Greek Comedy and Irish Tragedy

Ok it's been a while since I've ranted about moral hazard and bailouts, but the ongoing farce in the PIGS and the rest of Europe's responses are just too hilarious and frightening. This is an investment blog but the macro econ, politics, and history intertwined in the Irish saga is just too ripe to pass up.

Basically the Irish bank investors are being made whole while the rest of the Irish population is getting screwed.

Evans-Pritchard has two good articles. Ireland's Debt Servitude

Germany Faces its Awful Choice

The line in the second article that really woke me up was:

Even so, it is remarkable that Berlin is not even allowing the European Central Bank to pursue the first and obvious line of defence, which is to calm eurozone bond markets by using its financial stability powers to buy Irish, Portuguese, and Spanish debt on a nuclear scale.

This is what the Fed did in 2008 when the banks were teetering with TARP, and when there was a threat of a double dip with QE2. The Fed has chosen the nuclear option with debt monetization and the EU/ECB is sure to follow. Every time there is a hint of deflation, the central banks paper over the bad debt with more debt. This time they're using Irish pensioners money. It started with Bear Stearns as documented on our blog and it hasn't ended! It was followed by Merrill, AIG, Fannie & Freddie. I'm afraid the Greek episode was just a prelude and not just noise. The losses keep getting socialized but the bankers still keep their bonuses. I know this sounds hyperbole but this is the stuff of revolutions. Will the Irish people have the guts to stand up to the bankers and their paid off politicians unlike the Americans? If not the Irish, then who? The Spaniards? Maybe the Italians have the balls!

So what caught my attention was what Evans-Pritchard's wrote about the ECB buying PIGS debt on a nuclear scale like the Fed. I believe this is coming. Either there is a breakup in the Eurozone, or the ECB will have to play this card. This will have the effect of causing gold to rally.

Canadian Oligopoly Revisted

Seeing as we now own Royal Bank, I thought it would be good to post these two articles about buying the laggard Cdn bank, and how this investing strategy continues to outperform - efficient markets be damned.

May 30, 2010

Nov 24, 2010

I've read about this strategy over ten years ago (with modest success) and keep finding it again in the newspaper as if it's something new!

Royal still depends a lot on trading revenue and this most recent market hiccough in Europe may dent trading gains again, but hopefully only for the short term.

In My Opinion!

I was looking at the G&M this morning and noticed that IMO - Imperial Oil was trading at 52 week lows. I've had past success at trolling this list of laggards for contrarian plays. Imperial is the poor Canadian cousin of Exxon Mobil. By the way Exxon owns 69% of IMO and there have been rumours for years that the parent would take the rest of it private.

IMO like it's parent company has a reputation for being very conservative with projects and capital. It has been a consistent dividend payer and has been considered a Cdn blue chip for as long as I could remember.

A quick chart of IMO vs. XOM

The two are closely correlated as expected. The are in the same industry. Integrated E&P companies with exploration, refining, as well as retail. Over the last six months their performance has diverged and I'm unsure why.

IMO has large projects like its parent company. They're involved in offshore NFLD, arctic gas, and AB tar sands. Any number of potential operational issues to cause setbacks of expectations no doubt. A quick perusal of the news feeds didn't reveal any red flags.

During the meltdown of 2008 IMO dipped to $31. Its revenue and earnings have recovered but I notice it's EPS growth has yet to return to those of the mid 2000 years.

It has performed in line with the other Cdn integrated oils including Suncor (merged with the old PetroCan), Husky, and Provident. Cenovus the Encana spinoff is the other one.

It's historical yield has always been below 1% and currently it's yielding 1.2%

For those that care it's beta is 0.83 and that of it's mighty parent XOM is 0.48.

I know that this is mostly backwards looking but valuation is a tricky business. And no I still don't believe the market is always correct in pricing especially in the short run. So although I don't know what their issues are, IMO has been known for it's good management and they'll sort it out. The majority of analysts have a hold or sell on this one and you can say this is definitely against the crowd.

As a commodity play, I don't know where the price of oil will be in 6 months but I'm more certain now than ever, that the long term price of oil will be higher. So there you have it - a lower risk way to play energy in my opinion! - IMO.

RIM for RY trade

[excerpt from our email exchange]

OK, we sold RIM on a 5-day high at $51 and bought RY on a 5-day low at
$55.40. But I see now RIM is rallying on one of those short squeeze
days, upto $53.


On Fri, Oct 15, 2010 at 4:39 PM, Arash Bateni wrote:
> I never figured it out... is greed good or not?! ;)
>
> On Fri, Oct 15, 2010 at 3:59 PM, Eddie Kim wrote:
>>
>> What happened to this trade? Well, I got greedy, I saw some good short
>> term momentum last week upto $51 so I thought I'd try to let it ride.
>> but it's back down to $49. I'll try again next week.
>>
>>
>> On Thu, Sep 30, 2010 at 1:16 PM, Eddie Kim wrote:
>> > Now I'm confused! :)
>> > RIM has had a lot of negative sentiment over the past few week/months.
>> > It could take quite a while to work it's way thru back to positive. I
>> > think there should be easier ways to make money. I'll try to engineer
>> > this trade.
>> >
>> >
>> > On Thu, Sep 30, 2010 at 11:56 AM, Desmond Lam wrote:
>> >> I just forwarded an email link to a G&M story about how RY is hot and
>> >> RIM is not. Looks like all the pros and making the same trade! Now my
>> >> contrarian instincts say that our trade isn't controversial enough. I mean why
>> >> sell RIM when sentiment on it is so low?
>> >> Anyways, I am fine with trading RIM for RY as originally suggested, it
>> >> just looks like the momentum trade du jour and not au contraire.
>> >> Des
>> >> On Thu, Sep 30, 2010 at 11:38 AM, Desmond Lam
>> >> wrote:
>> >>>
>> >>> Good for me. RIM has had a little bounce the last few days. I think
>> >>> I read in the G&M the other day that Cdn banks are poised to increase
>> >>> dividends now that Basel 3 capital requirements weren't as strict as
>> >>> they first thought.
>> >>> Des
>> >>>

I am fine with RY or GS. Generally fine with tech as well, but we already have some Telus. RY should be a more conservative play than GS - gives dividend too.

