In May I posted about Prem Watsa positioning Fairfax Financial's (FFH/NYSE) investment portfolio for a "hundred year storm" in the markets. This weekend, James Daw of the Toronto Star reports on Watsa's comments during the Fairfax recent conference call:
But Watsa and his team
are looking smarter or luckier, in a morbid way, that they bought
investment protection when it was still available and when prices were
cheaper. Like various other stock market indices, the Standard
& Poor's 500 index in New York has fallen more than 6 per cent in
Canadian dollar terms in the past month. A U.S. index of high-interest
corporate bonds is down about 4 per cent. But Watsa boasted
yesterday that contracts or "credit default swaps" that were worth
about $198.3 million to Fairfax and its subsidiaries at the end of June
rose in value by $339 million during July. These swap contracts
are a kind of insurance policy that are only as sound as the financial
companies that issued them. But they would theoretically pay Fairfax up
to $18 billion if various U.S. bank, mortgage or insurance companies
failed to repay their debts. Fairfax bought these swap contracts
on other companies' debt obligations after determining they could be
exposed to losses if shaky U.S. homebuyers default on their mortgages. Stock
analyst Tom MacKinnon of Scotia Capital estimated yesterday that
Fairfax would report an extra $10 of profit per share on top of the
$7.67 he is predicting for the third quarter – provided the swaps
remain as valuable.
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