairfax does best....restructures...taking first creditor position an environment of restructure and growth would be nirvana for Fairfax..many did not comment on the Blackberry move to debtor but it had very little downside nor did Resolute out of bankruptcy. This is early days of course....does not take much for Bankers to get spooked...do you not think they are checking their loan books after gettting burned? Unless they are in Toronto...and smoking the wacky tobacco not sure WTF Canadians are doing...gambling on houses, gambling on Bitcoin, gambling on Pot stocks...all with debt. The world will continue forward and at a good clip but higher rates will bring opportunity and some destruction. https://www.bloomberg.com/news/articles/2018-01-17/u-s-banks-have-lost-more-than-1-billion-on-steinhoff-loans https://www.bloomberg.com/news/articles/2018-01-15/carillion-banks-lead-losers-as-2-2-billion-debts-crush-builder Link to comment Share on other sites More sharing options...
petec Posted January 22, 2018 Share Posted January 22, 2018 A couple of thoughts on various topics that have come up: 1/ On the corporate governance thing. It reassures me that a) Ben Watsa does not work at Fairfax, which suggests Prem wants to avoid being seen as nepotistic; b) there is a known likely successor in running the business. But I would like greater clarity on what happens to Prem's shares and votes when he dies. 2/ On realising Blackberry...the most obvious option is to sell the business - even at 2x of 3x up from here it's not a big ticket in the grand scheme of things. The second option is to engineer a block sale, probably at a slight discount. Fairfax will have c.16% after conversion. They can find a home for that in endowments and pension funds if BBRY is once again seen as a success and is paying a dividend out of recurring RADAR and QNX revenues. Failing that, they can go to market with the block. Bottom line: this isn't the first time that a company has taken both a big stake and a directorship in a turnaround. It happens in PE and activist investing all the time and there are well-trodden exit pathways. 3/ The alternative capital in the industry a) goes away with higher rates as Dazel says, and b) needs underwriting which you can charge for. Lancashire have a great model for taking advantage of it. Fairfax could do the same - but to the extent that they do, they lose float. . Link to comment Share on other sites More sharing options...
Dazel Posted January 22, 2018 Share Posted January 22, 2018 We ere at 2.67% this morning on the 10 year treasury....after a government shut down. Things are quiet for these levels... Gundlach is watching JNK....says that it has remained under its 200 day average every day but one since Nov 1. Junk bonds are the canary in the coal mine...It is possible we get a spike in rates in the scenario we are in....that is the perfect situation for Fairfax. Scenario....rising rates spike globally....as the trillion dollar bond market gets spooked...and unwinds quickly. Many are naked with tide heading out get caught run for the door...drives rates on the 30 year to 4.5 to 5%. This would achieve many things for the central banks who have-are controlling the bond markets 1. We get a correction in the market of between 5 and 10%...preferably 10.1% for governments. 2. Crypto mania nonsense gets crushed without CB’s having to do it themselves 3. Risk and moral hazard are at least thought of.... 4. The process would likely be quick and painless as the those that can (Fairfax) would be heavy buyers of a 5% 30 year....this would help global financials greatly if the could refinance their bond portfolio’s at higher rates and strengthen banks balance sheets. However many would suffer massive bond losses in the short term. 5. Rationality in a stupid environment May be achieved for a short while...but the bull market will continue in equities because cash returning to the bond market on short maturities will hold long rates down...and actually create a capital gains opportunity in bond buying and equities that sell off. Not sure how Fairfax shares will-would react to the above scenario which appears to have already started....it may be possible to wait...or you could have a spike in the share price. Either way they are in a position to make a lot of money if this trend continues. Link to comment Share on other sites More sharing options...
Dazel Posted January 22, 2018 Share Posted January 22, 2018 Feels like 1994 http://fortune.com/2013/02/03/the-great-bond-massacre-fortune-1994/ https://www.ft.com/content/32cca748-8fe8-11e2-9239-00144feabdc0 You can multiply the bond loss numbers by at least 10 I won’t paste a late 1993...1994 stock market chart but if you are paying attention...take a look it is eerily similar to where we are now.... Once again if 2018 played out like 1994 the global central banks would be over the moon with the outcome....and the world would continue to grow because the bond losses would be quick and prices would stabilize and recover by the end of the year... It’s what I would do if I ran the CB’s. ECB would slow buying th long end of the curve and US treasury would sell their longer dated bonds...easy to do if they go that way. Sad they control things but they do until they don’t. We would have Fairfax $1000 in that scenario. Guns Gold And Fairfax Link to comment Share on other sites More sharing options...
