Here is a document that tracks railway loads in Canada in Canada – anything relating to metals have been absolutely killed this year compared to the previous, while agricultural products seem to be doing quite well.
I’ve said previously that an investment in Canadian railroads (CP Rail, CN Rail) won’t triple overnight, but will be a good store of value in the long-term.
Thank you once again to Nelson for pointing out an article titled “Rise of the kitchen table traders“, roughly about some guy that discovered he was up a massive percentage and is starting his own firm doing algorithmic trading. Later on they got some executives to warn the world that you are fighting the big banks with their computers and information.
However, what got my attention was in the comments. Probably the biggest load of garbage that I have seen floating around academia and literature of financial advisors is the following quotation:
Asset allocation(equity vs fixed income) is what drives returns and volatility. It dictates 90% of your returns and that should be the biggest focus when investing.
This is absolutely untrue. As a quick and non-technical counterexample, will equity in a government-regulated utility company have a different return and volatility characteristic than equity in a development-stage biotechnology company?
I haven’t had time to read the bill regarding the change to the lobbyist registration act, but Sean Holman, who has been doing one heck of a fine job on the Public Eye Online, brings up an interview with the Attorney General, Mike de Jong, about why a recommendation of the lobbyists registrar was not implemented.
de Jong’s discussion with Sean Holman seems credible.
Fido and Rogers are changing their local calling area size in Vancouver. Formerly extending from Sechelt to Chilliwack, they have now lopped off the Chilliwack side of the local calling area. This is a reduction in service but they of course market it as an improvement (“this will help you understand your long distance bill better”). In reality it will result in incrementally higher long distance revenues.
A very, very long time ago, long distance ceased to cost telecommunication companies anything more to provide; it has just been an accounting construct to get more money out of customers. I am looking very forward to the day where competition (e.g. Wind) will come up and obliterate the concept of long distance. Skype has also been on the right track in making the notion of long distance nonsense.
This concept (unlimited long distance across the country) is given as a standard feature in all US cellular companies (e.g. Sprint, Verizon, T-Mobile, AT&T Wireless, etc.).
I have also noticed that getting local calling area information from any of the major cell providers (Bell, Telus, Rogers/Fido) has been made very difficult by virtue of the fact that they no longer publish local calling areas over the internet. Bell Canada used to have detailed tables on its website that you can look up, but no longer. You have to actually call or manually contact a representative on their end to get the information. This is both wasteful from the perspective of the customer and the company (which has to field more questions about local calling areas).
Scott Adams (author of Dilbert) was absolutely correct in his prediction that business margins can only remain higher when you confuse the heck out of your customers (a confusopoly), or forcing customers to take disproportionate efforts to obtain information that enables proper pricing decisions.
On November 9, four Canadian electoral districts will be going to the polls for a by-election.
I did not do any comprehensive analysis, but I will hazard some guesses. There are two weeks plus a day until people vote, but barring any huge developments in the national political scene, I doubt it will affect the results of the by-elections. By-elections inherently are more politically volatile than general elections, so predictions are more risky.
1. Cumberland–Colchester–Musquodoboit Valley – Conservative victory, suspect Liberals place second with the NDP at roughly the same vote level as the Liberals.
2. Hochelaga – Bloc victory, although I suspect it will be closer than the 2008 general election’s margin of victory of 29%, and the NDP will place second.
3. Montmagny-L’Islet-Kamouraska-Rivière-du-Loup – Bloc victory, suspect a larger margin of victory than 15% over the Conservatives. The Liberal candidate will be lucky to get his nomination deposit back (i.e. he will be flirting around the 10% vote, but I think they will be slightly under this).
4. New Westminster-Coquitlam – NDP victory, over the second place Conservatives. By far and away, this is the most difficult of the four ridings to call. I have put a lot of weight into the fact that Coquitlam is predominately the largest part of the riding; and that the NDP candidate is a very popular councilor in the city. The Conservative candidate is also a councilor, but in Port Moody (which representation is significantly smaller in the riding). The New Westminster area in the riding is traditionally NDP-leaning. In order for the Conservatives to win they will need to leverage on whatever now-Senator Yonah Martin tapped into.
I have created a very unprofessional map that shows the geography of the three municipalities – New Westminster, Coquitlam and Port Moody, in relation to their full size and the federal electoral boundaries. Blue is Port Moody, red is Coquitlam and green is New Westminster.
