Double Blind

I have liquidated my March position in the Bird Flu contracts at 2%. As there is a 1% expiration fee applied to contracts held to maturity, the net cost of liquidation is relatively light – essentially I am removing the risk of a Bird Flu outbreak during the next week in the US for the net price of 1%. Although the probability of Asian H5N1 Bird Flu hitting the USA between now and March 31 is less than 1%, better to have the cash in pocket.

Although Intrade has listed more Bird Flu contracts (with the end of June, September and December 2007 expirations), there has been little liquidity in these contracts – in fact there has been zero volume on them. Also, considering that the Bird Flu has not made headlines in the media over the past while, the probabilities given are not enough to trade the contracts.

Still, putting cash against the Bird Flu has been a very profitable venture. I have also tapped most of the liquidity of the marketplace when there were news events that claimed that the incoming Bird Flu was an ‘inevitability’. Unfortunately, I think this low-risk money is not going to be nearly as easy to tap as it was in 2006.

Before the big Neteller blowup in January 2007, I managed to cash out most of the equity in my online account. One reason is because I have found compounding my capital online to be quite difficult when your account gets to a certain size. After the Dion leadership and the December Bird Flu contract, the account has gotten to such a size that getting the same percentage returns as I have in the past is nearly impossible. There is also risk concerning the payout of funds – ever since the Neteller blowup and the division of Tradesports and Intrade, I have been very careful of concentrating my online funds in any one entity.

Right now, I have my position that is due to expire in June on Alberto Gonzales not resigning, a small position on the Canadian election and some money on Bill Richardson to win the Democratic nomination. It’s just a matter of being patient for right prices in the various markets.

After thinking a bit more deeply about the state of Canadian politics, I will take a ‘minority position’ and say that the perceived probability of an election being called soon is greater than what the media is generally thinking.

The budget was a document that was highly anticipated to potentially cause a lost confidence vote in the house. As a result, the Conservatives decided that they didn’t want the government to fall since the opposition was expecting it weeks in advance. The government gave a budget that most rational opposition people could not vote against. The fact that the Bloc indicated they will support the budget is icing on the cake for the Conservatives – they want an election, but they want one in a way that makes the opposition look as silly as possible.

So now that the budget has been tabled, how does the government enable its own defeat in the house of commons? With a confidence motion on some piece of legislation concerning a matter of law (e.g. an “anti-crime bill”) or something that can’t possibly be supported by all the opposition parties (the environment is a good topic for this, or the Kelowna Accord motion that Paul Martin brought forward).

Now what I’m thinking is that Stephen Harper has pulled a fast one on most of Canada, including myself – he tabled this budget to be much more left of centre to typical Conservative policies (i.e. less tax, less government) in order to get voters from the centre to vote for them. But once a bill is tabled in the house that is deemed a matter of confidence, the house will fall and anything mentioned in the budget will not come to fruition after Parliament is dissolved – the budget needs to be approved by the house before formally becoming law. If there is an election called before the budget is passed, the next government (even a Conservative one) has no obligation to follow through.

In other words, the Conservatives can claim to be much more left than they actually are, and be able to show the public that they tried to table a very left-wing budget but it died in Parliament.

Once the Quebec election is over and the results are known (March 26), the Conservatives will be in a better position to assess how well it would do in a federal election (the ADQ is a good proxy for what the Conservatives would do in the province). If it’s apparent that they have enough seats in Quebec and Ontario to secure an extra 30 seats amongst them (going for a majority), then they’ll likely pull the trigger soon after March 26.

I have not read anything along this line of analysis from any other political weblogs that I read. We’ll see if going out on a limb on this one turns out to be the right decision. Unfortunately, there’s no prediction market on this one.

I read about this in today’s Vancouver Sun this morning. My brother also pointed it out to me via email so I’ll post a reply to it here.

This sort of thing doesn’t surprise me in the least. Getting accreditation is the big hurdle in the education game and once you have this, there is very little control on compliance as long as you don’t do something stupid like giving your students 100% for everything. As long as there is incentive to cheat the system, people will continue to do so, especially when there is a monetary incentive for both parties involved to purchase higher grades.

It also doesn’t surprise me that this happens in English more than math, mainly because English is so subjective that you can rationalize nearly anything, while with a subject like math it is more difficult to hide incompetent performance.

Due to how the university system is rigged up (i.e. admissions go by grade), it is not surprising to see a huge amount of grade inflation. There is a problem of being able to quantitatively measure the ability of a student and not surprisingly, provincial examinations are a relatively cheat-proof method to determine how well students can write examinations. Sometimes it might even be a good proxy for knowledge and comprehension levels of students. But in absence of anything else, I think provincial examinations are a fairly solid method to ensure that schools are actually giving out the correct grades. Essentially if students are getting 90% as their school grades, while getting 60% in the provincial examination, then it’s pretty obvious that the school in question is guilty with enough of a sample space.

