FFH/LVLT?

[Guest ValueCarl]

On a fully diluted basis, it continues to appear that FFH owns nearly 13 percent of the total outstanding shares sitting at approx. 320M aggregate shares including conversions, if and when they do convert.

 

Is this a Forrest Gump story for them, or not? tia

[oldye]

Internet access will triple world wide in less than a decade and current users will continue to use more and more bandwidth.  There will certainly be opportunity for Lvlt to capitalize on all this additional traffic...no clue if they'll be successful but it certainly fits the Fairfax model for investing, they only need to be right 2 out of 3 times to make money.

[Packer16]

In my mind this is a commodity market with occasional shortages.  Originally, I thought once the dot com boom expenditures were used up the supply/demand imbalance would favor suppliers but technology seems to keep on providing more bandwidth for less cost (so you a constant creative destruction process with supply always outstripping supply - much like digital chip making).  Given this, it becomes more of a market call on the demand cycle.

 

Packer

[Guest ValueCarl]

Jim Crowe has been speaking about Silicon Economics and Moore's Law tied to "bandwidth demand" for almost twelve years now, whereby, like Intel, price compression is circumvented by "outstripped demand" from "# of units" sold" all at the same time underlying technologies are accelerating from a "speed" perspective. 

 

Fairfax's bet seems abnormal in size for their shareholders considering the amount of time visionaries and industry pundits, like Crowe and Chambers, have been absolutely wrong about up until now.

 

I hope that Fairfax investment managers have better vision than they do, and more like Warren Buffett, who scaled the LVLT common stock wall in 2002 as part of a Jr. convert, which somehow, he was able to easily double his money one year later.

 

They don't call him, "The Oracle," without cause!  :P   

 

 

 

 

[oldye]

Sounds like you missed the time Fairfax \sold their common position at around 5-6$ a share and made a small fortune.  Now granted Lvlt has a very high cost of capital, the good thing is that a good chunk of that is paid to Fairfax on their 100 million 15% convertible bonds.  Now you might think the position is too big but thats an opinion, they have plenty of liquidity to pay claims and won't need to sell unless the situation fundamentally changes.  Thanks for sharing your opinion. 

[Guest ValueCarl]

Actually, I didn't miss it, nor the 15 percent interest on what really represents a small portion, just 1/6th of their total stake in this very risky name when fully converted.

 

There is a reason why men like Stevie Cohen have felt obligated to attack this company over the years while their bets keep proving to take very long time periods in between. 

 

Ultimately, this has cost FFH shareholders dearly during the past decade.

 

That's a fact, not an opinion.

 

Hopefully, this time, they will get there (3) bet more right than following The Buffett two step in and out. 

 

 

[Nnejad]

Ultimately, this has cost FFH shareholders dearly during the past decade.

 

That's a fact, not an opinion.  

 

 

That's a fact? When did they lose dearly on this investment.

[Guest ValueCarl]

You must not be one of the long term share owners with a $600 pps cost basis on portions or more of their shares during the decade, and FFH's rough patch. ;)   

[oldye]

No you're right, I was in jr. high school when it was at 600 Canadian. If there are shareholders out there that bought at the peak and held their shares without averaging down than there are plenty of fund managers on this board that would gladly make their capital allocation decisions for a reasonable fee.    Most of them don't even have their ex wives suing them for hundreds of millions of dollars and publicly accusing them of insider trading. 

[Guest ValueCarl]

I was hoping this wouldn't become an emotional battle with certain parties fighting to be right, or waving their better than thou magical compounding wands.

 

Moreover, I don't think Fairfax would tolerate excuses from their investees-I don't-whose stock price didn't perform as a result of criminal activities, which at least in the case of Fairfax, they capitalized on by buying dirt cheap LVLT stock and charging what some might consider usury during sub prime HELL. 

 

Excuses don't cut the mustard. The stock price, ultimately, is the score card!

 

Like me said, I hope that they have it right this time, and their inner eye to Jim Crowe and the rest of that management team, is predicated upon more than the loud talk I have heard that man spew for more than one decade now.     

[StubbleJumper]

I was hoping this wouldn't become an emotional battle with certain parties fighting to be right, or waving their better than thou magical compounding wands.