The Pundits’ Guide also linked to a map showing the relative electoral support within the riding. It kills my thesis because Coqutilam looks to be net Conservative, but by-elections are much more about getting your voters to turn out than general elections are. Municipal elections have worse voter turnout and a vote there is typically worth 2 to 3 in a federal election.
Projected standings in the House of Commons after this by-election:
Conservatives 144 (47%)
Liberals 77 (25%)
Bloc 49 (16%)
NDP 36 (12%)
Ind 1 (0.3%)
Amazon announced a quarter that was higher than analyst expectations. Its shares today launched up about 25%, closing at around $118 per share.
Readers of this weblog will know that the price per share is irrelevant; market capitalization is the important number. Amazon has about 441 million shares outstanding, which means the market values the company at around $52 billion. The company is expecting fourth (Christmas) quarter sales to increase by between 21-36%, so a mid-line estimate would be around 28%. Net income is expected to be around $840 million for year’s end.
Doing the math, you are paying $52 billion for $840 million in income, or a ratio of 62, or a yield return of 1.62%, assuming no further growth in income.
How much would Amazon’s earnings have to increase to warrant such a valuation? By taking an operation such as Walmart (whom has racked up $400 billion in sales, and $13.3 billion in net income after taxes) and looking at its valuation – approximately 13 times earnings we can get a hint. Amazon at 13 times earnings would be expected to earn about $4 billion a year. Both operations have extremely slim margins – about 3.3% for Walmart, and about 3.4% for Amazon in 2008. Assuming Amazon, by virtue of its business model, can get its net margin up to 4%. It would have to increase sales to $100 billion or about four times the levels it will achieve in 2009. This is a very elementary analysis, but it clearly shows that Amazon’s valuation is priced very highly.
Will Amazon be able to achieve $100 billion in sales? Perhaps in 8 to 10 years. Is there any reason to buy shares in Amazon when this growth is already priced in? Not at all.
Never confuse a company and its shares – a company can be great like Amazon, but its shares can be a horrible investment. Another company in the same category (although it is less ridiculously over-valued, but still slightly over-valued) is Costco.
This is a perfect example of why our justice system is fundamentally broken dealing with low-level crime:
Chen is charged with assault, forcible confinement, kidnapping and carrying a concealed weapon.
The charges stem from an incident on May 23 when shoplifter Anthony Bennett stole a box of money tree plants from Chen’s Lucky Moose Food Mart on Dundas St. W.
A transcript of Bennett’s Aug. 17 sentencing hearing shows him pleading guilty to stealing 10 plants from Chen’s shop.
He also pleaded guilty to stealing plants from another store.
Justice Maryka Omatsu reduced Bennett’s sentence to 30 days instead of the 90 days sought by the Crown,largely because he was agreeing to be a Crown witness against Chen.
Police say Chen and two store employees, one driving a vehicle, chased Bennett as he fled the store on foot. He was not stealing at the time.
They caught him, forced him into the vehicle, tied him up and assaulted him, police said.
Police said they found Bennett bound hand and foot.They charged Chen.
Apparently the person that robbed David Chen’s shop was a chronic offender with a lengthy criminal record.
Since the police clearly weren’t going to investigate a petty crime for hours, Chen took the initiative and got punished for taking a reasonable action.
Our system advantages offenders significantly with all sorts of abuses of procedure. In this case, the offender was able to get a reduced sentence in exchange for testifying against Chen. In addition, what made this a “crime” was the fact that the offender was not actively stealing at the time that Chen detained him. Chen should be commended, not charged. The police, prosecutors and politicians should be ashamed that it got to this point.
I hope this goes to a jury trial and delivers a not guilty verdict.
Apparently the BC government is going to be spending $458 million on upgrading BC Place, including putting in a retractable roof. Partially paying for this will be land sales (the parking areas to the south and southeast of the stadium) and there will be 40-year financing guaranteed by the province.
My only comment is that I hope in the analysis they compared spending $458 million against the cost of demolishing BC Place and building a new stadium from scratch. It is a 26-year old facility which originally cost $126 million to build back in 1983; even though construction and material costs have increased since then, if you budget $750 million for a new stadium, it might have been a more attractive opportunity instead of spending $458 million on old infrastructure.
