oec2000

Thanks for your comments, uccmal and StevieV. I agree the natgas outlook is bleak but bleak environments should be the playgrounds of value investors. Many people on this board made out like bandits buying FFH and then the US banks (and their preferreds too) when it looked like Armageddon. Not saying that PEY is at the same degree of undervaluation but it seems to me an opportunity that bears a closer look. I know that the resource industry has caused a lot of heartache for investors because of the insane way that most of the companies in the sector are managed. But, therein lies the opportunity because the market is so fearful and PEY management is not typical of the sector. The dividend issue is a red herring imo. What should matter are owners' earnings and I think shareholders of PEY would be better served if they didn't pay any dividends because of the high incremental IRRs/ROEs they continue to generate on capex. The fundamental question is whether free market economics will work to bring the natgas market in Canada back to equilibrium where producers can earn a reasonable return. I would argue that this is more likely to happen in a negative environment where investors/bankers are much more reluctant to let promoters destroy their capital than in bullish times when the "grow at any price" craziness was so in vogue. Free markets worked when WCS oil spreads to WTI and Brent blew out a few years ago and it's logical to think that it will happen again with gas. I'm paying attention to capex plans among the gassy producers. When we start to see more drastic cuts to capex is when it's an indication of markets working. Meanwhile, low gas prices will only stimulate demand.

It's been a really long time since my last post. Drifted away from following the forum after the content started to move away from what used to be a more tightly focused value orientation. Not meant as a criticism but just found that it was too time consuming to sift though posts to find interesting gems because I was busy with other stuff. (This is still the best investment forum that I know. :) Thanks, Sanjeev!) Case in point - Peyto. I've been following the collapse in Peyto's price and taking advantage of it to buy a very well managed business at a reasonable (arguably, a cheap) price. This is one situation I thought would spark off a lively discussion on CoBF. A quick search showed that I was wrong - being able only to find this thread which was started to discuss Peyto but which ended up being hijacked by GXE.TO. This provided sufficient impetus for me to end my hiatus on CoBF. :D So, despite the plunge in AECO gas prices, PEY remains profitable and appears to be in good shape heading into 2018. Mr Market thinks that PEY's dividend is at risk and that their debt load is too heavy. Is Mr Market right, or is this a great buying opportunity? I believe this is a rare opportunity to buy PEY at a good price. The two key risks are that they have to trim the dividend and/or reduce capex to reduce debt (and thus cause a decline in production). In his recent PMR's, Darren Gee has discussed the options they have to deal with these issues and it is by no means a certainty they will have to resort to cutting divs or capex. The risks do get higher if gas prices stay low into 2019. But, even if the cuts occur, they result in a temporary valuation loss for investors, not a permanent loss. The cure for low gas prices is low gas prices and PEY with its super low cost structure will survive the downturn and benefit from the subsequent recovery in gas prices. Meanwhile, investors will get paid with attractive dividends (even if cut) while waiting. What's not to like? Contrary views, please.

Is the few hundred per cent upside you hope for as visible as the upside on US financials, for e.g.? With RIM, it's really hard to handicap the upside potential given the highly dynamic nature of the industry. Who knows what Apple will have brought out by the time RIM sorts out their mess. The other question that bugs me because I cannot answer it with satisfaction is why are their sales in emerging markets so strong when they are doing so badly in the US? Is it only a matter of time before the iPhone/Android phenomena catch up with them in emerging markets? Even if we accept your upside/downside ratio, do you see the probabilities of either outcome as 50:50? The downside outcome seems much more probable than the upside one imo. Isn't this a seven foot hurdle that's not worth attempting?

Australian wines cost more than they do in the US too - as I found out on my trip there last month. It used to be that London and Tokyo were considered expensive cities but I met people from these cities who complained that Sydney is more expensive now. Having said that, the nice thing about Australia is that the price you see is the price you pay unlike here in North America where taxes and tips are extra. So, menu prices are about 40-50% more than in Vancouver, adjusted for the 30% taxes and tips you have to add on here, the difference is not so great. One positive you forgot to mention - you get great coffee in Australia, very un-Starbucks. Btw, do you feel that Australians are more tuned in to what is happening in Asia (China in particular) and the pace of change there. Although people are more aware these days, I feel that many North Americans still haven't grasped the significance of what is happening in Asia - it's frustrating to see the petty bickering that goes on here that is so parochial.