Cigarbutt Posted January 22, 2018 Share Posted January 22, 2018 "Feels like 1994" These days, really looking at optionality in FFH bond portfolio. Mr. Bradstreet has done an amazing job over time and the return component of the bond portfolio may not have been (and may not be) fully appreciated. Speaking of 1994, FFH had a net negative move on unrealized gain on bonds of 20,8 million then with the message that bonds would fluctuate and could be held to maturity. SE was 391,9 million. In 1995, the net move was +39,2 million. In 1997, as per annual disclosure, Mr. Bradstreet was building a significant put bond position with dual maturity dates and that position continued to grow++. In 1999, long bonds went down about 20% and FFH reported 1,241 billion unrealized loss on bonds. SE was 3,116 billion and then, FFH was facing a difficult negative cash flow environment. The unrealized loss position reversed after. What's the point: -FFH (Mr. Bradstreet) has been able to find bond opportunities in many different circumstances. -They don't seem to mind huge unrealized positions as long as their long term thesis holds. -My understanding is that they mostly expected rates to go down over time. -The actual cash position now at FFH is highly unusual. I understand the investment team is (was?) morbidly fascinated by the the way Japan evolved in terms of general interest rate yields. In a way , if you're not mindful of the JGBs-type widow maker trade, a simple way to make money would be to short bonds if you expect yields to go up. No? Can't wait to see the evolving strategy on this front. Link to comment Share on other sites More sharing options...
chrispy Posted January 22, 2018 Share Posted January 22, 2018 Looking forward to reading those articles once I am done work today. I much prefer cash and not shorting after the short equities fiasco Link to comment Share on other sites More sharing options...
Dazel Posted January 22, 2018 Share Posted January 22, 2018 https://www.bloomberg.com/news/articles/2018-01-22/biggest-u-s-east-coast-oil-refiner-seeks-bankruptcy-protection As I said earlier expect a lot of these....the system is about to be cleared of the zombies....the way it should be. This will bring opportunity to Fairfax...and create action in the credit markets. Link to comment Share on other sites More sharing options...
StubbleJumper Posted January 22, 2018 Share Posted January 22, 2018 A couple of thoughts on various topics that have come up: 1/ On the corporate governance thing. It reassures me that a) Ben Watsa does not work at Fairfax, which suggests Prem wants to avoid being seen as nepotistic; b) there is a known likely successor in running the business. But I would like greater clarity on what happens to Prem's shares and votes when he dies. 2/ On realising Blackberry...the most obvious option is to sell the business - even at 2x of 3x up from here it's not a big ticket in the grand scheme of things. The second option is to engineer a block sale, probably at a slight discount. Fairfax will have c.16% after conversion. They can find a home for that in endowments and pension funds if BBRY is once again seen as a success and is paying a dividend out of recurring RADAR and QNX revenues. Failing that, they can go to market with the block. Bottom line: this isn't the first time that a company has taken both a big stake and a directorship in a turnaround. It happens in PE and activist investing all the time and there are well-trodden exit pathways. 3/ The alternative capital in the industry a) goes away with higher rates as Dazel says, and b) needs underwriting which you can charge for. Lancashire have a great model for taking advantage of it. Fairfax could do the same - but to the extent that they do, they lose float. . On #1, I'd actually rather see Ben Watsa working somewhere at FFH and have the relationship disclosed clearly in the filings. IE, Ben Watsa, son of Prem, works as a Senior XXXX Analyst in YYYYY subsidiary of FFH. Excluding his pay as a Director, his employment salary for 2017 is $XXX,XXX, and ZZZ options for FFH stock were granted to him during 2017. Instead of that type of clarity, we have Ben being hired by an investment company run by a guy who happened to be on the same board of directors as Prem of a major Canadian charity. So this fellow seems to have hired Ben, and then Prem seems to have elected to have $50m of shareholders' money managed by that fellow's company. I have never found any disclosure of the terms of that management agreement, so I cannot really say whether FFH shareholders are paying $500k per year (100 bps), or $1m per year (200 bps) or some other amount to have that $50m managed. There are many possible ways that this collection of facts could be spun, some of which are quite innocent and would be demonstrably in shareholders' interest, while other spins could be nefarious and indicative of the type of nepotism that SD noted earlier in this thread. Clear and complete disclosure would be preferable. On #2, your take is pretty much in alignment with mine. To unload the BB stake, FFH would need to find one or more parties who are able and interested to drop $1.5B on a large block of the company (and here's hoping that the stake is headed towards $2B!). That will be a very thin market, even it if is a pathway that has been trodden in the past. FFH could end up holding this for quite some time before an appropriate buyer can be found. I am not yet convinced that BB will become a cash-cow that pays a meaningful dividend, but we can always hope that happens. SJ Link to comment Share on other sites More sharing options...
