Double Blind

The government of BC has introduced legislation to prohibit usage of hand-held electronic devices while driving.

My opinions on this legislation are mixed; there are some drivers on the road that are horrible at basic driving (such as speed control) while using a cell phone. On the other hand, there are drivers that are fine with managing the mental load required to use a cell phone and drive at the same time.

On city streets, a ban on driving while holding hand-held devices makes sense; however, on the highway (especially in rural BC) it doesn’t make any sense at all.

In what has turned into an annual, but futile, tradition, I have written to BC’s standing committee on Finance and Governments Services. They have an online submission form.

Some points to my submission included:

1. That the “climate action dividend” and the upcoming HST tax credit could be used to instead increase the basic amount for provincial income taxes by about $3,100.

2. That the government is spending so much money and accumulating so much debt that they should finance their debt with longer durations, because once interest rates rise the interest bite will have a much higher effect;

3. Health spending is the only real area to target on the expenditure side of the government ledger, simply because it is nearly half of the provincial budget. All other ministries have had their budgets held relatively constant or have been cut.

The BC Government finally drafted and tabled legislation to control the purchase and usage of body armour.  They are doing this under the guise of “combat gang and gun violence”.

My opinion on the matter, back in April 18, 2009, was the following:

Both the BC Liberals’ and NDP’s platform calls for the banning of body armour. I have said earlier this policy is ridiculous – crafting and enforcing such legislation will do absolutely nothing for gang violence and will end up costing the government in compliance costs – money that could have been better spent elsewhere.

This is all the legislation will accomplish – creating another office space for a compliance monitor, and doing nothing to limit shooting on the streets. Similar to the federal gun registry, I am sure every gangster out there will dutifully comply with the legislation and apply for their body armour permits under the guise of being a “Security consultant”.

The legislation was likely crafted for the purposes of Section 21, which gives the police another “reasonable ground” for a warrantless search. The ultimate police dream is to give themselves the power to stop people on the streets, for whatever reason they desire. Suspicion of body armour is just another one on the list.

Of course, real gangsters don’t wear Kevlar. They wear bulletproof clothing. With all of their illicit and tax-free gains the head honchos make, not only are they cornering the greater Vancouver real estate market, but spending a few bucks on high technology clothing as well.

Probably the best compendium of Canadian financial statistics can be found on the Fiscal Reference Tables. All sorts of analysis can be dredged out of these numbers. They have been updated for the 2008-2009 fiscal year.

Of note is the Federal government’s spending record (the “Who?” column is which government introduced the budget):

Before 1983-1984, the government used different accounting standards, so they are not comparable to current years.

Mulroney had 9 budgets and averaged 4.3% program expenditure increases; Chretien had 10 budgets and averaged 2.4%; Martin had 2 budgets and averaged 7.0%; and Harper had 3 budgets and averaged 5.9%.  This is sure to increase in the 2009-2010 fiscal year as the stimulus package is expected to increase government spending by a whopping 16.4% from 2008-2009 to 2009-2010.  Including this in the average, that means the Harper government will have 4 budgets and an average of a 10% program expense increase.

There are subtle differences in the valuation of Gold when one looks at it scaled in Canadian dollars vs. US Dollars:

Price of gold: Canadian Dollars / 100: (e.g. 9.5 = CAD$950)

Price of gold: US Dollars:

The quick conclusion is that the low for Canadian dollar purchasing power was in the middle of the economic crisis (early 2009), while now the US dollar weakening is no longer putting gold at all-time highs, unlike what is happening to the US currency.

Purchasing a precious metal, and not real estate, is probably the ultimate bearish bet on the economy – although you won’t be getting a return by buying a slab of gold, you certainly won’t be destroying your capital either. With interest rates at nearly zero, it is not surprising why the price of gold has increased.

I currently have some True Energy Trust debentures, maturing June 2011. Coupon is 7.5%. Because it is trading close to par value (94.4 cents at the moment), I am getting to the point where I might consider a liquidation. I have a high confidence that True Energy will be able to pay off at maturity – their common shares for some strange reason has doubled over the past month, which means they can de-leverage if necessary, or raise equity financing. The company also has the option to pay off its debt in shares of its own company, at a 5% discount to market (calculated by the average price of a certain number of days of trading before the maturity date). The point is that at present, the ability for True Energy to pay off its debt is there and is likely to happen. It is pretty safe to assume that I will have the “bird in the hand” and have a liquidation happen on June 30, 2011.

Because a sale will result in realized gains, it will result in a taxable capital gain in the 2009 tax year if I sold today, so my first pass of thinking is that strictly for tax reasons, I should keep my hands off the bonds as I will be able to defer income taxes, at the latest, until April 2012 (i.e. selling it on January 1, 2011) when the issue will mature. However, ignoring taxes, what would it take for me to liquidate this?

The bonds will give off four more coupons – December 2009, June 2010, December 2010, and finally June 2011. This will be a cash flow of $37.50 per $1000 par value. There will also be a cash flow of $1000 (per $1000 par value) in June 2011. Math-wise, it works out to a capital gain of about 3.4% annualized and interest income of 7.9% on current market value. A very informal financial tool is adding these two together, and getting a joint yield of 11.3%. This should not be confused with “yield to maturity”, which is a very bad measurement tool when dealing with high-yield securities. Also, this “joint yield” calculation is an approximation compared to textbook financial modeling of cash flows, but I am trying to keep it simple.

In theory, I should be selling the notes if I can find something that has a better “joint yield” return than this, at the same amount of risk.

