Fairfax 2024

[UK]

14 minutes ago, MMM20 said:

It might also partially explain the low quality of the work vs. some others we’ve seen from MW.

 

+1:)

[MMM20]

Just now, UK said:

 

+1:)

Sorry, added that before I saw your comment. Same wavelength!

[Thrifty3000]

21 minutes ago, MMM20 said:

Low short interest just means it’s not a highly shorted stock and the borrow cost is probably cheap. In other words, it’s a contrarian short (at least not a crowded one) which is the best kind if you’re proven right.
 

In this case, I think the odds are good that some big fund out there with a ~$50-100mm short decided to exit before earnings and therefore paid Muddy Waters to publish this during the quiet period. This is quite common and somehow legal, though regulatory changes are apparently in the works right now.

It might also partially explain the low quality of the work vs. some others we’ve seen from MW.
 

+1. It’s unusual how little command of the facts Block has when asked to comment on things falling outside the scope of the written report.

 

Imagine if you’re the counterparty sitting on $150 million of losses on your FFH TRS position and you’re worried about FFH reporting a blowout quarter. 
 

What’s it cost to get a guy like Block to pump a short thesis so you can reverse the $150 million loss and exit? $10 million? The ROI is pretty irresistible. Follow that money. (Who are the counterparties now?)

[MMM20]

2 minutes ago, Thrifty3000 said:

+1. It’s unusual how little command of the facts Block has when asked to comment on things falling outside the scope of the written report.

 

Imagine if you’re the counterparty sitting on $150 million of losses on your FFH TRS position and you’re worried about FFH reporting a blowout quarter. 
 

What’s it cost to get a guy like Block to pump a short thesis so you can reverse the $150 million loss and exit? $10 million? The ROI is pretty irresistible. Follow that money. (Who are the counterparties now?)

 

Right. I am not a big conspiracy guy but it's well established that this is common practice nowadays and I think it pretty clearly fits the fact pattern in this case. Maybe I'm wrong.

 

Edited February 9, 2024 by MMM20

[sleepydragon]

I have access to short interest data. It seems someone put on big short position after 20231127, and then covered on 20231227. Then resumed shorting (at much smaller size) around 1/17. There’s actually not much shorting now. I suspect MW has a small short position , or if they had a client who co-shorted, that client covered last year.

 

[MMM20]

6 minutes ago, sleepydragon said:

I have access to short interest data. It seems someone put on big short position after 20231127, and then covered on 20231227. Then resumed shorting (at much smaller size) around 1/17. There’s actually not much shorting now. I suspect MW has a small short position , or if they had a client who co-shorted, that client covered last year.

 

 

What's the total dollar amount? And isn't that reported on a pretty long delay? I thought it wasn't so clear and transparent on the Canadian exchanges. Thx.

 

Edited February 9, 2024 by MMM20

[racemize]

could they do it via swaps and it not be reported?

[Hoodlum]

15 minutes ago, sleepydragon said:

I have access to short interest data. It seems someone put on big short position after 20231127, and then covered on 20231227. Then resumed shorting (at much smaller size) around 1/17. There’s actually not much shorting now. I suspect MW has a small short position , or if they had a client who co-shorted, that client covered last year.

 

I wonder if the 30 day period of the initial short is typical.  Based on the more recent short, they would cover the morning after the financials are released based on the same 30 day interval. 
 

it is also interesting that FFH is only $20 below where the most recent short was done.  LOL

Edited February 9, 2024 by Hoodlum

[Gmthebeau]

46 minutes ago, Spooky said:

 

If you don't know anything about the company why are you even posting here? Please at least bring some analysis to the table if you are going to post.

 

Bitter little man cuz your stock crashed.  Ok, the analysis was 2 times accused of creative accounting just because you don't understand the analysis doesn't make it less useful. 

[Intelligent_Investor]

50 minutes ago, MMM20 said:

Low short interest just means it’s not a highly shorted stock and the borrow cost is probably cheap. In other words, it’s a contrarian short (at least not a crowded one) which is the best kind if you’re proven right.
 

