Q1 2021

[maxthetrade]

8 minutes ago, SharperDingaan said:

Net of the cumulative mark, the buyback is at the very low Q4 2020/Q1 2021 price, there is an extended period of warehouse buying support throughout the life of the TRS (assumed), and no sudden price spike because of the buyback. 

Very elegant, and very FFH.

 

Well, I don't think they'll buy back the shares. First they have to pay taxes on the TRS gains and why would they do a buyback if at the time they choose to close the TRS their shares are fairly valued or even overvalued?  It would be better to invest in something that is undervalued. 

[StubbleJumper]

16 minutes ago, maxthetrade said:

 

Well, I don't think they'll buy back the shares. First they have to pay taxes on the TRS gains and why would they do a buyback if at the time they choose to close the TRS their shares are fairly valued or even overvalued?  It would be better to invest in something that is undervalued. 

 

Yes, I agree with this. 

The investment in TRS was a decision to take a position in an undervalued security, which was effectively FFH's own shares.  If the price of FFH shares should suddenly soar to 1.3x BV, the TRS would be very profitable and it might make sense to close them out, take the profit, pay the taxes and move on.  But the decision to then use the proceeds to buyback and retire FFH shares is completely separate and needs to taken rationally.  At a hypothetical level of 1.3x BV, I'd be disappointed if FFH actually bought back the shares because that might not be a rational price for FFH's shares.

My guess is that position in the TRS was taken under the assumption that it would take a year or two for FFH's share price to rise to 0.9x or 1.0x book, and that FFH could close out the contract and take the proceeds plus some other cash and make a rational re-purchase decision.  But, in the end, the re-purchase decision is completely separate from the TRS investment decision and it must stand on its own merit.

 

SJ

[SharperDingaan]

Not so sure ...

Agreed the buyback decision stands on its own merits. But if the final price is 1.3x BV, and you have received a cummulative .4x BV of MTM settlement, your net cost is .9x BV. Sure, you will have to pay tax on the positive MTM - but if it is over many years, and you have losses to offset against. how much can it really be? Just s different POV.

SD

[Viking]

Right now Fairfax continues to be ‘cash poor’ (example: selling 14% of Brit to further delever balance sheet). Nothing that is a concern. They will have lots of good options in the future as more cash becomes available.

1.) deleveraging

2.) FFH buybacks - with stock trading below .95 x BV

3.) buy back minority stakes in insurance subs (Allied and Brit)

My assumption is the insurance subs do not need cash to grow in current hard market (given positive earnings and their equity portfolio rising significantly)

[lessthaniv]

22 hours ago, StubbleJumper said:

 

Yes, I agree with this. 

The investment in TRS was a decision to take a position in an undervalued security, which was effectively FFH's own shares.  If the price of FFH shares should suddenly soar to 1.3x BV, the TRS would be very profitable and it might make sense to close them out, take the profit, pay the taxes and move on.  But the decision to then use the proceeds to buyback and retire FFH shares is completely separate and needs to taken rationally.  At a hypothetical level of 1.3x BV, I'd be disappointed if FFH actually bought back the shares because that might not be a rational price for FFH's shares.

My guess is that position in the TRS was taken under the assumption that it would take a year or two for FFH's share price to rise to 0.9x or 1.0x book, and that FFH could close out the contract and take the proceeds plus some other cash and make a rational re-purchase decision.  But, in the end, the re-purchase decision is completely separate from the TRS investment decision and it must stand on its own merit.

 

SJ

I also agree. They took advantage of the discount in their share price that they had visibility into but at a time where there their cash was tight. I would also be disappointed to see them buy their stock in at a premium with the proceeds. 

[Pedro]

Just trying to invert here so I understand the downside of the TRS . 

If the market goes into correction territory (ie the market and FFH drop  20%)  the TRS are marked down, FFH has to pay cash to settle? 

Isn't this the same sort of vehicle they said they'd avoid? 

I understand all the tailwinds for FFH but I'm just trying to understand the downside of the TRS here if things dont go as planned...

 

 

 

[Viking]

Pedro, Fairfax’s long equity investments have been purchased with the objective to earn Fairfax a better return than bonds over time. These long equity investments will do well if they go up in price over time. The equity investments are volatile: as we learned last year, they can go way way down, and as we learned the past 6 months, they can go way up. I view the TRS as another equity type investment; and yes, it will be volatile.

Shorting, either individual names or indexes, are a very different animal. Fairfax has proven to be spectacularly bad at shorting over the past 8 years; it is THE biggest driver of their underperformance. Fairfax has committed to no longer short individual companies or indexes moving forward. Given their track record the past 8 years or so i like this decision.

