Double Blind

I will be giving a seat-by-seat projection of BC on the weekend before the election – in particular, the swing ridings will be interesting to call. I hope to go 36 for 36. I have been actively trading on the ESM and currently anticipate making a 15% return on investment. The markets are fairly efficient, but there are ways of squeezing money out of the rock.

Tradesports, however, provides some binary marketplaces for party seat counts. The Liberals at 121.5, Conservatives at 106.5, Bloc at 57.5 and the NDP at 22.5. There is considerable potential to make money on this market.

In 2004, the Bloc vote tended to evaporate nearing election day, and the NDP vote tends to trend Liberal when the Conservatives have a chance of forming government. Will history repeat itself for 2006? This is a call that I will be making, but unfortunately since the markets are not liquid enough, I won’t be announcing it here.

I have quite a bit of online equity that will be freed up when the December Bird Flu contract expires at zero (I was short from 34%), so this will be ploughed into the Canadian Election market.

(Update January 22, 2006: Final predictions for Canada-wide results, and the BC-specific seat projections.)

The UBC ESM is back in business again for the Canadian Federal Election. My goal is the generic “make as much money as possible while taking the least amount of risk”. Certainly the most volatile market will be the majority government marketplace – right now an 85% probability is expected for a minority government to form. I’m not going to say whether this is fair value or not.

I’ve got a pretty good handle on the seats market, but unfortunately the markets in this are fairly tight. Not a lot of inefficiency at this stage, which isn’t surprising considering the non-volatile nature of the polls coming out (except from Strategic Insight, which appears to be using a polling technique from a different planet). The real volatility will start during the first debate this Thursday.

All Canadians have until the end of February 2006 to contribute to their RRSPs to have that income deductible for the 2005 tax season. People that have an income more than $35595 (the lowest Federal tax bracket) should consider contributing. Those that make less but still have a few investment dollars to throw around should strongly consider dividend-bearing Canadian investments outside the RRSP (the tax rate on dividends in the lowest bracket is extremely low in BC, at 3%).

I wrote a few articles previously dealing with Simple Portfolio Management. The idea is that if you want a maintenance-free and inexpensive portfolio, choose companies that will be around over a long period of time. Do not choose mutual funds or vehicles that charge you excessive yearly management expenses, as the 2%/year friction will kill your performance over time.

One of the questions that I ask myself before investing is, “Will this company increasingly be selling products to an ageing population?” Naturally drug and pharmaceutical companies will fit this mold (this is in addition to pretty much anything in the healthcare industry).

Big Pharma has been hammered to death over the past couple years because of the fears in the sector dealing with potential class action lawsuit liability (e.g. Vioxx for Merck) and also due to a belief that large drug companies will fail to produce “blockbuster” drugs (ones which sell more than a billion a year). I think these fears are misguided and as a result the sector is looking increasingly attractive.

I highly suspect companies like Pfizer would give market-beating returns over the next 20 years at existing prices. I wouldn’t expect too much extra performance – two or three percent over the S&P 500, but considering that the nature of the investment will be to just keep it in a portfolio without paying any attention to it, it’s certainly better than sticking it in a GIC or bond. It is vastly superior in terms of the income it will produce (via dividends) and also the capital appreciation (due to retained earnings and ability to keep up with inflation).

If a single stock does not offer enough diversification, there are exchange traded funds or trusts that offer cheap diversification. For example, the Pharmaceuticals HOLDR (ticker symbol PPH) offers diversification in all the major pharmaceutical firms (concentrated in Pfizer, Merck, Johnson + Johnson, Eli Lilly, etc.), at a annual expense of $8 per 100 units or about 0.12% at present prices. If you’re looking for a brain-dead RRSP stock, I’d highly recommend this one – you’ll outperform 90% of all mutual funds out there with the intellectual effort of 5 minutes to place a trade. The units also give out an approximate 3.2% yield which will only go up with time as the component companies raise their dividends.

Note that these investments are in USA-based corporations. The federal government got rid of the foreign contribution cap on RRSPs, which makes this possible. As much as some people would hate to admit it, the USA is not going to hell economically over my lifetime and I would have no issues keeping my investments dollars over there. Considering the high strength of the Canadian dollar, it’s probably a good time as any to be purchasing companies based in US dollar denominations before the commodity market crashes (taking the Canadian Dollar with it).

With the dividend income and additional RRSP contributions, the idea would be to invest in the next sector that got their butts kicked for incorrect reasons. You repeat this ad infinitum until you’re ready to retire and you’ll probably end up with a rich portfolio if you allow it to compound for 25 years. Right now the Bank of Canada will give you 4.2% on a 10 year bond. Surely you can do much better than that for your RRSP!

I’ve just been reading up on the history of rootkits and other computer security related issues. The last story that I’ve read about was Sony installing software that would effectively compromise your system when you put an audio CD in your system. Somebody that isn’t very computer literate wouldn’t have a clue what to do in these situations (other than telling them to use the recovery CD that comes with their system and start from scratch).

It is becoming progressively difficult to ensure that your system is secure. I doubt this will change in the future – there will always be ways to exploit the operating system. It will be a cat and mouse game with no end.

