Wednesday, 30 March 2016

Repost from March 4th - "H&R Block Down close to 20%"

I originally started writing this post back on March 4th, and about 1/2way through the post, realized that there was a serious deficiency in my analysis.  I'm reposting this as a walk through in order to compare my initial observations with what I think now is a bigger issue in performing valuations on the fly.  Hopefully this helps me bridge the gap between my incorrect initial observation and the correct set of conclusions to be drawn.

First, the original March 4th post (In Italics)

I'll do a more in depth post on HRB over the weekend, but here are my initial observations.

The stock is down close to 20% today on an earnings miss.  The culprit, as management explained it, was tax return filing deferral by taxpayers.  I guess this means permanent changes in the way taxpayers are going to file future returns equivalent to about $1.6B of market cap.

Here's a monthly chart going back to 1996.  Funny how in one session, HRB has wiped out close to three years of gains in terms of price.  The stock is back to early 2013 levels on today's move.

I've drawn two trend lines which I feel are important.  One catches most of the important lows from 1996 through current, with the exception of the 99/00 and 08/09, where HRB overshot along with the rest of the market.

The other catches the overshoot lows during the above corrective periods.

Here's what you get with HRB at close to a 20% discount to yesterday's closing price, and at almost a 30% discount from it's all time high made in late 2015, early 2016 (amazing how things can change so drastically in a span of a few months):

  • One of the most widely recognized franchises in tax preparation
  • Cash and securities of close to $2B ( = to approximately 30% of market cap).  Net cash is about $1.5B (almost equivalent to today's loss in market cap)
  • Pretty steady annuity type free cash flow generation (approximately $600M in free cash flow generated over the last three years on average)
  • A company with a small enough market cap at $6.5B (about $5B after net cash) to get swallowed up by an interested purchaser
  • A company in the midst of transformative change post disposition of HRB bank

By my rough calculations, $600M in free cash flow / .08 perpetually  = $7.5B, vs. $5B = about a 33% discount in a no growth FCF scenario.

And I promise, all you will read this weekend is how horrible a performer HRB was this week."

The problem with the original March 4th post in a nutshell

I was using 2015 reported #s to arrive at a conclusion in a hurry without properly analyzing what changed between April 30, 2015, and March 4th.  There have been some significant changes to the business since the last 10K, including:

  • Divestiture of H&R Block Bank (and along with it, bank capital restrictions) - see excerpts from investor conference presentation below
  • Addition of a significant amount of debt and upsized credit facility in order to facilitate a $1.5B tender offer to repurchase shares - see excerpts from investor conference presentation below

The Overall Problem With My Initial Observations

I mentioned in my March 5th post that by my rough calculations, perpetual free cash flow of $600M discounted at 8% would theoretically be worth $7.5B, and in comparison to the current EV (as at 04/30/15) of $5B, the valuation was compelling.

If this was the case, I'd be stupid not to buy the stock.  I'd be buying $.65 $1's.  But, as I've come to realize so very often over time, there is no free lunch in the market.

First issue

I didn't have my facts straight!  EV was not $5B.  It was closer to $9B post transition.  The company assumed a significant amount of debt in order to facilitate a massive share buy back north of $30.

Second issue

Once I realized the above, I did a quick back of the napkin valuation using the new #'s.  FCF of $600M / .08 = $7.5B.  Compare $7.5B to current EV of $9B, and all of a sudden, no more discount. In fact, based on my arbitrary evaluation rules, I was now looking at a 20% premium even after a -20% plunge.

This didn't make intuitive sense to me.  How could a valuation produce a -35% discount less than 1 year earlier when all that's really happened is a change in capital structure over the same period?

The answer, I think, was due to inconsistencies in my valuation approach.  And in order to solve my issues, I had to go back to valuation 101.  I've used a combination of Damodoran + CFA L2 slides to sort this out.  I've deferred to a free cash flow to the firm model, whereby the value of the firm = FCFF (FCF's + at interest x) / (WACC), assuming g =0.  I'm going to solve for PV FCFF under g = 0, and compare PV FCFF to EV.

