Académique Documents
Professionnel Documents
Culture Documents
6:156:20
6:206:40
Funds managed by Mr. Tilson are long BRK, FFH, TGT and short MBI.
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Introduction
What Is Value Investing? Attempting to buy a stock (or other financial asset) for less than its worth Contrast with greater-fool investing False distinction between growth vs. value investing o All intelligent investing is value investing. Charlie Munger Intrinsic value Margin of Safety Does not necessarily mean buying lousy businesses at low valuation ratios Three Steps to Evaluating Stocks Circle of competence o Do we understand this company and its industry deeply? o Can we make reasonable projections about the companys future? o Keep it simple. Good investment ideas can usually be explained in 30 seconds Company and industry evaluation o Is this a good business? Does it have sustainable competitive advantages? High returns on capital? Solid, steady growth? Healthy balance sheet? Strong free cash flow? o Often involves company visit, management and customer interviews. o Is this a good industry? Are the trends favorable? What are the competitive dynamics? o Look for an informational edge, often via proprietary sources or scuttlebutt research. Evaluation of management o Are they good operators? o Are they good capital allocators? o Are they trustworthy and shareholder friendly?
Trembling With Greed Is the stock really, really cheap? What is your variant perception? Focus Investing When you get an easy pitch, swing hard o Owning two stocks eliminates 46% of non-market risk of just owning one stock o Four stocks eliminates 72% of the risk o Eight stocks eliminates 81% of the risk o 16 stocks eliminates 93% of the risk o 32 stocks eliminates 96% of the risk o 500 stocks eliminates 99% of the risk
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Variant Perceptions The hardest thing over the years has been having the courage to go against the dominant wisdom of the time, to have a view that is at variance with the present consensus and bet that view. The hard part is that an investor must measure himself not by his own perceptions of his performance but by the objective measure of the market. The market has its own reality. In an immediate, emotional sense, the market is always right. So if you take a variant point of view, you will always be bombarded for some period of time by the conventional wisdom as expressed by the market. Michael Steinhardt Its much warmer inside the herd. Jean-Marie Eveillard If you just do what other people do, you will get the results other people get. Bill Miller Gaining an Edge Three ways to beat the market: better stock picking, better market timing or more portfolio leverage. Size Time arbitrage o Time arbitrage just means exploiting the fact that most investors institutional, individual, mutual funds or hedge funds tend to have very short-term time horizons, have rapid turnover or are trying to exploit very short-term anomalies in the market. So the market looks extremely efficient in the short run. In an environment with massive short-term data overload and with people concerned about minute-to-minute performance, the inefficiencies are likely to be looking out beyond, say, 12 months. Bill Miller Concentration Analytical Experience Emotional Informational Traits of Successful Money Managers The right approach 1. Think about investing as the purchasing of companies, rather than the trading of stocks. 2. Ignore the market, other than to take advantage of its occasional mistakes. o Basically, price fluctuations have only one significant meaning for the true investor. They provide him an opportunity to buy wisely when prices fall sharply and to sell wisely when they advance a great deal. At other times, he will do better if he forgets about the stock market. Ben Graham
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3. Only buy a stock when it is on sale. o To distill the secret of sound investment into three words, we venture the motto, MARGIN OF SAFETY. Ben Graham 4. Focus first on avoiding losses, and only then think about potential gains. o We look for businesses that in general arent going to be susceptible to very much change. It means we miss a lot of very big winners but it also means we have very few big losers.... Were perfectly willing to trade away a big payoff for a certain payoff. Buffett 5. Invest only when the odds are highly favorable -- and then invest heavily. 6. Do not focus on predicting macroeconomic factors. o I spend about 15 minutes a year on economic analysis. The way you lose money in the stock market is to start off with an economic picture. I also spend 15 minutes a year on where the stock market is going. Peter Lynch 7. Be flexible! It makes little sense to limit investments to a particular industry or type of stock (large-cap growth, mid-cap value, etc.). o We employ no rigid industry, sector, or position limits. Bill Miller 8. Shun consensus decision-making. o My idea of a group decision is looking in a mirror. Buffett The right person Most successful investors have the following characteristics: 1. They are businesspeople, and understand how industries work and companies compete. o I am a better investor because I am a businessman, and a better businessman because I am an investor. Buffett 2. They have a lot of intellectual horsepower. o However, investing is not a game where the guy with the 160 IQ beats the guy with the 130 IQ Buffett 3. They are good with numbers -- though advanced math is irrelevant -- and are able to seize on the most important nuggets of information in a sea of data. 4. They are simultaneously confident and humble. 5. They are independent, and neither take comfort in standing with the crowd nor derive pride from standing alone. 6. They are patient. (Long-term greedy, as Buffett once said.) Templeton noted that, if you find shares that are low in price, they dont suddenly go up. Our average holding period is five years. 7. They make decisions based on analysis, not emotion. 8. They love what they do. o Im the luckiest guy in the world in terms of what I do for a living and I wouldnt trade my job for any job and I feel like tap dancing all the time. Buffett
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Thoughts on Valuation
Discounted Cash Flow Present value of a 10-year Treasury note Same analysis for a stock or bond Focus 90% of your attention here Public Company Comps Make sure comps are valid Make sure entire sector isnt misvalued Acquisition Comps What multiples are acquirers (other companies or LBO firms) paying for similar companies? Strategic vs. financial buyers Historical Comps What multiples has this company traded at in the past? Has the business changed? Careful to exclude bubble periods Sum of the Parts Often useful to break business down into its parts and value each part separately Rules of Thumb Pay no more than 10x trailing earnings (normalized) for a fair business and no more than 20x trailing earnings for even the greatest business Paychex, Google, eBay
