Fairfax 2020

[vinod1]

At the current prices it is pretty cheap and I see no reason why it should not be worth say at least 0.8x adjusted book value. So pretty decent upside from $230. Forget the stock price, look at what the business is likely to generate.

 

Pre-covid I used to buy this at 0.95x and sell at 1.05x.

 

Now, low rates are likely to last a long time reducing the investment portfolio return big time. In addition, it is exposed to tail risks. I sold out at $455 and it is very very tempting to buy. If I buy I would have a strict position limit.

 

I think it is good to remember what Buffett mentioned:

 

When I look at worst case possibilities, I would say that there are things that I think are quite improbable. And I hope they don’t happen, but that doesn’t mean they won’t happen. I mean, for example, in our insurance business, we could have the world’s, or the country’s, number one hurricane that it’s ever had, but that doesn’t preclude the fact that could have the biggest earthquake a month later. So we don’t prepare ourselves for a single problem. We prepare ourselves for problems that sometimes create their own momentum. I mean 2008 and 9, you didn’t see all the problems the first day, when what really kicked it off was when the Freddie and Fannie, the GSEs went into conservatorship in early September. And then when money market funds broke the buck… There are things to trip other things, and we take a very much a worst case scenario into mind that probably is a considerably worse case than most people do.

 

Yes, Fairfax has a lot of levers to pull, but it needs a bit of luck.

 

Vinod

[bearprowler6]

At the current prices it is pretty cheap and I see no reason why it should not be worth say at least 0.8x adjusted book value. So pretty decent upside from $230. Forget the stock price, look at what the business is likely to generate.

 

Pre-covid I used to buy this at 0.95x and sell at 1.05x.

 

Now, low rates are likely to last a long time reducing the investment portfolio return big time. In addition, it is exposed to tail risks. I sold out at $455 and it is very very tempting to buy. If I buy I would have a strict position limit.

 

I think it is good to remember what Buffett mentioned:

 

When I look at worst case possibilities, I would say that there are things that I think are quite improbable. And I hope they don’t happen, but that doesn’t mean they won’t happen. I mean, for example, in our insurance business, we could have the world’s, or the country’s, number one hurricane that it’s ever had, but that doesn’t preclude the fact that could have the biggest earthquake a month later. So we don’t prepare ourselves for a single problem. We prepare ourselves for problems that sometimes create their own momentum. I mean 2008 and 9, you didn’t see all the problems the first day, when what really kicked it off was when the Freddie and Fannie, the GSEs went into conservatorship in early September. And then when money market funds broke the buck… There are things to trip other things, and we take a very much a worst case scenario into mind that probably is a considerably worse case than most people do.

 

Yes, Fairfax has a lot of levers to pull, but it needs a bit of luck.

 

Vinod

 

+1

 

[Viking]

When looking at Fairfax today:

1.) insurance businesses in aggregate are in solid shape writing at 96 CR.

2.) bond portfolio is positioned reasonably well

3.) dividend and interest income, with run rate of $900 million is solid.

 

What is the above worth?

 

4.) the remainder is the equity portfolio: stocks, associates, wholly owned companies  which i think is around $9 billion.

 

The real question When trying to value Fairfax is what is this group of assets worth?

 

I wonder what would happen to Fairfax’s stock price if they publicly stated that moving forward they will be moving up the quality spectrum with future equity purchases. And disposing of some legacy equity positions (the stinkers). Shift a couple of billion in equities from low quality to higher quality. This would hit BV in the short term (losses on sales); but would likely also result in a higher price/BV from Mr Market.

 

Perhaps this is kind of what we are seeing play out the last 18-24 months. The biggest new purchase, by far, is Seaspan/Atlas and this looks like a decent company (how good we will only know in a few years as it is still very young in its current incarnation). Last year there were lots of moves to get some of the operating companies into a better spot (Eurobank, AGT etc). We will see the size of Alphabet and Exxon positions.

 

Wishful thinking?

[Xerxes]

13F is couple of days.

We will get some real answer if the equity investment attitude is changing

[Parsad]

Clearly a very polarized name with very diverse and interesting point of views. 

