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Chou Funds - semi-annual posted


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http://www.choufunds.com/pdf/SA10%20pdf.pdf

NON-INVESTMENT GRADE AND INVESTMENT GRADE BONDS ARE NOW FULLY PRICED:

Non-investment grade bonds have rallied tremendously from their lows in March 2009, and at

current prices we believe they are close to fully priced. For example, three and a half years ago

the spread between U.S. corporate high yield debt and U.S. treasuries was 311 basis points.

Currently, it is about 696 basis points, down from its peak of over 1,900 basis points in December

2008. (Source: JP Morgan).

Similarly, we believe that investment grade bonds are now close to fully priced.

However, when compared to corporate bonds, U.S. treasuries are in bubble territory. In our

opinion, this is the worst time to hold cash and short-term treasuries unless you believe we are

headed into a 1930s style depression. And if you believe that you should redeem all your Fund

units.

In equities, we believe the financial, retail and pharmaceutical sectors are undervalued.

 

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Incidentally, Francis' thought process is about as close as you can get to the team at Hamblin-Watsa, and there are very few people who know Prem better than Francis.  Guess what Francis thinks is relatively cheap..."financial, retail and pharmaceutical sectors are undervalued".  

 

I read his semi-annual report about two hours ago when it was first posted, but resisted putting it on here, as I was doing further research on one of his best ideas in the report.  Now that Omagh went and took the cat out of the bag, I might as well mention it as well.  The Bank of America Class A Warrants look enticingly cheap!

 

I'm still revisiting the prospectus, but if I have it correct, at today's $6.59 closing price...you can buy the 2018 Class A warrants which give you the right to buy one share of BAC at $13.30.  If you assume that BAC doubles book value over the next 8 years in this environment and it's market price is at book value then, you would achieve a return of roughly 15.5-16% annualized on your $6.59 investment.  On top of that, and this is the clincher, if they pay any dividends over four cents annually, the strike price is adjusted for the decrease in capital, thus you could reasonably expect a 20% annualized return on the investment.  

 

Now as Francis lists in his semi-annual report, there are alot of risks, so take it with a grain of salt.  But I think it would be reasonable to assume that BAC would trade at book 8 years from now, and that in this type of environment they should be able to double book over the next eight years.  Love to hear everyone's feedback, now that the idea is out!   ;D  Cheers!

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" we believe that investment grade bonds are now close to fully priced.

However, when compared to corporate bonds, U.S. treasuries are in bubble territory. In our

opinion, this is the worst time to hold cash and short-term treasuries unless you believe we are

headed into a 1930s style depression."

 

It sounds like we should be fully invested.

 

I was lucky to get into Chou Associate Fund & bond fund during downturn, thanks to Parsad and other s on this board--thanks.

 

 

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Sanjeev as you know I follow the 20 tkts  advice of WB, my first to Pabrai funds in 2002, FFH in 2004 ( double down with 140 warrants at 3 1/2 thanks to AL on the board), LUK and WFC in dec- March 2008-9, now I have sold my WFC completely to go into WFC warrants for its 3X leverage. I did consider BAC and JPM warrants also and these BAC warrants look esp. good, however inherently WFC management is better and most imp, if we have another meltdown the derivatives at those banks could kill them. Now uncle Sam may bail them again but equity and warrant would probably wipeout. Those are my thoughts in a nutshell.

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Hi Indirect,

 

I totally agree with you.  WFC's management is better, and their cross-selling success with their customers is probably the best.  It's just that the exercise price with BAC, combined with the low dividend requirement before it impacts the exercise price, was an intriguing combination.  Cheers!

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"It sounds like we should be fully invested."

 

Did you forget that Prem, a friend of Francis, just bought billions (notional) worth of protection against deflation?

 

If you read between the lines, I think that Francis is giving a fair warning to all his investors. Said differently: I am a long only fund, if there is deflation which I can't predict (me neither), my picks may not work out even if they appear to represent great value at the moment. Temper your expectations.

 

So it is fine to invest in companies right now, but look at hedging, keep an eye on the economy and sovereign risks. If there are catalysts to unlock the value in your undervalued stocks even better. I don't know if you have listened to Kyle Bass interview on CNBC on Aug 17 (or 18?), but we can't just dismiss the risks of a country the size of Japan defaulting on its obligations.

