investment tips

New China Investment in Canada

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Well good news to investors comes today from an agreement between Ottawa and Beijing to allow Chinese insurers access to the capital markets in Canada, which would bring in potentially billions of new dollars into the TSX and the Canadian bond market; this will undoubtedly help push up asset prices in our relatively small market, as the Chinese seek to diversify their holdings out of US Treasury instruments.  The Finacial Post says:

The China insurance pact comes on the heels of the decision by Ottawa to stop a proposed bid by Australia’s BHP Billiton Ltd. to acquire Saskatoon-based Potash Corp. The ruling sparked widespread worry among policy experts that Canada would find it difficult in the future to attract foreign investment, which is required to help boost innovation, domestic competition and lacklustre productivity.

The Financial Post suggests this is welcome news in the light of recent events. The Canadian journalist community had convinced themselves that the failed Potash bid of Australian mining company BHP would send a negative message to foreign investors.  However, according to a very thorough article in the Globe and Mail on the failed deal, the fault lies entirely with BHP, starting with their low-balling the initial bid, making it so that neither the Potash board of directors nor the province of Saskatchewan were much interested in the offer.  In other words, if you want Canadian assets, you better be ready to pay a premium for them, and that is as it should be.  The BHP bid of $130, though 20% above the price of the day of the offer, was ridiculously below POT all time high over $244.

In my view, this is another reason to be bullish on the Canadian oil and gas sector.  In China, there is a growing demand for energy and a diminishing stock pile, as the WSJ has pointed out (hat tip Devon Shire).  I believe that the Chinese insurers will seek out energy stocks as one of their main interests, as they know their own demand for the products will continue to force up the price.  Meanwhile, there are still deals to be made in the TSX.  For example, Petrobakken has made a serious dip since its quarterly report, as investors were disappointed with less than spectacular results caused  by wet weather which hindered drilling.  Penn West Energy and Pengrowth Energy are both dipping, having both been downgraded by TD Newcrest from Action Buy List, to Buy–based only on their recent, dramatic increase in share price.

Wine as currency

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During difficult economic times, it is often the case that hoarding becomes illegal.  It is punishable by severe fines. In Weimar Germany a law was even passed against gluttony.  Today, the USA faces a serious threat of hyperinflation.  During hyperinflation, paper money becomes worthless and unhelpful in exchange.  Therefore, people resort to bartering goods and services.  Bartering is a form of commerce that is frowned upon by government because it can’t be taxed.  If I fix your plumbing and you fix my roof in exchange, each of us spending three hours to do it, we’ve exchange services but there is no money,  no paper trail, and no receipt.  Two normally taxable events are reduced to zero tax.  So a doctor treats a lawyer’s son and the lawyer draws up the doctor’s will.  Neither reports the activity to the government and no money passes hands. It is just a friendly transaction in an underground economy.

I believe that hyperinflation is an inevitability in the US, and unfortunately here in Canada, there is going to be high inflation.  In such times, it is useful to build up a store of silver or gold.  But personally, I’ve decided to store up something that I could potentially barter.  I have been making wine from concentrated juice, grape juice and from grapes since 2004.  My wines are pretty good; I’d say the equivalent of at least a $10 CDN per bottle at our local provincially control liquor stores (called the LCBO-the Liquor Control Board of Ontario).  Wine is a controlled substance, and so I am not allowed to sell my product without a license.  But when times are desperate, and money is worth nothing, I figure that I should be able to barter bottles of wine for food or other goods and services that I might need.

So I’ve decided to stock up on wine kits.  These kits are $70 for two at Costco, or $45 for one at my local supplier. Each kit contains concentrated juice that will make 30 bottles. I know that the juice remains usable for at least two years maybe more. Once made into wine, the wine can be aged another two years.  It is not certain how long the wine will last after that.  So my minimum cost base will be $1.17 per bottle plus my labor (which isn’t worth anything). If I buy 10 kits at Costco at a price of $300, I’ll be able to hoard 300 bottles of wine in reserve.  This would give me $3000 worth worth of goods with which to barter, and the product itself has an indefinite shelf life.  I estimate that it would be about the same as buying two one-ounce coins of gold, at a cost of $300 CDN.

The great thing about alcoholic beverages is that they do not lose their “currency” in times of depression.  Indeed, people feel the need to celebrate or to drown their sorrows even more during economic hardship than during the good times.  If the economic crisis never comes to Canada, well I can consume my product or give it away as gifts.   Or if the crisis comes and I am unable to barter the product, my wife and I could consume the wine for the calories and it will stave off starvation for a moment.

