Double Blind

First, she wants to clean up Surrey like Giuliani cleaned up New York.

Secondly, she doesn’t want to get into the trap that Vancouver landed into by clearly explaining why she doesn’t want a safe injection site in Surrey.

Now, she has this gem of a comment, and she is absolutely correct – from CKNW:

The mayor of Surrey wants to limit how long mayors and city councilors can hold office.

Dianne Watts says a three-term limit would bring fresh ideas to local government.

Watts says she’s not trying to get rid of any specific long-standing councilors in Surrey.

“We’ve got some long-standing councilors that, you know have certainly contributed a lot to the city, but I think as we grow as much as we have, I think it’s important to bring on other people as well.”

She adds turn-over is rare because high name recognition virtually guarantees incumbents get re-elected.

Watts hopes to hold public consultations on the issue of term limits.

The only limitation I would suggest to this would be to make the provision “three consecutive terms”, implying that you can step out of the scene for a term and then come back to serve another three terms later.

Incumbency in municipal politics is such an advantage that it distorts the thinking of present councilors to a “risk mitigation” mode – re-election is guaranteed if you don’t ruffle the feathers of your constituents by doing or saying something stupid (and even then your chances of re-election are pretty good). This is compared to having a risk-taking mentality in terms of innovative public policy, of which the system punishes with corresponding bad press. There is a certain element of this in provincial and federal politics, but it is most strongest in municipal politics.

My account is now at $1031 on the bid, and $1043 at the ask.

I put in the maximum into the UBC ESM because the plurality market was a bit inefficient – getting a small riskless yield on this was better than the idle cash that was sitting around. I waited to do this just after my monthly credit card cycle ended so that way I wouldn’t have to pay the implied interest on the amount owing for another month (when the election will be ending anyway!). From past experience, the people running the ESM write cheques to participants shortly after the official results are known.

The actions I took over the past week and a bit involved purchasing some NDP shares (on seats) and then I liquidated them for about an 8% gain. The liquidity on the buy side was horrible but I managed to milk some money out of it anyway.

I also finally dabbled in the majority government market – I initially thought that the Conservatives were not going to get a majority, but over the past week circumstances changed where I was no longer confident of that prediction so I liquidated the majority market position for a mild loss.

My gameplan at this point is likely to put a large majority market bet a few days before the election after I run some spreadsheet analysis. There are a lot of split ridings to take into account.

A couple months earlier, I wrote about how the knives were out because Finance Canada reported a deficit for the first two months of the fiscal year.

The latest report is out, and for the four months ended July 2008, it shows the country has a surprlus of approximately $2.9 billion.

Again, however, four months do not make a year and there will be volatility in this number, especially as corporate profits start to decline (along with personal income tax withholdings from the jobs that come with corporate profits).

Asset backed securities have a bad name in finance, mainly because the assets backing them tended to be mortgage related products.

I wrote about this earlier.

Just because something is called an asset-backed security doesn’t mean you should treat the investment as toxic.

So now that I have made an investment at the opening today, I can write about it (and be warned – after I write about purchasing something it is guaranteed to tank). One example of such an asset-backed security is PYG, which is an exchange traded trust. The trust has one asset backing it – senior unsecured bonds of Sprint-Nextel corporation, maturing in 2028. The bonds themselves yield 6.875%. The trust was created (using some financial wizardry) to yield 7%, and sell for $25 per unit of par value.

There were approximately 1.7 million units of this trust created, and the asset backing them (the bonds) has a par value of approximately $43.3 million. So the trust is taking in roughly $3 million a year in interest income, and distributing it back to trust holders in two payments per year.

The trust was trading today at around $12 a unit, with a current yield about 14-15%, and valuing the entire trust at $20.4 million dollars if you were to buy the whole thing.

The value is that the underlying assets are trading at $32.5 million, which means that by purchasing the trust instead of the underlying asset (Sprint bonds), you are essentially purchasing debt of Sprint-Nextel Corporation at a 37% discount under the market value.

Presumably illiquidity is the reason why this discount is so high.

