Double Blind

So far the markets have been quite efficient. There were a few opportunities dealing with inefficient pricing of Bloc contracts, but this has been mostly normalized. I cannot log into my account right now, but I estimate I am around $510 at the bidding price, from a starting equity of $500.

There are a few items which I notice -

There is a bid-side bias. This is presumably because more people are purchasing securities than buying $1 bundles and shorting them and because bundle askers are taking liquidity risks when they attempt to sell unwanted securities. You are more likely to receive efficient pricing if you are on the asking side of the market rather than the bidding – there are a few pennies to be made doing some market making. A quick way of determining this is to sum up the bids, and sum up the asks. If [100-sum(bids) > sum(asks)-100], then you have to analyze whether this spread is worth the hassle of liquidating a partial bundle.

Finally, there is a “risk-free rate” implied in the market, mainly the plurality market. Since the Conservative government is not going to collapse this election (Harper could announce he has the flu and sit in 24 Sussex for the rest of the campaign and still form government after October 14), it appeared to me that the Conservatives at 80-85% to form government was drastically undervalued. Right now this is trading at around 88%, which is still a 14% return on your money (in 27 days… that’s 563% compounded annually!) if you can get the proper amount of liquidity.

The majority market is going to be much more difficult to game. There is a lot of pin risk associated with having the Conservative seat market trade close to the 50% mark, and I am watching this very closely as it will be very difficult to anticipate if this has a material chance of occurring or not. The majority market, however, is where most of the money is going to be made, but at an extraordinary risk – one which I may or may not take given what I see over the next few weeks.

I have been making some directional bets on parties, but since liquidity in these marketplaces is horrible, I am not bothering to write about this until I have my positions established. Right now most of the liquidity is in the majority government market, where you have the gamblers.

I’m not interested in gambling – I’m just interested in taking investors’ money from that zero-sum marketplace.

The first five days of trading is almost concluded in the UBC Election Stock Market, and right now I have invested $500 in equity. The market value of my positions are $503.61 at the bidding price (i.e. if I wanted to liquidate everything now I would have $503.61 in the account).

I noted that the first day of trading was very inefficient, but I failed to capitalize on the market, mainly because I only registered later in the day.

Generally, I think the markets are very efficiently priced at the present moment – despite the news saying things about “Conservatives polling into majority territory”, the markets clearly indicate that they are not, although there is some majority pricing (about 40%). There is a lot of pin risk with respect to the majority market, which is going to cause a lot of volatility as the campaign continues.

The major known price risk points are the debates, while the other risks to be factored will be daily campaign messages.

Generally at this point, no campaign has made any major gaffes, although the expectations were very high for the Conservatives. The expectations were equivalently low for the Liberals.

This is a response to Declan’s comment he made to a prior post:

I guess it depends on what you see on the country’s main challenges. To my mind our main challenges going forward are fighting climate change and reducing our dependence on non-renewable sources of energy.

I guess our priorities are different.

You are right about my prior “qualified to run the country” statement though, without reference to policy it is a rather hollow sentence.

Climate change is very low on my priority list, mainly because I don’t think there’s a heck of a lot that we can do about it (even if we reduce our CO2 emissions to zero, there will be precisely zero measurable change on the climate), but secondly because even if I had a machine in the backyard that you can change the climate with, I wouldn’t change the setting on it – who am I to say that today’s climate is preferential and better than the climate in 1950, 1900, 1800, or 10000BC?

Reducing dependence on non-renewable energy is not a priority simply because as non-renewable resources become consumed, it will become more expensive over time, which reduces the incentive to use that particular source – eventually (whether it’s now, 10 years from now, 100 years from now, etc.). Even imposing a high tax on the resource will have no effect other than to increase the consumption of the non-renewable resource in other countries.

The reason why I don’t favour the other parties other than the Conservatives is that the other parties seem to prioritize their policy and attention to solving problems that are unsolvable or are not even “problems” to begin with. This will mean that more of my money that gets sent to Ottawa will be blown for no reason, and no way to account for it.

Instead, probably my largest abstract priority is a government that reduces the role of Ottawa in my life. This is vague, I know, but I’ll elaborate on it later.

And Declan, we really should meet in person one of these days!

The Conservatives have promised to decrease the excise tax on diesel fuel by 2 cents a litre (from 4 cents currently).

Already you are getting opposition giving the argument that “2 cents is so little that the oil companies will just raise prices to make up the difference”.

This is a bad argument – it implies that if you raised taxes 2 cents that “2 cents is so little that the oil companies would lower prices to make up the difference”.

In either case, it shows a complete lack of knowledge of economics. Putting a long story short, it depends on the elasticity of petroleum products, and the competitiveness of the marketplace. The oil market is (believe it or not) one of the most competitive markets on the planet, and oil is not a very elastic commodity. Combine those two together means that the majority of those two cents will be seen on the bottom line of diesel fuel purchases.

Now, compare this to a situation where you have an inelastic commodity, but pretend that it is solely provided for by a monopoly or monopoly-like consortium of companies. Then, you will see a tax decrease go mostly into the pockets of the companies in question. An example of this would be BC Hydro.