As my investment scanner is nearly devoid of any equivalent candidates (potential ones with higher returns possess far higher risk than I am willing to swallow at the moment), my only decision is to hold. I am also advantaged by waiting, as I will be collecting interest payments as a default course of action.

It is possible for bonds to trade at above par value – for example, if True Energy started trading at 103 cents tomorrow, you would receive a 7.3% current yield, and a -1.7% capital gain. On a $1,030 investment you would still receive $37.50 semi-annual coupons, but you would receive a $30 capital loss when the bond matures on June 2011. When bonds trade above par value, you are left with a choice of sacrificing capital for income – in a taxable environment, it would be preferential to sell as capital gains are taxed at half the rate than interest income.

There is finally the question of investing low-yield cash (earnings 1.05% at ING Direct) into this and reaping a higher rate of return in 1.7 years; the conflicting piece of information with respect to the security of principal lies in the company’s balance sheet. They have approximately $34M in senior bank debt, and $86M in convertible debt outstanding. With a market capitalization of $133M, in relation to their outstanding debt, is a little bit of solvency risk. However, this is more than made up for with positive cashflow through operations – a dramatic drop in oil prices would cause this.

Harvard University gambled off operating cash balances into their own endowment fund (which historically has been one of the best yielding performers in the entire capital marketplace), and taking a $1.8 billion hit in their 2008-2009 fiscal year.

Typically such cash balances are only to be placed in money market accounts or triple-A corporate debt (i.e. in risk-free vehicles). It is very tempting as a financial manager to place this cash in higher-yielding accounts, but the reason why such cash balances are to be placed in cash or near-cash accounts is because you could face a three-sigma event and suddenly discover your cash is not so secure.

Partly due to this loss, Harvard had to raise some $2.5 billion in long-term notes (paying a coupon of about 5.0-5.8% for 30-year duration notes) to help bridge them cash-wise.

This is why it is always wise to keep separate your operating account and your investment account. Your investment account can blow up and you can still keep living, but if you invest your operating account you are asking for a liquidity crisis if an adverse random event happens. The best example over the past 10 years would have been the freezing of the world’s capital markets after the September 11, 2001 terrorist attacks.

The preliminary design for the Evergreen Line is going to the public consultation stage.

After reading the consultation discussion guide, this will be a winning system. Probably the best design decision was to continue using Skytrain instead of going to LRT. There are multiple benefits with Skytrain, including the fact that the government has been using it for the Expo and Millennium Line. Speed is the primary advantage, and speed is what is required to get people to use the system.

The big disadvantage of using Skytrain is cost, but these costs are being compared to lower costs that LRT proponents claim that their option would incur. The reality is that any LRT project that goes on in the Lower Mainland will likely be above initial cost estimates, and this would be discovered when the requests for proposals started coming in.

The Evergreen Line, however, will face one geographical disadvantage (Skytrain or LRT) – the transfer to downtown Vancouver will require three train boardings. In conjunction with this (which will put load on the under-capacity Millennium Line) will be a required upgrade to the capacity of the Expo line, from the Commercial Drive station to Downtown. The few times that I have marched to and from downtown by Skytrain during commuter rush hour, it was pretty ugly with respect to how full the trains and stations were – Main street station is usually packed.

This will continue to make the West Coast Express from Port Moody that much more attractive for downtown commuters.

I continue to maintain that our rapid transit network becomes much more valuable with each additional link.

Light rail will have a role in Vancouver, however – I am thinking that the money required to expand the Millennium Line down to UBC might be better saved by a light rail link west of Burrard street and then investing the leftover capital into the expansion of the Expo Line capacity.

When I read a rather alarmist CBC article that Canada’s waterways are at risk, it cited a World Wildlife Federation (WWF) report that looked at some of Canada’s major rivers.

I naturally thought that since the WWF did the study, of course they were going to sound the alarm bells.

So I pulled out the source documentation (located here) and gave the report a read. I was rather surprised to find out that the report itself is not too alarmist – there is cause for concern in certain areas, but nothing like what the initial CBC article would have implied.

I do not like the fact that the report suggests that Canada can fight “climate change” – it will happen whether we like it or not, and the only thing we can really do is brace for impact. It is also absurd to think that we can keep the climate constant for the next hundred years (which is really what climate change activists are trying to propose) – nature will continue to throw curveballs as long as we are alive.

There are very legitimate concerns about river levels, especially in agricultural regions (the usage of the Milk River in Alberta is one example). Industrial uses (e.g. tarsands mining) also tends to be a heavy consumer of water resources (in addition to a source of pollution). These are legitimate concerns for our river systems. The USA also has a lot of concerns with their rivers, the Colorado river being one example.

Alarmism, however, does nobody any favours except getting noticed by the media. This is why the majority of science that gets noticed by the media is usually garbage designed to elicit public reaction.

All in all, however, both Canada and the USA’s environmental policies are light years above those of Russia and China. I could just imagine the public backlash that would happen if we had an Aral Sea situation, i.e. if we spontaneously decided to drain one of the Great Lakes.

At the very bottom:

Due to your excellent payment history, we are pleased to advise you that the Annual Interest Rate, as shown on your statement, has been decreased by 5% for the next 6 months.

I actually didn’t know what the interest rate was on my credit card since I pay it religiously every month, and discovered it was 19.5%. So now it is 14.5%, or a 12.75% spread over what I can otherwise get. Shares of Visa are ridiculously expensive, so no way to cash in through that route.