Good blog post on FFH

[Palantir]

Your whole argument about “the long-term” is very misleading. If Mr. Watsa’s defensiveness today is proven right, those numbers will change dramatically in a matter of just a few years… It is exactly like keeping cash for a very long time, and then investing in a truly outstanding opportunity: until that opportunity materializes, your track record seems very poor, than all of a sudden it becomes wonderful! Mr. Watsa at the AM has said the investment business is primarily characterized by how quickly things change. He simply has been waiting for three years now…

 

Gio

 

Good post. I think most people have stopped believing in large market declines after the bull market of the past 5 years. When valuations decline, and it inevitably will, the results will show a different story. I like what FFH is doing. They haven't forgotten the first rule of investing: never lose money.

 

Conversely, I've seen the opposite. It's as if people expect the market to plummet at any moment, and that a crash just like 08 is always around the corner. Whenever the market drops 1-4%, the same people start chiming in, or when the market rises we hear about how this is unsustainable and going to end in another correction.

 

 

[petec]

At the risk of bringing this back to AZ Value's post... ;)

 

I agree that a) they clearly got the equity hedges wrong and b) if they wanted to hedge, out of the money puts would have been a better and less cash-heavy option.

 

However, I'd counter come of the points in the post as follows:

 

1) JNJ and WFC have doubled since the annual report covered them, but IV has not.  I don't find their sale *that* odd (although I do find the timing suspicious for the reasons AZ has given).

 

2) They *did* take once in a lifetime opportunities to buy great businesses: Zenith, TCIL, arguably BKIR, minorities in Odyssey and Northbridge, and some smaller things.  This is a very different business than in 2008.

 

3) Are the equity hedges pure macro, as AZ argues?  To me, trying to predict next year's GDP is foolhardy but observing that there are some dangerous imbalances in the world is not.  Observing that there is too much debt and government stimulation in the world is arguably macro (but very important and very historically aware).  Observing that margins are at all time highs and are a mean-reverting series is really quite micro, IMHO.  And shorting indices while maintaining an equal long in equities you like isn't macro so much as it is backing yourself to generate beta.

 

3a) On the comparison with Buffett: he spent a lot of time talking up America and US govt financial policy.  That, to me, is as much a macro call as Prem made.  It just wasn't couched in macro terms.

 

4) It's a little harsh to dismiss Jha, Chennakeshu, and Bucher as 'some consultants'.  I for one am very glad that Fairfax looked outside for industry experts when deciding what to do with BBRY.  But I agree that doing it after making the offer seems odd from the outside.

 

I'm long and quite happy that a guy who is so content to differ from the crowd, while building and strengthening his core business, is managing some of my money.

 

Pete

 

Edit: I meant also to say thanks for a genuinely interesting and thought provoking read :)

 

[giofranchi]

I'm long and quite happy that a guy who is so content to differ from the crowd, while building and strengthening his core business, is managing some of my money.

 

Pete

 

Pete,

you know I couldn't agree more. ;)

 

Gio

[petec]

I'm long and quite happy that a guy who is so content to differ from the crowd, while building and strengthening his core business, is managing some of my money.

 

Pete

 

Pete,

you know I couldn't agree more. ;)

 

Gio

 

Yeah, I'd got that impression ;)

[colinwalt]

ECB takes raft of new steps to avoid deflation

 

http://news.yahoo.com/ecb-takes-raft-steps-avoid-deflation-125227440--finance.html

 

So is this going to be a repeat of Soros v's Bank of England? In the remake, it's Watsa v's ECB?

 

PS: Hope I'm not the only one here old enough to remember the original  ;)

[petec]

I clearly need to research Soros vs. BoE!

 

What interests me about this is Richard Koo's argument, that in a balance sheet recession monetary policy is powerless because management teams are focussed on balance sheets.  I would imagine that is the case for banks in the Eurozone: overlevered and facing a weak economy and rising regulation of balance sheets, will a tiny cost of deposit at the central bank make them lend into the economy?  I am sceptical, but we certainly live in interesting times.