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Overconfidence Projecting the immediate past into the distant future Herd-like behavior (social proof), driven by a desire to be part of the crowd or an assumption that the crowd is omniscient Misunderstanding randomness; seeing patterns that dont exist Commitment and consistency bias Fear of change, resulting in a strong bias for the status quo Anchoring on irrelevant data Excessive aversion to loss Using mental accounting to treat some money (such as gambling winnings or an unexpected bonus) differently than other money Allowing emotional connections to over-ride reason Fear of uncertainty Embracing certainty (however irrelevant) Overestimating the likelihood of certain events based on very memorable data or experiences (vividness bias) Becoming paralyzed by information overload Failing to act due to an abundance of attractive options Fear of making an incorrect decision and feeling stupid (regret aversion) Ignoring important data points and focusing excessively on less important ones; drawing conclusions from a limited sample size Reluctance to admit mistakes After finding out whether or not an event occurred, overestimating the degree to which one would have predicted the correct outcome (hindsight bias) Believing that ones investment success is due to wisdom rather than a rising market, but failures are not ones fault Failing to accurately assess ones investment time horizon A tendency to seek only information that confirms ones opinions or decisions Failing to recognize the large cumulative impact of small amounts over time Forgetting the powerful tendency of regression to the mean Confusing familiarity with knowledge
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Overconfidence
1) 2) 3) 4) 19% of people think they belong to the richest 1% of U.S. households 82% of people say they are in the top 30% of safe drivers 80% of students think they will finish in the top half of their class When asked to make a prediction at the 98% confidence level, people are right only 60-70% of the time 5) 68% of lawyers in civil cases believe that their side will prevail 6) Doctors consistently overestimate their ability to detect certain diseases 7) 81% of new business owners think their business has at least a 70% chance of success, but only 39% think any business like theirs would be likely to succeed 8) Graduate students were asked to estimate the time it would take them to finish their thesis under three scenarios: best case, expected, and worst case. The average guesses were 27.4 days, 33.9 days, and 48.6 days, respectively. The actual average turned out to be 55.5 days. 9) Mutual fund managers, analysts, and business executives at a conference were asked to write down how much money they would have at retirement and how much the average person in the room would have. The average figures were $5 million and $2.6 million, respectively. The professor who asked the question said that, regardless of the audience, the ratio is always approximately 2:1 10) 86% of my Harvard Business School classmates say they are better looking than their classmates
Can lead to straying beyond circle of competence and excessive leverage, trading & portfolio concentration
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Herd-Like Behavior
A social proof phenomenon From 1984 through 1995, the average stock mutual fund posted a yearly return of 12.3% (versus 15.4% for the S&P), yet the average investor in a stock mutual fund earned 6.3%. That means that over these 12 years, the average mutual fund investor would have made nearly twice as much money by simply buying and holding the average mutual fund, and nearly three times as much by buying and holding an S&P 500 index fund. Over the same period, the average bond mutual fund returned 9.7% annually, while the average investor in a bond mutual rose earned 8% annually A far narrower gap than equity funds Bonds are easier to value and thus bond markets are not as susceptible to bubbles and crashes
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Source: Solomon E. Asch, Effects of group pressure upon the modification and Distortion of judgment, in h. Guertzkow, ed., Groups, leadership, and men (Pittsburgh, PA: Carnegie press, 1951).
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More on Bubbles
Overconfidence, social proof, misunderstanding random bunching, overweighting vivid & recent data lollapalooza effect Wall Street Journal, 4/30/04: Speculators do know that it's important to get out, however -- that's the lesson they took away from the cratering of the dot-com highfliers. And they appear to believe that they will be able to get out before a stock craters, as illustrated by numerous trading experiments conducted by Vernon Smith, a professor at George Mason University who shared in the 2002 Nobel Prize for economics. In these experiments, participants would trade a dividend-paying stock whose value was clearly laid out for them. Invariably, a bubble would form, with the stock later crashing down to its fundamental value. Participants would gather for a second session. Still, the stock would exceed its assigned fundamental value, though the bubble would form faster and burst sooner. "The subjects are very optimistic that they'll be able to smell the turning point," says Mr. Smith. "They always report that they're surprised by how quickly it turns and how hard it is to get out at anything like a favorable price." But bring the participants back for a third session, and the stock trades near its fundamental value, if it trades at all, the professor's studies show.
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Loss Aversion
People feel pain of loss twice as much as they derive pleasure from an equal gain Case study: two six-sided dice, A and B. A is marked 1-1-1-1-1-13. B is marked 2-2-2-2-2-2. People prefer B, though expected value of A is higher (3 vs. 2)
Helps to be brain damaged
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Commitment
A study done by a pair of Canadian psychologists uncovered something fascinating about people at the racetrack: Just after placing a bet, they are much more confident of their horses chances of winning than they are immediately before laying down that bet. The reason for the dramatic change isour nearly obsessive desire to be (and to appear) consistent with what we have already done. Once we have made a choice or taken a stand, we will encounter personal and interpersonal pressures to behave consistently with that commitment. Those pressures will cause us to respond in ways that justify our earlier decision. Influence Leads to information distortion. "Information that is consistent with our existing mindset is perceived and processed easily. However, since our mind strives instinctively for consistency, information that is inconsistent with our existing mental image tends to be overlooked, perceived in a distorted manner, or rationalized to fit existing assumptions and beliefs. Thus, new information tends to be perceived and interpreted in a way that reinforces existing beliefs. Grizelda and Beth study Example of commitment and also brains have a remarkable talent for reframing suboptimal outcomes to see setbacks in the best possible light. You can see it when high-school seniors decide that colleges that rejected them really weren't much good. Case study: I made a big mistake in not selling several of our larger holdings during The Great Bubble. If these stocks are fully priced now, you may wonder what I was thinking four years ago when their intrinsic value was lower and their prices far higher. So do I. Warren Buffett, 2003 Berkshire Hathaway annual report One of the great dangers of speaking/writing publicly about ones positions.