 

So, you were hoping that this wouldn't become an emotional battle....what exactly were hoping for when you made the original post?  A broad accolade for your observation that 3 has been a mediocre investment so far?  Or were you hoping that someone could give you a thesis for a potential investment in 3?  Or did you want a discussion about Tom Hanks movies?

 

SJ

[Guest longinvestor]

Jim Crowe has been speaking about Silicon Economics and Moore's Law tied to "bandwidth demand" for almost twelve years now, whereby, like Intel, price compression is circumvented by "outstripped demand" from "# of units" sold" all at the same time underlying technologies are accelerating from a "speed" perspective. 

Fairfax's bet seems abnormal in size for their shareholders considering the amount of time visionaries and industry pundits, like Crowe and Chambers, have been absolutely wrong about up until now.

Crowe has been absolutely right, IMHO about the direction of IP! The over-capitalization in assets, ecoonomics-rather-than-technology-driven future of telecom, bit cost, its-all-IP-stupid world etc etc.

Now, about the only absolutely right thing about LVLT was that the stock price at $132 in 2000 was wrong. Turn the clock forward to 1998 and Prem's bet in LVLT was the $1 stock price was absolutely wrong as well. As a FFH investor, I am absolutely in with Prem on this. This could well turn out to be a deep value story from here.

 

[Guest ValueCarl]

I believe you mean 2008.

 

<Turn the clock forward to 1998>

 

The worm is turning, and Dr. Leonard Kleinrock will also be right! The faster Big Prem's hybrid interest rate is off of (3) share owner backs, the better this becomes a perpetual credit upgrade, refinancing story.

 

Online sales of iPhone halted in N.Y.

Analysis: AT&T's move raises questions about network      12/28 07:41 AM

 

 

 

WASHINGTON (MarketWatch) -- Being the only U.S. company allowed to sell the popular Apple iPhone isn't always peaches and cream.

In a holiday-shortened week, AT&T (T:...) has spawned a raft of headlines on the Internet after the company halted online sales of the iPhone in New York City, at least temporarily. The phone is still available to New Yorkers in Apple and AT&T (T:...) stores, however.

The decision has revived talk about whether AT&T's (T:...) network can handle the traffic generated by iPhone users, especially in dense urban markets. Owners of the iPhone tend to use the Internet much more than other wireless customers, but existing mobile networks are not designed for such heavy data traffic.

Although AT&T (T:...) has beefed up its network, complaints about dropped calls and Internet interruptions seemed to have increased. That's spurred rivals such as Verizon Wireless to mock the quality of AT&T's (T:...) network in commercials.

In almost any other week, AT&T's (T:...) effort to limit online sales in New York City might have gone little mentioned. Yet business news is scarce in the last week of December, between the Christmas and New Year's Day holidays.

Dallas-based AT&T (T:...) hasn't helped its cause with a cryptic and tight-lipped explanation of its action. Several spokespeople have given different media outlets, including MarketWatch, the same response: "We periodically modify our promotion and distribution channels."

Since reports of AT&T's (T:...) online move surfaced Sunday, a number of people have tried to order the iPhone online using New York City ZIP codes. An effort by this writer to do the same showed that "there are no phones and devices that match your search criteria," according to AT&T's (T:...) Web site.

A blog called the Consumerist, apparently the first site to report the halt in online sales, said a customer-service representative cited a lack of wireless cell towers in New York City for AT&T's (T:...) decision. Other AT&T (T:...) representatives blamed excess fraud or said the online stock of iPhones available to New York customers had been depleted.

Whatever the case, AT&T (T:...) knows it has to continue to expand its network to match the increased usage by iPhone customers -- 11 million and growing -- as well as 70 million other AT&T (T:...) wireless subscribers. Brand is critical in the fiercely competitive U.S. wireless market -- as Sprint Nextel Corp. unhappily discovered -- and AT&T (T:...) can ill afford to see its image suffer.

In a worst-case scenario, AT&T (T:...) might even have to consider raising prices for iPhone customers, who now pay a flat monthly rate for unlimited Internet access.

Ralph de la Vega, AT&T's (T:...) mobile-operations president, hinted at such a possibility in a presentation to investors earlier this month, though he later said a change in pricing policy is not imminent. He insisted AT&T (T:...) is merely exploring a variety of methods to reduce the strain on its wireless network.

[Guest ValueCarl]

This was an interesting comment which made me curious. A sixty six percent success rate over a one third failure rate.

