Blessed by the Potato

I looked at BP through the disaster in the gulf, and figured that they would not go bankrupt, and that it would look interesting to me at about $30. It crashed through that, bottoming out near $27, then started moving back up as news that the siphoning/recovery was at least partially working, and that the relief well was progressing well. One expert said that the team drilling the relief well had a 100% success rate (40 for 40). That lead me to buy in at $30.20 on the way back up.

I figured that the stock was cheap, overly beaten up on fears of just how high the costs for the cleanup could climb.

Now that the well is finally capped, and we can be sure that we’re not facing an Ixtoc-like scenario where oil gushes for months on end, the stock has recovered significantly, and I’m looking to sell.

BP is a remarkably profitable oil major, and many of the fines, settlements, and court awards won’t have to be paid for years and years. It’s possibly still cheap next to its peers. However, I don’t like BP as a long-term hold. Their safety record is horrendous, which may have played a role in the spill in the first place. They just sold off a lot of assets, and I doubt that they got terribly great value from the sales, given their negotiating position. I’ve made my money on the short-term inefficiency that was there due to fear, and now I’m out.

Hopefully, this crisis will serve to change the corporate culture at BP, and this may indeed be a good point to get in for the longer term as they come to put safety first… plus, if and when the dividend is restored, it will likely be an attractive yield. But for me, I’m taking my money and running.

To gloat a bit, I made 35% on the stock move itself, less 1% for commissions, 5% for the forex fee both ways (damn you Waterhouse, and your terrible USD exchange rates!!), and 2% for the move up in the Canadian dollar over the last few months, for a net gain of 27%.

As an aside, I called about buying another US security today and washing the trade. TD said they don’t do that for non-registered accounts since they have USD accounts as an option, so I’ve added one of those to my account, which should help a bit with exchange fees.

Rachelle at Landlord Rescue is hosting the first edition of the Canadian Real Estate Carnival. Head over there to check out a collection of articles about real estate in Canada, including one by me!

Mike from MoneySmartsBlog has published his guidebook to RESPs. I got to help proofread an advanced copy, so I can say that the book is a good resource to have when starting out with an RESP for your child. It covers all the bases, explains what an RESP is, why you’d want to set one up for your child, and details the rules you need to be aware of.

The Globe has an article on the power of 4chan. “But their apparent hatred for humanity is compellingly inverse to their love of animals. […] When they decide to avenge people, they do it according to odd whims, like some dark, mercurial supervillain with a soft spot for house pets.” Netbug responds: “4Chan… It’s like letting a swarm of piranhas out of their tank because you have a spare cow to get rid of.”

The Big Picture blog has a post about Freddie and Fannie. What I found interesting was figure “2.2” (the 4th? one down). This is the data I was talking about some time ago about how Canada isn’t as different as we think we are. You can see how having a bad credit score lead to higher rates of default, but having high LTV (i.e., low downpayment) was also a large risk factor, even without having a low credit score (having both was terrible). And Canada definitely has had a lot of high LTV mortgages written in the last few years, even if “subprime” isn’t as bad.

The Neurologica blog laments science education in the US. A topic near and dear to my heart.

Thesis sabotage. Just the thought makes me shudder.

I’ve had a chance to play StarCraft 2 a fair bit now, and I’ve gotten used to the changes from the classic Brood Wars. It’s a fun game, no doubt about that, and some of the custom maps really show off the capabilities of the map creator. There are some minor balance tweaks left to come (though I can’t say I’ve found any of the items Blizzard is changing in the 1.1 patch to be an issue — though I do think Zerg need a faster way of getting anti-air units).