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Anchoring
Anchoring on purchase price When I bought something at X and it went up to X and 1/8th, I sometimes stopped buying, perhaps hoping it would come back down. Weve missed billions when Ive gotten anchored. I cost us about $10 billion [by not buying enough Wal-Mart]. I set out to buy 100 million sharers, pre-split, at $23. We bought a little and it moved up a bit and I thought it might come back a bit who knows? That thumb-sucking, the reluctance to pay a little more, cost us a lot. -- Buffett Selling Dennys at different prices Anchoring on historical price (or typical price) Refusal to buy a stock today because it was cheaper last year or has a high price per share (Berkshire Hathaway) Refusal to sell because it was higher in the past Anchoring on historical perceptions Dell is a commodity box maker or MBIA is a triple-A company Anchoring on initial data/perceptions Restaurant descriptions experiment Anchoring on meaningless numbers Taversky and Kahneman study: spin the wheel and estimate the percentage of countries in the UN that are African
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Other Mistakes
Mental accounting Invest speculatively with found money or small amounts of money Holocaust payments There is no such thing as house money Emotional connections Paying more for a new car when upgrading I like McDonalds food; Cantalupos gift to my children Discount on Cutter & Buck clothing (reciprocity) Becoming friends with management Fear of uncertainty Embracing certainty (however irrelevant) The future is uncertain and hard to predict, where as the past is known Focus on stock charts (irrelevant)
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Failing to Act
Failing to Buy Status quo bias Regret aversion Choice paralysis Information overload Hope that stock will go down further (extrapolating recent past into the future; greed) or return to previous cheaper price (anchoring) Regret at not buying earlier (if stock has risen) Office Depot at $8 (vs. $6) Failing to Sell Status quo bias Regret aversion Information overload Endowment effect Vivid recent evidence (if stock has been rising) Dont want to sell at a loss (if stock has been falling) If I didnt own it, would I buy it? Or, If the stock dropped 25%, would I enthusiastically buy more?
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Recommended Reading
(in rough order of priority)
Poor Charlies Almanack Influence, Robert Cialdini Why Smart People Make Big Money Mistakes, Belsky and Gilovich The Winners Curse, Thaler Irrational Exuberance, Shiller Against the Gods: The Remarkable Story of Risk, Bernstein See overview of the field at http://www.investorhome.com/psych.htm
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T2 Partners LLC
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T2 Partners LLC
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The Basics
Stock price (10/8/08): $118,000 $3,930 for B shares Shares outstanding: 1.55 million Market cap: $183 billion Total assets (Q2 08): $278 billion Total equity: $118 billion Book value per share: $76,129
T2 Partners LLC
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2004 Insurance Group: Premiums Earned GEICO General Re Berkshire Reinsurance Group Berkshire H. Primary Group Investment Income Total Insurance Oper. Inc. Non-Insurance Businesses: Finance and Financial products McLane Company Shaw Industries MidAmerican/Utilities/Energy Other businesses Total Non-Insur. Oper. Inc. Total Operating Income
T2 Partners LLC
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2005
2006
2007
970 1,221 3 -334 417 -1,069 161 235 2,824 3,480 4,375 3,533
Insurance Group: Premiums Earned GEICO General Re Berkshire Reinsurance Group Berkshire H. Primary Group Investment Income Total Insurance Oper. Inc. Non-Insurance Businesses: Finance and Financial products Marmon McLane Company MidAmerican/Utilities/Energy Shaw Industries Other businesses Total Non-Insur. Oper. Inc. Total Operating Income
Q1 2005
Q2 2005
Q3 2005
Q4 2005
Q1 2006
Q2 2006
Q3 2006
Q4 2006
Q1 2007
Q2 2007
Q3 2007
Q4 2007
Q1 2008
Q2 2008
407 308 295 325 335 158 312 358 237 314 311 288 186 298 169 30 230 157 138 19 43 -389 -7 71 106 177 42 102 553 356 183 335 143 140 -1,635 283 94 137 735 692 29 79 154 49 63 77 90 18 37 -10 190 35 43 108 25 81 851 900 942 1,018 1,102 1,103 1,093 1,078 1,236 1,217 1,227 1,089 1,204 787 1,279 1,429 -897 1,722 1,529 1,676 2,530 2,416 2,005 2,210 1,969 1,948 1,371 1,764
199
199
207
217
251
343
282
281
242
277
273
214
69 59 53 36 55 56 141 100 141 141 418 278 88 139 145 113 155 169 514 486 557 430 671 364 861 1,011 1,032 1,064 1,309 1,517 2,140 2,440
68 58 72 50 52 50 416 364 513 372 481 408 132 91 111 125 109 138 916 632 904 895 848 686 1,572 1,761 1,536 1,736 1,824 1,631
135 2,786 2,838 3,193 4,102 4,177 3,541 3,946 3,793 3,579 3,001 3,632
T2 Partners LLC
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The Earnings of Berkshires Operating Businesses Have Grown at a Very High Rate And Growth is Accelerating
Note: CAGR: 1965-1979, 1979-1993, 1993-2007. EPS is pretax and net of minority interests.