 

Cardboard

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I've been looking at this fund. There are a couple different versions of the fund, Series A and Series F. The later looks to be available with a lower MER, since we're bypassing the middle man. The prospectus states "We do not pay any commission to a dealer who sells Series F securities which means that we can charge a lower management fee. Series F securities are also available to other groups of investors for whom we do not incur distribution costs."

 

What would define he "other groups of invesotrs for whom we do not incur distribution costs?" If a someone is an accredited investor and lives in the US, could he or she purchase the shares of the Series F?

 

If I get a wrap fee program, could I terminate the wrap and still maintain my position in the Series F?

 

Thanks for the help guys!

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Quoted from David Kaiser's Morning Coffee (Canaccord Capital):

 

Fairfax Financial* (FFH : TSX : $413.98), Net Change: 3.68, % Change: 0.90%, Volume: 18,996

Deflated? The Canadian insurer who won on a bet the decline of the U.S. housing market appears to have bought insurance

against the threat of deflation. According to an article from The Wall Street Journal, Fairfax spent US$174 million to buy

derivative contracts that pay off when the consumer price index drops below the 2% level over the next decade. Fairfax

purchased some of the derivative investments in the first three months of the year, when few fretted about deflation and the cost

of the contracts was cheap, and added more in the second quarter. Apparently, these derivatives have already gained 50% in

value, generating a paper profit of more than US$100 million. The hedge aims to protect US$22 billion of Fairfax's investment

portfolio. "We are extremely concerned about a double dip in the economy and about a deflationary environment," says Paul

Rivett, chief operating officer for Fairfax's investing department. The company has been studying bouts of deflation suffered in

the U.S. and, more recently, in Japan, and it is getting worried. "People say they understand deflation, but they don't understand

how corrosive it is," Rivett said. According to the article, if deflation averages 2% annually over the next 10 years, Fairfax's

contracts would rise in value the equivalent of 4% of US$22 billion, or US$880 million, each year over the next decade, reaping

nearly $9 billion in profit.

 

Cheers

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Did you forget that Prem, a friend of Francis, just bought billions (notional) worth of protection against deflation?

 

If you read between the lines, I think that Francis is giving a fair warning to all his investors. Said differently: I am a long only fund, if there is deflation which I can't predict (me neither), my picks may not work out even if they appear to represent great value at the moment. Temper your expectations.

 

With all due respect Cardboard I don't think there are any lines to read between. Looking at the quote:

 

In our opinion, this is the worst time to hold cash and short-term treasuries unless you believe we are headed into a 1930s style depression. And if you believe that you should redeem all your Fund units.

 

In equities, we believe the financial, retail and pharmaceutical sectors are undervalued.

 

Francis seems to be giving a pretty clear opinion here. He then goes on to describe, in detail, the Warrant opportunity that he wouldn't mention if he were as bearish as it seems Prem is.

 

I suppose it would be important to note that Prem's hedging his book is much more important than hedging a personal or mutual fund portfolio is. We are very leveraged at FFH 4:1 as is often quoted.  Prem may not be as bearish as the headline positions would make it seem.  All he needs to do is earn 4% on his overall portfolio and that's adding 16% to book. Keep the CR low and voila, who cares that you didn't blow the doors off we're compounding at a great rate.

 

Finally, a 200 million investment in a hedging derivative is only approx 1.25% of the value of the overall portfolio. Not bad for protection for the entire enchalada. It just makes a great headline.

 

At any rate, it seems that Francis is bullish to me. :-\

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Incidentally, Francis' thought process is about as close as you can get to the team at Hamblin-Watsa, and there are very few people who know Prem better than Francis.  Guess what Francis thinks is relatively cheap..."financial, retail and pharmaceutical sectors are undervalued".  

 

I read his semi-annual report about two hours ago when it was first posted, but resisted putting it on here, as I was doing further research on one of his best ideas in the report.  Now that Omagh went and took the cat out of the bag, I might as well mention it as well.  The Bank of America Class A Warrants look enticingly cheap!

 

I'm still revisiting the prospectus, but if I have it correct, at today's $6.59 closing price...you can buy the 2018 Class A warrants which give you the right to buy one share of BAC at $13.30.  If you assume that BAC doubles book value over the next 8 years in this environment and it's market price is at book value then, you would achieve a return of roughly 15.5-16% annualized on your $6.59 investment.  On top of that, and this is the clincher, if they pay any dividends over four cents annually, the strike price is adjusted for the decrease in capital, thus you could reasonably expect a 20% annualized return on the investment.  