My Hypothesis

No matter how I slice the capital structure, if a business hasn't fundamentally changed over a sample time period, there should really be no change in overall valuation (at least in the very short term). The fact that I came up with different valuations for HRB when the only aspect of the business that changed was capital structure post divestiture of H&R bank was a signal that I have been doing something wrong in my overall evaluation process.

Case in point, here are three sample valuation scenarios using different capital structures:

Case 1 - Mkt cap of $5B, excess cash of $1B, EV = $5B - $1B = $4B

FCF's of $500M and no interest expense  $500M / 9% = $5.556B value of the firm

Case 2 - Mkt cap of $4B, excess cash of $0B, EV = $4B - $0B = $4B

FCF's of $500M and no interest expense  $500M / 9% = $5.556 value of the firm

In this case, the company has used $1B of excess cash to buy back shares

Case 3 - Mkt cap of $3B, excess cash of $0B, debt of $1B.  EV = $3B + $1B = $4B

FCF's of $500M and interest expense of $1B x 2.5% x (1-.35) = $16M

$516M / X% = $5.556B?

In this case, the company has used $1B of excess cash + assumed another $1B of debt to buy back shares

If I use WACC of 9%, I get a higher overall value of $5.74B vs. $5.56B above.  In theory, this result is intuitively correct, adding debt to the capital structure up to an "optimal" level should increase the value of the firm, equivalent to at least the PV of the tax shield on the interest expense.

I need to brush up on my theory again.  For my simplistic purposes, I solved for X%?  = WACC of 9.29% in order for the value of the firm to be equal to $5.56B under all three cases.

This result also made intuitive sense to me, b/c adding significant debt to the capital structure should also increase the overall riskiness of the firm.

Somewhere between the two extremes, higher WACC or higher valuation, is an actual valuation (I just don't know what it is, and neither does anyone else).

Tying This All Back to HRB

Ok, so here's my revised work on HRB with the above in mind:

I looked at two cases on a FCFF basis:

  • Pre-transition, using an 8% no growth WACC model, I get a firm value of $8.2B.  At peak EV valuation back in the summer of 2015, EV was around $8.8B.  No discount.  
  • Post transition, solving for X% = WACC to get PV FCFF of $8.2B, I get 8.67%.  This compares to current EV of $8.4B.  No discount (even after a 20% drop)

Overall thoughts on the above results:

I'm leaning towards equalizing WACC's rather than solving for WACC's to equalize valuations, simply because I believe that adding debt up to an optimal amount should increase a valuation.  In this case, using 8% post transition, I get a firm value of $8.9B vs. current of $8.4B (and I still don't get a compelling valuation).

The problem, I think, with my initial approach, is co-mingling the concepts of FCFF and FCFE.

FCFE is much more difficult to pin down, because in theory, FCFE needs to be adjusted by the impact of net borrowings to get a value to capitalize at Re, and as a business goes through different life cycle stages, net borrowings change drastically.  In addition, capitalized FCFE should be the value to equity.  The capitalized result can't really be compared to EV, which is the value to equity + bondholders.

FCFF on the other hand, is a more appealing concept to me.  FCFF =  cash flows adjusted for after tax interest expense, and is more symptomatic of what's available to all stakeholders, equity + bondholders.  

The fact that I've been using FCF's as published by gurufocus without adjusting for after tax interest expense, capitalizing this result, and adding/deducting net debt probably means I'm farther off in my attempts at valuations than I would like to be  Back to the drawing board (again).

Friday, 25 March 2016

The Becker Milk Company vs. Bill Ackman (& how you can buy Alimentation Couche Tard Shares at a steep discount)

It's funny how in the universe of daily financial muppetry that a day doesn't go by without news concerning Bill Ackman or Valeant, or Ackman's exploits concerning Valeant, or Valeant's exploits concerning Ackman. I'd hazard a guess that if Valeant isn't mentioned 50 times a day, I'd be underestimating.  And it's all noise. It's all irrelevant.