 

<the Fairfax model for investing, they only need to be right 2 out of 3 times to make money.>

 

If you measure their 09 performance, how have they done based upon the aggregate ideas in their portfolio? What time period is utilized before they quit, or establish being wrong?

 

If I'm not mistaken, they blew out a majority portion of their Charlie Pfizer position at fifteen percent lower prices. 

 

 

[JAllen]

Actually the size of the position determines the success more so, it seems to me.  And last years failures, such as Abitibi, might just take a couple of more years for us to determine any success/failure rate.

[Guest ValueCarl]

O.K. So at any snapshot in time, how many ideas do they like to have swirling around and at what dollar allocated percentage rates?

 

There is a problem with your latter comment,  however.

 

Take for example, another institution who bellied up to the (3) bar too many times over many years, them being SEAM. You can keep saying next year to your owners every year until DEATH does them part.

 

In the long term, we're all dead.   

 

Speaking of dead, here's some BEAR TALK from a Canadian fund manager near Mr. Watsa.

 

http://www.bloomberg.com/apps/news?pid=20601087&sid=aNKd7Uck3FoM&pos=5 

[tyska]

Have been reading through the thread and am unable to grasp what your direction is ValueCarl. Are you on the fence about investing in Fairfax and want someone to convince you it is the right fit for you. Or do you feel it is a bad investment and have no interest in it, but then I don't put this much effort into something that I have written off. I guess there could also be other reasons you may have.

 

Dan

[Guest ValueCarl]

Hi Dan,

 

I'm just trying to learn like other fund managers here, how Fairfax measures risks and rewards relative to their investing decisions over time.

 

At the same time, I have created a subject title tied to one of their very weighted, extremely risky bets on the internet called Level 3 Communications (LVLT).

 

Other than that, it's immaterial whether I am long, short or neutral on its name. I do like the run-stretched valuations-that FFH might continue to have as a result of Stevie Cohen's crew and back office machinations since switching exchanges, however.   

[Guest ValueCarl]

Wow! These Fairfax boys and girls are aggressive! I just did a back of the envelope calculation showing that if (3) is half the growth story they seem to be while providing the majority of PIPES to the INTERNET, then FFH's BV would almost double compared to their market cap today, based upon that one security alone!

 

When I say half the growth story, I'm talking about a value that is just 1/5th of GOOG, a company that would never find its place in internet history without LVLT.

 

Of course, value curmudgeons would be hard pressed to stick around for those type of returns because of the very nature of their souls, but one can get the picture of how aggressive this team at FFH is!

 

Then again, if you're going to live up to Buffett like reputations, you must be prepared to DOUBLE ones CAPITAL quickly and often!

 

The only problem I keep finding, is the lack of "safety margins" investment managers at FFH are failing to incorporate when betting on the come in this name.  :o         

[Guest ValueCarl]

Forbes is citing George Putnam's Turnaround Letter for 2010. It seems he is looking for some "short term" momentum out of (3), a large FFH holding also.

 

I don't know George, but he looks like a MOMO TRADER to me.  :-\

 

Level 3 Communications ( LVLT - news - people ) has spent most of the last quarter century building one of the world's largest fiber communications and Internet backbones. It has been a capital-intensive project that's saddled the company with a heavy debt load, and revenue growth has been slower than expected. It remains to be seen whether Level 3 can grow its business fast enough to support its highly leveraged capital structure, but with most of its debt maturing in 2013 and beyond, the company still has some runway left. Regardless of its long-term prospects, the stock could take a nice short-term bounce in January.

 

[benhacker]

LVLT has always been one of those investments I've never really gotten.  The thesis has seemed to be that Jim Crowe is smart, so if you can buy his PP&E expenditures at a discount, then you have an MOS.  Secondarily (or prmiarily, depending) the growth / inelastic demand "at some price point" argument lingers as a carrot in the future.  Too hard pile for me...

 

That said, ValueCarl, you are coming off like a JackA$$ on this thread (to me).  You may not care, and that is fine.  There are plenty of us who are very able to take critcism of our ideas, even the cherished FFH.  But reading through your posts, it appears you are just trolling for an agrument.  If you have a pre-disposed notion about "us" I suggest you drop it, and the forum will be much more valuable to you and us (though far from perfect of course).