In this case, I think the odds are good that some big fund out there with a ~$50-100mm short decided to exit before earnings and therefore paid Muddy Waters with their big following to publish this during the quiet period. This is quite common and somehow legal, though regulatory changes are apparently in the works right now.

It might also partially explain the low quality of the work vs. some others we’ve seen from MW.
 

Wouldn't that be insider trading if Muddy Waters shorted due to knowing insider info that a large shareholder was selling? That sounds pretty illegal to me

[sleepydragon]

9 minutes ago, MMM20 said:

 

What's the total dollar amount? And isn't that reported on a pretty long delay? I thought it wasn't so clear and transparent on the Canadian exchanges. Thx.

 

Between 1/16-1/22, it peaked at $700m. And then after 1/23. it went down steadily to $100m. Yesterday it “popped” to $130m.

 

there are certain institutional data feed you can get these daily or even hourly.

 

[gfp]

1 minute ago, Intelligent_Investor said:

Wouldn't that be insider trading if Muddy Waters shorted due to knowing insider info that a large shareholder was selling? That sounds pretty illegal to me

 

That's not what "insider information" is.  Material non-public information is about the company itself, not the behavior of other shareholders.

[Hoodlum]

I wonder if MW did this report so that their shorts could get back to their cost, allowing them to get out approx. breakeven or a small profit before the financial.   This was likely a last gasp chance before FFH took off even further from where they initially shorted.

Edited February 9, 2024 by Hoodlum

[sleepydragon]

1 minute ago, sleepydragon said:

Between 1/16-1/22, it peaked at $700m. And then after 1/23. it went down steadily to $100m. Yesterday it “popped” to $130m.

 

there are certain institutional data feed you can get these daily or even hourly.

 

Before 11/27, it was less than 60m. After 11/27, it popped to $100-150m. Then back to $50m in 2024 till popping a lot around 1/16

[Malmqky]

7 minutes ago, Gmthebeau said:

 

Bitter little man cuz your stock crashed.  Ok, the analysis was 2 times accused of creative accounting just because you don't understand the analysis doesn't make it less useful. 

Thanks for the positive contribution to this board.

Do you understand the report? It’s kind of a joke. A lot of these “issues” have actually been addressed by Fairfax. I don’t think this is a good faith report by MW…or they’re just misinformed. Guess FFH shouldn’t follow accounting rules..

 

Also not sure why you’re bringing up a situation from two decades ago that was proven to be false.

 

Fairfax isn’t a fraud lol
 

 

Edited February 9, 2024 by Malmqky

[Thrifty3000]

If you want to know if a short has teeth take a look at the bonds and preferreds. Example, look what happens to bonds after a Hindenburg hit.

[sleepydragon]

12 minutes ago, racemize said:

could they do it via swaps and it not be reported?

The bank who wrote the swap can cross with other clients a bit, so it won’t show on the market, but that’s for small trades only. if it’s big size, the bank will have to sent that out to the market. 

[MMM20]

"not alleging fraudulent behavior" ... "cherry-picks" ... "standard short-seller playbook"

 

"If we had to guess, Muddy Waters likely covered the bulk of its short position yesterday"

 

These guys get it.

 

 

 

Edited February 9, 2024 by MMM20

[ValueMaven]

Bought some more OTC in an account that has had way to much cash ... 

[Spooky]

15 minutes ago, Gmthebeau said:

 

Bitter little man cuz your stock crashed.  Ok, the analysis was 2 times accused of creative accounting just because you don't understand the analysis doesn't make it less useful. 

 

Lol! I'm up significantly on my FFH position, a 10-12% drawdown is nothing. I read the report, I did not find it convincing. There is nothing to address the long term performance of the underlying business to state that it is fundamentally impaired. Still think the company is very cheap here.

[gfp]

18 minutes ago, Gmthebeau said:

 

Bitter little man cuz your stock crashed.  Ok, the analysis was 2 times accused of creative accounting just because you don't understand the analysis doesn't make it less useful. 

 

We will see if it "crashes."  So far we are re-living the morning of January 17th, 2024 (at least in USD terms).  I did most of my purchasing yesterday so I won't have much capital to buy a crash if it comes.

