Prem Watsa är förberedd för nästa blodbad

Fairfax Financial publicera nyligen sin årsrapport och denna rapport är av någon anledning (okänd) inte lika populär som Berkshires årsrapport. Fairfax är förberedd för nästa ekonomiska kris med en stor kassa, en helt hedgad aktieportfölj och gigantiska derivat kontrakt som ökar i värde vid händelsen av en djup deflationär kris. Prem Watsas Fairfax är ett av de mest välskötta försäkringsbolagen i världen. Tyvärr handlas bolaget till ett högt p/b ratio, vilket är väldigt tråkigt.

För den intresserade= en artikel om vem Prem Watsas är.

Jag undrar om man ska köpa Fairfax eller ej. Hade p/b ration varit 0,8-1,1 hade det varit en "no brainer". Hade p/b ration varit 1,2 hade det varit godtagbart, men tyvärr överstiger ration 1,4. (beräkningen här är felaktig, se nästa inlägg för rättelse)

Nu till Prem Watsas tankar.

Chairman`s letter to shareholders, 2015 mars, Fairfax;

Om IT-bubblan 2.0

"The Wall Street Journal says that worldwide there are 73 companies that are valued at more than $1 billion by venture capital investors, versus half that number prior to the dot.com crash. The third column of the table above shows the ratio of the latest valuation of each company to its total cumulative equity funding raised from inception. So Uber has a valuation of $41.2 billion as compared to the cumulative equity capital raised of $2.8 billion – i.e., the valuation is a hefty 14.7 times all of the money that was raised by the company. We’re confident that most of this will end as other speculations have – very badly!"

Caveat Emptor ('let the buyer beware')
We had to endure years of pain before harvesting the gains of 2007 and 2008. While we hope the world economy muddles through, we continue to protect our company from the significant unintended consequences that prevail today.

The CAPE (Cyclically Adjusted Price Earnings) Ratio for the S&P500 is currently at 28 times. It has been higher only twice before; both times ended badly. The first time was in 1929 and the second time during the dot.com boom of 1999 to 2002. The rising U.S. dollar (with over 40% of the average S&P500 companies’ earnings coming from abroad) and the current record after-tax profit margins, combined with deflation, could result in significant declines in the earnings of the S&P500 companies – just as the index hits record highs. We say ‘‘caveat emptor’’, and continue to be very cautious about our equity positions. I have reminded you many times in past Annual Reports of the warning from the distant past from our mentor Ben Graham: ‘‘Only 1 in 100 survived the 1929 – 1932 debacle if one was not bearish in 1925’’.

(vän av ordning påpekar förstås att räntorna är låga, vilket motiverar oändligt höga priser på bolag)

Om deflation och Fairfax exponering mot ett scenario med hög deflation
"Hedging our common equity exposures has been very costly for us over the last five years – particularly in 2013. However, we did warn you that we wanted to be safe rather than sorry – our time will come again! We have worried about deflation in the past few years in our Annual Reports – it is now upon us! In spite of QE1, QE2 and QE3 and some twists, we saw deflation in the U.S. in the second half of 2014, as shown in the table below:

(...) We have had deflation at an annualized rate of 3% in the second half of 2014 in the U.S.! And it is not going away. In fact, in January 2015, the U.S. reported its first year-over-year decline in the CPI index since 2009 of 0.1%. In Europe, we had deflation of 0.5% in the second half of 2014, as shown in the table below:

(...) With deflation in the air, our CPI-linked derivatives, with a notional value of $112 billion, have come to life. In the fourth quarter of 2014, these derivatives doubled in market value from $110 million to $238 million as shown in the table below – but they are still only at 1⁄3 of our cost!

(...)While the deflation derivatives are very volatile, if we are right, these derivatives may become as valuable as our CDS derivatives became in 2007/2008. In fact, our CDS derivatives first began moving upwards in the first quarter of 2007 with the demise of New Century Capital.

(...) Given our concerns about China, which we detailed in last year’s Annual Report, we have for a few years now expected commodity prices to collapse. And collapse they did in 2014, as shown in the table below:"

Vad oroar sig Prem Watsa för? Förutom framtida deflation och  IT-bubbla 2.0 (artikel)?

Chairman`s letter to shareholders, 2014 mars (Fairfax);

"Last year, I quoted a major U.S. bank CEO who famously said, ‘‘As long as the music is playing, you have to get up and dance.’’ You can see how difficult it is not to dance! And what a party it was in 2013! The S&P went up 30% while the Russell 2000 was up 37%. As discussed earlier, the high tech stocks were soaring – particularly those with no earnings and very little revenue. Tesla Motors, for example, sold 22,477 cars in 2013 but commands a market cap of $31 billion, while Fiat, which we like, sold 4.4 million cars but has a market cap of only $14 billion. Amazon has a market cap of $167 billion but has not earned more than $1.2 billion in any one year since it went public in 1999. Facebook has recently made a $19 billion offer for WhatsApp – a company with approximately 50 employees and $20 million in revenue. This is the poster child for the excesses that prevail in the tech world!

Signs of speculative excesses are everywhere – even though the U.S. economy is still very tepid. The world might muddle through as it did in 2013, but the grand disconnect between stocks and bonds, and the real economy, continues. You will remember, we consider the 2008 – 2009 contraction to be a one in 50 or a one in 100 year event – similar to the 1930s in the U.S. and Japan since 1990. Because of massive fiscal and monetary stimulus in the U.S., the economic consequences have yet to play out. We continue to worry about the unintended consequences, and continue to hedge our common stock portfolio for the reasons discussed in our last few Annual Reports. Just to highlight a few of them:

1. The U.S. total debt/GDP ratio is at a very high level and significant deleveraging is yet to come. This applies to Europe and the U.K. also.

2. Economic growth in the Western world is still very weak in spite of huge monetary and fiscal stimulus by the Fed and the ECB. In nominal and real terms, annually since 2009 the U.S. only grew by 3.9% and 2.3% respectively (while Europe grew by 1.6% and 0.5% respectively). In spite of this anemic growth, after-tax profit as a percentage of GDP in the U.S. is at the highest level of the last 60 years.

3. Inflation in the U.S. and Europe, after five years of huge fiscal stimulus, is still in the 1% area – and falling. We remind you that it took five years after the stock market crash in 1990 before Japan saw deflation – and this deflation continued for most of the following 19 years.

4. QE1, QE2 and QE3 have helped the financial markets but have not worked in the real economy. What happens when everyone realizes that the Fed and the ECB have no more bullets?!

5. There is a monstrous real estate and construction bubble in China, which could burst anytime. It almost did in 2011 but China increased its credit growth significantly since then.

6. Reaching for yield continues everywhere, with junk debt at record low yields, emerging market debt in U.S. dollars at very low yields and corporate bonds at very low spreads. Many emerging market countries also have significant external debt in foreign currencies. All vulnerable to a ‘‘risk off’’ run on the bank!"