T2 Partners LLC
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* 5-year compound annual growth rate of EBIT (earnings before interest and taxes) through Q3 07. Berkshires figure is pre-tax EPS excluding all income from investments.
T2 Partners LLC
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Source: Capital IQ
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Valuing Berkshire
Over the years we'veattempt[ed] to increase our marketable investments in wonderful businesses, while simultaneously trying to buy similar businesses in their entirety. 1995 Annual Letter In our last two annual reports, we furnished you a table that Charlie and I believe is central to estimating Berkshire's intrinsic value. In the updated version of that table, which follows, we trace our two key components of value. The first column lists our per-share ownership of investments (including cash and equivalents) and the second column shows our per-share earnings from Berkshire's operating businesses before taxes and purchase-accounting adjustments, but after all interest and corporate expenses. The second column excludes all dividends, interest and capital gains that we realized from the investments presented in the first column. 1997 Annual Letter
In effect, the columns show what Berkshire would look like were it split into two parts, with one entity holding our investments and the other operating all of our businesses and bearing all corporate costs. 1997 Annual Letter
T2 Partners LLC
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T2 Partners LLC
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Investments Per Share $47,460 $52,507 $62,273 $66,967 $74,129 $80,636 $90,343
Pre-tax EPS Excluding All Intrinsic Income From Value Investments* Per Share -$1,289 $64,000 $1,479 $70,000 $2,912 $97,000 $3,003 $103,000 $3,600 $117,300 ** $5,200-$5,400 143,000-144,400 $5,500-$5,700 *** 156,300-158,700
Subsequent Year Stock Price Range $59,600-$78,500 $60,600-$84,700 $81,000-$95,700 $78,800-$92,000 85,700-$114,200 107,200-151,650 ?
* Unlike the table on page 4 of the 2007 Annual Report, we include earnings from Berkshires insurance businesses. ** Actual result was $6,492, but we reduce this to assume the 2nd-worst year ever for super-cat losses. *** Actual result was $6,270 but we reduce the pre-tax, pre-investment-income margins of the insurance businesses by 400 basis points (from 14% to 10%) to reflect Buffetts guidance in the Annual Report.
T2 Partners LLC
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Berkshire Is At Least 25% Below Intrinsic Value, Near the Most Undervalued Its Been in the Past 12 Years
Intrinsic value based on YE 2007 estimate of $157,000, which doesnt factor in this years events, most importantly likely gains from $50+ billion of investments & commitments
Intrinsic Value*
T2 Partners LLC
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* Investments per share plus 12x pre-tax earnings per share (excluding all income from investments) for the prior year.
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Market cap: $183B 2007 company earnings: approximately $11.5B adjusted for normal super-cat losses and pricing, and for unusually high capital gains in 2007 Plus 2007 estimated look-through after-tax earnings after cash distributions: $2.2B Equals total pro-forma earnings of $13.7B P/E: $183B / $13.7B = 13.4x
T2 Partners LLC
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12 10
$B
8 6 4 2 0 (2) (4) (6) Acquisitions Net Stock Purchases 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 H1 08
Hes doing a good job but the cash is coming in so fast! A high-class problem Markets have a way of presenting big opportunities on short notice Current chaos, junk bonds in 2002; cheap blue-chip stocks in 2005-07 Buffett has reduced average maturity of bond portfolio so he can act quickly
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T2 Partners LLC
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T2 Partners LLC
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Catalysts
Continued earnings growth of operating businesses New equity investments Additional cash build Potential for more meaningful acquisitions and investments If the credit crunch continues or worsens, this becomes more likely
T2 Partners LLC
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Risks
Major recession impacts earnings Recent investments turn out badly No catalysts Intrinsic value will likely continue to grow nicely Buffetts health In good health; turned 78 last Aug. 30th Strong board and succession plan in place Little Buffett premium in stock today Major super-cats Cant find place to invest cash Not a problem currently There are worse things than sitting on a lot of cash Buffett has said Berkshire will distribute cash if he doesnt think he can allocate it
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T2 Partners LLC
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Conclusion
Cheap stock: 75-cent dollar, giving no value to redent investments and immense optionality Extremely safe: huge cash and other assets provide downside protection
T2 Partners LLC
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T2 Partners LLC
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T2 Partners LLC
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Fairfax and Its Primary Subsidiaries Had a Great 2007 and Growth and Underwriting Trends Have Been Strong for Many Years
1. Crum and Forster 6 month 2008 results include 20.6 points related to a reinsurance commutation and a reinsurance settlement.
T2 Partners LLC
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Following is a summary of Fairfax's financial results for the third quarter and first nine months of 2008 and 2007:
Total revenue Earnings before income taxes and non-controlling interests Net earnings Net earnings per share Net earnings per diluted share
THREE MONTHS ENDED NINE MONTHS ENDED ---------------------------------SEPTEMBER 30 SEPTEMBER 30 ----------------------(unaudited -$ millions, except per share amounts) 2008 2007 2008 2007 ------------------2,155.1 1,871.2 5,791.2 5,076.3
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Combined ratios of the company's insurance and reinsurance operations were as follows for the third quarter and first nine months of 2008 and 2007:
THREE MONTHS ENDED -----------------SEPTEMBER 30 ----------------------2008 ------113.3% 128.5% 85.0% 113.0% 111.9% 115.5%(2) 2007 ---88.5% 96.5% 68.0% 97.9% 94.6% 94.8%
NINE MONTHS ENDED ----------------SEPTEMBER 30 ----------------------2008 ------103.9% 121.8%(1) 80.6% 103.6% 104.5% 107.4%(1)(2) 2007 ---89.6% 95.3% 82.6% 96.1% 95.5% 94.3%
Insurance Reinsurance
Canada (Northbridge) U.S. (Crum & Forster) Asia (Fairfax Asia) - OdysseyRe - Other
Consolidated
(1) Excluding the impact of Crum & Forster's reinsurance commutation in the second quarter and Crum & Forster's lawsuit settlement in the first quarter, the combined ratios in the first nine months of 2008 were 107.6% and 104.2% for Crum & Forster and Fairfax respectively. (2) Prior to giving effect to catastrophe losses related to Hurricanes Ike and Gustav in the third quarter of 2008, the consolidated combined ratios were 93.2% and 99.8% in the third quarter and the first nine
months respectively.