petec Posted January 23, 2018 Share Posted January 23, 2018 On #2, your take is pretty much in alignment with mine. To unload the BB stake, FFH would need to find one or more parties who are able and interested to drop $1.5B on a large block of the company (and here's hoping that the stake is headed towards $2B!). That will be a very thin market, even it if is a pathway that has been trodden in the past. FFH could end up holding this for quite some time before an appropriate buyer can be found. I am not yet convinced that BB will become a cash-cow that pays a meaningful dividend, but we can always hope that happens. SJ I'm not convinced either - but: 1/ If RADAR and QNX don't take off at Blackberry, in which case I would expect the shares to drop, Prem can exit just over half the position at $10 simply by letting the convert expire. 2/ If RADAR and QNX do take off the market for a block won't be thin - even if they have to do a secondary at a discount. 3/ Worst case is that RADAR and QNX grow somewhat without blowing the doors off and the shares get stuck at say $15, but you can still do a secondary at a discount. Agree with you re: better disclosure about the prodigal son. Link to comment Share on other sites More sharing options...
Dazel Posted January 23, 2018 Share Posted January 23, 2018 https://www.indiatoday.in/india-at-davos-2018/story/narendra-modi-in-davos-live-pm-to-deliver-wef-keynote-at-elite-gathering-of-global-ceos-1152136-2018-01-23 While this will not show not up on the balance sheet of Fairfax India or Fairfax it is extremely important. Part of the Fairfax thesis is the continued growth of India and Modi pushing for foreign investment is important for that growth. India has not been at Davos since the 1990’s and their growth was enemic. With China tapped out with massive debts...I am betting India takes over the torch for global growth as their demographics are fantastic. It’s early days of course but Fairfax has a huge head start. The Indian stock index is too small (overvalued because too much money chases small number of stocks) and there is very little opportunity to enter the country and capitalize on this growth. Foreigners have very little opportunity to buy into private business the way Fairfax has... Fairfax and Fairfax India are a great way to capitalize on this growth...this probably should be on the Fairfax India thread as well....the jewel of the Fairfax family could be “Go Digit” the Indian start up insurance company. One thing all will agree on is Fairfax has proven to build companies well and have created incredible value in the process. Munger thinks Ajit Jain has created about a $60-$80b dollars of market value through building insurance operations from scratch. I think Fairfax as a whole can do that. https://timesofindia.indiatimes.com/business/india-business/fairfax-to-back-general-insurance-startup-digit/articleshow/59117659.cms Link to comment Share on other sites More sharing options...
Dazel Posted January 23, 2018 Share Posted January 23, 2018 https://godigit.com/why-i-started-digit/ It looks like go Digit is a fintech Insurance co. And it is located in Silicon Valley of India...maybe they will use blockchain technology. List on the Nasdaq and be worth a couple billion next month! Kidding about the listing!!!Lol. But not blockchain...they have technology around their home office to implement blockchain into their operations. Link to comment Share on other sites More sharing options...
Dazel Posted January 23, 2018 Share Posted January 23, 2018 SD our resident expert on all things Crypto is correct with his points on what blockchain will do to the insurance industry....costs could fall dramatically in the next couple of decades. Fairfax presence in Silicon Valley India if they integrate and learn from growing “Go Digit” and their experience in Blackberry and the technologies and people that are available to improve efficiencies at their large operations could be very rewarding. Block chain is the future (as much I poke fun at the crypto currencies!)...any advantage in its implementation is a competitive advantage. Case in point technology has allowed the big banks in the U.S finally be able to integrate across their huge operations with scale. JPM had record margins last quarter and the their costs should continue to drop. Link to comment Share on other sites More sharing options...
Dazel Posted January 23, 2018 Share Posted January 23, 2018 SJ, Your concern about Fairfax buying longer term bonds will not be relevant for the third quarter as almost half the value of the bond portfolio is in corporate bonds. I would have to assume that a large part of the bond portfolio is the Blackberry convertible which of course is going up because the common shares are rising and the converts worth more. Fairfax has virtually nothing in government bonds in relation to the size of their invested assets in the terms of long term duration....so they will have sidestepped the current bond “whacking” as of the 3rd quarter.... But I can’t say that for the fourth quarter...so looking forward to the annual report...I bet Bradstreet is still waiting. Link to comment Share on other sites More sharing options...
petec Posted January 23, 2018 Share Posted January 23, 2018 SD our resident expert on all things Crypto is correct with his points on what blockchain will do to the insurance industry What thread is this discussion on? Thanks. Link to comment Share on other sites More sharing options...
wondering Posted January 23, 2018 Author Share Posted January 23, 2018 http://business.financialpost.com/news/retail-marketing/cara-operations-signs-deal-to-buy-steakhouse-chain-keg-restaurants-ltd Does anyone know what Fairfax's cost was in Keg Restaurants? Link to comment Share on other sites More sharing options...