Isn't it true also that the high we get from making money has similar effects on the brain as cocaine? Explains Buffett's love of stocks and coke (the legal type)? :)

The impact of surrenders is not straightforward and even though in some situations insurers make money from surrenders, generally speaking surrenders are not a good thing for insurers. Because of new business strain (caused by high upfront costs), surrenders in the early years of a policy result in losses. This is a negative. After a policy has been in force for a while, surrenders do throw up gains for lifecos via the release of surpluses. (Policy reserves in excess of cash surrender amounts paid out.) While this provides a short term boost to profits, there is a negative long term impact to the insurer - because they lose the future profits from the policies. These lost revenues then have to be replaced with revenues from new policies which introduce the drag of new business strain. The most negative and dangerous impact of surrenders is when interest rates rise sharply. Policyholders holding policies bought when interest rates were lower (thus providing lower rates of implied return) now have an incentive to surrender their policies and reinvest in higher yield instruments. Because this happens at a time when interest rates are elevated and therefore investment values are depressed, the insurers are forced to liquidate discounted investment assets to pay off policyholders. There is another negative dimension. Healthy policyholders (i.e. those still insurable) are more likely to surrender than those who are uninsurable - this will end up skewing the mortality risk of the insured lives that stay on the book. In any case, my original post was in response to a comment about using life funds as float. The danger of unpredictable surrenders is what makes life insurance float risky and thus less attractive than general insurance float. This is why neither Buffett nor Watsa are interested in life insurance float. In fact, I believe Prem used to work at Confederation Life which experienced such a run (must confess my recollection is vague and someone else may be able to give a better account of what happened). I would add that term life as well as life reinsurance policies do not have these problems because they work more like general insurance. I don't think, however, there are companies that do only these types of business. Wonder why Buffett or Watsa are not interested in this form of float - what I am missing?

The two key problems with life insurance float are: 1) They are subject to runs - policyholders can surrender their policies. With P&C business, once the policies expire the money is locked in as float until claims have to paid out. So, the life business is not unlike the banking business where you borrow short and invest long. 2) Life insurers are committed to very long term pricing. If they get it wrong, they will be screwed for a very long time (as we are seeing MFC experience over the past few years). Also, for some products, they commit to very long term fixed returns to their customers. These fixed returns cause problems when you have severe economic environments when interest rates go either very high or very low because policyholders can act selectively against the insurer. The current economic environment where we might have a prolonged period of abnormally low rates which oculd then be followed by a period of high inflation and interest rates is excatly the mix that is not good for lifecos. Their spreads suffer when rates are low; and they are vulnerable to surrenders when rates go high. Investing the float without certainty of the duration of liabilities is a major problem.

They are not stupid, just realistic. The PM knows that if they cannot implement the austerity measures successfully they will be back asking for more help eventually and the austerity cannot be carried out without the support of the people. Greece's problem are indicative of the problems facing other countries if they do not arrest the trend of rising debt/GDP ratios soon. The 50% debt haircut brings Greek sovereign debt down to 120% of GDP for now - but unless they can balance the budget going forward, this ratio is set to rise again. The perverse thing is that if they balance the budget but do it at the cost of causing an economic contraction, the debt ratio still rises! What is scary is that Italy is already at 120%, and the less indebted countries in Europe will have to increase their ratios to provide the support needed to the EFSF and their own banks. So far, except for the Greek debt writedown, none of the schemes proposed in Europe solve the fundamental problem of overindebtedness - they are just rearranging chairs. Even the Greek debt haircut has to deal with unintended consequences of Greek banks and pension funds getting hit on their bond holdings - presumably the Greek govt will have to borrow to fill up these holes! It's a crazy situation. Probably explains why Prem remains worried.