And hiding in the dark cobwebbed catacombs of non newsworthy reporting, is a tiny little company that is so completely boring and off the beaten path that it gets completely ignored.  The daily trading volume is piddly, usually less than a few 1,000 shares, the market cap is minuscule, around $26M, and control resides in the hands of the president/directors, per below.  So, in a nutshell, likely minimal institutional involvement as there's no liquidity.  There's also no growth. Good I say.

Here sits the Becker Milk Company, ready for any fool with half a brain (that's me) to discover if they can be bothered.

To me, this is a scenario straight out of the teachings of esteemed value investors like Seth Klarman.  While everyone around you is focused on Ackman's next trip to the toilet, ignore everyone waiting for Ackman to flush, and continue looking for $.50 $1's.

So what does the Becker Milk Company do?  They own 66 commercial plaza's and, for the most part, lease these plazas to, you guessed it, Alimentation Couche Tard.  In addition, they own land for development. And get this.  No debt!  The properties are mortgage free.

I ran my numbers as follows, and found a few anomalies, which I haven't got my head around yet.

First the numbers:

A few comments on the as reported numbers.  Sources  = MD&A's and annual financial statements.  For 2016, I annualized the 9 month interim financial statements.

  • The company reports Net Operating Income in it's MD&A's and I've used NOI  / Fair Value of Properties to come up with an imputed cap rate.  I get around 11% each year, which I think is too high.  Either the company's measure of NOI is too high, or the Fair Value of the properties is too low
  • The company also discloses the cap rates used to Fair Value the properties in its annual reports.  I've reproduced these cap rates above.  
  • Using the reported cap rates, I've recast NOI which is significantly lower than NOI as reported in the MD&A's.  So what gives?  More on this later.
  • Next, I've attempted to do a sum of the parts sensitivity using the highest and lowest cap rate ranges. I've compared FV per F/S to Capitalized higher NOI of say, $3.472M /  7.9% = $43.9M.  This leads me back to the what gives question regarding the discrepancy between reported NOI per MD&A and imputed NOI for cap rate valuation purposes
  • Next, I've done a lowest vs. highest sum of the parts analysis.  The 66 plazas aren't the only assets on the books, they also carry about 20K Alimentation Couche Tard shares, mortgages receivable, cash, and other short short term investments.  I haven't included the value of the undeveloped land.  They've also accrued a provision for deferred tax, which, I'm guessing will come into play at some point in the future if the individual properties are sold. To be conservative, I've deducted the entire amount of deferred tax liability.
  • I've then compared the net value under both lowest and highest scenarios to average capitalization since 2010.  It appears that the company has consistently traded at a discount to average capitalization depending on how you look at NOI (with the exception of 2014 & 2015 under the lowest NOI scenario).

So what gives with the NOI discrepancy?  The following is an excerpt from the most recently published quarterly:

The 9 month ended NOI, normalized for the tax provision, admin expense, expenses related to strategic review and fair value adjustment to investment properties was around $2.6M through Jan 31, 2016. Annualizing, I get $3.46M.  On the subject of the strategic review expense...this is what caught my eye in the first place:

So here's a potential catalyst in plain sight, which may or may not be contributing to the current discount between market capitalization and sum of the parts at the lowest end.  My guess is that the discount exists because of concentrated control and overall illiquidity.  The hint of a sale probably caused the stock to trade at a premium to market capitalization back in 2014/2015, and as discussions were terminated, the stock slid back into obscurity.

So, on the subject of what the correct NOI is, my guess is it's somewhere between $2.4M (imputed) and $3.4M as presented in the MD&A.  The company runs a pretty tight ship with less than 10 employees, so whether admin expense of $842K is relevant on a going concern basis is up for discussion. What certainly is non recurring are the strategic review expenses.  To a lesser extent, increases or decreases in the fair value adjustment to the properties are likely not all that relevant.  The properties will either be sold or they won't. If they aren't sold, the year to year FV adjustments are likely irrelevant.