Two risks that remain deal with liquidity (the trust is very thinly traded) and the underlying corporation (Sprint Corporation isn’t exactly gushing cash, but they are making positive cash flows). If Sprint goes under, the bondholders are first in line in any liquidation, so chances are there would be some sort of recovery greater than 50% of par value. For example, the market capitalization of their equity is currently 20 billion, while the amount of their debt outstanding is approximately 23 billion, which makes me suspect that this will be a winning fixed income investment. Sprint has enough cellular infrastructure to be worth at least 12 billion to a potential acquirer in the event of a (unlikely) bankruptcy.

Buffett is a master at buying low and selling high. This is what was announced on Tuesday (September 23) evening… keeping in mind that Goldman closed at $125/share.

The Goldman Sachs Group, Inc. (NYSE: GS – News) announced today that it has reached an agreement to sell $5 billion of perpetual preferred stock to Berkshire Hathaway, Inc. in a private offering. The preferred stock has a dividend of 10 percent and is callable at any time at a 10 percent premium. In conjunction with this offering, Berkshire Hathaway will also receive warrants to purchase $5 billion of common stock with a strike price of $115 per share, which are exercisable at any time for a five year term.

Let’s work the terminology here:

1. Perpetual = Forever
2. Preferred Shares = In case if Goldman goes belly-up, Buffett will be in line to pick up the cash first before the common shareholders.
3. Dividend of 10% = The yield of this “investment” is 10% a year.
4. Callable at a 10% premium = Goldman, if they have $5.5 billion in money lying around, can give it back to Buffett to pay off the $5 billion he loaned them.
5. Warrants to buy $5 billion in shares at $115/share = This here is about worth $2 billion alone if you liquidated the time value of these warrants at present prices.

So what do we have here?

At a very minimum (if Goldman does not go belly-up), Buffett will net about $2.5 billion on this investment. At a very maximum, if Goldman actually survives, Buffett will net much more due to the warrants.

The worst case scenario here is that Goldman will go belly-up and Buffett will take a 3 billion dollar hit. But I bet you he’s already starting to hedge the value of his Goldman warrants.

I wish I will be as sharp as him when I’m 77 years of age.

Ross Perot dropped in the middle of the 1992 presidential election campaign. He eventually came back, but it severely compromised his ability to win some electoral votes in that election.

John McCain apparently suspended his campaign to go back to Washington to resolve the financial crisis in the USA.

Either this move will be the boldest risk of the campaign and pay off (just like nominating Palin for VP has materialized into a huge coup for McCain), or it will be a move of colossal stupidity. Unfortunately for McCain, it’s going to be the latter.

The internet gives politics a new definition when it comes to information retrieval. We saw this during the last parliament (comments made decades ago being brought up to the present) and are seeing it in this election campaign.

During this phase of the election, we are hearing about particular candidates that have had some opposition research done on them, mainly their online postings on their blogs.

Chris Reid (Toronto Centre, Conservative Party) was one example, Ryan Warawa (Vancouver East, Conservative Party) is another example. (A side note of disclosure – I have met Ryan personally about half a year ago and had a two minute chat with him. Just like most political candidates that I’ve met (of all parties), he’s a cordial fellow that obviously is engaged with politics.)

The NDP, Liberals and Greens had people that are in trouble as well (for various reasons, including blogging). My favourite one so far is the former NDP candidate for Saanich-Gulf Islands, Julian West, who apparently was forced to step down for skinny dipping 12 years ago with a bunch of children. To be clear, there was no sexual connotation involved here – apparently swimming naked is a crime when you’re with children.

It’s unusual, yes, but it didn’t warrant getting kicked out as a candidate in my opinion.

Now my post here is not about the comments that were made, but what the political system is promoting – mainly that candidates have to be slime-proof with respect to their lifetime recorded history. Anything that one writes over the internet (or video put up on Youtube) will be archived for all history, and writing a blog is creating a library that can be used to attack ones’ self, when the political opposition combs over every comment that you make.