Much like the Tesla thread but without the Muskism.

 

Covid 19 changed the chessboard, I rather wait to see what the new generation would be doing. Starting by this quarter 13F. I like to think I should not underestimate someone who built a multi billion dollar business and his capacity to learn from mistakes.

 

I sold Nvidia few weeks ago after a good run from $130 ish.

At least that is what I tell to comfort myself when I look at my melting FFH holding ....

 

Feeling better that I am not alone watching my FFH holding melting ;)

 

You aren't alone. FRFHF is my largest holding, followed by WFC. I’ve still managed to break even over the past year due to large positions in mining stocks such as NG (purchased in early 2019 and sold recently for 150% gain) and SGGDX (purchased throughout 2019 and up 70%). Now, I’m trying to figure out where to go from here. I’m tempted to keep averaging into my losing positions but am afraid that I’ll box myself into becoming too concentrated.

 

The bearish arguments provided by Viking, Bearprowler, and others are very compelling, and would probably be enough to convince me to sell if I didn't think that the things they point out (terrible investment results, low interest rates, etc) are already factored into the price. Those would have been great reasons to have already exited (as Viking and Bearprowler did I believe, at much higher prices), but they may or may not be good reasons to sell going forward. I've followed Fairfax for about 15 years and have never seen sentiment as negative as it is now. While it could get worse, I wouldn't want to bet on it getting worse, not at these prices.

 

If you ask me - and I am a newbie - I give lots of weight to Parsad's comments. Maybe it is some confirmation bias, but it is appealing to me, credible, and make sense when you have a long time horizon. I do trust they have a great safety net with their valuable assets as Parsad commented. That alone should calm us down a bit and allow us to see the big picture. This company isn't going bankrupt tomorrow. A comment that was also made today is to trust a guy that has built a multi billions dollars company; I also buy that one. Yes, our bearish friends also have valid comments, but I am convinced Prem and his team are working hard to weather the storm and head in the right direction on solid ground going forward. They aren't going to stand still here.

 

I value different opinions and the beauty of it is that is generates a debate of ideas like this one. You then have the information you need to make your own decision. Mine is to hold and maybe add a little as it gets closer to 300 although I hope not ! Parsad said it all when he said it will eventually revert back close to BV. I can afford to wait. I am happy with 2 years ( or a little more!).

 

Always make your own analytical decisions about investing.  Doesn't matter what I say, what Prem says or even Buffett!  Doesn't matter what we do either.  The easiest way to go broke as a value investor is to simply follow what others are doing instead of doing your own research.  And if you can't stand behind your own research, buy ETF's and dollar cost average in over time.

 

What I can provide you is perspective, my rational assumptions and how I came to my conclusions.  Yes, I've seen this rodeo before...including with Fairfax.  Amazing what 22 years of investing teaches you, especially over this last generation where we've incredibly seen compressed cycles of 50% drops in the market 3 times...1999/2000, 2008/2009 and 2020/2021. 

 

You generally get one of those cycles every other generation...we've seen three in one generation.  Is that due to the internet?  Computer trading?  ETF's?  Massive amounts of competition by hedge funds, private equity, pensions, etc?  Recklessness in financial instruments, by the Fed, IMF?  Distortions in monetary policy?  Maybe a combination of all them!

 

All I know is that I've been given 3 massive swings at the bat in one generation...300% gains over several years.  This is probably the last one before I retire, and I'm going big!  I expect the stuff I'm buying today to be up 300% or better from my current cost over the next 5-7 years. 

 

While I mourn for the personal losses...we've had 4 people we know die from Covid-19 now...the other part of me like Buffett has always said, welcomes this moment of uncertainty and crisis.  These are the times that the true value investor benefits from the normal transfer of wealth, because everyone is afraid...including the institutions, hedge funds, private equity guys and general market. 