In the worst case, assuming full tax hit on sale of $3.7M, I've calculated a 17% discount between sale proceeds of $31M vs. current capitalization of $26M.  On a simplistic basis, this would put a sale at around $17.35 per share.

But, my logic may be too simplistic, as I would assume that in the case of an acquisition of control of the shares, the acquiring company would inherit the legacy tax characteristics of the acquired portfolio of properties, and any tax hit would fall into the hands of the vending shareholders.  In this case, $3.7M deferred tax isn't relevant if the portfolio of properties isn't sold piece-meal.

Concluding Thoughts

I bought 225 shares across the three retirement accounts I manage last month at an avg cost of $13.70 per share.  The company pays an annual dividend of $.80, and seems to me to be a good bet on an eventual takeout.

I suppose the major risk to my hypothesis is that a sale does not go through, which would put short term pressure on the stock given it's illiquidity.  

Update 03/26/16

Figured I'd post a monthly chart which may or may not be relevant.  The following provides a pretty clear trend since 2002 (I've drawn 08/09 as an overshoot to trend).  Full disclosure, I have good to cancel orders in at $10.99 for the next addition to the overall position.  With any luck, these get hit on overall market weakness in the coming months.

Ideally, I'd like to bring the position up to a maximum of a 5% weighting across the accounts, which would allow me two more strategic buys.  Maybe the answer is, next 1/3 at $10.99, with a stink bid for the last 1/3 at $7.50 (50% below current).

Tuesday, 22 March 2016

re: Globe says Big Six ready to squeeze shorts

Quick tongue in cheek post on what I would call, extremely prescient and timely investment reporting.

The Globe published this piece in last week's newspaper, which was picked up by Stockwatch:

"Ready to squeeze shorts"

And here's BNS over the last year.  Notice the ferocity of the move over the last month:

The globe (and stockwatch) would have us believe that after a 24% move off the Feb lows, shorts are about to get squeezed.  Draw your own conclusions.

Friday, 18 March 2016

More on Student Transportation - Technical Trade

Quick follow up post on STB.  I often attempt to marry up fundamental analysis with trading ideas.

Here's a better look at the common shares since Feb 11th.  The scale of the move is actually ridiculous, and demonstrates just how yield hungry participants are, but at what cost?  The common hasn't been more overbought technically at any time over the last 1.5 years, and has virtually erased the entire 9 month move down since the last treasury offering in less than 3 weeks.  It's rallied all the way back up to previous support at around $6.80 / $7.00

Here's my hypothesis.  Management aren't stupid.  They've enjoyed a near 60% move in the span of a month off the February lows.  Now, if they're really smart, they'll take advantage of participant euphoria to do a secondary or treasury offering while price is high.  By my estimates, free cash flows are insufficient to cover the ongoing dividends (per my previous post).

So my play:

Bought to open, 5 Oct $5 puts at $.15

Bought to open, 3 July $6 puts @ $.25

Total capital at risk in my play account, $150

Stop-loss?  There is none.  I'm looking for a full retracement back to $5 within 6 months.  This is my m.o. in my play account.  Put on improbable sounding trades.  It's not that I know that $6.80/$7.00 is resistance. By all rights, the stock could blow right through previous resistance and retest the previous highs at $7.40. Entirely possible.  But is this a probable scenario?

Let's assume I'm a fool (fair assumption), and I'm flipping a coin.  I have 50/50 odds of the trade working. My risk on the trade is my premium.  -$150.

My possible reward on the trade, assuming the euphoria wears off, participants come to their senses, or some other unexpected event or set of events occurs (i.e., secondary offering)?