So the question here is – do we want candidates where their opinions are open and known, or do we want people that basically are nothing but a name with some fancy titles in their resume (e.g. “Chairperson of the XYZ society”, “President of the Trivial Group Association”, “Co-Chair of the ABC committee safety group”, etc.)? Sadly, this describes a lot of candidates that we see in politics today, and as a result, when some of these people actually get elected they are, not surprisingly, not up to the task.

We get worse government as a result.

There are a lot of complaints how much power is being concentrated in the Prime Minister’s office and the Premier’s office. Both offices are very demanding when it comes to communications and discipline – there is a very narrow beam which those two offices want to project to the public, and any caucus/candidates that stray from that beam are eliminated (lose your party endorsement and your chances of getting re-elected are precisely zero). The reason for this requirement of ultra-tight control is because of what happens to people like Warawa – anybody with an actual opinion on anything that strays out of the “political correctness” beam gets taken out and shot – if not by the party, then by the media.

Either way, it’s just easier for the party to nominate candidates that have no public record on any issues of any relevance.

This is why people like Jordan Bateman and Garth Turner have my respect – mainly because they’re willing to stick their necks out – although in Jordan’s case, the electoral structure of council is much more suited towards individuals with opinions, opposed to the party system that are in the provincial and federal domains. I’m also pretty sure Jordan is quite cognizant of any future political impact of what he writes and won’t shoot himself in the foot like Garth Turner has just in case if Jordan wants to throw away his independence and run provincially or federally one day.

There are ways to structurally reform this – for one, if the people in BC decided to accept BC-STV as a new electoral system, there would be less of this, as it would be the individual candidate that made the moronic statements that would take the brunt of the damage and not necessarily the party that endorsed the candidate. Unfortunately the connection between the electoral system and concentration of power at the top office is usually too abstract to explain to people in a 5 second media sound bite.

Over a couple months ago, I went out on a camping trip with a bunch of friends. This was at a place that wasn’t on most maps, roughly east of Manning Park (and not in any park boundaries).

It required driving about 30-35km along a forest service road, of which approximately a third was deactivated. Now, while my friends had an Toyota SUV, I had my 1988 Cutlass Supreme, which surprisingly made it there and back, but it took some damage along the way. The first problem was that I noticed the car made these rumbling noises when it started up, and when accelerating through 45km and 85km (those speeds exactly). The second problem was that my transmission fluid was leaking. I only detected this by the splotch on the bottom of the concrete one day.

As my car otherwise was mechanically sound (or as sound as it could be for being 20 years old), I decided to try my luck at fixing the transmission fluid problem. It so happened that the clearance on the bottom of my car was exactly an inch greater than the width of my head, so I was able to get underneath my car without too much difficulty. I eventually saw that the bottom of the transmission pan was extremely dirty, but also wiped it off a bit with paper towels and WD40 and determined that there were a few screws that were clearly leaking red (transmission) fluid.

I eventually tried some fixes that didn’t work (using duct tape, and also using some transmission sealant from Canadian Tire) but what eventually turned out to be the problem was that the screws holding the bottom pan to the transmission were extremely loose. So I monkey wrenched it tighter, and much to my surprise, the transmission fluid stopped leaking.

This still didn’t fix the rumbling noises that the car had when starting up (especially cold) and on acceleration at those two speeds.

So I eventually thought that I would have a $2500-3000 repair job ahead of me, mainly to replace the transmission when it craps out. On a 20 year old car, this would be a grand waste of money. So I had to get rid of my car as it was imminently obvious that something was going to go wrong, very wrong, very soon. I guess the lesson here is not to go up deactivated forest service roads with an Oldsmobile.

There were a lot of options to getting rid of my car, but the easy one was the provincial Scrap-It program. The eligibility criteria is simple – your car has to be made in 1995 or earlier; you have to have owned, insured and operated the car for the past year in BC; and your car has to be in operating condition when you drive it to the scrapyard – you cannot have your old car towed in. Once approved, there are irrelevant options for transit passes and other stuff, but the primary benefit is to get a huge discount off of the purchase of a new or used car at a very large list of dealerships.