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T2 Partners LLC
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T2 Partners LLC
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Fairfaxs CDS Portfolio Has Paid Off In a Big Way And We Think Theres More Upside As the Credit Crunch Worsens
As of 9/19/08, Fairfax had harvested more than $1.85 billion in cash from its CDS portfolio since mid-2007, representing gains of $1.65 billion. It had $12.9 billion notional amount of credit default swaps, valued at $685M remaining. Its 23 CDS positions include (in descending order): AIG, Societe Generale, Fannie Mae, Freddie Mac, XL Capital, Barclays, Goldman Sachs, Genworth, MGIC, ACE, Washington Mutual, Swiss Re, Bank of America and PMI.
T2 Partners LLC
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($ millions) Original acquisition cost 25.7 95.5 22.8 59.4 38.1 ---241.5 Excess of sale proceeds over original acquisition cost 173.6 789.5 167.2 536.3 141.6 -----1,808.2
Notional amount FY Q1 Q2 Q3 Q4 2007 2008 2008 2008 to October 24 965.5 3,830.0 855.0 3,580.9 1,793.2 ------11,024.6
Cumulative sales since inception Remaining credit default swap positions at October 24, 2008 Total realized and unrealized from inception
9,834.7 -------
191.5 -----
404.6(2) -----
20,859.3 --------
433.0 -----
2,645.8 -------
2,212.8 -------
(1) Market value as of October 24, 2008 (2) Unrealized gain (measured using original acquisition cost) as of October 24, 2008 The company has sold $11.02 billion notional amount of credit default swaps since inception with an original acquisition cost of $241.5 million for cash proceeds of $2.05 billion and a cumulative gain (measured using original acquisition cost) of $1.81 billion. As of October 24, 2008, the remaining $9.83 billion notional amount of credit default swaps had a market value of $596.1 million and an original acquisition cost of $191.5 million, representing an unrealized gain (measured using original acquisition cost) of $404.6 million. As of October 24, 2008, total cash proceeds realized from the sale of credit default swaps was $2.05 billion, compared to the total original acquisition cost (the aggregate acquisition cost of the credit default swaps sold and the remaining credit default swaps) of $433.0 million.
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T2 Partners LLC
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T2 Partners LLC
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Fairfax Is Trading At a Low Multiple of Book Value, Even If the Entire CDS Portfolio is Excluded
Price (11/4/08): $283.65 Market cap: $4.96 billion Tangible book value (Q3 08): $4.56 billion ($261/share) P/B: 1.09 Tangible book value minus entire CDS portfolio of $596 million as of 10/24/08 (assume 30% tax rate): $4.14 billion ($237/share) P/B (adjusted): 1.20
Summary: We think Fairfaxs core business is worth 1.3-1.5x book value, so at todays price, were getting a very good, growing insurance company at a good price, with a free call option on Fairfaxs CDS portfolio.
Note: Page 53 of 95 Tangible book value excludes preferred stock and goodwill. T2 Partners LLC
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$63,367
$59,490
$52,620
$42,025
$46,839
$3,159
$3,601
$4,323
$5,069
$5,272
22% 7% 71%
($4.4 billion)
$2,787
$2,849
$2,408
$1,885
$1,619
$1.76
$2.07
$2.71
$3.21
$3.33
Diluted EPS
2007 Growth %: 3.9% Five-year CAGR: 17.1%
($61.5 billion)
Consumables & Commodities Electronics, Entertainment, Sporting Goods & Toys Apparel & Accessories Home Furnishings & Dcor Other
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Y E A R - E N D S T O R E C O U N T A N D S Q U A R E F O O TA G E B Y S TAT E
Sales per Capita Group No. of Stores Retail Sq. Ft. (in thousands) Sales per Capita Group No. of Stores Retail Sq. Ft. (in thousands)
Over $300
Colorado Minnesota North Dakota Group Total 38 71 4 113 5,615 10,032 554 16,201
$101 $150
Alabama Idaho Louisiana New York Ohio Oklahoma Pennsylvania Rhode Island South Carolina Group Total 18 6 13 58 63 10 47 3 18 236 2,554 664 1,853 7,718 7,798 1,455 6,039 378 2,224 30,683
$201 $300
Arizona California Florida Illinois Iowa Kansas Maryland Montana Nebraska Nevada New Hampshire Texas Virginia Group Total 45 225 115 82 21 18 32 7 14 15 8 136 49 767 5,800 28,836 15,701 11,035 2,855 2,450 4,082 780 1,934 1,863 1,023 18,580 6,425 101,364
$0 $100
Alaska Arkansas Hawaii Kentucky Maine Mississippi Vermont West Virginia Wyoming Group Total Total 0 6 0 12 4 4 0 5 2 33 1,591 0 745 0 1,383 503 489 0 626 187 3,933 207,945
$151 $200
Connecticut Delaware Georgia Indiana Massachusetts Michigan Missouri New Jersey New Mexico North Carolina Oregon South Dakota Tennessee Utah Washington Wisconsin Group Total 16 2 51 32 30 57 33 38 9 45 18 4 28 11 34 34 442 2,093 268 6,845 4,207 3,803 6,690 4,321 4,925 1,024 5,852 2,166 417 3,464 1,679 3,968 4,042 55,764
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15
2007 Financial Results: (in millions) Sales Credit card revenues Total revenues Cost of sales Selling, general and administrative expenses (b) Credit card expenses Depreciation and amortization Earnings from continuing operations before interest expense and income taxes (c) Net interest expense Earnings from continuing operations before income taxes Provision for income taxes Earnings from continuing operations Per Share: Basic earnings per share Diluted earnings per share Cash dividends declared Financial Position: (in millions) Total assets Capital expenditures Long-term debt, including current portion Net debt (d) Shareholders investment Financial Ratios: Revenues per square foot (e)(f) Comparable-store sales growth (g) Gross margin rate (% of sales) SG&A rate (% of sales) EBIT margin (% of revenues) Other: Common shares outstanding (in millions) Cash flow provided by operations (in millions) Retail square feet (in thousands) Square footage growth Total number of stores General merchandise SuperTarget Total number of distribution centers
(a) Consisted of 53 weeks. (b) Also referred to as SG&A. (c) Also referred to as EBIT.
2006(a) $57,878 1,612 59,490 39,399 12,819 707 1,496 5,069 572 4,497 1,710 $ 2,787 $ $ $ 3.23 3.21 .46
2005 $51,271 1,349 52,620 34,927 11,185 776 1,409 4,323 463 3,860 1,452 $ 2,408 $ $ $ 2.73 2.71 .38
2004 $45,682 1,157 46,839 31,445 9,797 737 1,259 3,601 570 3,031 1,146 $ 1,885 $ $ $ 2.09 2.07 .31
2003 $40,928 1,097 42,025 28,389 8,657 722 1,098 3,159 556 2,603 984 $ 1,619 $ $ $ 1.78 1.76 .27
2002 $36,519 891 37,410 25,498 7,505 629 967 2,811 584 2,227 851 $ 1,376 $ $ $ 1.52 1.51 .24
$61,471 1,896 63,367 41,895 13,704 837 1,659 5,272 647 4,625 1,776 $ 2,849 $ $ $ 3.37 3.33 .54
$44,560 $ 4,369 $16,590 $15,238 $15,307 $ 318 3.0% 31.8% 22.3% 8.3%
$37,349 $ 3,928 $10,037 $ 9,756 $15,633 $ 316 4.8% 31.9% 22.2% 8.5%
$34,995 $ 3,388 $ 9,872 $ 8,700 $14,205 $ 307 5.6% 31.9% 21.8% 8.2%
$32,293 $ 3,068 $ 9,538 $ 7,806 $13,029 $ 294 5.3% 31.2% 21.4% 7.7%
$27,390 $ 2,738 $11,018 $10,774 $11,132 $ 287 4.4% 30.6% 21.2% 7.5%
$24,506 $ 3,040 $11,090 $10,733 $ 9,497 $ 281 2.2% 30.2% 20.5% 7.5%
(d) Including current portion and short-term notes payable, net of marketable securities of $1,851, $281, $1,172, $1,732, $244 and $357, respectively. Management believes this measure is a more appropriate indicator of our level of financial leverage because marketable securities are available to pay debt maturity obligations. (e) Thirteen-month average retail square feet. (f) In 2006, revenues per square foot were calculated with 52 weeks of revenues (the 53rd week of revenues was excluded) because management believes that these numbers provide a more useful analytical comparison to other years. Using our revenues for the 53-week year under generally accepted accounting principles, 2006 revenues per square foot were $322. (g) See definition of comparable-store sales in Item 7, Managements Discussion and Analysis of Financial Condition and Results of Operations.
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http://investors.target.com/phoenix.zhtml?c=65828&p=irol-newsArticle...
Quarter-to-date
10,172
2.8
(2.6)
3.5
Year-to-date
39,445
4.7
(1.1)
4.3
Target's current sales disclosure practice includes a sales recording on the day of the monthly sales release. Consistent with this practice, a new message was recorded earlier today. The next sales recording is expected to be issued on Thursday, November 6, 2008. These recordings may be accessed by calling 612-761-6500. Forward-looking statements in this release regarding expected earnings per share results should be read in conjunction with the cautionary statements in Exhibit (99)A to the company's first quarter 2008 Form 10-Q. Target Corporation's retail segment includes large, general merchandise and food discount stores, and a fully integrated on-line business called Target.com. In addition, the company operates a credit card segment that offers branded proprietary and Visa credit card products. The company currently operates 1,685 Target stores in 48 states. Target Corporation news releases are available at www.target.com. Source: Target Corporation
2008 Target.com. All rights reserved. The Bullseye Design and Target are registered trademarks of Target Brands, Inc.
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11/5/2008 11:36 AM
http://investors.target.com/phoenix.zhtml?c=65828&p=irol-estimates
Earnings Estimates
Investors Earnings Estimates
Analyst Forecasts
Last Month's Revisions Fiscal Period Mean High Low Median # of Estimates #Up #Down Mean % Change
Annual Annual Annual Quarterly Quarterly Quarterly Quarterly Long Term Growth
7 22 22 20 18 12 12 10
0 0 0 1 0 0 0 0
4 16 19 15 16 8 8 0
Actuals
Reported EPS Mean Estimate Surprise % Change
Find out which investment firms prepare and publish research on Target Corporation