On a move to $5.50 (50/200 MA reconnect within 2-3 months), $.70 x 3 on the July $6's, and $.35 x 5 on the Oct $5's = +$210 + $175 = $385

Reward: Risk = 2.6 : 1

Now, let's assume my odds are better than 50/50.  When is the optimal time to put on an improbable sounding trade?  I'd offer after a 60% move off the lows, and with the Globe and Mail validating the move recommending that investors accumulate the stock at these levels.  So that's what I've done.

Sunday, 13 March 2016

Student Transportation Inc.: Globe and Mail cheerleads, I scratch my head in amazement

As a participant in the capital markets trying to make consistently intelligent decisions, sometimes a situation exists which is completely perplexing, and that situation tends to persist for longer than anyone could reasonably imagine. One such situation is Student Transportation Inc.

First, the charts.  STB has thee outstanding classes of securities currently trading, common shares, and two unsecured US $ convertible debentures.  I've charted all three comparatively to give some context as to what's happened recently.

The chart shows relative % price performance between the three securities over the last 5 years, but doesn't properly communicate the context of the move off of the February 11, 2016 lows for the common.  On Feb 11, 2016, the common got down to around $4.30 per share, and has rallied close to 60% currently.

And of course, the Globe and Mail published the following analysis (link here) shortly after the most recent earnings release, virtually endorsing the move and the overall stability of the company, copyright globe and mail:

I wrote the following email to Ms. Dowty in response to this article (which she never responded to):

"Hi Jennifer.  Read your article.  I don’t think you’ve looked far enough into the shenanigans under the surface.  All is not as it seems.

My comments:

  • How did they deliver higher adjusted EBITDA, and why is adjusted EBITDA even relevant in assessing the ongoing viability of the company?  They run a capital intensive business.  They likely have to replace their fleet after 12 years (average age of buses before operating costs start to increase significantly).  The average age of the fleet is just under 6 years.  How are they going to replace the fleet when they don’t generate meaningful cash flow from operations?  They should use free cash flow rather than adjusted EBITDA.
  • Here’s an extract from their annual information form illustrating the reconciliation between their EBITDA and cash for dividends.  Notice that there’s no line for depreciation expense in the reconciliation.  They’ve omitted it because it’s non-cash, but this is a sneaky tactic, considering the capital intensive nature of the fleet replacement requirements.  Depreciation will likely approximate capital spend, yet they’ve only deducted “replacement capital spending, net,” in the figure.
  • Another comment, why are operating leases not relevant?  They are below the adjusted EBITDA line, except that operating leases are the rents they pay for a portion of the fleet.  The lease expense payments are not 100% interest, but in the absence of them making the operating lease payments, you tell me if the lessor wouldn’t repossess the buses they haven’t made payments on?  This is just dumb and it’s misleading.  If we reclassify operating leases into adjusted EBITDA, Dan’s adjusted EBITDA is $73M vs $70M.  Not the quite the result management postulated.  But equity gobbled this up.
  • The other item that sticks out like a sore thumb in the reconciliation is the class B share repurchases.  More on this below…

Here's the extract from the 2015 annual information form:

Here's some relevant information on the Class B shares from the 2015 AIF:

Further comments to Ms. Dowty:

"To “put” the above into context, here’s the dual class capital structure

As you can see below, management owns 100% of the class B shares, distinct and separate from the common shareholders (public).  And in 2015, management put back $2M of stock, around 332K class B shares, at $2,013 /332 = $6 per share and paid dividends to management before the common shareholders got a dime? 

This company is anything but safe."

Obviously I got no response, but that's neither here, nor there.  The Globe needs to publish stories with sex appeal, and that's what they've done.

On the subject of all of the above, I began crunching some my own numbers just to see what it is I'm missing. It's entirely possible that I'm wrong here, and the market, even with STB's current 10% yield after a 60% rally off the lows, is not pricing in the future safety and the stability of the business.