Nelson pointed out to me (earlier than I actually read the headline) that one of my holdings, Harvest Energy, agreed to a CAD$4.1 billion takeover by Korea National Oil Corporation. I do not own equity in Harvest Energy, but I do own debentures. The relevant portion of the press release is the following:
In accordance with the terms of the indentures governing Harvest’s convertible debentures, KNOC will make an offer to purchase all outstanding debentures for a cash consideration equal to 101% of the face value thereof, plus accrued and unpaid interest, within 30 days following the effective date of the Arrangement. Likewise, in accordance with the terms of Harvest’s 7 7/8% U.S. Notes, KNOC will make an offer to purchase all outstanding Notes for a cash consideration equal to 101% of the face value thereof plus accrued and unpaid interest, within 30 days following the effective date of the Arrangement.
Most of the debt of Harvest Energy I have acquired earlier this year was between the prices of 40 to 50 cents on the dollar. My TFSA, for example, has exclusively Harvest Energy debt. I have grown my TFSA from $5,000 to somewhat over $12,000 in less than a year, and I guarantee that this rate of growth will not continue. As I do own Harvest Energy debt outside the TFSA, there are tax considerations for me to examine, and other variables.
The variables are as follows:
1) The actual takeover is subject to government approval, but it is likely the Canadian government will not step in. It is clear that the acquiring company will be investing further into the company, and this will mean jobs will stay in Canada. In addition, the acquirer (a Korean “crown” corporation) is from a country that we have good relations with. The risk of the takeover falling through is minimal.
2) The acquisition will take place in late December, but it could be early next year. What gives the debt security value is that once the change in control takes place, the acquiring company is legally obligated to offer 101 cents on the dollar (cash) to the owners of debt securities within 30 days of the change of control. Of course I will be accepting this offer – I can get my money today, or I can get it in 3-4 years; I will take it today, and the cost of this is that I will not be getting a 6.4% or 7.25% coupon from this particular investment after I sell the debt back to KNOC.
3) It is advantageous for me to hold the securities until at least January 1, 2010, where capital gains taxes can be deferred until April 2011. It is also an income balancing tool – if I sell in 2009, these are capital gains taxes that I will not have to pay in 2010.
4) The debentures will continue to accrue interest until they are bought out, which means that there is a cost to selling them and getting an immediate cash conversion. Right now the debt securities are trading at 98.5. Let’s review the math.
Per $1,000 face value of debt (6.4% coupon), I am locking up about $985 of capital. This is still a current yield of 6.5% on investment. In addition, there will be a $25 increase in capital, which spikes up the absolute reward to 2.5%. Realistically, if the offer to repurchase debt is extended to January 31, 2010, then I would have to wait 3.2 months to obtain $25 in capital appreciation and $17 in additional interest income. Math-wise, this is about 4.3% over 3.2 months, and I would have to find an alternative investment candidate that would yield better than that to make selling at current market prices any sense at all.
In other words, if I do not think merger failure is a risk, I am still being paid quite handsomely to hold onto these debt securities. This is actually better than the equity itself, which is priced at a 2.15% return if the deal is consummated (based off of a share price of CAD$9.79, which will receive CAD$10.00 per unit when the transaction is concluded).
If I were to do some merger arbitrage on this deal, I would borrow some serious amounts of money to purchase the convertible debentures. It is not too efficient – if I borrowed $1,000,000 and used it to buy as much debt at 98.5, I would be able to extract about $32,300 minus financing costs (about $4000) over a 3.2 month period. The second the Canadian government gives approval to the transaction, the debt should trade slightly higher than 101 because of the extreme certainty of investors being paid off.
Unfortunately, I do not have the capacity of borrowing $1,000,000, and also the low probability risk of a merger failure would make such a transaction excessively risky. However, certain portfolio managers specialize in merger arbitrage and undoubtedly will be taking advantage of this pricing.
My main problem at this point will be reinvestment risk, although I now have a huge cash injection coming up early next year, I will have to find a place to invest it. Right now my candidates are marginal at best, and I do not like investing in marginal situations.
Somebody posted a video on Youtube of an arrest done by the Abbotsford police department.
You can watch it here, and a related short article on CKNW here, and the Vancouver Province here.
I think the allegations of brutality or abusive behaviour are completely unwarranted by the evidence in this video; it was clear that the suspect was not complying with orders to remain still and not to move. He was warned enough times, and received a swift kick in the head to reinforce the point. In a situation where the police do not have control, it is procedurally correct to do exactly what they did – the suspect lying on the ground is not sufficient to obtain control of the situation.
Say what you want about the police, but notwithstanding the Robert Dziekański incident, they have done an incredible job here in the lower mainland in balancing the interests of the public and getting their primary job done (nabbing criminals). It is only a shame that the justice system is so horribly broken that allows their good work to be wasted.