Tater’s Takes

April 10th, 2010 by Potato

Ok everyone, I’m going to start a weekly feature here. You’ll probably find it dry as toast, especially if you only know me via the site. Unfortunately, until you guys start clicking on some ads, I really don’t care what you think (kidding! I kid… though some non-spam comments at least would be nice. I’ve got an ego to feed here, folks.).

First up, I’ll share my change for the better progress for the week, then later share some links and random thoughts that I didn’t manage to turn into full posts earlier in the week.

Workout: Considering it was the first week, I’m rather disappointed in myself. The weather was bad, so I only went out biking twice, and not very long for either trip (one of which was to Shoppers); I only did my basic workout three days — I was busy, and sore the day after the first day, but still, I was hoping to do better the first week!

Diet: Creme Eggs, half price at SDM. ‘Nuff said.


SMBC, what keeps you up at night?

TVO’s the agenda had a sober discussion about climate models. If you have an interest in global weirding and have no idea what a climate model is, it’s a decent little introduction, but if you already have a clue, I’m not sure it’s worth the time commitment. There are four other parts I haven’t had the chance to watch yet.

The Ontario government announced changes to how the government will pay for generic drugs, and that will likely lead to pharmacies becoming less profitable. Shares in Shoppers Drug Mart dropped 12% on the news, and there’s some discussion at Canadian Money Forum as to whether this represents a buying opportunity. Personally, I thought it was overvalued before, so it’s still not a screaming buy in my mind, but I have put in a bid that will get filled next week if it takes another ~6% haircut.

Finally, I’ve been revisiting Freddie Mac. The preferred shares are still trading for pennies-on-the-dollar (and the C$ is at par), and from the more recent results (yes, I’m months late in getting around to reading them), John Hempton’s estimates are looking pretty good (though I didn’t see that pretty graph of defaults, losses, and reserves — they don’t seem to be as interested in producing slick figures under conservatorship). The biggest risk here still appears to be political. Unfortunately, that risk is huge, as so far the US government has shown every intention of setting Freddie Mac up to fail: crushing penalty interest (which none of the bailed out banks that caused the mess had to pay), and even refusing to allow them to pay off some of the loan with their tax loss pools or cash on hand. I’m torn between greed on the one hand, and prudence on the other. My best guess is that there’s a ~20% chance that Freddie Mac might actually pull through and pay back the junior preferred — of the 80% guess at the chances of failure, I’d say 75% is the political risk, and only 5% chance of failure comes from John Hempton’s numbers being wrong at this point (i.e., that the GSE is actually insolvent and can’t possibly earn its way out if given time). Not great odds, but if it happens the payoff is $25, if it fails, the cost is $1.30. That’s a pretty damned good expected payout, and if I had a hundred such bets I’d put all I had into them, safe in the knowledge that I’d be better off from the ones that did make it. Unfortunately, I don’t have a hundred such bets to make, I have just the one (and Fannie is a correlated bet so it doesn’t count as a second). So, as Warren Buffet says, when it’s raining gold, do I reach for a bucket, or just a thimble? Or, should I focus on not losing money, and only gambling as much as I can afford to lose here (i.e., what I already have invested and no more). For now, I’m sticking with the thimble: even though these are very illiquid securities, there will probably be more opportunities to buy as clarity emerges.

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