It would be nice if everyone could be all things to all people. The reality is that we are all composites of good and bad. Rather than wishing for something idealistic that will not happen, why not be glad that we have people who excel in different things, character faults notwithstanding. We are infinitely better off in a world where Jobs, Churchill, Gandhi, Buffett, Mandela, Franklin, Princess Diana, etc focused on what they did best. The work of the great humanitarians would more than offset the pain caused by the "assholes." This would be certainly be a more interesting world than one in which Diana and Jobs wasted half their time doing things they were bad at, such as creating electronics and helping AIDS and landmine victims respectively. The Theory of Comparative Advantage works.

I found this disturbing: "We have assembled, with support from Capital Economics in London, foreign debt to GDP ratios that are comparable to the U.S. debt to GDP ratio. The debt figures in these ratios include both private and government debt; thus, they are measures of aggregate indebtedness. These statistics indicate that the euro currency countries as a group, the United Kingdom, Japan and, interestingly Canada, are all more deeply indebted than the United States. This should not give the U.S. solace, nor detract from our severe problems. However, the greater debt in these areas may serve to provide backhanded support for the dollar. More critical is that all major countries are destined to experience slower growth because of excessive indebtedness. The latest readings indicate that debt to GDP ratios are about: 450% for the Euro zone and the United Kingdom; 470% for Japan, and 410% for Canada. Thus, the Euro Zone, UK, Japan,and Canada ratios are 100%, 100%, 120%, and 60% higher, respectively, than the U.S. debt to GDP ratio of 350%."

Last time I checked, it did not appear that either current management (i.e. those who have not been suspended) or the auditors really knew what was going on in the company. Do you think they know whether the company is solvent?

I totally agree, and this is what annoys me most about politics around the world. The lack of adults in the room. Its very interesting because you get elected by promising to lower taxes and increase entitlements. We all know that wont work long term but its what they do each session. One day it will give though. This is one adult worth listening to. :) (The Jamie Dimon of Canada?) http://www.theglobeandmail.com/report-on-business/read-ed-clarks-speech/article2207111/

You should check out his other book reviews on Amazon - very high quality and informative. (Thanks, James! :))

All investors (including Buffett and Watsa and I presume all of us here) invest with selfish intentions of making money - it is simply unfair to imply that only short sellers have selfish intentions. No one is claiming that shorts are altruists out to help the world. But we cannot deny that the actions of both longs and shorts can contribute to the greater good (e.g. when the longs provide capital to good companies and when the shorts expose dishonest management). I understand and share your distaste for unscrupulous characters who short, distort and collude. However, there is a tendency for the negative "rush to judgement" of shorts who go public with their positions. Unless there is evidence of wrongdoing, shouldn't we practise the principle of "innocent until proven guilty?" Where is the evidence that Carson Block deliberately singled out healthy companies for attack and spread false rumours? Why do people think that shorts would deliberately choose healthy companies to attack? No matter how unethical they are, it doesn't make sense to choose a healthy company to short over an unhealthy one. The simpler explanation - that shorts, like longs, occasionally make mistakes in their analyses - seems more plausible to me. That's a false analogy, because a hit and run sees the victim severely injured for a period of time. A negative writeup on a company, although it distracts management, doesn't affect the core business. Alfred Little's blog ramblings don't make it harder or more difficult to mine silver. Unless there is some silver fairy that I don't know about working for the shorts and disrupting mining procedures (I wouldn't put it past the Sith Lord). Access to capital is a privilege not a right. Capital can freeze with or without shorts, just due to a loss of confidence. Silvercorp will get that privilege back if and when the shorts are proven wrong (they are possibly most of the way there) and/or the market restores confidence in them, just like the Fairfax story. Hester, don't you think we should make a distinction between "good" and "bad" shorts? To the extent that "bad" shorts drive down a company's stock with false rumours and coordinated attacks resulting in a highly dilutive fundraising (as happened with FFH), there is some permanent damage done. The bad shorts have the privilege to trade in markets but surely that doesn't give them the right to use illegal tactics. I think the problem with this debate is that we have one group who want to demonise all high-profile shorts and another group that want to defend all shorts. Why not just accept there are some "bad" shorts (whom we should all condemn) and some "good" shorts (whom we should all support for their contrary views)?

If you understand how ponzi schemes work, you will not think this curious at all. Ponzi schemes work BECAUSE the operators do pay interest - at very attractive rates usually!