 

Have we seen the bottom...probably not...I would imagine it will hit in the 2nd or 3rd quarter.  And then the locked up, pent-up consumer frenzy in subsequent quarters will end the recession and breath new life into a new bull market next year.  We'll then face the consequences of all of this loose money flying around.  At some point, I cannot imagine how we will avoid some sort of inflation...as good as governments have become at quantitative easing and tightening.  Government debt will undoubtedly be of concern at some point...not necessarily the U.S., but probably Europe or South America.  Until then, enjoy these prices because this bear market won't last forever...even though they seem like they've been coming fast and furiously!  Cheers!

[petec]

13F is couple of days.

We will get some real answer if the equity investment attitude is changing

 

Don't hold your breath. They'd have had to have sold some of their big positions to do anything meaningful, and they have not mentioned doing so.

 

As an aside, the Dundee/DPM transaction yesterday shows how they could, in theory, offload some of the big stakes if they wanted.

[bearprowler6]

A shiny object for us to focus on:

 

https://www.businesswire.com/news/home/20200514005103/en/Kennedy-Wilson-Fairfax-Launch-New-2-Billion

[petec]

Ha - what’s wrong with the Eastern US?

[StubbleJumper]

A shiny object for us to focus on:

 

https://www.businesswire.com/news/home/20200514005103/en/Kennedy-Wilson-Fairfax-Launch-New-2-Billion

 

 

At least they've made money from their engagement with K-W.

[Bryggen]

From CNBC : ''Coronavirus will be the largest loss on record for insurers, Lloyd’s of London says''

 

Would Fairfax insurance businesses face such a large loss as well?

 

https://www.cnbc.com/2020/05/14/lloyds-of-london-coronavirus-will-be-largest-loss-on-record-for-insurers.html

 

Bry

 

[Xerxes]

13F is couple of days.

We will get some real answer if the equity investment attitude is changing

 

Don't hold your breath. They'd have had to have sold some of their big positions to do anything meaningful, and they have not mentioned doing so.

 

As an aside, the Dundee/DPM transaction yesterday shows how they could, in theory, offload some of the big stakes if they wanted.

 

Indeed

 

Unrelated (and I know that it is impossible at the moment) but if FFH was able to buy back its share at 0.6 BV with the same total quantity that it issued shares ABOVE BV for the Allied World purchase in 2016 that would have been a quite a coup worthy of a song.

[petec]

13F is couple of days.

We will get some real answer if the equity investment attitude is changing

 

Don't hold your breath. They'd have had to have sold some of their big positions to do anything meaningful, and they have not mentioned doing so.

 

As an aside, the Dundee/DPM transaction yesterday shows how they could, in theory, offload some of the big stakes if they wanted.

 

Indeed

 

Unrelated (and I know that it is impossible at the moment) but if FFH was able to buy back its share at 0.6 BV with the same total quantity that it issued shares ABOVE BV for the Allied World purchase in 2016 that would have been a quite a coup worthy of a song.

 

Ha - if only.

[ourkid8]

FFH is currently repurchasing shares at these prices however not at the same quantity.  :) 

 

13F is couple of days.

We will get some real answer if the equity investment attitude is changing

 

Don't hold your breath. They'd have had to have sold some of their big positions to do anything meaningful, and they have not mentioned doing so.

 

As an aside, the Dundee/DPM transaction yesterday shows how they could, in theory, offload some of the big stakes if they wanted.

 

Indeed

 

Unrelated (and I know that it is impossible at the moment) but if FFH was able to buy back its share at 0.6 BV with the same total quantity that it issued shares ABOVE BV for the Allied World purchase in 2016 that would have been a quite a coup worthy of a song.

[Fairfaxnut]

FFH is currently repurchasing shares at these prices however not at the same quantity.  :) 

 

13F is couple of days.

We will get some real answer if the equity investment attitude is changing

 

Don't hold your breath. They'd have had to have sold some of their big positions to do anything meaningful, and they have not mentioned doing so.

 

As an aside, the Dundee/DPM transaction yesterday shows how they could, in theory, offload some of the big stakes if they wanted.

 

Indeed

 

Unrelated (and I know that it is impossible at the moment) but if FFH was able to buy back its share at 0.6 BV with the same total quantity that it issued shares ABOVE BV for the Allied World purchase in 2016 that would have been a quite a coup worthy of a song.