Dazel Posted January 23, 2018 Share Posted January 23, 2018 Petec, I believe SD came on the Fairfax 2017 thread with the benefits Fairfax and all insurance companies would reap from Blockchain transactions...it was one of the Fairfax threads in the fall anyways. He is all over the Crypto currency threads...to get the Blockchain discussion. Link to comment Share on other sites More sharing options...
petec Posted January 23, 2018 Share Posted January 23, 2018 http://business.financialpost.com/news/retail-marketing/cara-operations-signs-deal-to-buy-steakhouse-chain-keg-restaurants-ltd Does anyone know what Fairfax's cost was in Keg Restaurants? $85m for 51% I believe. 2014 annual letter. I think Fairfax are getting about $105m here and presumably drew dividends from Keg - it doesn't seem to have grown its restaurant count much under their ownership so I assume it was a cash cow. Link to comment Share on other sites More sharing options...
StubbleJumper Posted January 23, 2018 Share Posted January 23, 2018 http://business.financialpost.com/news/retail-marketing/cara-operations-signs-deal-to-buy-steakhouse-chain-keg-restaurants-ltd Does anyone know what Fairfax's cost was in Keg Restaurants? $85m for 51% I believe. 2014 annual letter. I think Fairfax are getting about $105m here and presumably drew dividends from Keg - it doesn't seem to have grown its restaurant count much under their ownership so I assume it was a cash cow. So ~20% over 5 years plus the divvies (if any)? Well, at least it's a gain. SJ Link to comment Share on other sites More sharing options...
Viking Posted January 23, 2018 Share Posted January 23, 2018 The restaurant business is very challenging. I am happy FFH is selling The Keg. There must be much better opportunities out there to redeploy the cash. Link to comment Share on other sites More sharing options...
petec Posted January 23, 2018 Share Posted January 23, 2018 The casual dining restaurant business is also very profitable and cash generative! Not saying it is easy but many lasting fortunes have been built in it. Fairfax is not really reducing their exposure given they control Cara and are largely being paid in Cara shares. Link to comment Share on other sites More sharing options...
Dazel Posted January 24, 2018 Share Posted January 24, 2018 If bonds fall example Travelers Insurance has $70b in bonds with half of it in corporates.... $2b private equity $900m $3b equity This has been a genius move for the 30 years...can you imagine what their sensitivity to losses are if rates were to rise 100 or 200 basis points? Sure longer term they will role short maturities into higher rates...but there would be significant losses to mark to market equity. They had significant reserve reduncy for the hurricane season this year...this was likely the reason for all insurance companies rising yesterday...it looks like costs for the 2017 hurricanes will come down. This is likely one of the reasons we are not getting a hard market. Link to comment Share on other sites More sharing options...
petec Posted January 24, 2018 Share Posted January 24, 2018 What's the duration on their bonds? Link to comment Share on other sites More sharing options...
Dazel Posted January 24, 2018 Share Posted January 24, 2018 They do not break it down their SEC filing. 3.3% yield on the bond portfolio....the 30 year U.S treasury bond is below 3%. While the corporates will yield higher it is obvious that they have significant longer duration bonds. They have $400m in hedges for interest rate risk which is not broken down. To be clear this has been a very smart move by them...and will continue to be if rates don’t rise...the 10 year has risen about 35 basis points recently. It’s up 65 basis points from the low in August... These are not huge moves....3% is likely pain threshold which may bring panic for those holding long duration bonds and a possible Fairfax opportunity entry point if we were to spike around that yield. Link to comment Share on other sites More sharing options...
Dazel Posted January 24, 2018 Share Posted January 24, 2018 Another Fairfax point which has not been made and it may appear as if the India drum has been beat to death here...is that the $5b investment there is a value play but has been done with the expectation of the holdings being growth companies. As Prem stated “our Indian companies are growing by leaps and bounds”....this is a different approach for the Fairfax team...as pure value has dominated investment decisions over 35 years. Prem is bullish which is not the impression the market has. They expect growth and the investment portfolio is spring loaded for it....the bets are on Emerging markets not the U.S stock market so it’s not getting any attention. If global growth continues the emerging market bets will certainly appreciate many fold the developed market returns....Bradstreet will renter the bond market in bigger way, and Fairfax will realize returns on the old dogs, Greek investments,Resolute, Blackberry etc. It’s a nice set up for reaching Fairfax earnings potential as Insurance premiums will be solid... Link to comment Share on other sites More sharing options...
Recommended Posts
Create an account or sign in to comment
You need to be a member in order to leave a comment
Create an account
Sign up for a new account in our community. It's easy!
Register a new accountSign in
Already have an account? Sign in here.
Sign In Now