[Zorrofan]

ECB takes raft of new steps to avoid deflation

 

http://news.yahoo.com/ecb-takes-raft-steps-avoid-deflation-125227440--finance.html

 

So is this going to be a repeat of Soros v's Bank of England? In the remake, it's Watsa v's ECB?

 

PS: Hope I'm not the only one here old enough to remember the original  ;)

 

Sigh, no your not.....  :(

 

cheers

Zorro

[tombgrt]

ECB takes raft of new steps to avoid deflation

 

http://news.yahoo.com/ecb-takes-raft-steps-avoid-deflation-125227440--finance.html

 

So is this going to be a repeat of Soros v's Bank of England? In the remake, it's Watsa v's ECB?

 

PS: Hope I'm not the only one here old enough to remember the original  ;)

 

I guess it really isn't enough. Inflation at 0.4%

 

http://online.wsj.com/articles/euro-zone-inflation-jobless-rates-fall-1406797310

[tombgrt]

http://www.tijd.be/nieuws/politiek_economie_belgie/Belgie_staat_op_de_rand_van_de_deflatie.9538528-3136.art

 

Sorry, it's in Dutch. Belgian "inflation" at 0.02% in August.

 

Seems more and more likely Prem will be proven right.

[petec]

http://www.tijd.be/nieuws/politiek_economie_belgie/Belgie_staat_op_de_rand_van_de_deflatie.9538528-3136.art

 

Sorry, it's in Dutch. Belgian "inflation" at 0.02% in August.

 

Seems more and more likely Prem will be proven right.

 

Feels that way, and a lot of commodities point that way too.  The options are a way off strike, but my understanding is that their price can rise in the market regardless.

[obtuse_investor]

http://www.tijd.be/nieuws/politiek_economie_belgie/Belgie_staat_op_de_rand_van_de_deflatie.9538528-3136.art

 

Sorry, it's in Dutch. Belgian "inflation" at 0.02% in August.

 

Seems more and more likely Prem will be proven right.

 

Feels that way, and a lot of commodities point that way too.  The options are a way off strike, but my understanding is that their price can rise in the market regardless.

 

That is my understanding too. If and when the deflation expectations become the norm, then the market will discount that. That is when these defaltion swaps will shine. We don't have to see actual deflation ever be all that low for these swaps to pay off big.

 

Today's expectations are that ECB's Draghi has a bazooka in his backpocket with a QE sticker on it.

[benhacker]

Feels that way, and a lot of commodities point that way too.  The options are a way off strike, but my understanding is that their price can rise in the market regardless.

 

That is my understanding too. If and when the deflation expectations become the norm, then the market will discount that. That is when these defaltion swaps will shine. We don't have to see actual deflation ever be all that low for these swaps to pay off big.

 

Today's expectations are that ECB's Draghi has a bazooka in his backpocket with a QE sticker on it.

 

I think there are two elements to this:

 

1) Obviously, if the market starts desiring deflation protection, FFH's derivatives may be able to be sold high (even before deflation actually occurs).

 

2) The valuation of the deflation derivatives on FFH's books, are unlikely to have large M2M swings in value if deflation FEARS are high, but inflation remains positive.  I may be wrong on this, but FFH seems to be valuing the entire deflation swap bucket as Level 3 assets, and their model doesn't seem to be related at all to dealer quotes, and it much more conservative than what they have been paying (I haven't checked recently, but historically they had several swap purchases that were marked down (by model) 50% within one month in an environment where deflation and deflation expectations weren't changing.).  So I would assume, unlike CDS which have significant observable inputs into their prices (corporate bonds do trade frequently, and are strongly related to CDS), the deflation derivatives will be marked conservatively based off models... until they are sold or expire.

 

I could be wrong, and certainly level 3 assets have a lot of flexibility in how FFH could value them...