Fairfax 2024

[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...

[cwericb]

1 hour 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.

 

I was wondering the same as he previously admitted he didn't know much about Fairfax - which I found surprising given the name of this board and the fact that he has been a member for a couple of years.

 

He seems to have formed a snap opinion of Fairfax based simply on the MW report. There is a wealth of information on these pages if he really wanted to offer an educated and informed opinion on the subject. 

 

It is always good to see contrary opinions, but when they are obviously and admittedly ill informed then they serve little purpose.

[MMM20]

I guess simple errors of omission don't matter when you can move the market and cover the next day.

 

Source: National Bank of Canada

 

[SafetyinNumbers]

1 hour ago, StubbleJumper said:

 

Yes, that's true.  FFH has been making a tonne of money over the past couple of years and will probably continue to do so for the next few years.  So, what an investor needs to figure out is whether that is just a cyclical phenomenon, or whether this time it's different.

 

 

SJ

Most investors don’t bother to model out the earnings power and look at historical results expecting mean reversion. The quants have had a great influence over how the average investor invests.

[MMM20]

1 minute ago, MMM20 said:

I guess simple errors of omission don't matter when you can move the market and cover the next day.

 

Source: National Bank of Canada

 

 

And I guess obvious analytical errors don't matter either. 

 

Source: National Bank of Canada

[Gregmal]

I honestly don’t know why this is such a big deal to people. Either way, the move is pretty immaterial and anyone who’s followed Block knows that he is somebody who at best, is very comfortable being deliberately misleading. Like the sleaze balls who sell sports betting tips claiming they have 80% win rates. And you don’t follow closely but as far as the eye can see know that number isn’t right. And when you actually see the dudes at the bar they’ll tell you off the record that the 80% number is totally cherry picked but no one will care about them if they gave you the entire picture. 

[MMM20]

24 minutes ago, Gregmal said:

I honestly don’t know why this is such a big deal to people. Either way, the move is pretty immaterial and anyone who’s followed Block knows that he is somebody who at best, is very comfortable being deliberately misleading. Like the sleaze balls who sell sports betting tips claiming they have 80% win rates. And you don’t follow closely but as far as the eye can see know that number isn’t right. And when you actually see the dudes at the bar they’ll tell you off the record that the 80% number is totally cherry picked but no one will care about them if they gave you the entire picture. 

 

I'd prefer that FFH not end up forced to sell another piece of a sub (even if it's at ~2x book). They're not running with some massive cushion at the holdco. Yes, they are generating a whole lot of cash right now - but if short sellers pile on, spread misinformation, and force them to post cash for the TRS going against them, then it's not just about meaningless volatility b/c anything can happen with stock prices in the short run - especially if short sellers smell blood in a relatively complex, volatile and illiquid one. I don't think it plays out this way, but that's why it's hard to just wave away as the bush league manipulative nonsense it seems to be. Maybe I'm off base?

 

I think many of us have big positions and just trying to make sure we're not missing something stupid.

 

Edited February 9 by MMM20

[Alekbaylee]

47 minutes ago, MMM20 said:

 

Good job! They just forgot to update the dividend ($15 not 10).

 

[Red Lion]

6 minutes ago, Gregmal said:

I honestly don’t know why this is such a big deal to people. Either way, the move is pretty immaterial and anyone who’s followed Block knows that he is somebody who at best, is very comfortable being deliberately misleading. Like the sleaze balls who sell sports betting tips claiming they have 80% win rates. And you don’t follow closely but as far as the eye can see know that number isn’t right. And when you actually see the dudes at the bar they’ll tell you off the record that the 80% number is totally cherry picked but no one will care about them if they gave you the entire picture. 

I’ve done well over the years buying after some of block’s reports. Buford was the best. I’m fully invested right now, already have a big chunk of ffh, and watching to see if I get a great chance to backup the truck. Looks like probably not. 

[SharperDingaan]

5 minutes ago, Ghost said:

Promises...promises. 

 

Hopefully, a good $300+/share on the turn before any option/margin leverage!

 

We would also be very surprised if MW didn't intend to exercise on existing options, as the mechanism by which to raise the shares to repay the short loans; plus accumulate some additional - offered for a buyback. We also expect them to have used the drop to lay in a stack of out-of-the-money calls; FFH buys in the stock at a price well < 1401, MW walks away, the price quickly returns > 1401 & all those calls go deep in the  money.

