Double Blind

The reports of more people not using Skytrain after the closure of the Pattullo Bridge is not surprising, but it does demonstrate the collective intelligence of the public.

The simple reason for the lack of initial Skytrain usage is that anybody presently using the system already thinks that the Pattullo Bridge (when functional) will be impacting their commute time.

The Skytrain is an excellent system to get to any point within 400 meters of a station (the “5 minute brisk walk rule”); after this distance the utility of Skytrain diminishes significantly. The only exception is downtown Vancouver, where the entire downtown is fair game since it is a pain to get in and out of there.

The complex reason is that commuters are signaling they find it difficult to using public transit for off-Skytrain routes. For example, taking a bus will not improve your commute time since the bus system will still be encountering the increased traffic that was caused by the bridge closure.

To illustrate – let’s pretend you lived a 5 minute walk away from Surrey Central Station. Your workplace is in downtown New Westminster. Before the Pattullo Bridge closed, would you be taking Skytrain or car? Chances are you would be taking Skytrain. The bridge closure has no effect on you.

Let’s pretend you live in Langley City and work in downtown New Westminster. Since the bridge closure obviously affects you, would you park at King George and Skytrain it over? Or do you roll the dice and take the Port Mann? Or the Alex Fraser? Chances are you’re going to do one of those first, and then take the Skytrain if the other two decisions are too costly. This is assuming you don’t already do the “Park at King George” option. The information available suggests that a lot of people do this already.

The second day of the bridge closure should result in a lot more Skytrain usage than the first, as people feed this information into their “what’s the least amount of time for the least cost?” decision matrix.

One thing is sure – those people that work off of Skytrain routes are still more than likely to take their cars.

There is a subtle argument to be made that increasing the coverage of Sktyrain with linkages across the Canada/Expo/Millennium lines would increase ridership even further. For example, the network would be greatly enhanced by a link from Metrotown station to Brentwood along Willingdon – this has the strategic impact of servicing BCIT. The Canada Line would receive a lot more usage if there was a link from Richmond Centre to 22nd Street Station.

Although not apparently obvious you would see a lot more Skytrain usage in the event of a bridge closure if those two links were there – the benefit of highspeed transit is that the more nodes on the network you have, the more valuable the other nodes are. A lot of people are complaining that the Millennium Line is a failure, and although the placement was sub-optimal, it will benefit greatly from the upcoming Skytrain expansion.

We are seeing some brilliant marketing coming from real estate marketers that have been asked with the unenviable job of trying to sell units in a market that is declining.

First was the hype of Onni selling 340 units (which may or may not happen) at “below market” rates. Here’s a hint – “market rate” is whatever people are willing to pay for it so the phrase is nonsensical.

Second is the Flo development in Richmond (roughly at the intersection of Alderbridge and Hazelbridge in Richmond, very close to the Richmond law courts!) apparently sold their 55 units. Some woman was quoted as saying she got a 2 bedroom condominium for $340,000.

If I was making a bet on the future outcome of a 2 bedroom condominium in Richmond, it would be less than $340,000. Market rate for rent for such a place in Richmond is about $1,000/mo (just with some cursory glances at Craigslist), and subtracting nominal fees (e.g. maintenance/insurance/taxes) you end up with a price-to-earnings ratio of about 40.

It wouldn’t surprise me to see this P/E ratio drop down to about 20 before the real estate market is done dropping here in the Lower Mainland. This would imply a 50% contraction of current prices.

I was cooking some perogies on a frying pan today, and came up with this mathematical question. I invite people (quants) like Declan, or Alfred, or Justin, etc. to give this one a shot. Do not attempt this problem while hungry.

Let’s pretend that I have N perogies on a frying pan. A perogie has two sides. Each side of the perogie has to be cooked for at least t1 (anything less and it would not be cooked enough), and not greater than t2 (anything more and it would burn).

Initially when each perogie is put on the frying pan, it is on a side. To turn the perogies over, I would shake the frying pan, which would have the effect of having a 50% chance of flipping each and every perogie. Because I am sight-challenged, I do not know which perogies have turned over, nor do I know which side they are currently on. I also do not know when a perogie has been “cooked” or not.

Question: What is the minimum number of shakes of the frying pan should I make in order to achieve a probability of P1 of not burning any one perogie, and P2 of not undercooking any one perogie?

Analysis (just to get you started):

1. All perogies are guaranteed to be undercooked if you spend less than 2*t1; likewise all perogies are guaranteed to be burnt if 2*t2 is spent;
2. If you flip the pan an infinite number of times, it stands to reason that all you would need is 2*t1 to cook the perogies.
3. Intuition would suggest that the greater the N, the more shakes of the pan that are required. However, this may be false and N may be an irrelevant variable.
4. Initially reducing the problem to N=1 may be helpful.
5. After cooking the perogies and eating them, I still couldn’t solve this problem other than highly suspecting it dealt with a lot of messy binary probability trees and an analytical solution would be elegant, but currently beyond me.

The Bank of Canada today lowered short term interest rates to 1%. This essentially means that what little interest cash will accrue will go to zero – go purchase some assets that will actually earn a return instead of GICs.

Bank of Canada lowers overnight rate target by 1/2 percentage point to 1 per cent

OTTAWA – The Bank of Canada today announced that it is lowering its target for the overnight rate by one-half of a percentage point to 1 per cent. The operating band for the overnight rate is correspondingly lowered, and the Bank Rate is now 1 1/4 per cent.

The outlook for the global economy has deteriorated since the Bank’s December interest rate announcement, with the intensifying financial crisis spilling over into real economic activity. Heightened uncertainty is undermining business and household confidence worldwide and further eroding domestic demand. Major advanced economies, including Canada’s, are now in recession and emerging-market economies are increasingly affected. Energy prices have fallen as a result of substantially weaker global demand.

Stabilization of the global financial system is a precondition for economic recovery. To that end, governments and central banks are taking bold and concerted policy actions. There are signs that these extraordinary measures are starting to gain traction, although it will take some time for financial conditions to normalize. In addition, considerable monetary and fiscal policy stimulus is being provided worldwide.

Canadian exports are down sharply, and domestic demand is shrinking as a result of declines in real income, household wealth, and consumer and business confidence. Canada’s economy is projected to contract through mid-2009, with real GDP dropping by 1.2 per cent this year on an annual average basis. As policy actions begin to take hold in Canada and globally, and with support from the past depreciation of the Canadian dollar, real GDP is expected to rebound, growing by 3.8 per cent in 2010.

A wider output gap through 2009 and modest decreases in housing prices should cause core CPI inflation to ease, bottoming at 1.1 per cent in the fourth quarter. Total CPI inflation is expected to dip below zero for two quarters in 2009, reflecting year-on-year drops in energy prices. With inflation expectations well-anchored, total and core inflation should return to the 2 per cent target in the first half of 2011 as the economy returns to potential.

Against this background, the Bank today lowered its policy rate by 50 basis points, bringing the cumulative monetary policy easing to 350 basis points since December 2007. Guided by Canada’s inflation-targeting framework, the Bank will continue to monitor carefully economic and financial developments in judging to what extent further monetary stimulus will be required to achieve the 2 per cent target over the medium term. Low, stable, and predictable inflation is the best contribution monetary policy can make to long-term economic growth and financial stability.

The southern end of the Pattullo Bridge was lit on fire this morning, apparently due to an arson. The part is approximately here, where there are wooden supports to the bridge.

Last summer, when I delivered my car to the Scrap-It program, I walked from the scrap yard at the coast of the Fraser River to the Scott Road Skytrain station, and it took me through the area that was lit on fire. The area struck me as a popular spot for homeless people to camp out – although noisy, it does provide good coverage against rain. I was also the only person walking around in the area.

It’s likely a bunch of punks (or maybe a single one) just decided it looked like a good target to set on fire. Almost nobody would be walking around that area so they’d have time to do it comprehensively. It wouldn’t be as simple as lighting a match and throwing it in – they would need some sort of accelerant to get things going.

The bridge itself is nearly a century old and this incident should hopefully accelerate plans to replace it. It won’t be cheap, but it would be necessary.

The traffic diversion will be extreme – 88th Ave/Nordel Way and the Alex Fraser Bridge should be receiving the majority of the flow that would otherwise go to the Pattullo.

A couple days ago I was in Sumas, WA picking up some stuff and filling the car since it was nearly empty.

The price of gasoline was $2/gallon. A US gallon is 3.785 litres.

The CAD-USD exchange rate at that time was about 0.815.

The credit card charges a 2.9% currency conversion premium.

To calculate the differential:

US$2 to CAD = $2 / 0.815 / (1-0.029) = CAD$2.53/gallon

CAD$2.53/gallon / 3.785 gallons/litre = CAD$0.668/litre

It was an easy decision to fill up, was about 18 cents cheaper than prices in Abbotsford. Plus I didn’t have to pay any silly “revenue-neutral” carbon taxes which gives me a small smile.

I have not had to learn a lesson “the hard way”, but I am setting some internal policies for myself that will hopefully mitigate it from ever happening.

1. Make sure whatever institutions I have money in there is some form of insurance available in the event of a bankruptcy (CIPF/CDIC are the two in Canada) that offer some sort of government guarantee.

2. Do not have money in institutions that are not publicly traded. Right now Questtrade for my RRSP is the only exception. The lack of publicly available financial statements means I am taking a financial “leap of faith”, although if they turn out to go bust, there is CIPF which will have me covered (although it will take some time for them to recover my funds). Questtrade uses Pension Corporation (an external corporation) for clearing, this is the largest (“Bernie Madoff“) risk for clients – at least with external clearing trades are being executed outside the firm.

3. If your money is with a publicly traded company, if their common stock trades at a low enough level, move money out of the company into another one. For example, ING Canada is IIC.TO and looks healthy. Interactive Brokers is publicly traded in the USA and is IBKR. Both of those are healthy, and it is likely if one of the Canadian majors has a blowup that the market will signal this in advance (general rule of thumb: less than $10/share).

Those invested in E-Trade Canada, be thankful that the Bank of Nova Scotia took you over.

To conclude, right now my only material risk is dealing with Questtrade. Unfortunately they are still the only brokerage firm that offers US dollar-based transactions without currency commission swap charges within a registered account. Their commissions are also cheap.

As previous discussed, Nortel formally filed for bankruptcy protection.

They still have $2.4 billion in the bank, so they will continue operating, but the people holding Nortel debt will likely be able to control the company. Nortel debt at this moment is trading at around 17-19 cents on the dollar, depending where you are looking. This places a market value on Nortel of about $760 to $850 million. If you take their existing balance sheet, subtract debt, goodwill and intangibles, and the deferred tax asset (which they will have a difficult time using after bankruptcy), you are left with a company that has about $1 billion in tangible equity, so the valuation is probably correct to an order of magnitude.

The reason why the market didn’t price in this bankruptcy was because there was some speculation that Nortel would continue paying the debt coupon to give it another six months. Instead, they just pulled the trigger today.

Attached is a file that you can print and use for a free day at the Olympic Oval. Expires on February 25th.

I’m guessing due to the lack of numbering of these files and stuff that they are essentially making the oval free for everybody until February 25th. I have no idea why, but just passing along the “winter cheer”.

Apparently Nortel is going to declare bankruptcy fairly soon.

Their balance sheet is actually not in terrible shape, although they’re not in good shape either. With about $2 billion in cash and $4.5 billion in debt, the company is still bleeding cash and is facing declining revenues.

Their essential problem is that they are now in a commodity market, and they are far from being the low cost leader. In a commodity market, when you are not the cost leader, you will lose.

Nortel debt due in 2016 (coupon – 10.75%!) is apparently trading at 24.5 cents on the dollar, which would imply that the restructured company would have a market value of about $1.1 billion after bankruptcy. I have not done any valuation exercises on Nortel, nor will I.

Almost everybody I know that traded stocks owned Nortel in the year 2000, and this is how the story ends.

But if you still believe, don’t buy the stock – don’t buy the preferred shares – buy the debt. For starters, you will have a 44% annual yield, and a 400% capital gain if the debt matures and is paid off in 7 years. Not very likely, however.