A first-order solution would have the school’s accreditation removed for a year (the “penalty box” approach) and any existing and paid-up students for the remainder of the year have 100% of their grade derived from the provincial examination as there is no need to needlessly punish them for the school’s ineptitude (even though they might be implicitly conspiring with them for a high grade). Note that students can take provincial examinations multiple times so it’s hardly a “one shot situation” where they can wreck their lives on a single examination sitting.

Apparently an MP in Thunder Bay is kicked out of the Liberal caucus for saying he will vote for the budget when Stephane Dion said the party is against it. Keith Martin (MP in a Vancouver Island riding) was previously stated in the media to support the budget, but I bet you he’ll shut up really quickly since his political career depends on a Liberal nomination. The Thunder Bay MP, Joe Comuzzi, is 73 and retiring and doesn’t really have to care about his re-electability.

I have already identified that any party voting against the budget is making a mistake and I think Dion is learning this one the hard way. It will also be very difficult for him to campaign inside Quebec when the Conservatives will have an easier time whenever the next election is, no matter who wins provincially. Again, the budget is so left of centre that the left wing parties would be stupid to be voting against it – Gilles Duceppe knows what he is doing, but Layton and Dion both need to adjust their strategic thinking caps.

(Update: For Dion it is obvious, but for Layton, there is more of an excuse to grandstand for the usual NDP priorities which might get him a bit more press, but he can’t do it for too long since it becomes increasingly evident that the 29 seats the NDP has in Parliament amounts to zero power.)

I also find the kicked out MP to be yet another example of the political hypocrisy involved in all major political parties (the previous example is the ex-Conservative, ex-Independent, now-Liberal Garth Turner) – parties and the leaders all say that they allow their MP’s a “free say” but the free say is only free as long as what you say is what the leader says. It’s no different than union-style thuggery when you allow open and non-anonymous votes. Not surprisingly you end up with Saddam Hussein-style elections, with stunning results of 99.9% support for whatever the leader says.

I think it would be a very interesting experiment if you got rid of the concept of a “confidence vote” (i.e. a confidence vote would not trigger an election) but rather allowed anonymous voting on what would otherwise be confidence votes. If the budget vote fails, for example, the government would not fall but instead have to table a new budget or make amendments until there is a passing vote. The only disadvantage of this is that your local representative could say one thing and vote another way, but a potential mitigation to this is you can remove the anonymous shield two elections after the MP is out of office to have a historical record whether he/she was consistent with what they said in public vs. how they voted in Parliament. An election can be triggered by a simple and direct non-confidence motion.

Algonquin Power, as the name might suggest, operates power generation assets consisting of hydroelectric, gas and other modes. They are structured as an income trust and give out a distribution of 92 cents a year, which works out to roughly a 10.7% current yield at existing prices.

They recently announced that they will be acquiring Clean Power Income Fund which has been an income trust that has been on my watch list pretty much since it IPO’ed in late 2003. I did briefly own the trust units and flipped them like a pancake and made a few bucks, but otherwise I have just been actively watching them. Now that they are getting acquired, I looked at the parent company-to-be and determined it was a lousy merger.

The reason is simple – Clean Power, at best, is marginally profitable. Wind power, just like other energy generation projects, is very capital intense, but the payoff for wind is significantly less than other “conventional” forms of power generation. Algonquin is somewhat more profitable than Clean Power, but they are going to face some serious debt issues when the takeover is completed.

It is not surprising that today the CFO announced that he was leaving. Anytime you see a CFO leave shortly before or after a major acquisition or decision means that there was a huge conflict between him and the CEO and/or the board of directors and he felt that he should be getting out of dodge. More often than not, this turns out to be a good decision since usually the CFO’s are the number crunchers and the CEO’s are the visionaries. Sometimes the visionaries can be correct (Steve Jobs is a great example) but unless if your valuation metrics of intangibles are exceedingly well-defined, it’s usually best to go with the numbers.

My prediction is that if this merger goes ahead that Algonquin will be facing financial problems greater than what Clean Power Income Fund is facing today. Essentially both of these income trusts are paying distributions though depreciation of assets rather than generating actual income. Eventually the buck stops when you have to start replacing those assets with capital expenditures. I would avoid units of both income trusts and if you’re looking for a 10% yield on a much less riskier play, try an income trust like Rogers Sugar.

I have learned two lessons from my dealings on Intrade. One is that I have a rather good eye for value on events – I’m fairly good at locating inefficiencies in event markets. This is a good lesson and something that I shouldn’t do much to change. The other lesson, and one I can learn much more from, is that when I make very short term decisions it ends up affecting my account equity.

Recall during the last US congressional election (November 2006) that I had initially placed fairly heavy bets that the Democrats would take both the House and Senate. During the middle of election returns, I made some rather stupid short-term decisions that ended up costing me a potential profit of about a large 3-digit figure. Instead I cleared about a hundred bucks which was nice but it could have been a lot more. Had I fallen asleep that day, I would have been up significantly more than I was.