 

.... Now of course, if an enterprising lad had learnt from ericopoly, and also knew how to work this trick!

Interesting times 

 

SD

[Gregmal]

18 minutes ago, MMM20 said:

 

I'd prefer that FFH not end up forced to sell another piece of a sub (even if it's at ~2x book). They're not running with some massive cushion at the holdco. Yes, they are generating a whole lot of cash right now - but if short sellers pile on, spread misinformation, and force them to post cash for the TRS going against them, then it's not just about meaningless volatility. And anything can happen with stock prices in the short run, especially if short sellers smell blood in a relatively complex, volatile and illiquid one. I don't think it plays out this way, but that's why it's hard to just wave away as the bush league manipulative nonsense it seems to be. Maybe I'm off base here?

 

I think many of us have big positions and just trying to make sure we're not missing something stupid.

 

If they’re forced to sell anything because the stock trades back to where it was a few weeks or months ago then they’re idiots.

[ander]

1 minute ago, Gregmal said:

If they’re forced to sell anything because the stock trades back to where it was a few weeks or months ago then they’re idiots.

@MMM20 I agree with Gregmal they're idiots if they do not have a margin of safety for stock price movement that forces their hand. I have an oversized position and added to it - am only annoyed it's not down further! But @MMM20 what do you think the price threshold would be that would actually force their hand??

[Gmthebeau]

1 hour ago, Malmqky said:

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
 

 

 

I didn't say it was a fraud, nor did the MW report.  They said it used iffy accounting to overstate assets and profits.   

 

As far as the guy who said the prior lawsuit sued the short sellers into the Stone Age, I hope he realizes that Fairfax lost that lawsuit and it was dismissed.

 

I am done replying to this thread because to many people only want to hear one side of a story.  MW has identified numerous company for many years that are frauds or using bad accounting so to simply dismiss it is stupid in my opinion.

 

Edited February 9 by Gmthebeau

[Ghost]

20 minutes ago, SharperDingaan said:

 

Hopefully, a good $300+/share on the turn before any option/margin leverage!

 

We would also be very surprised if MW didn't intend to exercise on existing options, as the mechanism by which to raise the shares to repay the short loans; plus accumulate some additional - offered for a buyback. We also expect them to have used the drop to lay in a stack of out-of-the-money calls; FFH buys in the stock at a price well < 1401, MW walks away, the price quickly returns > 1401 & all those calls go deep in the  money.

 

.... Now of course, if an enterprising lad had learnt from ericopoly, and also knew how to work this trick!

Interesting times 

 

SD

I am most likely missing the obvious, where would one find call options on FFH?  

[Junior R]

turned green lol

[Spooky]

13 minutes ago, Gmthebeau said:

I am done replying to this thread

 

Good riddance.

[lessthaniv]

19 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

Hedge by liquidating to cash based on a weakly supported argument ahead of what will likely be an exceptional looking annual report in 7 days? No thx. The last thing I want to do is lower my exposure here.

[UK]

1 hour ago, MMM20 said:

 

And I guess obvious analytical errors don't matter either. 

 

Source: National Bank of Canada

 

Thanks for these snippets!

[dartmonkey]

OK, question for the board: Given the fact that Fairfax has a normal course issuer bid outstanding, enabling them to purchase up to 10% of outstandings shares between 30 Sept 2023 and 29 Sept 2024, am I correct in thinking this allows them to continue purchasing their maximum of 8219 shares a day? (i.e., 25% of the average daily volume of Subordinate Voting Shares last year.) Given the fact that shares are selling at about $100 less than the pre-MW price, this would mean that they are saving almost $1m a day, thanks to the waters having been muddied for a little while.

 

Unfortunately, I don't expect this savings to last long enough for it to be material.

[spartansaver]

I don't have any skin in this game but man am I cheering for Fairfax to put on a short squeeze. Good luck! Diamond Hands!

[sleepydragon]

The thing is there won’t be any short squeeze.. Maybe MW is shorting, but if so they don’t have much money and if they have clients , those clients are not shorting, at least don’t seems so right now. They either have already tried and got burned in Jan, or they will try again after earning