However, I think I still prefer WarCraft III’s gameplay. Here’s why:

1. Army sizes. I liked the (much) smaller armies of WCIII – each unit was somehow precious, and it provided a more balanced focus on micromanagement and macromanagement together. [For the non-gamers, micro is controlling each unit individually, using abilities, etc., while macro is about getting your economy up, pumping out as many units as you can, and getting the unit mix right].
2. The economic trade-off of getting a larger army. In WCIII if you built up your army above key supply points you’d face penalties to your resource gathering, providing some benefit to keeping a small, nimble force rather than just massing up and trying to steamroll somebody, or at least trying to delay that final build-up as long as possible. In SC2, there’s constantly pressure to keep building up, and no penalty for keeping a large force just sitting around.
3. The Creep (aka mobs) gave people a reason to leave their base. Yes, a large part of the reason was to level up their hero, and I can totally understand that SC2 is a different game with no heroes, so I’m not going to add that to my list, but nonetheless, it was an interesting mechanic to shake things up and get people doing something besides building up for the final armageddon clash. Having forces roaming the map made open-country clashes more likely, rather than having to try to besiege a base. It also made it a little more interesting to pull off a rapid expansion strategy.
4. Non-resource map features to fight over. SC2 has the Xel’Naga towers to provide sight, but beyond that the only focus points on the maps are the resource locations (expansion sites). There aren’t any shops or restoration pools for someone to take an interest in holding or visiting.
5. Scroll of town portal. I bolded this one because I almost exclusively play team games, and in WCIII the ability to teleport to your ally’s aid was critical when they were attacked. In SC2, there is no such ability, so on maps where allies are separated, it becomes very very difficult to be the defender. Some ability like this is what I miss most in SC2. Two (or more) players can almost always gang up on one, making early(ish) rushes a dominant strategy in team maps where the players are separated. In single-player games its really a non-issue, but hey, I’m not playing single-player much.

Larry McDonald pointed me to the Chou funds latest letter which describes buying into the US banks, in particular via the warrants that were issued to the US treasury in the bailout (and are now being publicly traded).

As it happens, I’ve been looking into the US banks (BAC in particular) on the theory that the worst is behind them now, and the pain is yet to come for Canada’s banks. I’m still a long way away from actually buying anything because it’s a very difficult sector to wrap one’s head around, especially in another country. However, this notion of the warrants was interesting so I decided to take a quick look.

The warrants (BAC.WS.A) allow you to buy a share of BAC for $13 and change in the distant future — 2019. They have an interesting feature in that the strike price is reduced by any dividends above the current 1 cent/qtr, so you don’t run the risk of the company paying out all the profits in dividends and the stock price going nowhere. Though warrants are very similar to call options, you don’t need to have an options-trading account to trade them. So far it sounds like an interesting option, especially if they’re cheap.

To see if it’s cheap, I need some way of modeling how much the warrant should be. That’s a tricky problem, one even the pros grapple with. Warrants provide leverage: for $7.50, I can buy the future upside to a stock that’s currently $13. So if I have $13, I can either buy nearly twice as many warrants, or one warrant and one safe security. However, with warrants you have to not only get the general direction right, but also the timing and the magnitude. I made a graph to very quickly look at what the return would be from either just buying and holding the stock, or buying the warrant, based on what the stock is at 9 years from now.

Here the formula I used was:
For going long: (future price – current price)/current price for a cumulative return in %.
For the warrant: If future price was less than the strike price of $13, -100% (warrant expires worthless), else (future price – strike price – warrant price)/warrant price.

Now this starts to give an idea of the situation: if BAC shoots the lights out, the warrants are the better way to go, thanks to the leverage. If they just muddle through, then just going long would be better. The cross-over point is at approximately $30.50, which would represent a compound gain of roughly 10%/year. I haven’t finished my research yet (which is going slowly thanks to that other research), but I’m not sure I’d be quite that bullish on it.

I am obviously not doing this according to industry standards, as nowhere do I have any greek letters, or volatility, or what-have-you. I haven’t taken into account the time value of money, though I’m not quite sure I need to with this method. This is just a quick back-of-the-excel-sheet type estimation to look at what would happen with these warrants, and under what conditions they may be lucrative. Right now, it looks like one needs to be pretty bullish (~10%/yr for ~9 years running!) on BAC for the warrants to do better than the stock; but if you’re very bullish, then the leverage may start looking good.

Another obvious point is that I’m not going to run out and buy some warrants since I clearly don’t fully understand them yet… but it’s all part of the learning process!