 

I'd be interested if you (or anyone else) has actually calculated a rough IRR for FFH's level 3 investments... I haven't before, but I would guess that they are >0%... although not great in absolute terms.  Much of what you are saying on this thread is an argument that LVLT has in fact been a poor use of capital, but there is no quantification of this fact.

 

Many will say "it's so obvious..." but in this business I've seen a few too many people assume obvious things that were wrong... so any data you have chronicling the LVLT bond/stock flows over time would be great.

 

Obvoius things I see people assume that are false:

1) Stock returns are corrleated to Real GDP growth over short/long timeframes (at the country level)

2) Option ARM resets will mushroom in 2010

 

Maybe  it happens that FFH's LVLT coupons have paid for their bath in the common... I don't know, but maybe I'll take a shot at calculating it if you don't have the data.

 

And welcome aboard.  This community can be a little quirky, but if you're not out for a fight, I think it can be very valuable.

 

Cheers,

 

Ben

[Guest ValueCarl]

Hey Ben,

 

Thanks for the rather strange welcome.  :-\

 

I continue to be perplexed with the size of this FFH bet relative to the risks including a company that continues to fail at executing on the sales front notwithstanding valuable PP&E which you astutely point out.

 

First, please teach me your term, MOS?

 

Secondly, I have been attempting to confirm my estimate of fully converted FFH shares being 320M in aggregate excluding registrations to sell shares publicly or in privately negotiated transactions.

 

Lastly, I look forward to your math surrounding coupons paying for common stock losses to break even, as well as the IRR being utilized by FFH attached to this investment. 

 

As a further inquiry for my introduction, I keep wondering if cognitive dissonance is part of their reason for staying this course with all of its uncertainties, quite frankly, technological complexities this business possesses, or if it is more about them agreeing to capitalize this call on the internet's future success until Kingdom come because they want to be builders with (3)'s Chairman, Walter Scott? 

 

As a final note, if I understand your macro call, item #2 for 2010 relating to false assumptions, you are saying that interest rates will remain low? Told differently, the Treasury market bubble will continue to provide dirt cheap funds for market participants, or is there a disconnect from US treasuries to Option Arm's? 

 

I have been told that this a place to come in order to learn much about the world of finance without ridicule, angst or emotion. I look forward to it even as I am schooled as a student from time to time. tia

 

[Uccmal]

Carl, your like a one man band...

 

You must not be one of the long term share owners with a $600 pps cost basis on portions or more of their shares during the decade, and FFH's rough patch.     

 

Very few shareholders bought at that level.  The stock was lightly traded then and only at those heights a few days.  Prem even suggested at the 1997 or 98 AGM that the price was on the high side and likely to drop.  Probably no one who still holds the shares and likely no one on this board paid that much.  I bought about 15 shares at 385 cdn before it started tanking in 1998. 

 

The rough patch has little to do with FFH's investing skill and more to do with their hubris when they bought TIG and C&F. 

 

Prem has stated publicly that they aim for 3 out of 5 success rate in their investments.  I am not exactly sure what this means, but their equity investing record is in the AR and is about 20% per year averaged over the entire time of the company.  This mixed with their incredible bets in the bond markets and CD markets gives them a total return over 24 years of about 20%.  There are likely only a handful of investors who could beat them.

 

As for LVLT I have seen it all with Fairfax and try to keep an open mind.  They obviously know the company and the business.  These folks are not rubes and have plenty of bench depth in virtually any investing arena. 

 

For the above reasons I generally dont coattail FFH.  If you dont do all of what they do you wont have the same odds of success.  Like Buffett it is better to just own the stock and see what the masters do.  But, it makes most sense to buy the stock cheap in all cases. 

[Guest ValueCarl]

Uccmal,

 

The song I am playing is not all doom and gloom with this LVLT note that they're stuck on. I think I made a compelling case for their BV if they're owning as many shares as my tentative count indicates inclusive of conversions; while assuming LVLT finally hits the cover off the ball regarding their levered factory's sales requirement.

 

Quite frankly, I can't keep my excitement down when thinking about the margins that are built into the Level 3 factory whilst pondering scores of other capital intense business plans including highly successful ones like the outstanding documentary I saw on Home Depot last night. A terrible business model in comparison to (3) in my feeble mind.

 

Some like to criticize Crowe for his, "build it and they will come mantra;" however, I have never come close to imagining a building project like this one where every capita across the globe can hop onto their network so easily because of ubiquity courtesy of that engineering marvel being tied to every device. There's a reason it received the Smithsonian Award when its US long haul network was finished years ago!   