[Santayana]

17 minutes ago, Gmthebeau said:

Bitter little man cuz your stock crashed.  Ok, the analysis was 2 times accused of creative accounting just because you don't understand the analysis doesn't make it less useful. 

No one on this board is bitter about getting the chance to buy at a lower price.

[Ghost]

18 hours ago, SharperDingaan said:

Folks, the reality is that FFH is going to go a good bit lower before this is all over. Simply do a swing trade, buy your stock back later at the lower price, and take your cash difference off the table. MW drives the share price down; FFH does a share buyback at below book, and books both a gain on cancellation, and a higher EPS. 

 

SD

Promises...promises. 

[Ghost]

8 hours ago, Parsad said:

 

What?  Have you actually read the report?

 

Key takeaways:

• Fairfax is GE, not Berkshire Hathaway
• MW believes that there should $4.5B in adjustments to assets on the balance sheet
• Fairfax is pulling financial levers to improve results and book value since 2018
• Fairfax has missed their ROE target of 15% for several years

Ok, the 4th one is pretty much a joke.  Buffett and Munger have talked for decades about lumpy 15% versus an even 12% return every year.  Fairfax is an insurance company that invests its float for income, so there will be volatility in annual returns.  With that, you can get rid of the 1st one as well, since GE was engineering earnings to get a consistent annual return, not accepting volatile annual returns.  I'm glad Block really studied GE!

 

Slide #4 of MW's report shows how Allied put pressure on Fairfax and they wrote a 107% CR in the year acquired.  Then I guess somehow, Fairfax finagled a 97.3% CR since.  Last I checked, writing below 100% was the target for insurance companies, not what they necessarily wrote historically.  Again, not sure why he brings up Allied, since CR's are well under 100% for the last 5 years.

 

For mispriced assets:

 

Recipe

• They talk about the $15.30 takeover price for Recipe being artificial...well they have to talk to the PCAOB about that, because under IFRS fair value tests, the last market price or takeover price is what they have to use.
• They say that PWC restated goodwill and intangibles in 2021 compared to Recipe's previous auditor KPMG.  Although, they don't note that PWC also restated the 2020 goodwill and intangibles for Recipe.  So there was no real net tangible gain after acquiring Recipe if you simply look at Section 12 in the 2021 FFH AR showing total goodwill and intangibles for Recipe in 2020 and 2021 since the increase would have also been reflected in the restated 2020 financials for FFH in the 2021 report.

Quess

• They argue that Quess was deconsolidated to create an artificial accounting gain.  You can look at that whatever way you want.  It was treated fairly under IFRS.  Again, if there are issues, it's a PCAOB issue.
• Also, they don't account for the fact that Indian companies have not transitioned yet to IFRS and there might be adjustments in valuation between Indian Accounting Standards and IFRS.

EXCO

• They say it is overstated by $220M or so on the books.  I'll leave it to someone else with more understanding of the long history of EXCO to comment.

Grivalia/Eurobank

• Essentially saying that Eurobank overstated goodwill by $62M...you can quibble this whatever way you want, but $62M is barely material here relative to Eurobank's equity and assets.

Riverstone

• Suggested that the sale to OMERS and then subsequent sale from OMERS to CVC Capital was financial engineering to hide losses at Riverstone and show a profit at FFH.  Yes, OMERS took the risk of buying Riverstone simply to help out FFH.  Not that anything like that could risk OMERS entire being as a public pension plan, cause sanctions and fines against the investment team at OMERS, bar those managers from working in the industry, and possibly lose their CFA/Advisory designations.  Sure, let's help a friend out with some financial chicanery and risk everything, including our reputation.
• As an aside, they mention that CVC Capital acquired Riverstone from OMERS with asset note guarantees by Fairfax for 4 years...they also suggest that the associate shares Fairfax put up as collateral were simply stuffed into Riverstone to hide paper losses on those associate shares.  The funny thing is, most of those shares have recovered significantly since the pandemic and Fairfax would have been able to book tons of paper gains if they held those shares.  No comment on that of course!
• Also no breakdown by MW's if any losses have been paid on the 4 year guarantee!