Krugman vs. Rogers

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Krugman and Rogers are publicly exchanging barbs.  Krugman says that Bernanke’s quantitative easing is necessary to stave off deflation.  Rogers says it will cause a collapse of the dollar and surge in commodity prices, i.e., inflation.  Who is right?  Krugman or Rogers, the deflationistas or the inflationistas?

Krugman writes:

I’ve seen Rogers in action; he seemed to me to be confused about issues like the difference between assets and liabilities. And please note that inflationistas like Rogers have been wrong about absolutely everything this cycle (and the last cycle, and the cycle before that). 

[Read more: http://www.businessinsider.com/paul-krugman-jim-rogers-has-never-been-right-about-anything]

Now to be sure both men are rich.  But so far I’ve not heard that Krugman has made money investing–his money probably comes from his Nobel prize, writing, book royalties, and media appearances.  Rogers on the other hand is universally recognized as one of the world’s premier investors/traders, along with such names as Warren Buffet and the shady George Soros.  I would tend to accept the advice of a successful  investor over an egghead.

I first heard of Jim Roger’s and his advice to put money on commodities and shunning bonds on January 19, 2009.  I’ve maintained such a portfolio, and I think I’m doing very well thank you very much–not including some serious profit-taking along the way, our current DIY portfolio is 60% above book with mostly oil and gas and gold mining stocks; Rogers would approve.  Had I put my money in bonds, I’m afraid at the dismal interest rates, my portfolio would have slight nominal gains but would have lost some serious buying power.  Rogers is right, his recommendations have worked for investors.  Krugman may end up being one of the most ridiculed and mocked economists of all time.

The deflationista David Rosenberg said that there would be a double dip this Fall.  A friend of mine took his advice and sold some of his oil stocks and now regrets it.  It could still happen.  But my money is on Rogers not Krugman.

The US dollar: America’s greatest export, Jim Grant

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At 2:08 in the video below, Jim Grant makes the point that the dollar is America’s greatest export.  A few weeks ago, I argued this very thing as an explanation of the trade deficit: there is no trade deficit, I said, only countries who will trade their goods for US dollars as a commodity in and of itself.  I’m gratified that Grant would come to this conclusion too.  Now consider OPEC.  When OPEC sees the price of a barrel going down, they cut production in order to reduce the supply and get prices back up.  The US Federal Reserve bank with QE is doing the opposite; it is increasing the supply.  The natural result of that will be that the value of the dollar as a commodity will decline.  But we should be forewarned, when the value declines too much, it will  no longer be a useful export, and the world will stop being willing to trade for it.  Then, the US will be in big trouble.

hat tip:  Monty Pelerin

Petrobank spinoff: what happens to an option contract? (updated)

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Update 29 December 2010:  Please note that Montreal Stock Exchanged has clarified these issues in a PDF document:  the contracts are now trading under the ticker PBG1.  The value of each contract is essentially what I predicted in this post.  Each contract is now based upon the following:

100 common shares of Petrobank (PBG) and 61 common shares of New Petrominerales (PMG) and a cash portion equivalent to 0.5 common share of PMG

 

Original post:

I have sold some April puts on Petrobank.  Yesterday they announced the spinoff of their holdings in Petrominerales of which they own 60%.  According to the Globe and Mail, Petrobank holders will receive shares Petrominerales when the arrangement closes before December 31:

The subsidiary, which produces oil in Colombia, saw its shares climb by almost 7 per cent. Following the reorganization, Petrobank shareholders will receive approximately 0.62 shares of the former subsidiary, renamed New Petrominerales, for every share of Petrobank they currently own.

I’ve sold some put contracts of Petrobank, and I was wondering what happens to my options contracts in case they are in the money at expiration, since the new share price of Petrobank will obviously adjust to reflect its value after the spinoff.  I found this answer at the International Securities Commission:

Corporate actions such as mergers, acquisitions and spinoffs will often necessitate a change to the amount or name of security that is deliverable under the terms of the contract. When such adjustments occur, the short call position is responsible for delivering the adjusted security.

For example: The shareholders of company JKL Inc. have approved a takeover bid placed by Global Giant Co. As a result, holders of JKL stock will now be entitled to a 1/2 share of Global Giant for every share of JKL Inc. they own. Therefore, holders of JKL call options will now be entitled to a deliverable amount of 50 shares of Global Giant for every contract of JKL that they are long (100 shares per contract x .5 Global Giant). Investors with short positions in JKL call options would then be responsible for delivering 50 shares of Global Giant for every call option assigned.

If I am correct, if my shares are assigned, I will receive at the strike 100 shares of Petrobank for each April contract in the money; I would also receive 62 shares of New Petrominerales.  Those exercising a call contract would receive the same.  I don’t know how the  price would be calculated, but I assume the combined market price on expiry of 100 shares of Petrobank and of 62 shares of Petrominerales.  If anyone knows, please make a comment below.