Edit: The maturity is in January 2019, so it’s really only 8 years plus a few months. I haven’t gone back to fix any of the figures.

It’s my 800th post! I was trying to think of ways of celebrating this arbitrary milestone, but they all involved the chocolate bar sale at RCSS this week, which means I don’t have very good news for my diet update this week. Well, actually, it’s not all bad. I’ve been much better about my regular meals, even having salad for lunch, much to the very vocal shock and surprise of my coworkers. It’s just that I’ve also been grinding away at analysis for 10-12 hours a day for the last two weeks or so, and that has involved a lot of snacking. Worse yet, I haven’t done much at all in the way of exercise through all this, and the weather’s not getting any better.

The housing bubble seemed to crack into the media’s attention this week, with numerous stories on the matter, thanks in part to some attention from reports from CCPA, Howe, the OECD, and TD.

One important distinction to make is that the US was not the only country to have a housing bubble collapse in the last few years: most of Europe did as well. So if some analyst lays out the reasons why we won’t have a “US-style collapse” here, well, that’s just playing with semantics. We could have a UK-style collapse. Or a Spanish one. Or our very own flavour. Yes, due to how our lending is set up we’re less likely to have “waves” of defaults, but that’s a fine point. The housing market in the US was not hunky-dory save for the defaults (and we didn’t really see them in our 1989 crash either). The fact is that housing is too expensive, and it will come down. There’s still plenty of debate about how quickly that will happen, and even how far it will come, and I will vigorously debate that the answers are “over the next 3-5 years” and “far enough that you don’t want to buy now” — but those are opinions vs facts. While we may not have defaults accelerating the downward cycle, we do have the experience of watching the rest of the world burn. Once it’s common knowledge that yes, our house is on fire too, I don’t think people will dick around before heading for the exits, which will help speed the process along.

In the US, Barry Ritholtz points out that the spin from the NAR did not help anything. Something to keep in mind when reading CREA/TREB releases!

David Fleming had a look at his new condo at West Side Lofts, and was not impressed. An important reminder that pre-construction is supposed to sell at a significant discount because of the risks inherent in buying something sight-unseen. Plus of course the delays, and the risk the market could move against you.

An engineering student did a cross-Canada trip in an electric car he built himself! Should (slightly) help put people’s minds at ease about range anxiety and charging infrastructure, at least a little bit.

Michael James comments on an article about using “robot traders” to move against the herd and stabilize markets. He asks the same question that popped into my mind when I first saw it on Larry McDonald’s blog — who’ll pay for all of that trading, especially if the positions lose money for years at a time?

John Hempton of Bronte Capital had an interesting post about doing due diligence on an internet travel booking company in China. It’s a long post, but a good read on some basic ways to check up on a company you may be interested in. He came to the conclusion that the company was worth shorting, which raised something of a shitstorm — UTA was the biggest decliner on the NYSE the day after the blog post. There are two followup posts as well.

I’ve long been a browser tab addict with Firefox, opening all kinds of links in new tabs to follow-up on later. I usually use the CTRL-click shortcut to have a link open in a new tab, rather than right-clicking, then going to “open in new tab”. However, Netbug just pointed out that clicking with the middle mouse button (on most mice, that’s clicking your scroll wheel) also does the trick. Efficiency!

And finally, it’s a new school year, which generally means very little to the full-time grad student. However, it did mean the replaying of our annual introduction to the department for the new students, including laying out the details on tuition support and stipends/scholarships. Which has resumed a discussion that is near and dear to my heart: Year X & funding. Funding for students is only guaranteed out to 5 years for PhD students (4 for those who already have a MSc). However, the average degree takes something more like 7 years — indeed, just finding information on the actual statistics for the time to complete a degree is proving to be nearly impossible. If you’ve got any good data on these issues (even just at the departmental level at whatever university you’re at) please share! There was also some brief talk on the fact that the funding slide was exactly the same as the one I saw when I first arrived here [redacted] years ago, which was old even then. In over a decade there have been no cost-of-living adjustments to the stipends grad students get, even though the university can’t be ignorant of inflation, as tuition has gone up 35% in that time.