Fairfax Financial Holdings Ltd. FFH-T defended the ways it values its businesses and its application of accounting rulesin a rebuttal to allegations that U.S. short-seller Muddy Waters Research published last week.
Chief executive officer Prem Watsa once again called the report “false” and “ill-informed” and reiterated his confidence in the company on a Friday conference call to report its fourth-quarter earnings.
“We have built our company over 38 years on honesty and integrity, full and complete disclosure in our reports to our shareholders,” he said.
Mr. Watsa also said “the market has already spoken,” as Fairfax’s share price had recovered from its 12-per-cent plunge after the short-seller report was released last week. On Thursday and Friday, Fairfax shares traded above the $1,404.40 Feb. 7 closing price the day before Muddy Waters went public. They closed at $1,374.97 Friday, down 1.8 per cent on the day.
Mr. Watsa and chief financial officer Jennifer Allen said Fairfax does quarterly checks for impairments of its investments through what Ms. Allen called a “robust process.” She said Fairfax’s evaluations typically use models that include cash-flow projections from the management of its operating companies, which the company then corroborates by looking at market prices and sales of other companies.
She also said Muddy Waters’s critique of Fairfax’s application of International Financial Reporting Standards 17, a transformational accounting standard for the insurance industry, was wrong because Fairfax believes the short-seller used an inappropriate peer group and an incorrect financial metric to weigh the impact.
In a report last Thursday, Muddy Waters said it believes Fairfax has overstated its balance sheet by US$4.5-billion because of accounting choices or transactions involving 13 of its investments, subsidiaries or joint ventures, including the IFRS 17 application. All 13 of the items had an impact of at least US$100-million, Muddy Waters asserts. The IFRS 17 application added US$1.24-billion, more than a quarter of the alleged overstatements, it says.
With Fairfax often valued at a multiple of its book value – assets in excess of liabilities – an inflated balance sheet would mean an overpriced stock.
Muddy Waters, as a short-seller, profits when a stock falls. Short-selling is a bet that the share price will drop, with an investor borrowing shares, selling them and repaying the loan by returning new shares, hopefully bought at a lower price.
On Friday’s call, Fairfax took brief questions from Muddy Waters CEO Carson Block. His company asked five detailed questions of Fairfax and said it “remains short” on Fairfax’s stock in a posting on its website.
Mr. Block pressed Mr. Watsa and Ms. Allen to provide additional disclosure on cash invested and returned from associates, which are companies in which Fairfax owns between 20 per cent and 50 per cent, in future financial statements. “Will you be disclosing these associate transactions?” he said.
Ms. Allen responded that disclosure with respect to associate transactions is made “as applicable” in the company’s annual reports, according to the IFRS rules it follows.
But Mr. Block pressed for more. “Obviously you could do the bare minimum but why leave it there?”
Mr. Watsa told Mr. Block that Fairfax has “taken a lot of time to go through the allegations you’ve made.”
“We’ve made the point very clearly that we will not tolerate false and misleading information,” he said, before calling for the next question from an analyst.
Ms. Allen addressed Fairfax’s complex accounting decisions for several investments specifically targeted by Muddy Waters, including its stakes in restaurant company Recipe Unlimited Corp, Dallas-based energy company EXCO Resources Inc., and the sale of a minority stake in its U.S.-based insurance and reinsurance subsidiary Odyssey Group Holdings Inc.
In the case of EXCO, Ms. Allen pushed back on Muddy Waters’s argument that Fairfax has overvalued its investment by carrying it on the balance sheet at US$18.26 a share when it traded at US$8 on the U.S. OTC Pink exchange.
“The OTC Pink market is recognized as one of the lowest tier of the available marketplaces for trading over-the-counter stocks and the OTC traded value is not representative of fair value, as the stock is very thinly traded in an illiquid market,” Ms. Allen said. Fairfax carries the investment at about three times EXCO’s 2023 net earnings, she said.
Mr. Watsa said that the market value of all its non-insurance investments and ownership stakes, in the aggregate, were worth US$1-billion more than their carrying value on the balance sheet. “Muddy Waters highlights a number of these investments in its report, all with carrying value above market value, never mentioning one that is carried below. Clearly, a one-sided argument.”
The Toronto-based insurer and asset manager reported fourth-quarter profit of US$1.67-billion, or US$52.87 a share, compared with US$2.48-billion, or US$91.87 a share, in the same quarter last year. Full-year profit was US$5.1-billion, and Mr. Watsa said 2023 was “the best year in our history, by far.”