2008 Target.com. All rights reserved. The Bullseye Design and Target are registered trademarks of Target Brands, Inc.
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11/5/2008 11:37 AM
6.0x
$40/Share (1)
15.7x
Large Cap REITs (1)
17.0x
Recent Big Box Ground Lease (2)
33.3x
Inflation Protected Treasury Securities (TIPS) (3)
The Transaction creates immense and instant value because 22% of Targets current EBITDA will be valued at a significantly higher multiple than where Target trades today
(1) Based on a 20-day trading average as of 10/24/08 (2) Based on mid-point precedent cap rate of 5.9% (3) Based on current 20-year TIP yield of 3.0%
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19
Retail Operations
Iconic U.S. retail brand Best-in-class operator with distinctive merchandising strategy 1,685 stores in 48 states Best management team in the retail industry Attractive growth profile, driven by mid-tohigh single-digit square footage growth and market share gains Recently sold an undivided interest in credit card receivables
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79% ND
ND 2%
ND 84%
55% 76%
ND 55%
35% 89%
ND 54%
27% ND
ND represents Not Disclosed (1) Represents % owned stores (includes owned stores on leased land) (2) Represents % owned stores on owned land only (3) Page 62 of 95 Represents % owned DCs (includes owned DCs on leased land)
2009E "Combined"
(1)
18% EPS accretion from tax efficiencies and improved free cash flow
(1) Includes incremental $15mm of standalone costs at TIP REIT (2) Normalized to exclude $112mm (approximately $0.16/share) of incremental interest expense due to CY2009 cash E&P distribution
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26
Valuation Summary
Based on the assumptions provided and using the mid-point of the valuation analysis, this Transaction would result in total combined value of $70 per share for Target shareholders (74% premium to the 20-day average trading price) and $83 per share twelve months later
$83
$80
$70
TIP REIT
$60 $/Share
74% $40
Target Standalone
TIP REIT
$42
$40
$38
Target Corp Target Corp
$20
$32
$0 Target (20-Day Avg. Price)
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$42
For illustrative purposes, assumes Transaction occurs on 01/01/09 (1) Based on a 20-day trading average as of 10/24/08; assumes sale of remaining 53% interest on credit card business with proceeds used to pay down debt (2) Based on mid-point of valuation analysis 30
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50x
25x
0x
Reserves / Guarantees
Page 66 of 95
3.15 bps
37
3.93 bps
1996
Structured Finance
2006
Structured Finance
32%
Public Finance
Public Finance
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39
$ insured (bn)
% of total
25.2
45.0%
2003
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2004
2005
40
2006
Q1 '07
Leverage
94:1
(Net Par / Capital)
$ 635.2 Billion 421.8 $ 213.4 Billion 108.6 52.0 26.9 25.9 $ 213.4 Billion $ 0.5 Billion 23 bps 6.8 Billion 316 bps
(1) Excess Capital estimate assumes $1.5B of excess capital at 12/06 reduced by two $500M dividends in 12/06 & 4/07
42
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Source: Company reports, Pershing estimates (MBI adjusted for one-time expenses).
49
6.0
5.0
bps
4.0
3.6bps
3.5bps 3.2bps
3.0
2.0
1.0
2000
Page 72 of 95
2001
2002
2003
50
2004
2005
2006
Q1 '07
Note: All figures as of 6/30/08. Funds managed by T2 Partners LLC are short MBIA. Source: MBIA Q2 08 investor presentation.
T2 Partners LLC
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-1-
MBIAs Structured Finance Insured Portfolio Poses Many Problems, Given That MBIA Has a Mere $4 Billion in Equity
T2 Partners LLC
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-2-
1Q08
$ 23 265
2Q08
$ 22 0
3Q08
$ 22 961
Total
$ 90 2,040
837
44 25
288
108 10
22
305 26
983
491 5
2,130
948 66
69 $ 1,264
118 $ 1,435
331 $ 1,258
496 $ 1,806
1,014 N/A
Credit impairments p Loss Prevention Expenses Total Payments T t l credit Total dit impairments i i t + LPE
$ 200 0 0 $ 200
$ 827 1 0 $ 828
$ 13 2 0 $ 15
$ 57 5 0 $ 62
8
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RMBS Portfolio Second Lien Incurred Loss Estimate Increased to $2.1 $2 1 billion
RMBS Related Loss Estimates ($ in billions)
$2.5 $2.0 $1.5 $1 0 $1.0 $0.5 $0.0 MBIA Loss Estimates 3/31/08 MBIA Revised Loss Estimates 9/30/08
21 2.1
1.1
22
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HELOC
CES
U.S. Subprime
International
Alt-A
HELOCs and CES are predominantly 2005 & 2006 and 2006 & 2007 vintages, respectively International exposure is primarily to Financial Institutions capital relief and covered bond transactions/$1.6 billion natural amortization this quarter
20
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In Q2, the earlystage delinquencies started reducing slightly, but in Q3 they increased by over 12%
23
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Where Did All of These Toxic Loans End Up? They Were Securitized, First Into Asset-Backed Securities (ABS)
Quick Review: What is a Securitization?
Source: Deutsche Bank Securitization Research; How to Save the Bond Insurers, Pershing Square presentation, 11/28/07.
T2 Partners LLC
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-72-
Tranches from Asset-Backed Securities Were Pooled into Collateralized Debt Obligations (CDOs)
Loss rates of, say, 20%, in the underlying RMBSs can lead to catastrophic losses for a CDO
This is an example of a Mezzanine CDO. A High-Grade CDO would select collateral primarily from the A and AA tranches mixed with ~25% senior tranches from other, often mezzanine, CDOs
Note: Asset-based securities backed by home mortgages are called Residential Mortgage-Backed Securities (RMBS), those backed by commercial real estate loans are called Commercial Mortgage-Backed Securities (CMBS), etc. Source: Citigroup, All Clogged Up: Whats Ailing the Financial System, 2/13/08.