 

An SIB would be nice here....

[TwoCitiesCapital]

 

On an unrelated note, anyone have the transcript from Q1 earnings call? Seeking Alpha doesn't seem to have it and I'm uncertain that it will be posted at this point.

 

If there is no transcript, does anyone mind summarizing what was said about the Equity Total Return swaps previously mentioned in the thread. It sounded like Fairfax went long total return swaps in March?

 

If that is so, these are likely a source of additional liquidity since these things tend to be standardized and settled on a quarterly basis in cash payments. Depending on the size of the TRS purchase, Fairfax could have tens of millions of cash coming to it in June simply based on what the indices have done since March.

[StubbleJumper]

 

On an unrelated note, anyone have the transcript from Q1 earnings call? Seeking Alpha doesn't seem to have it and I'm uncertain that it will be posted at this point.

 

If there is no transcript, does anyone mind summarizing what was said about the Equity Total Return swaps previously mentioned in the thread. It sounded like Fairfax went long total return swaps in March?

 

If that is so, these are likely a source of additional liquidity since these things tend to be standardized and settled on a quarterly basis in cash payments. Depending on the size of the TRS purchase, Fairfax could have tens of millions of cash coming to it in June simply based on what the indices have done since March.

 

 

Transcript is here: https://finance.yahoo.com/news/edited-transcript-ffh-earnings-conference-024448274.html

 

 

SJ

[TwoCitiesCapital]

 

On an unrelated note, anyone have the transcript from Q1 earnings call? Seeking Alpha doesn't seem to have it and I'm uncertain that it will be posted at this point.

 

If there is no transcript, does anyone mind summarizing what was said about the Equity Total Return swaps previously mentioned in the thread. It sounded like Fairfax went long total return swaps in March?

 

If that is so, these are likely a source of additional liquidity since these things tend to be standardized and settled on a quarterly basis in cash payments. Depending on the size of the TRS purchase, Fairfax could have tens of millions of cash coming to it in June simply based on what the indices have done since March.

 

 

Transcript is here: https://finance.yahoo.com/news/edited-transcript-ffh-earnings-conference-024448274.html

 

 

SJ

 

Thanks. Wasn't aware YAHOO also provided the service and Google didn't pull it up in a search. Have always relied on SeekingAlpha!

 

Doesn't seem like a whole lot of information is given on the swaps, notional amounts, or underlying indices. The quarterly report does say the notional for the swaps is $952 million though.

 

When I worked for a hedge fund, these were typically standardized on total return indices and would settle on the 3rd Thursday of the month ending the quarter or something like that. Things might've changed since then given the move to Central Clearing and whatnot, but I'm just trying to ballpark figures of incoming liquidity to Fairfax as a result of these derivative positions.

 

Using the S&P 500 total return index and a last settlement date of 3/19 - Fairfax would be in the money by 18.7% on the current run and would be owed a cash payout of $178 million if values don't change between now and June. $178 million of incoming cash in a quarter is nothing to sneeze at for those who are concerned about liquidity issues.

[StubbleJumper]

 

On an unrelated note, anyone have the transcript from Q1 earnings call? Seeking Alpha doesn't seem to have it and I'm uncertain that it will be posted at this point.

 

If there is no transcript, does anyone mind summarizing what was said about the Equity Total Return swaps previously mentioned in the thread. It sounded like Fairfax went long total return swaps in March?

 

If that is so, these are likely a source of additional liquidity since these things tend to be standardized and settled on a quarterly basis in cash payments. Depending on the size of the TRS purchase, Fairfax could have tens of millions of cash coming to it in June simply based on what the indices have done since March.

 

 

Transcript is here: https://finance.yahoo.com/news/edited-transcript-ffh-earnings-conference-024448274.html

 

 

SJ

 

Thanks. Wasn't aware YAHOO also provided the service and Google didn't pull it up in a search. Have always relied on SeekingAlpha!