One generic solution involves game theory – if you run an operating system that is less commonly used or known, you will have less exposure to attacks because no hackers will be targetting your system. For example, you could decide to create your own operating system and until somebody configures an attack specifically for that system, you will be relatively safe. So instead of running Windows XP, perhaps try running an odd-ball variant of Unix.

On the client side, rootkits and other programs that compromise computer security (e.g. spyware) are going to become more and more prevalent over time. It’s almost getting to the point where it’s just best to keep personal documents and files on a seperate machine that is totally isolated from any network.

I took the liberty of venturing a guess on CalgaryGrit’s Off-Beat Election Pool. The answers I submitted are in bold with the commentary in regular font:

1. Will the Liberals win a seat in Alberta (10 points)
No. This is really a call on the seat of Edmonton Centre, where Anne McLellan is fighting for her political life. The Liberals are even more unpopular in Alberta than ever, and I suspect this will result in a Conservative sweep in Alberta.

2. Over/Under Conservative support in Quebec – 9% (5 points)
Under. The Conservatives in 2004 got 8.8% of the vote in Quebec and will get less this year. The Liberals are even more unpopular in the province and they will not be swinging Conservative – they will be voting for the Bloc.

3. Which party will run the most vicious attack ad (I get to play judge and jury on this one) (5 points)
Conservatives. The Conservatives should know that attack ads worked against them in 2004, so they’re probably going to come out with something really trashy at the end of the election campaign (when they’re going to realize that they’re not forming government).

4. Which party will win Ottawa Centre? (3 points)
Liberals. Ed Broadbent was the reason why the riding went NDP last time. This time around it’s going to be a clean Liberal victory.

5. Svend Robinson or Heddy Fry? (3 points)
Hedy Fry. Svend is returning too quickly in a riding that is firmly an entrenched Liberal area.

6. Will the Bloc crack 60 seats? (5 points)
Yes. Without a doubt, Duceppe will be able to pull off 60 seats.

7. Will Marc Garneau win his seat? (3 points)
No. His “star candidate” power is going against the flow of the Bloc Quebecois. Although his placement was very strategic (in that it was a close victory for the Bloc), Meili Faille (Bloc Candidate) surprised a lot of people by winning in 2004, and I don’t think she’s a liability for the party – it will be close, however. For those that don’t know, Marc Garneau was Canada’s first man in space.

8. Will Allan Cutler win his seat? (3 points)
No. Ottawa South is a safe Liberal seat – the only way that the Liberals can blow this one is because of the relative unpopularity of Ontario’s premier (his brother is running for the Liberals in this riding as an incumbant).

9. Will Olivia Chow win her seat? (3 points)
Yes. She missed by a hair from the previous election and will make it this time. The NDP will gain a little in Ontario. This actually spells big trouble for the Liberals since Jack Layton and Olivia Chow are in ridings that are side by side in the heart of Toronto.

10. Will Jean Lapierre keep his seat? (3 points)
Yes. Outremont should be a Liberal hold, although Jean Lapierre made some really idiot comments about the Bloc being Nazis, which will probably be forgotten in the 7 weeks between now and election day.

11. What date will the first abortion reference be made during the campaign? (5 points for person who is closest, 4 points for second closest, etc.)
December 10. Just a wild guess. I think it’s going to be sooner than later.

12. Number of times Stephen Harper mentions “corruption” in first English debate (5 points for correct guess, minus 1 for every one away you are)
8. Guessing, although you can be sure that his closing remarks will be full of this.

13. Number of times Paul Martin is “clear” or “perfectly clear” during the first English debate (5 points for correct guess, minus 1 for every one away you are)
5. He might say it once or twice, but he’ll probably be conscious to avoid this in his practice.

14. Which party leader will the CTV instant poll claim to have won the first English debate? (5 points)
Paul Martin. For the last 5 elections the Liberals have won this poll, what makes you think that it will be any different this time?

15. Will Belinda Stronach appear in a nationally televised Liberal TV ad? (2 points)
No. She’ll be out of the limelight – don’t want her face to show on TV, since it’ll just get more Conservative voters to show up in the voting booth.

16. Monte Solberg’s popular vote over/under – 75% (5 points)
Over. Liberals are even more hated in Alberta.

17. Which leader will get the most points in the Gaffe pool? (5 points)
Harper. Although I expect it to be closer this time around.

18. Voter Turn-Out (5 points for actual percentage, -1 for every percentage point off by)
61%. I don’t expect the winter to change voter turnout materially from the previous election.

19. Which polling company’s final poll will be the closest to the actual election results? (10 points)
Strategic Counsel. Although they’re run by an ex-Conservative, they’ve been fairly accurate so far.

20. Which party will get the most seats? (I guess it had to be asked) (10 points)
Liberals. Not a heck of a lot will change in this election except the Bloc and NDP will gain more seats.

For those people that like watching Star Trek and Babylon 5, you’ve got to download Star Wreck – this has to be the best fan movie made on the internet up to date. Killer plot, special effects and acting made this an absolute joy to watch.

In a way, this type of innovation could only be brought to you by the Internet and by the advances in CPU technology. There’s no way you could have envisioned the special effects available to people today when you compare it to what was available 20 years ago. As hardware and CPU cycles become less of a limitation, the barrier now becomes the human capability to innovate.