T2 Partners LLC
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-10-
MBIA has guaranteed the most senior tranche of the Longshore CDO MBIAs potential liability is $1.13 billion (before reinsurance) The most senior tranche originally had 13% credit enhancement (CE), totaling $169 million, meaning MBIA has no liability until the CDO suffers losses of this amount However, MBIA is on the hook for 100% of the losses (before reinsurance) above this As of 3/31/08, losses in this CDO had reduced the credit enhancement to only 4.4% and MBIA projects 83% default of inner CDO collateral
Sources: Pershing Square, Amherst Holdings LLC.
T2 Partners LLC
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-11-
RMBS tranches account for 53.5% of Longshores total value, or $683 million. These tranches are from RMBS pools with total assets of $27.5 billion. The tranches on average are 3.1% thick and have 13.6% credit enhancement.
T2 Partners LLC
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T2 Partners LLC
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-13-
1 of the 90 RMBS Tranches Underlying the Longshore CDO: The M5 Tranche of the ABFC 2006-OPT2 Trust
Tranche (M5) Owned by Longshore CDO There is $79.3 million beneath it
There was 8.45% credit enhancement when this RMBS was created, but this has risen to 11.32% thanks to prepayments
T2 Partners LLC
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There are 471 basis points of yearly excess interest available to absorb losses (because homeowners pay a higher interest rate than the Trust does)
-14-
T2 Partners LLC
-15-
T2 Partners LLC
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Distribution of the Remaining, Performing Loans in the ABFC 2006-OPT2 Trust Full Doc Loans
FICO/CLTV 700 - 1100 680 - 700 660 - 680 640 - 660 620 - 640 600 - 620 580 - 600 560 - 580 540 - 560 520 - 540 500 - 520 480 - 500 460 - 480 0 - 460 0 - 65 0.1% 0.1% 0.1% 0.2% 0.7% 0.2% 0.4% 0.4% 0.2% 0.6% 0.3% 0.4% 0.0% 0.1% 65 - 70 0.1% 0.0% 0.2% 0.2% 0.4% 0.3% 0.5% 0.5% 0.5% 0.4% 0.3% 0.3% 0.0% 0.0% 70 - 75 75 - 80 80 - 85 85 - 90 90 - 95 95 - 100 0.1% 0.0% 0.1% 0.1% 0.6% 1.0% 0.5% 0.5% 0.2% 0.5% 0.5% 0.1% 0.0% 0.3% 0.1% 0.0% 0.0% 0.4% 0.4% 0.2% 0.7% 0.4% 0.4% 0.9% 0.4% 0.2% 0.0% 0.3% 0.3% 0.1% 0.4% 0.8% 1.3% 1.7% 1.4% 1.0% 0.4% 1.3% 0.9% 0.3% 0.0% 0.5% 0.5% 0.3% 0.4% 0.8% 1.0% 0.9% 1.8% 1.1% 0.4% 0.8% 0.5% 0.6% 0.0% 0.4% 0.1% 0.2% 0.2% 0.7% 0.6% 0.1% 0.4% 0.1% 0.1% 0.3% 0.0% 0.1% 0.0% 0.0% 0.9% 0.9% 1.3% 2.6% 3.3% 5.9% 2.5% 0.1% 1.7% 0.1% 0.9% 0.0% 0.6% FICO/CLTV 680 - 700 660 - 680 640 - 660 620 - 640 600 - 620 580 - 600 560 - 580 540 - 560 520 - 540 500 - 520 480 - 500 460 - 480 0 - 460 0 - 65 0.1% 0.1% 0.3% 0.3% 0.2% 0.2% 0.5% 0.4% 0.4% 0.5% 0.4% 0.1% 0.0% 0.1% 2.1% 700 - 1100
60.2%
T2 Partners LLC
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S&Ps Projected Lifetime Delinquency Rates for Loans With Characteristics of Those Remaining in the ABFC 2006-OPT2 Trust
The 23.8% defaults in the first 25 months are only the tip of the iceberg
Source: Amherst Holdings LLC.
T2 Partners LLC
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-18-
Amherst Securities is pricing a tranche like this as the present value of 1-2 years of interest payments only (i.e., at most, 4-7 cents on the dollar)
-19-
T2 Partners LLC
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The CMBS pools, the tranches of which account for 25% of Longshore, are not showing any losses (in part because they are all recent 2006 and 2007 vintage)
The CMBS market is currently under tremendous stress, but to be conservative, lets assume no losses (though there surely will be some)
As for CDO-squareds, which account for 23% of Longshore, if CDOs like Longshore are severely impacted, then CDO-squareds (which in Longshores case have a weighted thickness of 14.2%; see lower chart on page 12), are worthless In summary, we estimate that Longshore will incur losses of 55-60% of the original collateral of $1.3 billion, or $720-$780 million
This is in the ballpark of the $649 million loss estimated in Pershing Squares Open Source Model
T2 Partners LLC
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-20-
MBIA has taken only $602.7 million in impairments (3.3%) against its $18.5 billion of exposure to CDOs of High-Grade and Mezzanine U.S. ABS
*
* MBIA has, however, taken $2.1 billion in mark-to-market losses on its CDOs of High-Grade and Mezzanine U.S. ABSs, which it claims will be reversed over time.
T2 Partners LLC
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-21-
T2 Partners LLC
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-22-
T2 Partners LLC
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-23-