… this paper from the International Finance discussion group (hosted by the US Federal Reserve and published in June 2002) is an absolute read for those that care about these things.
Basically it gives some lessons learned from how Japan handled their 1989 market crash.
But the information in the paper is very much applicable to the US markets today.
Above is a chart of Yahoo stock over the last three years. Note that the spike from $20 to $30 at the beginning of 2008 was directly caused by Microsoft’s unsolicited takeover offer. I analyzed this offer in this post, and pointed the following:
So my conclusion is that Microsoft was stupid for making this offer, while Yahoo would be stupid to not accept it.
The Microsoft offer was revoked because the CEO, Jerry Yang, either tried to play “chicken” in order to entice a better offer from Microsoft (i.e. getting greedy) or truly believed that the company he founded was worth more than the $44 billion that Microsoft was willing to pay for it (it wasn’t even close).
So now, Jerry Yang is resigning as Yahoo CEO since it is clear that this whole debacle from Microsoft showed that he was over his head. Although he created Yahoo with David Filo, one of the smartest decisions was when they both decided that they needed to delegate management to more experienced people. Jerry gave it a shot after Terry Semel (previous CEO) was fired by the board, and showed why the initial decision was the right one.
It is highly speculated that the job of the next CEO is to find a way to sell Yahoo. If this is the case, the business is doomed. On paper, however, Yahoo is a fairly healthy entity – $3 billion of cash on the balance sheet, little debt, and still with a positive net income (and projected to be profitable in the future). The entire business costs about $12 billion (once you subtract their cash holdings), but this is still a high price to pay. However, it is a lot cheaper at $12 billion than the $31 billion $31/share ($44 billion) that Microsoft was offering just nine months ago.
The business direction for Yahoo is quite simple – if they are not going to sell out, they have to hire good people and find a way to “out-Google” Google. Microsoft has been trying and failing. I don’t see Yahoo succeeding either, but just like Ebay, it’s old but it won’t go away.
Speaking of which, $12 billion is what it would take to buy EBay these days. Which one would you purchase if you had a $12 billion hole in your wallet? Optionally, you could purchase Starbucks Corporation twice with the same amount!
Now that the shackles of being an MP have been removed, Garth Turner tells it like it is in the Vancouver real estate market.
The math is completely correct – there is no point to financially buying a condominium in downtown Vancouver unless if you are anticipating approximately 5% capital gains in the future for a breakeven outcome. While the 5% hurdle rate might seem small, there are significant transaction costs which make a profit more difficult to realize – for a regular “retail” person, the hurdle rate is more likely closer to 7% than 5% once you’ve factored in selling commissions, and the implied cost on the dreaded property transfer tax.
There are other investments out there that are much easier (and cheaper) to liquidate than real estate, and should perform better in the near term. For example, the best rate available on a 1-year GIC is currently 4.24%, requires no maintenance and and risk-free. Moving further up the risk curve, preferred shares of the major Canadian banks offer a tax-preferred dividend of approximately 6.5%. If you decide you screwed up, you can liquidate that decision with a few clicks of the mouse.
Yesterday the people of Chilliwack elected five people to be Park Commissioners of Cultus Lake Park. I was one of them, and I would like to thank all of those that voted on November 15th.
The preliminary results:
PARK COMMISSIONER
* Five (5) to be elected 11 of 11 Polls Reporting
1 * CAMERON, John 4,114
2 * SKONBERG, Owen 4,065
3 * WOODROW, Terry 3,901
4 * ENNS, Maggie 3,776
5 * PETER, Sacha 3,234
6 ALLINOTT, Scott 2,776
7 SHANKS, Malcolm 2,678
8 PIERS, Sita 2,490
9 PAYEUR, Larry 2,063
It’s difficult work getting elected. The even more difficult task lies ahead. I’m up for the challenge, and there are a lot of challenges ahead for the board.
