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I need to sell FFH and ORH because.......


Mikenhe
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This is an exercise in getting inside the mind of someone who is selling Fairfax and why they would do so.

 

 

1) In a supposed hardening market they still can’t produce a decent loss ratio on their underwriting.

2) The best year they had is gone. If they can’t produce an underwriting profit then where will the profit come from.

3) There are few chances left for them to make money from the cds portfolio. They have bought into the market and taken the hedges on equities off. Since then the market has gone down therefore they must lose money. They can’t make money off bonds and other investments therefore why bet on the jockey.

 

4) They have a lawsuit out there against short traders yet its going nowhere. Does that mean that the shorts really did have a case?

 

5) I see some great companies for sale and Fairfax has still made money for me over a 3 year span.. maybe now this the tie to sell FFH and invest elsewhere.

 

6) I just need the cash.

 

 

Ok then – so what else is there to make anyone think that it should be sold. I’m struggling with the fact that anyone who looked deep enough to cover the above points wouldn’t also see the positives. What am I missing? I’m frustrated because the value of my portfolio is now heading south after getting through all the calamity in the market up to now. However it does mean that I can buy more at a good price.. I just don’t have as many bullets as I’d like.

 

 

Discloser: I’m long FFH and ORH and intend to be for a while.

 

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Its spilt milk at this point.

The greater value is what would entice those folks back in.

 

- From the roughly $400 high, todays close is down 31%. The 2008 low was roughly $225, 44% below the $400 high, & 18% below todays close of $275. The market as a whole was also a lot more buoyant when it made that $225 low, than it is now.

- Q1 is usually FFH`s best quarter, but these folk have little reason to value at anything other than the average industry multiple (at best). Q2,Q3,Q4 are the more volatile quarters, & most economists are calling for further economic deteriation as we move through the year. Therefore bias to continuing multiple contraction.

 

Best guess is short term stabilization in the 250-275 range untill after Q1 results are out, then more downward drift. You cant buck the market indefinately.

 

SD

 

 

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I am thinking mostly that number 6 is the most likely reason.  The initial drop after the earnings release was due to a drop in future expectations.  The rest is due to people selling the stock because they had to.  Concurrent with FFH's start down was the next leg down of the general market.

 

Nothing is rationale.  If this was 1996 the stock would have gone the absolute opposite way.  Very frustrating though as I am sure most people would love to buy but have exhausted their ammo.  I have sold common to buy Leaps, not something I would like to do but something that seemed to be the best future bang for my buck. 

 

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I've been forced to sell off a small sliver of my meager FFH holdings over the last couple weeks but it has definitely been with regret and only because I needed the cash.  Were anything else different about my situation I'd be buying every share I could get my hand on right now.

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Guest ericopoly

I like the charts at investor.msn.com because it is handy for setting a custom time period and plotting multiple stocks at once.

 

 

The one month chart for ORH/MKL/FFH is nearly identical.

 

By throwing MKL in there you eliminate "CDS" theories.

 

Market is just down -- relative value game.

 

Perhaps a bigger question is who the hell was selling WFC for less than $8?  I am kicking myself for not buying some, but I was on a ski trip.

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I don't know who was selling at 8, I do know there where other forces.

 

At some point last week JPM and WFC were around 25% of the XLF or the financial complex.  SKF is the 2X Inverse ETF of the Financials, and there are other ETFs that trade on the inverse, are levered and need financial exposure (on the short side).  As some names started to represent a larger portion of the financials,  these ETF's needed to increase shorts on the remaining complex.  At least that's my theory. 

 

Coincidentally, last week I put in a test order to short SKF, there were no shares available, but every other financial I test-ordered, there were shares available. 

 

Last week was crazy.  There are other forces at work now, Pandit's timely "memo", Ken Lewis timely "Op-ed" http://online.wsj.com/article/SB123655575807665985.html

 

There are probably more explanations.

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The most ridiculous thing was WFC preferreds selling for 17%+ yields.  BTW, FFH has been buying these too (its says so in ORH's NAIC filing).  That could explain why WFC was a smaller position than Kraft/JNJ yet still listed with them as his favorites, he not only holds the common but also preferreds.

 

20%+ actually! Does the filing identify which WFC preferred?

 

Does anyone know how US corporations are taxed on preferred dividend income? Would FFH pay a reduced tax rate?

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I was checking the ORH's NAIC filing in order to find more detail about the WFC preferred.

In the summary investment schedule (page 2) it's stated that ORH has about 1.800.000$ (unaffiliated 115.228$) in preferred stocks, without indication of WFC.

The amount seem not relevant, but maybe I'm missing something reading the filing.

I apologize for eventual mistakes. 

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On page 43 of the filing it saying they acquired $42 million at cost of "Various" WFC preferreds on 11/24/08.  That is ORH.  That means FFH probably has $100mm+ of these at cost.

 

 

Holy smokes!  Those guys sure don't mess around when they take a position!  By my reckoning, an investment of $100m in WFC preferreds should yield out about $17-20m/year in dividends, or roughly $1/share for each FFH shareholder.

 

OEC, good call on the WFC preferred recommendation !!!

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Maybe I'm making a mistake, but on page 43 the 42$ million outlined are classified in the "6799999 Common stock - Banks, Trust and insurance companies" section that total 68$ million. "Various" refers to the vendor not the type of preferreds.

The section "6599999 Total - Preferred stock" is equal to 1.64$ million.

I thik the 42$ of WFC are only common stock. 

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I would add 8) FFH insurance companies as operating underwriting entities are generally also-rans in the industry if you break out the investing jockey. Unlike Geico and General Re which are competitively advantaged.

 

 

 

Just like the auto industry FFH Cos are built to write way more business.  No one knows how they'll do during a hard market or what competitive advantages they'll achieve.   

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They will write 2-3x the business in a hard market at a profit.  10 Billion of this money will be invested in equities, and 40 Billion in bonds of some kind, and 2 Billion in some kind of derivatives as a hedge or play on the inflationary future.  This in turn will allow them to generate over 100/share in earnings/year in 1.5 years time.  These also ran insurance companies are been pretty productive.  Put another way, even Berkshire is having a so/so insurance year. 

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I would add 8) FFH insurance companies as operating underwriting entities are generally also-rans in the industry if you break out the investing jockey. Unlike Geico and General Re which are competitively advantaged.

 

 

 

The attached industry comparisons published by Reuters clearly show that ORH and even FFH must be "also rans"...  ::)

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My comments were meant to exclude any profitability from investing or one time credit bets. I don't know whether your profitability graphs include that or not, but if so, that is not what I was trying to point out in response to potential reasons to sell the position.  I don't think that Federated, Lombard, or Commonwealth insurance and their products and services and underwriting discipline are competitively advantaged in the Cdn marketplace. They are decent companies but there are umpteen other competing entities in their marketplace.

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