 

As for Ben's PP&E comment, I am seeing $25B presentation numbers cost new with verbal representations by various executives of their management team at $20B conservatively. I don't know what he means by MOS, but assuming debt can be refinanced, the PP&E is trading at somewhere between 10-12.5 cents on the dollar.

 

Personally, I think those fools at Fairfax-no offense please!-are going to make a real fortune in that name by hanging in there. Maybe this investment weighting is part of pent up, remaining hubris on their part still? Talk about sowing wild oats!  ;D                 

[benhacker]

First, please teach me your term, MOS?

 

Margin of Safety... my comment was just that Fairfax clearly views this "bet" as low risk because they value the physical buildings/plant/etc... they are senior creditors, so this isn't not a theoretical level of protection.

 

Secondly, I have been attempting to confirm my estimate of fully converted FFH shares being 320M in aggregate excluding registrations to sell shares publicly or in privately negotiated transactions.

 

Lastly, I look forward to your math surrounding coupons paying for common stock losses to break even, as well as the IRR being utilized by FFH attached to this investment.

 

Don't know where you are getting the 320m share count #.  I think you are confused, or maybe I am.  See the attached spreadsheet I created to summarize Fairfax's history in LVLT... 139m shares of common owned, ~224m shares FULLY diluted (assuming the exercise of both $100m converts... each out of the money right now).  These #'s are not additive, it's 224m total.

 

Fairfax's total IRR from inception on LVLT is +14% valuing both converts at 15-20% premiums to par (market values) and the common at $1.50 / share.

 

As a further inquiry for my introduction, I keep wondering if cognitive dissonance is part of their reason for staying this course with all of its uncertainties, quite frankly, technological complexities this business possesses, or if it is more about them agreeing to capitalize this call on the internet's future success until Kingdom come because they want to be builders with (3)'s Chairman, Walter Scott?

 

I think their reason for staying the course is that they have made a ton of money here despite most people thinking they are idiots.

 

As a final note, if I understand your macro call, item #2 for 2010 relating to false assumptions, you are saying that interest rates will remain low? Told differently, the Treasury market bubble will continue to provide dirt cheap funds for market participants, or is there a disconnect from US treasuries to Option Arm's?

 

 

It is not a macro call... it is that I understand how Option ARMs work, and those who put together the Credit Suisse mortgage chart do not (or more appropriately, those who continue to parrot the chart after times have changed, do not).  Option ARMs recast in very specific circumstances (the vast majority now held by WFC at least), that is when we reach 10 years from issuance (ramped in 2004 hard), OR when the amortized value reaches 125% of ORIGINAL LOAN VALUE.  Given where short rates are, it is a near certainty at this point that 10 years will be the trigger, not the 125%.  Certainly O ARMs aren't a great thing, but there will be NO (near zero) recasts of WFC's portfolio in 2011 or 2012.  This is somewhat a macro call as the short rates need to stay around 1-2% for this to be right... but either way 2011 isn't happening.

 

I have been told that this a place to come in order to learn much about the world of finance without ridicule, angst or emotion. I look forward to it even as I am schooled as a student from time to time. tia

 

You have found the right place.  I'd stop the weird jokes about "fools at fairfax" and silly comments about investments being bad when you haven't done the math... I'd also stop the weird "this could be a huge homerun" kind of comments... I have to say your entire line of discussion here has been totally confusing to me.  Apologize if you're not a native English speaker, but I struggled to find your meaning or if you were joking on nearly every post.  You came across poorly.

 

Just trying to help you fit it... perhaps in your next discussion, bring some actual data instead of just random and confusing discussion and you'll get along better here.  We are all here to learn.  Sorry for the weird welcome, you looked like you may need a few suggestions.

 

Cheers,

 

Ben

 

PS - Board, I didn't spend too much time on the LVLT spreadsheet attached, but I think I'm good here.  If anyone has some memory of what I may have missed, shoot (and note there are two tabs, one calcing the IRR, and one with the links to SEC docs of both LVLT and FFH).  I show that FFH doubled their money on their first trip through the common and they are underwater (average cost) now by about 30% on common.  Debt coupons + appreciation make this thing a 6-7% IRR deal without the first double on the common.... with that added, IRR is 14.5% all in.  These guys are phenomenal...