[StubbleJumper]

1 hour ago, Viking said:

Pedro, Fairfax’s long equity investments have been purchased with the objective to earn Fairfax a better return than bonds over time. These long equity investments will do well if they go up in price over time. The equity investments are volatile: as we learned last year, they can go way way down, and as we learned the past 6 months, they can go way up. I view the TRS as another equity type investment; and yes, it will be volatile.

Shorting, either individual names or indexes, are a very different animal. Fairfax has proven to be spectacularly bad at shorting over the past 8 years; it is THE biggest driver of their underperformance. Fairfax has committed to no longer short individual companies or indexes moving forward. Given their track record the past 8 years or so i like this decision.

This is all true, but Pedro has tabled a valid point.  If FFH is receiving periodic cash payments at the moment because the underlying stock (FFH) for the TRS is increasing, they might need to make periodic payments if the underlying stock price decreases.  As long as FFH doesn't spend the money that it has received as its stock price has risen, this is not a problem because it can simply return some portion of that cash to the counterparty if the stock price should drop a bit.  But, if that cash is used for some other purpose (ie, debt repayment, acquisitions, corporate overhead, etc) and then FFH's stock price decreases, the holdco will need to find the cash from somewhere. 

That's a little different than the BB situation where FFH owns the shares outright.  The stock price went up in February, and then went back down again in April and there were no cheques received or written.  It was just a large paper gain, followed by a smaller paper loss.

The TRS will certainly require consideration in FFH's continuous risk management process.  The higher FFH shares go (ie, from 0.6x BV to 0.75x, now to 0.9x and hopefully to 1.1x), the greater the risk that they might eventually owe a cheque of some magnitude to the counterparty.  They'll do well to keep that in mind when considering holdco liquidity levels and when considering their exit price.

 

SJ

[petec]

Ignorant question, because I haven’t actually checked, but do we know the TRS’s are held at the holdco, or could they be at the subs?

[StubbleJumper]

7 minutes ago, petec said:

Ignorant question, because I haven’t actually checked, but do we know the TRS’s are held at the holdco, or could they be at the subs?

I thought the Q1 MD&A suggested that the holdco received significant cash payments.  Might need to read it again...

[TwoCitiesCapital]

10 hours ago, Pedro said:

Just trying to invert here so I understand the downside of the TRS . 

If the market goes into correction territory (ie the market and FFH drop  20%)  the TRS are marked down, FFH has to pay cash to settle? 

Isn't this the same sort of vehicle they said they'd avoid? 

I understand all the tailwinds for FFH but I'm just trying to understand the downside of the TRS here if things dont go as planned...

 

 

 

This is correct in that they'd potentially have a cash liability in a month/quarter where the stock declined. 

Not quite the same as shorting though as the most they can pay is the 100% of the contract notional if their stock goes to $0 - where shorting your losses are unlimited. 

[Pedro]

Thanks the for repsonse. 

My sense is that the downside is more risky at 0.9BV then it was 6 months ago at less than 0.7BV. I'd rather they close the TRS now with the win  and not have any potential cash settlement to drag down  postiive quaterly results.  Realistcally any number of situations come bring the market/FFH down -  cat event, someone sneezing in another country that the market doesnt' like - any FFH could trade back again at a large discnnect to intinsic value which would cause FFH to take cash out that could be used to buyback shares/delever. 

Close the swap and move on with the small win. Thats my advice. 

[Xerxes]

TRS are a levered-play, if they sense the bounce back is losing steam at some point in 2021, they ought to unwind the position, capture the gain and live to trade another day.

Good news is that with some of their holdings doing well, their margin of safety keeps increasing.

[Xerxes]

Interesting clip with the Redfin CEO on low housing inventory. My personal view has been that once the economy re-opens and rate start to climb up the great dash to move to suburb will slow down. As folks settle down and start enjoying life.

I of course have no global view on the housing market but listening to this clip, they see this (bias view for sure) as a multi-year event that igniting a housing construction boom given the low inventory. So, does that mean lumber prices will stick for some times if this rally has some legs.

Redfin: U.S. Housing Inventory at Record Low, Getting Worse - Bloomberg 

On a different note, all these houses that have been bought by the newer generation using apps like Zillow, Redfins or Opendoor, will probably come with an owner that is more likely than not make use of services like ANGI as oppose to call up contractors like I do to get a quote. The opportunity is there for ANGI, the hard part I guess is execution and having that pipeline of "pros" that haven interest.

 

[matthew2129]

I know Prem swore off shorting after getting burned on TSLA, but I wonder if it's possible they held any ARK puts? They're such ARK perma-bears, would be a pity not to make anything off this ARK sell-off (though I know ARK puts aren't particularly cheap). 