Those two cents will add up to dollars, which adds up to substantial savings over time, especially if you’re in the trucking industry. Those costs will mostly get passed down to the retail side, giving your dollars more purchasing power. This is the advantage of imposing lower costs on people, and anybody taking a trip down to Europe will easily see how our dollar goes further here than there – a huge amount of their higher costs is imposed through taxation, both direct and indirect.

Putting on my non-partisan cap, these are my thoughts:

I think this was a “no choice” decision for the major networks.

Harper, Layton and Duceppe also did not want Elizabeth May there – the deal that she cut with Dion early in Central Nova really bit her in the rear end right now – an unintended consequence. I’m fairly sure if May did not cut this deal with Dion that she’d be in the debates.

Blair Wilson was purely a “get into the debate” move, DRBC provincially tried doing this with a less than stellar MLA (Brenzinger) and this move failed. Wilson’s track record is less than stellar himself (and I’m not talking about the Elections Canada bit, I’m talking about his business dealings… such as not paying employees). To take a guy with such damage was a stupid move by May, as you’re antagonizing the rest of your party members that actually care to have people with “green integrity”. It also devalues people like Adriane Carr, whom like it or not, has done a decent job provincially (via the provincial politics route) getting the Greens up from zero to 7%+.

The decision to include Wilson makes me wonder what other candidates with equivalent baggage are running under the Green banner.

The decision (Blair Wilson actually running again) gives a huge hand to the Conservative candidate in West Van (Weston).

The Greens, by virtue of getting more than 2% nationally in the last election, qualify for federal funds – this is favorable to them in terms of getting into the debate. Ordinarily it should have been sufficient, but as I alluded to in my first paragraph, the deal that May cut with Dion makes the decision a lot more difficult.

Should elected seats be a “get in the debate” criterion? There’s a balance between having too many talking heads (not enough time for each in a short 60 or 90 minute debate) and not having the country represented. There’s also the “chicken and egg” problem that newer parties face – in order to win seats, you need to get into the debates, but if elected seats is a criterion to get into the debates… so I don’t mind the 2% national vote as a sufficient criterion to be in the debates, from a moral perspective.

My middle of the road suggestion would be to have a “Dion vs. Harper” debate (since these two people are the only credible candidates that have the possibility of forming government) and a second “Parties that qualified for federal financing” debate.

But obviously that’s not happening since debates are politically risky and incumbent parties will only show up to two (French / English)… Mulroney, Chretien, Martin, and now Harper will do the same. I wouldn’t expect anything otherwise.

May is also getting a lot of press about whining, but she’ll have to learn when to stop before it becomes counterproductive.

This will be as blatantly partisan as it gets on this site, but go vote Conservative this time around – it’s clear that Stephen Harper is immensely qualified to be running this country, much more so than any of the other leaders’ offerings out there.

Posting will continue to be slow over the next few weeks.

Since the Federal Election will be called on Sunday, the UBC Election Stock Market will open, and I will be an active participant. The ESM is probably the best futures market for people to be putting money where their mouths are – it is frictionless (no commissions) and very easy to fund an account (via credit card).

An alternative market would be Intrade, but funding your account there is not a trivial process, and there are commission costs involved.

Currently, the Conservatives are expected to continue to form government with a 77% probability.

This is a great way to do some research:

Graphic health warnings need to cover almost the entire surface of cigarette packages if they are to become more effective in convincing smokers to kick the deadly habit, new Health Canada research found. The department wanted to find out whether increasing the warning size from the current level — 50 per cent of the panel’s surface — to 75, 90 or 100 per cent of cigarette packages would have a greater effect on smokers. The research, conducted by Montreal-based polling firm Createc on behalf of Health Canada, found increasing the size of health warnings to cover 75 per cent of cigarette packages would have a “small impact” and over time would unlikely remain more effective than the current coverage of 50 per cent. After interviewing 730 adult smokers, 306 teen smokers and 440 teens who are likely to start smoking, the firm found that warnings need to cover at least 90 per cent of the package for the negative messages about smoking to achieve “substantial” and “significant” effects on most indicators.

This is quite funny – you could label the entire tobacco package black with skulls and crossbones all over the box and people will still purchase them.

This is one fault of surveying – you can ask people all the questions you want, but you’re sure to get inaccurate answers, just like this survey did. Anybody with half a brain could figure out that putting a warning on the side of the box isn’t going to do anything, putting a warning on half the box isn’t going to do anything, and making the whole box one big warning isn’t going to do anything. People that want to smoke will smoke.

These numbers are pretty damning for the Lower Mainland real estate market.

It looks like the speculators are finally unloading and there isn’t going to be nearly enough demand to pick up the slack, which means only one thing – prices will be dropping.

The federal Liberals continue to dig their own grave further –

Liberal leader Stéphane Dion is reportedly changing his carbon tax plan on the eve of an expected election campaign amid pressure from his caucus members. The policy will now incorporate breaks for farmers, truckers and fishermen in the form of subsidies to help buy equipment to reduce use of diesel fuel. PEI Liberal MP Wayne Easter, the opposition agriculture critic, who had criticized the plan and its treatment of farmers, called the proposals for change a “major improvement,” and said it balances out the costs for farmers.

So, a carbon tax billed as “revenue neutral“, but with now over a billion dollars of annual earmarks for special interest groups… well done.

The real piece of information will be to see how much the Liberal vote collapses in BC, where we currently have a carbon tax.