TORONTO – Canada’s main stock index was down more than 200 points in late-morning trading, weighed down by losses in the technology, base metal and energy sectors, while U.S. stock markets also fell.
The S&P/TSX composite index was down 239.24 points at 22,749.04.
In New York, the Dow Jones industrial average was down 312.36 points at 40,443.39. The S&P 500 index was down 80.94 points at 5,422.47, while the Nasdaq composite was down 380.17 points at 16,747.49.
The Canadian dollar traded for 73.80 cents US compared with 74.00 cents US on Thursday.
The October crude oil contract was down US$1.07 at US$68.08 per barrel and the October natural gas contract was up less than a penny at US$2.26 per mmBTU.
The December gold contract was down US$2.10 at US$2,541.00 an ounce and the December copper contract was down four cents at US$4.10 a pound.
This report by The Canadian Press was first published Sept. 6, 2024.
TORONTO – Canada’s main stock index was up more than 150 points in late-morning trading, helped by strength in technology, financial and energy stocks, while U.S. stock markets also pushed higher.
The S&P/TSX composite index was up 171.41 points at 23,298.39.
In New York, the Dow Jones industrial average was up 278.37 points at 41,369.79. The S&P 500 index was up 38.17 points at 5,630.35, while the Nasdaq composite was up 177.15 points at 17,733.18.
The Canadian dollar traded for 74.19 cents US compared with 74.23 cents US on Wednesday.
The October crude oil contract was up US$1.75 at US$76.27 per barrel and the October natural gas contract was up less than a penny at US$2.10 per mmBTU.
The December gold contract was up US$18.70 at US$2,556.50 an ounce and the December copper contract was down less than a penny at US$4.22 a pound.
This report by The Canadian Press was first published Aug. 29, 2024.
The crypto market has recently experienced a significant downturn, mirroring broader risk asset sell-offs. Over the past week, Bitcoin’s price dropped by 24%, reaching $53,000, while Ethereum plummeted nearly a third to $2,340. Major altcoins also suffered, with Cardano down 27.7%, Solana 36.2%, Dogecoin 34.6%, XRP 23.1%, Shiba Inu 30.1%, and BNB 25.7%.
The severe downturn in the crypto market appears to be part of a broader flight to safety, triggered by disappointing economic data. A worse-than-expected unemployment report on Friday marked the beginning of a technical recession, as defined by the Sahm Rule. This rule identifies a recession when the three-month average unemployment rate rises by at least half a percentage point from its lowest point in the past year.
Friday’s figures met this threshold, signaling an abrupt economic downshift. Consequently, investors sought safer assets, leading to declines in major stock indices: the S&P 500 dropped 2%, the Nasdaq 2.5%, and the Dow 1.5%. This trend continued into Monday with further sell-offs overseas.
The crypto market’s rapid decline raises questions about its role as either a speculative asset or a hedge against inflation and recession. Despite hopes that crypto could act as a risk hedge, the recent crash suggests it remains a speculative investment.
Since the downturn, the crypto market has seen its largest three-day sell-off in nearly a year, losing over $500 billion in market value. According to CoinGlass data, this bloodbath wiped out more than $1 billion in leveraged positions within the last 24 hours, including $365 million in Bitcoin and $348 million in Ether.
Khushboo Khullar of Lightning Ventures, speaking to Bloomberg, argued that the crypto sell-off is part of a broader liquidity panic as traders rush to cover margin calls. Khullar views this as a temporary sell-off, presenting a potential buying opportunity.
Josh Gilbert, an eToro market analyst, supports Khullar’s perspective, suggesting that the expected Federal Reserve rate cuts could benefit crypto assets. “Crypto assets have sold off, but many investors will see an opportunity. We see Federal Reserve rate cuts, which are now likely to come sharper than expected, as hugely positive for crypto assets,” Gilbert told Coindesk.
Despite the recent volatility, crypto continues to make strides toward mainstream acceptance. Notably, Morgan Stanley will allow its advisors to offer Bitcoin ETFs starting Wednesday. This follows more than half a year after the introduction of the first Bitcoin ETF. The investment bank will enable over 15,000 of its financial advisors to sell BlackRock’s IBIT and Fidelity’s FBTC. This move is seen as a significant step toward the “mainstreamization” of crypto, given the lengthy regulatory and company processes in major investment banks.
The recent crypto market downturn highlights its volatility and the broader economic concerns affecting all risk assets. While some analysts see the current situation as a temporary sell-off and a buying opportunity, others caution against the speculative nature of crypto. As the market evolves, its role as a mainstream alternative asset continues to grow, marked by increasing institutional acceptance and new investment opportunities.