 

Doesn't seem like a whole lot of information is given on the swaps, notional amounts, or underlying indices. The quarterly report does say the notional for the swaps is $952 million though.

 

When I worked for a hedge fund, these were typically standardized on total return indices and would settle on the 3rd Thursday of the month ending the quarter or something like that. Things might've changed since then given the move to Central Clearing and whatnot, but I'm just trying to ballpark figures of incoming liquidity to Fairfax as a result of these derivative positions.

 

Using the S&P 500 total return index and a last settlement date of 3/19 - Fairfax would be in the money by 18.7% on the current run and would be owed a cash payout of $178 million if values don't change between now and June. $178 million of incoming cash in a quarter is nothing to sneeze at for those who are concerned about liquidity issues.

 

 

Yes, $178m is $6/share pre-tax, so that's great.  I am, however, curious where those swaps are held.  Are they held in holdco or in one or more of the subs?  Money is money, but as you suggested, it would be a happy situation if a cash influx happened to be at the holdco.

 

 

SJ

[petec]

Excuse my ignorance, but if you’re long a TRS what happens if the market drops? Do you just lose your principal, or is the liability greater?

[TwoCitiesCapital]

Excuse my ignorance, but if you’re long a TRS what happens if the market drops? Do you just lose your principal, or is the liability greater?

 

Typically, index TRS are quarterly cash settled. So if you have $1B of notional that goes up 10% over the quarter, you'd be owed $100 million, less financing costs, at the end of the quarter and the contract would continue forward for the next quarter until maturity.

 

So in this case, if the $950 million in notional that Fairfax owns goes down more than the $180 million that we estimated they were in the money by, they'd owe cash at the June settlement

[Xerxes]

What a the advantage of using a swap instead of just buying the index if the bet was rebound in the market ?

[TwoCitiesCapital]

What a the advantage of using a swap instead of just buying the index if the bet was rebound in the market ?

 

Cash. With the TRS you only need initial margin and maintenance margin to maintain. Fairfax's $950 million position probably only costed something like $90-100 million in cash to put on

[petec]

So in this case, if the $950 million in notional that Fairfax owns goes down more than the $180 million that we estimated they were in the money by, they'd owe cash at the June settlement

 

This all makes my head hurt but I find it very hard to find a positive. A few thoughts:

 

1) If I understand correctly, Fairfax are exposed in both directions. I am struggling to see how this is much different from the short swaps that so hurt us in the bull market. Fairfax took a levered bet on stock movements without capping their downside or the potential cash collateral calls if they are wrong. In return for a possible $178m profit which doesn't really move the needle, they risked moving the liquidity/capital situation from "mildly concerning" to "oh fuck". If this interpretation is correct, I would argue that they have kept to the letter of their promise not to short equities again, but perhaps not the spirit of it.

 

2) Although at the end of the quarter their long TRS position was 10x the size of their short position, note 7 suggests they either really f***ed up the timing on their shorts or they were short stocks that have gone up a lot, including in q1. If it is the latter, one might reasonably infer that they shorted the tech stocks they wrote about in the 2019 newsletter - and did so without telling us. Here is the wording: During the first quarter of 2020 the company closed out $404.4 notional amount of its short equity total return swaps and recorded net losses on investments of $107.4 (realized losses of $248.1, of which $140.7 was recorded as unrealized losses in prior quarters). I am no expert but I would assume a $248m loss on $404m of notional means they were very wrong.

 

@SJ, the wording re: the collateral suggests to me the TRS's are at least partly held at the holding company. Note 7 says: At March 31, 2020 the aggregate fair value of the collateral deposited for the benefit of derivative counterparties included in holding company cash and investments and in assets pledged for short sale and derivative obligations was $413.4 (December 31, 2019 - $152.4)…" Presumably if the collateral is at the holdco, the TRS is too.

 

@TCC, two questions if I may:

a) note 7 shows zero cost for the long and the short equity TRS's. How does that work? Is the only cost the collateral that needs to be posted? Or is there an up front "premium"?

b) what is the advantage of these TRSs vs a call with capped downside and no need for collateral?