 

Now as Francis lists in his semi-annual report, there are alot of risks, so take it with a grain of salt.  But I think it would be reasonable to assume that BAC would trade at book 8 years from now, and that in this type of environment they should be able to double book over the next eight years.  Love to hear everyone's feedback, now that the idea is out!   ;D  Cheers!

 

Bruce Berkowitz talked about Bank of America, and its peaked my interest. I may have to start looking at the banks / warrants as a small speculative play. The still seem like big black boxes to me though.

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Cardbaord, Francis doesn't mince words.  If he felt there was a risk to the portfolio he would say so outright. 

 

As said above this hedge/investment makes a good headline.  If the CPI doesn't do what FFH intends then they will make more in JNJ stock alone then the entire investment in these derivatives.

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http://www.chouamerica.com/pdf/Chou%20America%20-%202010%2007%2001%20(Prospectus).pdf

 

Does Chou Canada have the ability to invest in all these instruments as described in the Chou America funds prospectus? It sounds like he could make large Prem-like bets on deflation, currencies, financial armageddon, etc. via derivatives. I like the idea, but I wish they would get the Chou America funds cranked up, get a symbol, and make them available at TD Ameritrade and the like.

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http://www.chouamerica.com/pdf/Chou%20America%20-%202010%2007%2001%20(Prospectus).pdf

 

Does Chou Canada have the ability to invest in all these instruments as described in the Chou America funds prospectus? It sounds like he could make large Prem-like bets on deflation, currencies, financial armageddon, etc. via derivatives. I like the idea, but I wish they would get the Chou America funds cranked up, get a symbol, and make them available at TD Ameritrade and the like.

 

i'm wary of funds that charge 12b1 fees. i'm really disappointed in that.

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I've been looking at this fund. There are a couple different versions of the fund, Series A and Series F. The later looks to be available with a lower MER, since we're bypassing the middle man. The prospectus states "We do not pay any commission to a dealer who sells Series F securities which means that we can charge a lower management fee. Series F securities are also available to other groups of investors for whom we do not incur distribution costs."

 

What would define he "other groups of invesotrs for whom we do not incur distribution costs?" If a someone is an accredited investor and lives in the US, could he or she purchase the shares of the Series F?

 

If I get a wrap fee program, could I terminate the wrap and still maintain my position in the Series F?

 

Thanks for the help guys!

 

I think your questions would be best answered by a brief phone call to Chou Funds.  

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Large banks are sound with strong balance sheets but they can still suffer some hits to their long term earnings potential and Francis Chou conveniently ignores some of these potential negative events.

 

Who is this turkey "Plan Maestro" anyway?  He copies portions of the letter (and I'm sure without consent), in which Francis lays out risks of investing in the banks, and then says that "Chou conveniently ignores some of these potential negative events" of investing in large banks.  Bizarre!  Cheers!

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Sorry Parsad, I think I read the article too fast. I tend to skim at times. I thought he was describing Francis's thesis...sometimes skipping some small key  words can change the whole meaning.

 

I posted the article thinking it was great that Mr Chou is getting some recognition out there (I noticed as well, he was also picked as a "guru" this weekend on gurufocus.com for those who read that sight.)  Good for him, it seems to me that he deserves it.

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There's a pretty good discussion about the WFC warrants vs. common stock on the Motley Fool board:

 

http://boards.fool.com/Message.asp?mid=28525732&sort=whole

 

Interestingly, Wells bought back about two-thirds of its own TARP warrants at $7.70 when they were sold by the federal gov't in May, so WFC mgmt must see them as a good deal.

 

I'm seriously considering switching from WFC common to warrants.

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http://www.chouamerica.com/pdf/Chou%20America%20-%202010%2007%2001%20(Prospectus).pdf

 

Does Chou Canada have the ability to invest in all these instruments as described in the Chou America funds prospectus? It sounds like he could make large Prem-like bets on deflation, currencies, financial armageddon, etc. via derivatives. I like the idea, but I wish they would get the Chou America funds cranked up, get a symbol, and make them available at TD Ameritrade and the like.

 

i'm wary of funds that charge 12b1 fees. i'm really disappointed in that.

 

I tried emailing them at the address listed on the Chou America funds website to ask about this fee and got a bouceback email saying there was no such user.

 

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