What a Difference a Year Makes…
Last year I highlighted Odyssey Re (ORH) as the stock I liked best. A good management team, conservative investment portfolio, good insurance underwriting, great management, and (of course) a cheap price were the main factors in my analysis.

Flash forward one year and the shares have risen about 10% (including dividends) in an 11 month stretch where virtually every single stock plummeted in value. It may be a surprise though to learn that I like Odyssey Re just as much now as I did then. The company is even cheaper now, and many of the business-specific risks I highlighted have been reduced or eliminated. While there are many interesting relative values available, Odyssey is still unquestionably a good deal in my opinion.

Last year I highlighted Odyssey Re (ORH) as the stock I liked best. A good management team, conservative investment portfolio, good insurance underwriting, great management, and, of course, a cheap price were the main factors in my analysis.

Flash forward one year and the shares have risen about 10% (including dividends) in an 11 month stretch where virtually every single stock plummeted in value. It may be a surprise though to learn that I like Odyssey Re just as much now as I did then. The company is even cheaper now, and many of the business specific risks I highlighted have been reduced or eliminated. While there are many interesting relative values available, Odyssey is still unquestionably a good deal in my opinion.

In my last post I highlighted the reasons why I own Odyssey Re (ORH), and also some of the risks in the investment.

Of the 5 risks I highlighted, one was relating to a dispute about some tax transactions in the past wrt to the Fairfax Financial (FFH) parent company:

Don't look away, it's a financial.

The insurance industry isn’t exactly viewed as a panacea for the investment woes inflicted on many of us over the past several months. While not as lowly as banking or retail, the insurance industry has certinaly seen its share of pain recently. The most notable problems are due to very soft pricing industry wide, and write downs of all sorts of products from Asset Backed bonds, CDS contracts, and other acronym-filled toxic waste that need no introductions in this format. Both of these problems are well captured by mighty AIG’s (AIG) most recent results and consequent $20B recapitalization plan.

I certainly wouldn't consider myself an 'income' investor per se; I'm an equity or cash guy in most circumstances. However, I do own insurance companies that have large bond portfolios, and the general market does take some cues from the fixed income markets so in my opinion it is always good to pay attention to what is going on in the general credit markets.

Recent market action in the MBS, ABS, CDO, and SIV markets have received much coverage for good reason. The TED spread (difference between LIBOR and Fed Funds) is even getting some mainstream attention these days for its historically large deviation from the mean. However, just recently I was doing some (very frustrating) research on the bond insurers and I stumbled upon something absolutely bizarre to my eyes. (Click here for the Bloomberg interest rate summary)

A large focus for many professional and amateur investors alike is the determination of the appropriate level of valuation of the stock market. While often times you will hear some folks dismiss this topic as unnecessary when hunting for superior individual stocks, I do believe that the discussion should merit at least a modest amount of focus.

Without a rough estimation of what the 'fair value' of a market may be, it (I believe) is speculation to dip too big of a toe into any individual equities that are encompassed by it. A prime example of where this may have gotten an investor into trouble was in 2000 in the U.S market. Investor enthusiasm for all technology issues distorted the valuation on many names to the point where the aggregate S&P500 was pushing up over 30x earnings. An investor specializing in large U.S equities, and technology names in particular would have done well to at least contemplate the underlying economic assumptions that a 30x multiple implies about a market.... and then immediately realize the lunacy that was taking place.

Some (rare) macro investment thinking I've been doing lately has lead me to Japan. In a post earlier this week I highlighted how Japan is certainly below average when looking at the world markets from a profitability perspective. I will be the first to concede that low profitability may be a non-intuitive place to unearth investment ideas, but in the case of Japan, there may be something interesting lurking underneath the ugly numbers.

Japan has a couple of issues which I believe have really compressed corporate profitability: