Double Blind

One of the best things that can happen to an investor is that their company is taken over for a premium over fair value.

Usually you take up one morning and find out that some company has launched over a takeover bid and that is the end of the story – you sell your shares and move on.

In other cases, it becomes a little more complicated – such as when there are strong rumours of a pending takeover. The market value typically rises, but it is not at the point where you would receive full benefit of the takeover bid being formalized. About 9 times out of 10, such rumours are unfounded and when such a takeover never occurs, the market value drops to what it was before the rumours began.

One holding of mine, Sprint Corporation, had a rumour today that Deutsche Telekom (who owns T-Mobile) is looking to put a bid on for Sprint. Today, the shares for Sprint are up about 10%. However, I do not own shares – I own the corporate debt of Sprint.

It is a common clause in corporate debt that if a corporation goes through a change of control that the company is obliged to offer existing debtholders the right to purchase their debt at par value within a certain time after a merger is completed. If the debt is trading at a discount to par value, it means that you will get to cash out at par value.

Right now, the debt that I own went up from roughly 61 cents on the dollar to 67 cents. If such a takeover is actually true, I would have the right to cash it out at 100 cents (and I would choose to exercise this right and invest my cash elsewhere).

Unfortunately, I am faced with a decision – by selling, I am effectively believing that the takeover rumours are false, and that the bonds will trade back down after all the hooplah has settled. I could then probably buy back the bonds at the lower, uninflated price. If I hold, I am implicitly accepting that the rumours are true.

I hate these types of situations, but considering my upside is about 50% from current value, while the downside is about 10%, I will choose to hold, even though I do not think the rumours are true (or at least that it will result in a takeover offer being bid and accepted).

It is impossible to find a political analyst out there that is non-partisan. Anybody naturally interested in the topic will have partisan leanings; some people are more intense than others. The best political analysts are the ones that can take off their partisan caps when reporting.

Probably a good example of partisan commentary pretending to be non-partisan was during today’s Christy Clark show at around 12:40pm on CKNW today (September 14, 2009). Clark had on the air Dennis Pilon, a political science professor, that was giving some political analysis with respect to the parliamentary jockeying for position during the leadup to this supposed election that is coming up. Pilon is a good speaker, but it is rather obvious by listening to what he has to say, that his political interests are anti-Harper, and pro-NDP. Listening to him trying to explain away Jack Layton’s about-face on being the “only official opposition in parliament” to his new mantra of “We can make parliament work” was hilarious spin. He really should have just said that Layton is deathly afraid of losing 15 to 20 seats if there is an election this autumn, which is really the objective truth.

It is a heck of a lot better if political analysts disclosed their political leanings off the bat instead of trying to pretend they are a non-partisan commentator.

The 2009 Canadian election will be the most pivotal election since 1974.

In addition for the Liberals to having financial incentives to calling this election, there is another reason why the Liberals want to do so – if no party wins a majority of seats, it is very likely that Michael Ignatieff will cut a deal with the NDP and the Bloc to form government.

Obviously if the Liberals and NDP’s electoral result shows they will win 155 seats or higher, the coalition will be much easier to negotiate and maneuver through. That said, that electoral result is highly unlikely – Liberal gains are more likely through the NDP than the Conservative party.

A more likely scenario is the Liberals and NDP getting together and negotiating with the Bloc (who are likely going to win more seats in this election than the last one) for some key concession to Quebec in exchange for parliamentary support for a year.

The Conservatives are raising the mantra of a coalition for two reasons: One is that it is true, and the other is because if they do not win 154 seats or more in this upcoming election, it is likely that Michael Ignatieff will become the next prime minister of Canada. Considering the spiked polls after the last coalition debacle, there is very strong public opinion on this matter.

Currently, there is no way for the Liberals to form government. With an election, there will be no ambiguity – although the Conservatives will win the most seats in the upcoming election, they will be asked by the governor general to form government. However, the first vote will result in a loss of confidence and Ignatieff will be asked if he can form government, per the precedent set in 1925.

We live in very interesting times in this country.

Anytime you have a country with a commission banning glass glasses in pubs, you know you are in trouble.

Barrick Gold raised $3.5 billion today in equity financing; the purpose of raising that amount of cash was to purchase back gold hedges. What happens with gold producers is that they frequently sell their production in the future at present day prices; it works to their favour if the underlying commodity is priced at the same or lower than the agreed-to price. If the price of the underlying commodity goes up, however, the transaction is a net negative, as the company could have been able to sell production for the higher price.

Companies usually have insiders that are well-informed as to their future views on commodity pricing, but occasionally executives make very bad decisions – TeckCominco’s decision to purchase Fording Coal for an insanely large sum of money right at the peak of commodity markets turned out to be a decision that cost shareholders dearly – they will be paying down the accumulated debt for a very long time.

Could this be another sign that the gold market is topping, or do Barrick’s executives know what they are doing? I have been reading a lot of press lately as to how the US dollar is going to collapse and subsequently how commodity pricing will increase, which touches off my contrarian sensors.

I already thought having a 10 ounce gold bar would be the ultimate hedge against anything having to do with paper money, but at US$1,000 an ounce, it’s quite expensive, especially when history would suggest it could drop 30% or so from present levels. Or maybe Barrick is correct and it will continue rising. Very difficult to say.

Just reading this article from Zero Hedge (which is turning out to be quite the funny financial gossip blog), they linked to a youtube video of some person that is trying to start up a “debtor’s revolt”.

When listening to the video, this person has racked up some credit card debt and the issuer (Bank of America) jacked up her interest rate to 30%, and so she is upset about it and says she will not pay off her credit cards.

I have very little sympathy for these types of people. They accrue expenses on a payment medium which inherently has a high rate of interest to begin with, and then they are looking for an excuse not to accept their responsibility to pay their bills.

If she desires a lower rate of interest, then most banks will give a line of credit at a reasonable rate (high single digit percentage). If they don’t give her such a line of credit, it is usually because their history indicates that they won’t pay it off. The amount of interest to be gained from such customers compared to the potential cost of collection is usually not worth it for financial institutions at the retail level.

Ultimately, it boils down to the simple expression, “Don’t buy stuff you can’t afford“.

The R-Squared Energy Blog writes about biofuel contenders, and discusses algae, hydrogen, and corn-based biofuel.

Ultimately it is about scaling production in such a way that is price competitive with traditional fossil fuels. At $100/barrel, biofuel still cannot compete. At $1,000 a barrel, biofuels will be much more prevalent.

The other factor in energy is proper storage – if somebody can develop a reliable, high-capacity, and low-loss storage mechanism, it will be an absolute game-changer.

This site is full of cartoon satire, but it is quite believable that there is an embedded truth to it in the real world.

There are light rail advocates everywhere that say LRT is the solution to mass transit problems. They frequently cite lower costs (compared to Skytrain) in their arguments.

I have little knowledge how this would compare to a hypothetical LRT system in the Lower Mainland, but Edmonton costed an expansion of theirs (which the original track was built in the late 70′s) out to $2.4 billion. This covered a “West” and “Southeast” LRT line to their downtown core. More information on Edmonton’s LRT is here, and an even better presentation on the expansion plan is here. One of the most important decisions is how far to space stations – urban style is 400 to 800 meters apart, while suburban is about 2km apart. This also makes a huge difference with respect to travel times.

The entire Edmonton regional network is planned to be 198km, and cost about $14 billion to construct (operating costs $338 million a year). This works out to a capital cost of about $70 million per km of track, and an operating cost of about $1.7 million per km of track.

In comparison, the Canada Line (20km) was a $2 billion project ($100 million per km); the Evergreen Line (if they ever give it the green light) will be a $1.4 billion project for 11km ($127M/km); and an expansion of the Millennium Line from Vancouver City College to UBC would be $2.8 billion.

Skytrain’s 2005 operating cost was $73 million on 48 km of track, or about $1.5 million a kilometer.

Capital costs of LRT might be slightly cheaper than Skytrain-type solutions, but it comes with the speed disadvantage and increased operating costs.

For reasons I won’t get into, my best guess now is an October 26th election date, with the writ dropped in the first week that Parliament returns.