 

Finally, also in note 7 of the 1q report, can anyone explain the assets & liability columns under "fair value"? Does the asset represent swaps that are in the money and the liability represent swaps that are out of the money?

 

 

 

 

[TwoCitiesCapital]

So in this case, if the $950 million in notional that Fairfax owns goes down more than the $180 million that we estimated they were in the money by, they'd owe cash at the June settlement

 

This all makes my head hurt but I find it very hard to find a positive. A few thoughts:

 

1) If I understand correctly, Fairfax are exposed in both directions. I am struggling to see how this is much different from the short swaps that so hurt us in the bull market. Fairfax took a levered bet on stock movements without capping their downside or the potential cash collateral calls if they are wrong. In return for a possible $178m profit which doesn't really move the needle, they risked moving the liquidity/capital situation from "mildly concerning" to "oh fuck". If this interpretation is correct, I would argue that they have kept to the letter of their promise not to short equities again, but perhaps not the spirit of it. [/Quote]

 

Yes. Exposed in both directions just like owning the stock would, just with a lesser cash outlay upfront. This position provides liquidity at zero gain and positive gains and costs liquidity at negative gains but still likely better than owning the actual security (from a liquidity perspective).

 

Say they buy $1000 stock. That's $1000 out the door. They buy a TRS for $1000 notional on the same stock and they put up $100-$150. Even if the stock moves against them 50% and they now owe $500, they've still only had a total outlay of $600-650 versus the $1000 from owning the stock directly. Roughly same P&L (less financing costs), but way less cash used.

 

2) Although at the end of the quarter their long TRS position was 10x the size of their short position, note 7 suggests they either really f***ed up the timing on their shorts or they were short stocks that have gone up a lot, including in q1. If it is the latter, one might reasonably infer that they shorted the tech stocks they wrote about in the 2019 newsletter - and did so without telling us. Here is the wording: During the first quarter of 2020 the company closed out $404.4 notional amount of its short equity total return swaps and recorded net losses on investments of $107.4 (realized losses of $248.1, of which $140.7 was recorded as unrealized losses in prior quarters). I am no expert but I would assume a $248m loss on $404m of notional means they were very wrong.

 

[/Quote]

 

I think you're right about what they were short, though sounds to me it's not as bad as you think. They had $404 million of exposure during the first quarter carried @ a $140 million unrealized loss. During the quarter, that $140/million loss became a $240 million realized loss. So yes, they're down 50% on the position as a whole, but only 25% or so came from the 1st quarter. Sounds to me like they were short Amazon?

 

 

@TCC, two questions if I may:

a) note 7 shows zero cost for the long and the short equity TRS's. How does that work? Is the only cost the collateral that needs to be posted? Or is there an up front "premium"?

b) what is the advantage of these TRSs vs a call with capped downside and no need for collateral?

 

Finally, also in note 7 of the 1q report, can anyone explain the assets & liability columns under "fair value"? Does the asset represent swaps that are in the money and the liability represent swaps that are out of the money?

 

Typically there is zero cost upfront because the only cash required from you is posting initial margin which is still owned by you. As far as a premium, you pay LIBOR+spread that accrues while the contract is ongoing - financing costs are netted from P&L monthly or quarterly when the contract settles.

 

For calls your paying a premium for the right to own a contract. For TRS you only pay ongoing LIBOR+spread that is  typically quite a bit less than call premiums AND you're only paying while the contract is active/accruing where calls you pay for the entire time premium upfront.

[Xerxes]

Folks

Would it be fair to say that the $2.9 billion that FFH invested in March when credit spread blew out, now that Fed stepped in and closed opportunity for distress fixed income investor, those spread have narrowed, so ... does it mean that a significant portion of that capital gain would be marked-to-market as unrealized gain by close of June (Q2). I think that capital gain is front-loaded where you see most of the snap back happen in Q2 ... and the rest panned over several quarters.

 

This is 7% of the $39 billion portfolio. The position is significantly larger than Blackberry, Resolute and Seaspan combined. This fixed income unrealized gain on its own might in turn snap back the discount between market and BV.

 

What am I missing here ?