The discount depends on how much greenhouse gasses less your new car emits compared to the one you had scrapped – they have a calculator that is available online. Over 3 years, if the difference is 4 tonnes or more, you will get $2000 from Scrap-it. If the difference is 2 to 4 tonnes, you will get $1000. If it is less than 2 tonnes, you will get $500. In addition, you will get $250 off at the dealership.

So the trick was shopping for a car that ideally emitted 4 tonnes less than my existing car, to get the maximum benefit. This, combined with a car having good trunk space, and air conditioning, and automatic transmission.

I looked at shopping for used vehicles, but I decided against a used car because the cost differences between used and new vehicles (of smaller, more fuel efficient type cars) was cutting it quite close numerically (in terms of valuing “risk” and depreciation and such). This kind of surprised me as five years ago, the comparison of a used vs. new car was much wider – i.e. a used car was much more economical to purchase. This is presumably due to high fuel prices increasing demand for older, more fuel efficient vehicles. Now that economic difference between used and new cars was slight, I decided to pay the extra since I didn’t want to deal with potential problems and wanted to know that what I was driving was something I owned from day zero.

I made a spreadsheet containing the differences in features between different models. I ended up trying a few cars before deciding one. A few items struck out at me:

1. Toyota and Honda cars are a lot more expensive for similar features.
2. Hybrid vehicles, once you factor in the Federal and Provincial tax rebates, are still not worth it (although the gap is quickly closing). In terms of performance and size, the Prius is horrible unless if you know you will be driving in heavily urban stop-and-go traffic a lot.
3. The other car, the Toyota Yaris, that qualified for tax rebates, is a death-trap because the dashboard console is in the middle of the car and not on the side (as most cars are). I tend to look at my tachometer and speedometer quite often while driving, and looking to the side is much more dangerous than looking down. Otherwise the car is fine, especially if you do not anticipate having more than two people drive in it.
4. Most cars, on paper, are quite similar. They are also quite similar in terms of physical appearance except for cargo space. And in this class of car that I was looking at, they all tended to drive quite similarly (except for the hybrid, for obvious reasons).
5. Most cars have a “basic” model, and they have a package that for an extra $1200, you can get air conditioning. For another 500-800 on top of that, you can get a lot of other extras (power windows, cruise control, etc.). If air conditioning is not required for your decision, then getting the basic model is worth it. If getting air conditioning is required, then getting the “next step up” is economically worth it.
6. Toyota and Honda don’t budge on price very much, probably reflecting the fact that most of the cars you see on the road today are one of these two brands.

I eventually decided on a Hyundai Elantra, and ended up getting the full $2000 from Scrap-it 6 weeks after I handed in the paperwork. After factoring in taxes ($250 at the dealership plus GST/PST, $2000 plus GST from Scrap-It), that amounted to a $2380 savings – approximately $1500 more than what ICBC says the book value of my old car was.

Financially speaking, when I work out the initial cash expenditure, and look at future cash flows that I will save with gasoline (saving about 35% of fuel consumption) and maintenance (offset by slightly higher insurance costs), I estimate that the internal rate of return on this purchase is approximately +6% compared to if I had remained with my old vehicle. There is also the intangible benefit of knowing that my car won’t explode every time I turn on the ignition.

Having driven the car for just under 2 months, I am quite happy with it. It had all of the features I was looking for, and had a superior price point, plus it emitted 4.02 tonnes of GHGs less than my previous car, which made it eligible for the maximum scrap-it bonus. I highly suspect that Scrap-It will become too popular and will likely have their benefits reduced in the near future.

I don’t know if the US Financial crisis is actually affecting the ESM or not, but the liquidity of it has dried to such a point where it has become virtually untradable.

Right now my account is $510.73 on the bid with no substantial changes since the last time I wrote about it.

If there was ever a time to invest in the US stock market, we are very quickly approaching that time. My portfolio is about half cash just for this purpose.

A lot of financial companies are getting slaughtered, but I will not be investing in this sector – instead, all other sectors (other than commodities) are fair game. Some of them are trading at insanely low valuations, and pass the “brain test” where I ask myself “Assuming the US implodes, will this company’s products and/or services still be in demand?”.