I don't like gold or other commodities now. Looks like they have gone too far. I think the downside risk is high.

Cheers, AB

>> >>> On Wed, Sep 29, 2010 at 10:59 PM, Eddie Kim wrote:
>> >>>>
>> >>>> How do you guys feel about trading RIMM for RY?

POT anyone?

[excerpt from our email exchange]

The POT decision was such an interesting dynamic between politics and
finance, it was quite surprising to see how it played out. Kudos to
Premier Brad Wall for standing up to Harper and giving him a rare beat
down. He convinced the Alberta premiers and energy execs that if
Harper approves Potash, then oil and gas companies would be next. He
made the very convincing case that while fertilizer may be a strategic
resource now, it will be an even more important strategic resource in
the future for food and energy security. And with the world's largest
mining company attempting the largest mining takeover, who can argue
with the experts?
Somehow, I think if BHP would NOT pull POT out of the Canpotex cartel,
then I think Harper may have approved the deal. But lots of moving
parts, hard to say.

So I have a new trade idea. Sell Telus and buy POT! BCE just
announced weak earnings based on bell mobility, Telus will be next.
POT is off 4% today and has actually been lagging MOO and the other Ag
names over the past few months. I think BHP's interest in POT only
confirms that fertilizer is going to be one of the world's next
strategic energy resource.

I think we have the implicit OK from Des;
Arash, what say you?
- Hide quoted text -



On Wed, Nov 3, 2010 at 8:25 PM, Desmond Lam wrote:
> The G&M said it all: Triumph of Politics Over Principle! Now do you think
> any less of Harper! I think the US elections yesterday sums it up. In
> times of economic hardship, keep the message simple.. I mean Ford was
> elected with a platform of stopping the "gravy train"! Sounds stupid
> really, but it worked.
> Alas we're off to NYC tomorrow to see some sights and do some running so I
> might be incognito for a while. If you guys can think of a good way to make
> some $$, by all means vote for Ford if you have to....er I mean do what you
> have to do.
> Cheers,
> Des
>
> On Wed, Nov 3, 2010 at 6:55 PM, Eddie wrote:
>>
>> Wow Harper kills deal! When did he become a soft liberal protectionist.
>> Alas no trade today. Telus did not reach my sell price.
>> Lucky for us we did not act on my political instincts.
>> I thought Smitherman would beat Ford!
>>
>> Sent from my iPhone
>> On Nov 2, 2010, at 10:07 PM, Desmond Lam wrote:
>>
>> If Harper plays politics, he would do the populist thing and block the
>> deal. This is a close call. I agree with selling Telus. If you have tine
>> tomorrow morning, try to make the trade. My bet is that BHP comes in with a
>> higher bid to make it "friendlier". You always invite the guy with the
>> extra booze into your party. Alternatively, we can pick up some POT through
>> MOO! I'm not sure the commodities have priced in how big QE2 is going to be
>> tomorrow. Lot's of news coming down the pipe. The base case scenario is
>> another cool $500 billion over the next 6-12 months. Anything less than
>> this and the $US strengthens and commodities may weaken. Anything larger
>> aka the bazooka, and the $US falls and gold and commodities as well as all
>> risk assets get repriced upwards! Interesting times. I notice the Greeks
>> are electing a new gov't too in a few weeks time and they're not happy with
>> their current Pap!
>> Des
>>
>> On Tue, Nov 2, 2010 at 3:55 PM, Arash Bateni
>> wrote:
>>>
>>> Honestly, I am reluctant to bet on Harper's decisions.
>>> I'd rather rely on my understanding of economics than politics ;)
>>>
>>> On Tue, Nov 2, 2010 at 12:06 PM, Eddie Kim wrote:
>>>>
>>>> sort of a last minute, short term trade, but shall we trade Telus for
>>>> POT? Although the market is somewhat unsure that Harper will nix the
>>>> deal, I am more than convinced the right-wing ideologue will never
>>>> interfere with free-market economies (whatever that means). It would
>>>> be so out of character for Harper to stand up for protectionism or
>>>> "canadian net-benefits", I am willing to put money on it. POT is at
>>>> $148 well above the BHP bid of $130, hence the market and most
>>>> analysts are predicting an increased bid of $165. It's only held back
>>>> by the possibility of political interference. which I claim will never
>>>> happen.
>>>> Telus is at $45.50, off it's highs of $47, but as I mentioned before,
>>>> like RCI, they are experiencing some competitive pressures from the
>>>> startups, so the easy money may have been made there.
>>>> This trade has to happen today since the gov't will announce it's
>>>> decision Wed morning.
>>>> Let me know
>>>>
>>>> Eddie