The same thing happened during the recent contract whether US Attorney General Alberto Gonzales will resign. There are contracts listed on various months, but the end of March and June are the most liquid contracts. There has been a flurry of activity on these contracts since the media has gone on a rampage calling for Gonzales’ head. A couple days ago I had taken a position that he will not be resigning, specifically on the March contract which was trading at around 60%. This basically meant that you could get 3:2 odds on him not leaving by the end of two weeks. The June contract was trading even higher, at around 80%. So I accumulated some position, virtually at the same time that Alex was accumulating.

Next day, a story comes from a (supposedly) credible site that the White House was interviewing people for the future AG position. Uh-oh, we both figured, and bailed out of our positions in a hurry. Alex executed on his trades much better than I did, so he ended up with some pizza money while I ended up with a two-digit loss on the affair.

Now today we have Bush himself on the record saying he supports the AG and makes talk about no show trials and stuff. So apparently he’s going to war with the Democratic congress which means that the chances of Gonzales leaving is going to be nil between now and March, and probably nil between now and June. So once again, I’ve taken a short position on the June contract, something larger than I took initially before this whole charade began. The only difference this time is that I’ll have to wait three months and two weeks for a payoff, opposed to two weeks. This is assuming, of course, that he won’t resign.

But it’s a little difficult to fabricate a story coming from the President himself, so I think this is more credible than the rest of the BS media that has been coming out on this issue. We’ll see whether it works out this time, and I’m not going to allow myself to get whiplashed like this ever again.

Good traders can identify situations where they are in the wrong and make appropriate reversals; they do this with information that is just as good as the information that got themselves into the position in the first place. This criterion is something I didn’t have on both instances – the 2006 Congressional elections, and this event. In the future, I’ll be saving myself a lot more equity by adhering to that rule and not allow myself to get swayed by weaker information.

I’ll look forward to waking up one day and finding out that Gonzales has quit and with it goes a chunk of my remaining Intrade equity. I should point out to my readers that I have cashed out about 85% of my accumulated earnings online which is safely in my bank account earning a small rate of interest.

The Conservatives have pretty much delivered a forced budget. Forced because they need to demonstrate to the rest of the country that they’re really more left of centre than people think and thus are trying to rush for the centrist vote – something the federal Liberals have been able to make majority governments out of. This budget was politically smart but pretty stupid in the grand scheme of things. The Dilbert quote “We need to concentrate our resources across the board” comes to mind when I read through this document. At 478 pages, it’s one of the larger if not largest budget documents the country has produced. If you must read it, start with the first 276 pages since the rest of the document is technical.

As I pointed out in my previous post, the budget is very Liberal-like. If I handed the budget document to somebody politically informed and asked him to guess which party was leading the government, he/she would probably say this was a Liberal budget if they didn’t know who was in government.

I think the big winner, yet again, is Quebec and Gilles Duceppe. He will have an easier time during the next election, whenever it might be, by just saying “If you keep voting me in, you’ll get the goods delivered to you from Ottawa”. When you look over the past fifteen years in Canadian politics, it has been proved beyond any doubt that if you whine and threaten to separate from the country that you’ll get as much money shoved into your laps as possible. Maybe BC and Alberta’s MPs should think about forming some sort of “Western Bloc” and demonstrate what a fiscal joke this country has become. At the very least, the Bloc Quebecois has been the primary beneficiary of the minority governments over the past three years.

When you look at the 200 billion dollars that’s being spent in various pet projects, it’s apparent that the government has grown large. Very large. To the tune of $6000 per person large. If you took that money that went to Ottawa and gave it to the provincial government, you would end up with about $26 billion coming out of BC alone – since BC already pays for its own healthcare and education, do you think $26 billion would be enough to run the rest of the country? It wouldn’t surprise me if you could find ways of getting that down to $4000/head without materially affecting the fabric of society. But as long as people don’t demand efficient government, they will continue to get bigger government while wondering where their tax dollars are really going.

It’s also apparent that there is no real alternative out there for people that want less government and less taxes. A shame, considering that this is parallelling what’s happening in America, except they’re even more of a fiscal basket case than we are. Eventually the economy will slow down and with it will come either deficits or the backbone to reduce spending. Guess what’s going to happen then?

My advice for opposition parties: Quickly pass this through parliament and start advocating where the next ten billion should be spent.

Looks pretty balanced. It could have been something the Liberal government produced and I wouldn’t have known the difference. I can’t see how the opposition can credibly vote this one down, so we’ll see what the immediate reaction is tonight.

Today’s federal budget has been over-hyped by the media as an important “make it or break it” document for the government, but I think the impact will be less than expected. The rumours of buying off the areas that the Conservatives were weak in the last election, mainly Quebec and the urban cores of Vancouver and Toronto will likely turn out to be true. I’ll try to cover this and the last BC Budget, time permitting.

None other than the Bloc Quebecois de l’Ontario!

This reminds me of when I was going through the real Bloc Quebecois‘ website and seeing whether somebody outside of Quebec could get a party membership. They don’t even bother listing a field for “province” in their forms. This is also the same for when it comes to donations.

I’m surprised they don’t allow candidates to run outside of Quebec – there are certain regions in the Prairies and BC that would vote MPs into power if their sole goal was to get Quebec out of the country.