[StevieV]

I'd much rather that Fairfax keep their promise to avoid shorting and avoid any more disastrous short losses.  Tempting situations like ARK puts would seem similar to what has gotten them in trouble in the past.  I think simply avoiding shorts altogether is the right solution and also believe it is very important that they stick to their statements on the matter.

[petec]

1 hour ago, StevieV said:

I'd much rather that Fairfax keep their promise to avoid shorting and avoid any more disastrous short losses.  Tempting situations like ARK puts would seem similar to what has gotten them in trouble in the past.  I think simply avoiding shorts altogether is the right solution and also believe it is very important that they stick to their statements on the matter.

Agree.

[Xerxes]

Matt,

If I may suggest:

Own FFH for what it is & not what you want it to be. What FFH is today is a company with large bond portfolio with short term duration, well suited to deploy it into this transient/permanent rising inflation/rate environment. J. Powell is helping to create that mother of opportunity for FFH. Druckenmiller talked about just now on CNBC and had a piece on WSJ.

If the fall in growth/ARK and rise of value are the two sides of the same coin, than FFH can play that trade through its bond portfolio and stay away from something that historically may have been just awful in executing. Said differently, you are getting what you want but through a different lever.

Lastly, at no point Prem did mention Tesla as as short. The Tesla short speculation started here.... that said it is also true that a number of 2008-09 bears who did well during the GFC seem to have a correlated point of view that Tesla was doomed and shorted it. So by that logic one can correlates that Prem also shorted Tesla but that is purely speculation. 

We did however get an additional piece of info during the AGM about it. He said it was one short position from 2019. After AGM, i said to myself let me go through the realized/unrealized shorts in the 4 quarters of 2020 and find out the likely 2019 short candidate, but then wisely decided not being worth my time.

Prem mistake was to think that he was the Valuation Policeman giving speeding tickets to inflated tech names. For a macroinvestor, I think he entirely missed the impact of a lasting low-interest regime on valuations. Chanos and other successful short sellers, on the other hand, makes their dough by shorting mostly names where there is trigger or reason (fraud etc.) in the same period.

PS: but then both Buffet and Druckenmiller also did not see the magnitude of Fed intervention to prevent a complete market collapse. BUT they pivoted when facts changed through 2020, while Prem remained perm-bear from 2010 till 2016. Or at least that is my understanding.

 

Edited May 11, 2021 by Xerxes

[petec]

1 hour ago, Xerxes said:

Own FFH for what it is & not what you want it to be.

This is very wise advice.

[matthew2129]

3 hours ago, Xerxes said:

Matt,

If I may suggest:

Own FFH for what it is & not what you want it to be. What FFH is today is a company with large bond portfolio with short term duration, well suited to deploy it into this transient/permanent rising inflation/rate environment. J. Powell is helping to create that mother of opportunity for FFH. Druckenmiller talked about just now on CNBC and had a piece on WSJ.

If the fall in growth/ARK and rise of value are the two sides of the same coin, than FFH can play that trade through its bond portfolio and stay away from something that historically may have been just awful in executing. Said differently, you are getting what you want but through a different lever.

Lastly, at no point Prem did mention Tesla as as short. The Tesla short speculation started here.... that said it is also true that a number of 2008-09 bears who did well during the GFC seem to have a correlated point of view that Tesla was doomed and shorted it. So by that logic one can correlates that Prem also shorted Tesla but that is purely speculation. 

We did however get an additional piece of info during the AGM about it. He said it was one short position from 2019. After AGM, i said to myself let me go through the realized/unrealized shorts in the 4 quarters of 2020 and find out the likely 2019 short candidate, but then wisely decided not being worth my time.

Prem mistake was to think that he was the Valuation Policeman giving speeding tickets to inflated tech names. For a macroinvestor, I think he entirely missed the impact of a lasting low-interest regime on valuations. Chanos and other successful short sellers, on the other hand, makes their dough by shorting mostly names where there is trigger or reason (fraud etc.) in the same period.

PS: but then both Buffet and Druckenmiller also did not see the magnitude of Fed intervention to prevent a complete market collapse. BUT they pivoted when facts changed through 2020, while Prem remained perm-bear from 2010 till 2016. Or at least that is my understanding.

 

I don't disagree with this in general; I understand that people are tired of the drag on returns that hedging has caused (myself included). I may be mistaken, but as far as the TSLA short, I thought someone on here posted a filing from FFH disclosing a short TRS position on an "auto manufacturer" matching TSLA's closing price thereby confirming the speculation.