I will use SachaPeter.ca as my correspondence site for Cultus-related business, while I will leave DoubleBlind.ca for commentary on other topics that do not relate to the Park Board.
Once again, thank you to those who supported me this election. It is much appreciated and never forgotten.
These don’t come too easy:
Langley Township -
Jordan Bateman for Council – Rational-minded, good communicator, hasn’t gone nuts with power, although I’d wish he’d be a little more active in getting rid of those speed bumps on Zero Avenue.
City of Richmond –
Howard Jampolsky for Council – Ideally, all of Richmond’s incumbents will get flushed out this election, but unfortunately this isn’t happening. Howard’s got a good chance to displace one, and deserves it.
Chak Kwong Au for School Trustee – Quality character.
City of Vancouver -
Did the electorate strike out, or what? I’m trying to decide how much of a media circus it would be if somebody like WENDYTHIRTEEN got elected.
Somebody wears a “McCain girl” t-shirt to a Chicago school, and notes down all the comments that she receives. Then she wears an “Obama girl” t-shirt the next day, and notes the comments she receives.
If you are planning on playing the General Motors debacle financially, I would suggest avoiding the common shares (currently at around $3/share) and instead look into purchasing senior debt of the company.
For example, ticker GBM is an exchange-traded bond (senior unsecured debt) trading around US$4/bond right now. Since par value is $25, it means that they’re trading at about 16 cents on the dollar. The bonds yield 5.25% on $25, which means a semi-annual distribution of $0.65625 annually, or a yearly yield of about 33%.
These yield numbers are ridiculously high since nobody expects GM to be surviving in its existing form a year from now. But if GM reorganizes, the senior debt holders will likely end up with equity in the surviving organization.
I wouldn’t go anywhere close to this, but if you want to take a risk, GM bonds would pay off significantly well if they received some sort of bailout from the US government. The equity, however, is toast.
We are all invested in the stock market, whether you know it or not. Whenever you earn money through employment, 4.95% of that goes to the Canadian Pension Plan. Whoever is hiring you will have to chip in another 4.95%. If your income source is from self-employment, you have the privilege of paying both!
The Canadian Pension Plan took an 8.5% hit between July 1 and September 30 this year. Most of this was due to a $10.9 billion investment loss for the quarter. The CPP had net assets of approximately $117 billion at the end of September.
About $40 billion of this is invested in publicly traded equities.
According to the financial statements, the CPP board has added approximately $22.7 billion in value since their inception – the other $94.7 billion came directly through CPP contributions.
When the CPP was created, pension payments were funded by existing taxpayers. It was decided by the government (Chretien era) that assets should be accumulated to pay for future CPP payments, instead of the pension liability being strictly funded by existing taxpayers. The decision to double CPP premiums was controversial, but is turning out to be a good long term decision.
In theory, in about 10 years, the CPP fund should have about $300 billion in assets, which can be used to pay out the increasing number of people that will be collecting CPP benefits in the near future. This assumes that the markets will actually be able to deliver positive returns on the future – something that doesn’t seem like a given at present!
Assuming that you pay fully into the CPP for your working career (40 of 47 years), you will receive a CPP benefit of approximately $885 per month (inflation-adjusted) when you turn 65.
The only problem is that when you add up the employee and employer contributions to CPP, it doesn’t make much sense. For example, if you work from 2008 to 2047, and contribute the maximum to CPP, you will have contributed $164,000 in 2008 (inflation-adjusted) dollars, for a $10,600 yearly benefit once you turn 65. Note that the $10,600 is considered to be taxable income, and there are various rules concerning the taxation of income when you turn 65 that essentially taxes CPP money at around 70% (via the GIS clawback, and reduction of income-tested benefits such as MSP premium payments).
Now, if you would have taken those yearly $4,100 CPP contributions and put them in an RRSP or TFSP (either one works, although the TFSP is much, much better if you can take the initial tax hit), and compound the investment at 4% a year (a very conservative number; right now 3.7% is the 10-year Canada government bond yield), you will end up with $390,000 in a bank account after 40 years.