For my purposes, I split my analysis into two parts:

1) Analysis of interest coverage  / ability to cover fixed charges, and analysis of free cash flow
2) Analysis of balance sheet liquidity, efficiency and overall safety

Here's Part 1 over the last 8 years (all data derived from the company's annual financial statements):

Analysis of interest coverage  / ability to cover fixed charges, and analysis of free cash flow

My observations are bolded at right, here they again:

  • Ms. Dowty and the CEO hint at pricing power in upcoming bid renewals.  I note the steady diminution of EBIT margins since 2008.  What pricing power?
  • How in the universe of lunacy is an industrial with 1 x interest coverage safe?
  • Notice the trend in growth in free cash flow? Me neither!
  • There hasn't been one year since 2008 where there was sufficient excess free cash flow to pay the common dividends.  You can see that the company has only been able to pay the generous level of common dividends by virtue of unimpeded and continuous access to equity and debt markets.

Here's Part 2 over the last 8 years:

Analysis of balance sheet liquidity, efficiency and overall safety

A bit of background to explain what I've done.  I took the as reported Sales and as reported net fixed assets over the last 8 years in order to determine fixed asset turnover.  Management chimes on about being an efficient operator, taking advantage of pricing power in its fixed bid contracts and leveraging operational efficiencies out of the fleet.

Here's the caveat, the fleet is not what they say it is.   Since 2008, the % of off balance sheet fleet has grown from 10% to 34% currently, so the as stated fixed asset turnover metric is incomplete.  Yes, the leased assets are not on their balance sheet, but they're still running the leased portion of the fleet in order to fulfill their service contracts.  On an as stated basis, F/A turnover looks strong, up from 1.77x in 2008 to 2.35x now, but I believe this is a function of accounting sleight of hand.  If one were to recast the "estimated" cost of additions to existing fleet by interpolating the % of leased fleet as additions to the owned fleet, the F/A turnover picture changes drastically.  The recast F/A turnover is around 1.78x, up marginally since 2008, but nowhere near the efficiency picture generated from not including leased fleet on the balance sheet.

Even more disturbing is management's propensity to exclude operating leases from their own adjusted EBITDA calculation.  This is a joke.

I'd hazard a layperson's guess that the reason for the lease % growth is to ensure that access to accomodative debt and equity markets continues unfettered, and having to buy additional fleet assets would require diversion of cash flow up front into property and equipment and away from common shareholders.

You can get an idea as to how significant a portion of the capital structure fleet leases are by observing the growth in off-balance sheet commitments since 2008, per below:

Lease commitments (premises + fleet) at the end of 2015 were close to 1/2 of total obligations in the capital structure, up from 30% in 2008.  On a leveraged basis, you can see that the company is running at close to 2x  debt:equity and 100% of debt:assets (excluding goodwill and intangibles).

Concluding Thoughts

I thoroughly disagree with Ms. Dowty's analysis, conclusions and recommendation.  I'd argue that this company is the polar opposite of "safe" and that investors should not even consider "accumulating shares at current levels".

On the contrary, if I were to make any sort of recommendation (and I am not qualified to do so, so take this with a grain of salt), it's for investors to steer clear of the shares, lest they wake up one morning to news of the "unexpected" impact of unaccomodative debt and equity markets forcing the company to cut or eliminate the dividend (or worse).

Thursday, 3 March 2016

The Intersection of (gulp) Technical Analysis, Globe and Mail, and Fairfax

I haven't posted in a while because I'm in the midst of tax season and I haven't had time to post much.

I stumbled across the following article from the Globe's Rob Carrick on Fairfax at the end of February. The article, in my opinion, is silly.  Judge for yourself.  Copyright and all rights reserved globe and mail.  Link here.

The reason I think this article is just plain silly (and I'm holding back here), is because Mr. Carrick attempts to makes a case for Fairfax being a hedge against a market crash, and I personally think that the concept of Fairfax being any sort of hedge is just wrong.  For starters, Mr. Carrick compares the performance of Fairfax vs. the S&P TSX composite.  Given that Fairfax's equity portfolio is primarily comprised of S&P500 constituents, and given that Mr. Watsa himself compares the performance of the hedged investment portfolio vs. the S&P 500 in his annual letters (see below), I wonder how the S&P TSX composite slipped into the comparative analysis at all, but this is probably just me being a nit-picky idiot.