Fairfax Africa/Helios

• They state that Helios was booked at $5.25 USD while the price on the date of deconsolidation (December 8, 2020) was $4.04 USD.  No mention that the stock traded up to $6 USD on the days after December 8, 2020.  Total gain...$43M...on $21B of shareholder equity.

APR Energy

• They say that Fairfax sold APR to Atlas (a friend) so they wouldn't have to show a loss.  Hmmm, funny how FFH hasn't bought it back, nor the fact that David Sokol and Bing Chen were willing to destroy their reputation solely to help Fairfax out.  

Bizarre Take on Prem's sale of Atlas shares - Prem sold shares of Atlas at the $15.50 tender offer and accepted the same number of shares from Poseidon...simply to align himself with the $1B investment by FFH into Poseidon.  MW's states without any real issue of criticism that they don't understand why Prem would sell ahead of the minority shareholders.  No idea what the argument is here.

 

Eurolife/OMERS transactions - again, I'll leave this one for Fairfax to comment on, because there are a number of transactions that make it more convoluted than I have time to examine it.  Essentially, MW's says that there was a $262M gain that should not be on the books.  Ok, again that is 1% of shareholder equity and one tenth of what they will earn in 2024.

 

Brit/Odyssey/OMERS transactions - MW's says it boosted book by $421M when portions of those were sold to OMERS because the remaining amounts were now carried at fair value.  They say they were essentially financial transactions to boost book with a call option to buy back.  Not sure how this is any different than any company under IFRS boosting liquidity by a partial sale of a fully consolidated entity.  Berkshire, Markel, etc would all book this the same way.

 

The most hilarious section of the analysis is Fairfax's accounting adjustments for Digit in 2021/2022 and the use of the FFH swaps.  They say Fairfax began booking the gains on valuation of Digit later than they should have by a quarter so that they could juice the results for those quarters.  Yet, the irony is if they had began when MW's suggests, then the gain in book value would have been inflated for 2021, a year which they say Fairfax was inflating gains widely through their transactions.  They also note that they haven't made any adjustments to book based on the value of the swaps!  In terms of a downward valuation of Digit that they suggest...I'm not sure I agree with the number, but Fairfax may have to adjust that based on prices for all fintech companies in India.  Depending on markets, it could just as easily be valued upwards again.  But I'll leave it to the auditors on this...I'm certain Muddy Waters has no clear idea either.  Even MW notes that Sequoia invested $3.5B into Digit and relegates it to Silicon Valley's lack of discipline.

 

Here's another big one that you can argue either way.  They say that under IFRS 17 Fairfax received too much in adjusted gains.  That their adoption gain divided by contract liabilities was about 6%...higher than the industry.  Yet, they don't note that Fairfax also generally books higher redundancies on statutory capital compared to the industry and it is around that 6% mark.  Could FFH book that more conservatively...sure.  Did FFH book that accurately...yes.

 

Farmer's Edge - another one that I'm not 100% up to speed on, but it's a $71M adjustment according to MW's.  That's in the negligible territory when you look at $26B in equity.

 

Lastly, they suggest that the 46% acquisition of Gulf Insurance is the latest piece of financial engineering by Fairfax and they purposely overpaid at 2.4 times book for the new stake.  Yet Gulf made $125M in 2022 and 26% would be about $58M.  The $860M cost amounts to about 15 times earnings.  Which isn't expensive when you are paying up for a leading, quality insurer.  One which also had a closing condition that the $2.00 per share price could not be lower than the 6-month moving average market share price leading up to the closing of the deal.  Thus why the premium offered was 100% to market price rather than 60-70%...to ensure the deal would close and KIPCO couldn't walk away.

 

Anyway, I'll leave it to brighter minds to approve or disapprove of the MW report.  But to lackadaisically say that an ex-partner of the audit firm sits on their BOD's is somehow irregular and that what happened in the past regarding the short seller attack and financial restatements without even glancing over the facts...well that's just bloody lazy analysis! 

 

Not too mention the liability that the auditors could be exposed to, Fairfax could be exposed to, employees jobs, shareholder's account values...does anyone really think that Fairfax and the auditors would risk all of that for plus/minus 2-5% of book value?!

 

Cheers!

 

Thanks Sanjeev...I believe that would be game, set, match...

[Castanza]

 

Well...