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Mixed Signals


rtgross
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On slide 21 at the annual meeting Prem identified Wells Fargo, Johnson & Johnson, US Bancorp, and Kraft foods as investments they were committed to holding for a very long duration.

 

In addition the following comments were made in the annual letter to shareholders (pg 6).

 

The investment section in the MD&A gives you a lot more detail on our long term investment record.

Last year gave us an outstanding opportunity to add to our investment holdings of excellent companies with fine

long term track records. All things being equal, we expect to hold these common stocks for the very long term.

 

Hyperlink for spreadsheet.  I was having a hard time getting it into the text box.

 

https://spreadsheets.google.com/pub?key=0AjsvR_WMf5u1dGppYWlIbDI2ZmNiS3UzUDMtTzZwMGc&hl=en&single=true&gid=0&output=html

 

So, selling of all the recently identified core holdings.  To include a huge 30% decrease at Wells Fargo and US Bank. 

 

What gives?  Are they short on cash from the subs for the Zenith acquisition?  Have they changed their assessment of the core holdings this quickly?  Perhaps they are growing bearish on financials again as credit spreads approach 07' levels.

 

....another acquisition in the making?

 

I wouldn't say this action indicates they are generally bearish on the overall market, if that was the case it would make more sense to increase their S&P shorts rather than sell these holdings.

 

I would be interested to hear everyone else's thoughts.

 

As a couple side notes they also liquidated Magna International and Leucadia.  Plus they cut the GE and Dell holdings by ~30%

 

Very interesting 13F.

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My guess is they want to raise cash levels, they think the market has gone up too far and too fast, and they think these stocks are slightly overvalued at these levels and wanted to trim. I sold some long term holdings the other week due to a few of the reasons listed above. I believe I will have a chance to buy them back over the near term.

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Gruru Focus has a page(probably dynamicly generated) of the changes at http://www.gurufocus.com/news.php?id=94670

 

SuperMedia Inc., formerly Idearc Inc. is a yellow pages directory publisher in the United States. It provides media advertising programs to the clients and consumers, through the SuperYellowPages, Superpages.com and SuperpagesDirect, as well as services, such as the SuperGuarantee and SuperTradeExchange Programs. During the year ended December 31, 2009, the Company published more than 1,200 distinct directory titles, including more than 1,100 directory titles in the markets and more than 100 directory titles in the expansion markets. During 2009, it distributed about 121 million copies of these directories to businesses and residences in the United States.

 

I find IAX more interesting

 

International Absorbents Inc. (International Absorbents) is the holding company of its wholly owned subsidiary, Absorption Corp. (Absorption). Absorption accounts for almost all of the consolidated entity’s annual sales revenue. Absorption is engaged in developing, manufacturing and marketing a range of animal care and industrial absorbent products made from off-specification and reclaimed cellulose fibers. Absorption is a manufacturer and seller of small animal bedding in North America. The primary product that the Company sells in this market is small animal bedding sold under the brand name CareFRESH. It also expanded the animal care segment of its business by the addition of new sales channels and the introduction of animal food and cat litter into its product line.

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"In 2009, under the Delaware Insurance Code, the Company

recorded a nonadmitted charge of approximately $81.8 million, net of tax, due to the Company exceeding Delaware’s statutory

limits for investments in equity securities."

 

C&F 2009 Annual Report

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A penalty of $81.8 million, net of tax and there is no mention of that in Fairfax AR? Sounds like material stuff to me. Why not using calls or other derivative to avoid that. Where is that recorded on the income statement? What is the penalty at other divisions if any?

 

Cardboard

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Reading now the related text in the 10K from C&F, I don't think that it is a "penalty" or fine.

 

"Crum & Forster’s insurance subsidiaries are subject to state laws and regulations that require diversification of investment portfolios and that limit the amount of investments in certain investment categories. Failure to comply with these laws and regulations may cause non-conforming investments to be treated as non-admitted assets for purposes of measuring statutory surplus and, in some instances, would require divestiture. Either of these could result in the Company having to sell an asset when market conditions would not otherwise warrant a sale. In 2009, under the Delaware Insurance Code, the Company recorded a nonadmitted charge of approximately $81.8 million, net of tax, due to the Company exceeding Delaware’s statutory limits for investments in equity securities."

 

It is more of a temporary charge against the calculation of statutory surplus by Delaware. It is done net of tax to account for the amount of tax payable upon real sale. My take anyway.

 

If I am correct, it is still interesting information for shareholders to know or what can be held in equities at Fairfax before getting into these. At the moment, they have more than enough statutory surplus to write the current volume of policies. However, if we were into a hard market or needing most of our statutory surplus and stocks were attractively valued, you can see where this regulation could limit the investment portfolio.

 

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If I am correct, it is still interesting information for shareholders to know or what can be held in equities at Fairfax before getting into these.

 

I remember asking Prem this question at our lunch, and he had said it was 25%.  When I brought up this number with Sam Mitchell at our dinner a couple of years ago, he said that there was no limit.  I'm guessing that most states or jurisdiction have no limit, but certain states or jurisdictions do, and that may be what Prem was referring to.  Anyway, it would be a good question to ask.  Cheers!

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