Here's a monthly study of Fairfax juxtaposed to both the S&P500 and the TSX Capped Composite Index ETF.  Since 1998, Fairfax has, for the most part, lagged both the S&P500 & the TSX Capped Composite Index in terms of cumulative performance.

Relative to the S&P TSX Capped Composite, Fairfax has outperformed visibly since mid-2014, which makes intuitive sense given the Canadian market's exposure to all things commodities.  In terms of relative outperformance vs. the S&P 500?  Not happening.

Here's a closer look at the weekly performance vs. the S&P500 over the last 5 years.  With the exception of the last couple of months, no dice.  The S&P500 has outperformed.

Unquestionably though, Fairfax has performed exceptionally well since 2012, returning just over 12% on a compound annual basis, but facts are facts, this is about the same as that returned by the S&P500 over the same period (before considering FX return of a Canadian investor holding an S&P500 equivalent equivalent basket in USD vs. Fairfax).

And then there's the timing of Mr. Carrick's article, about 1 week removed from a $735M bought deal offering, the proceeds of which are to be used towards the acquisition of shares of Eurolife Insurance Group Holdings S.A. (a Greek insurance co.) and ICICI Lombard General Insurance (an Indian insurance co.).

On the subject of the timing of the article and the prescience of the concept of Fairfax as a hedge, my thoughts are as follows.

If the entire investment hypothesis is "buy Fairfax as a hedge because Fairfax has hedged close to 100% of its invested float, and everyone in the market (i.e., looney land) piles in believing it's a hedge that will work as a hedge, at what point does the idea stop being a hedge? i.e., at what point does the theoretical price of being a hedge not become a hedge?  The stock was bid up close to $800 in late January as the market nose-dived, but the price of the hedge became stupid relative to what was actually being hedged.

Case in point, the invested float is close to100% hedged. This has cost premium in order to maintain over time. So with no alpha from the invested float (and arguably no investment income ‎either as it gets eaten up by the cost of maintaining the hedge), investors are left with exposure to the insurance businesses only, his other bets (Greek bets, blackberry, etc), and a smattering of esoteric bets with un-quantifiable payoffs.  I'm certainly not smart enough to take a stab at what the deflation bets may pay-off over time.

Personally, I would prefer to own Berkshire. Yes, you are exposed to the equivalent of owning SPY inherent in owning Berkshire, but the lower SPY goes (and the lower Berkshire goes), the more sense it makes to buy equities as they get less risky.

I was reading prefblog this morning, and couldn't help but notice that James Hymas alluded to the following regarding Fairfax's bought deal:

So in the context of the above, here is my rebuttal to Mr. Carrick's very timely buy Fairfax as a hedge argument:

The bought deal unsold shares means that the underwriters have inventory to sell‎, and given that the stock isn't the most liquid on the best of days, this could be an opportunity to revisit wanting to own Fairfax at the right price. 

I think good to cancel orders just above $640 make sense given the supply overhang. Technically, it may well become a self fulfilling prophecy, as participants start to realize that the underwriters have inventory they need to sell, this could result in a good chunk of pressure on the common in my opinion as they front run the underwriters and force their hands.

Avg trading volume is around 27k shares/day. 27k x $709 / sh = ‎$19.3m notional value per day.Unsold inventory = $735m x 50% = ‎$367.5m

Days to sell:$367.5 / $19.3m per day = about 20 days assuming the market can absorb it over a month... which is doubtful. I'm guessing at 20 days with no further pressure on the stock.

Here's where technical analysis comes in handy. It can be used to identify possible supply/demand zones in terms of support. 

My target on the underwriter's puking? Between $625 & $640 (about $70-$85 below current):