You can take 4% out of this account indefinitely after for a $15,600 income – far better than the $10,600 given by the CPP. If this money is from the TFSP, it will be tax-free.
The mathematical break-even point is 3.3% – if you can do better than 3.3%, then you should invest outside the CPP. If you project less than a 3.3% return, then you should invest in the CPP.
Finally, while the CPP is indexed to the CPI (Consumer Price Index), changes in interest rates in the market should offer some sort of inflation protection.
The other advantage of “do it yourself” is that if you so happen to die, the money will still be there. Also, you can structure your income to be advantageous with respect to income taxes (whatever the rates so happen to be in 40 years).
These are probably the best arguments why if you can avoid paying CPP premiums, you should do so. The only way one can realistically do this is by structuring their income through a small business corporation and pay dividends, opposed to employment income.
The UBC ESM liquidated today, and the following was my result:
2006: +$376.57 or +37.7%
2008: +$242.56 or +24.3%.
2008: +$270.06 or +27.0%
The reason why the 24.3% amount was incorrect was that I didn’t account for the $27.50 cash left in my account.
According to Werner Antweiller, who heads the UBC ESM, he had the following to say:
The largest percentage gains were 326.1% (on a $30 investment) and 254.8% (on a $25 investment). The largest dollar gain was $634.26 (a 63.4%) on a $1,000 investment.
In total, we had 127 traders who made a gain, 10 traders who broke even exactly, and 117 traders who lost some of their investment. Another statistic may be of interest. The total amount of funds that shifted ownership through the UBC-ESM came to about $7,700, or 11% of the total investment amount.
It is interesting to see that this market and the 2006 market had more traders profiting than losing money, something that is very uncommon to markets. What happens is that there are a few gamblers that decide to bank it all on a majority government contract and end up losing. These people subsidize those that bet on the opposite outcome.
The following charts show my relative performance compared to the other 256 traders that were in the system. My ranking in absolute dollars was 8 out of 257, while in percentage terms it was around 25 out of 257.
It is much easier to rack up a huge gain in percentage terms on smaller accounts than it is for larger accounts – this is why dollar amounts are relevant, in addition to percentages.
It turns out that the best winning strategy this election was to put $1,000 in your account up-front and just start shorting Conservative majority / purchasing Minority government contracts – realistically you would have been able to average yourself in at around 63% in the first three weeks of the election. This you would have been able to purchase about 1600 contracts of the minority government contract, and get a 60% gain or about $600 out of the market. This is consistent with the top trader’s result in this market.
The second most effective strategy would have been to buy Bloc seat contracts from the beginning. Assuming your average was around 11%, you would have been able to make about 45% out of this strategy – note, however, that the liquidity on this contract was significantly worse and there would have been no way somebody would have been able to pour their $1000 account in this contract.
So I have no idea how somebody managed to make 325% on their ESM account.
One thing I know for sure was that this market was exceptionally difficult to trade, as it was illiquid except in the majority government contracts, and the actual outcome of the election was expected before the election was even called. The only real “surprise” was that the Bloc would repeat their 2006 performance.
There was also about $25,000 less money in this market than there was in the 2006 election market.
I think the next ESM that will open will be for the 2009 BC Election, of which I will participate in.
My predictions were somewhat off – 311 vs. 224, but the actual result should be around 364 to 174.
McCain, as I thought, never had a chance. The “deviations” from my pre-election day predictions were the states of Indiana, North Carolina, and Florida, which went to Obama by 1, 0.5 and 2% margins. Even if he had won those states, he would have had to have swung Colorado, Virginia and Ohio – roughly a 5% difference in votes. No chance of this happening.
Obama’s share of the national popular vote was 52%, and McCain was 46%. The 6% spread was relatively predicted by polls, as well as the state-by-state results.
The formal inauguration is on January 20, 2009. It will be interesting to see what happens between now and then. Already, the stock markets are down 3%.