SharperDingaan

Couldn't resist! http://www.telegraph.co.uk/finance/alex/?cartoon=6943950&cc=6918205

"Should the government have the power to impose limitations on size of compensation between two private parties in the private markets?" The rebuttal is: Its my sand-box - if you don't like it, go elsewhere. Capitalism in action. SD

Nothing wrong with merit pay, but there's only '1' best. He/she works for XYZ coy, the others don't; & he/she is only there as long as XYZ coy makes an outsized return well above the market. Everyone else is a 'wannabe', & you don't pay 'wannabe's' the premium for 'best'. Supposedly if you don't pay - the talent leaves 'en-mass'; let them! The banks they left collectively return to the mediocre 'norm', become smaller (asset loss to more aggressive competitors), & less risky. Yes, the talent could start up hedge funds - but they'll have a lot less AUM - & even with inflated payouts the takehome will still be less than have now with the bank. Then if you really are so hot, you aren't the #1, & you didn't hit the highest bid within 6 months - you're past your 'best before' date; so why should I pay you? Triple base pay to make the bonus smaller, & fire as soon as the bank fails to make its ROE on the investment desk. Firings will be much quicker as the higher base pay increased fixed costs, & the talent has an incentive to manage the size of their base pay. Here today, gone tommorrow - the capitalism that made the gains in action. London has already been through this, & the talent didn't leave 'en-mass' - so why should a US banker in the same marketplace act differently ? Or is a US banker just more arrogant ?. SD

The reality is that if you want to get green quicker, you replace the coal fired apps with either gas or wind/solar, & add new apps that are some combination. All else equal, the natural gas price should rise as demand increases, & supply depletes. The gas price is not rising as there's a one-time 'new discovery' glut in NA, & you cannot (efficently) arbirtage the physical commodity accross markets. For the UK, a rising & mild above market price for gas over the next 4-8 years is quite probable. PDS market pricing is just mildly less silly than it was. Kind of hard to trade at far below BV when its pretty clear that they aren't going under, & their auditors have just finished impairment testing the goodwill (part of y/e audit). SD

Ubuy: Agreed its highly likely that Vancouvers RE is over-priced, particulary the trendy areas where there's also some olympic impact. When those areas sell off the decline WILL probably be dramatic, and it'll also be much larger than in most of the other areas of the city. Yes, post olympics, most Vancouver RE will go down - but not equally. The points I hoped to get across were: 1) There are multiple markets within any given city, & some of those markets have very little to do with the local employment conditions/affordability. 2) The index can be very misleading, & why. Cheers SD

Keep in mind that there are practical limits to this. To reduce this stuff you really need to materially increase the payoffs to the first ones for talking; which effectively requires the fraud to always be personally massively profitable, otherwise its more profitable to talk. But as with options, the 1st one gets the biggest take ..... the next one less, etc. Wait too long, & you could get nothing. If you're the 'brain' its better that the potential talker have an accident. Of course, if you're good - this can go on for years, & we have entire (global) industries using this as their business model (mafia, drug & war lords, etc). The incentives rise with the increasing 'cost' of business, but you have to be around to collect. And as with any business, if you can improve on the collectability of your debts - you can do a lot more business! SD

Think in terms of the houses on the 'nice' waterfront going for 200K & the average joes house 3 blocks in going for 125K. The waterfront people stop buying; their house now sells for 140K (30% less) & joes house sells for 110K (12% less), the new 'average' price for that city. The waterfront house sold for what someone else was willing to pay (for whatever reason). Joes house sold for maybe 3x the average worker income in that city. The stats themselves ? Pretty meaningless SD

Keep in mind that for many comparitive purposes these numbers are not relevant. The buyers/sellers of houses in the glitzy neighbourhoods of Vancouver, Hollywood, LA, etc. are not what most people would consider the locals. Its often the 2nd/3rd home of some wealthy individual, or its owned by a company renting it out to travelling execs, or movie stars, etc. that for business reasons, need the address as part of the 'image'. Affordability is based on global comparitives (the neighbourhood is cheap relative to Singapore, London, New York, etc.) &/or whether the wealthy buyers in that market view the property as desirable (as they allready have more $ than they could possibly spend, price is not a consideration). Average joe just doesn't come into it. If your city has a lot of these neighbourhoods, and/or the house prices are many times the 'average' price in your city; it will skew the number upward. Average joe interprets it as a bubble, when its truly just a measurement problem. SD

Q3/09 they had a total of $8,760 in FX losses. The back-of-the-envelope suggests they have < $1,750 in FX losses for Q4/09; an immediate $7,000 (approx 7c/share) boost to quarterly earnings - in ADDITION to the far higher margins that they had during the quarter. Assuming that CFX also did well, this reporting season could well deliver what we've all been looking for. SD

Assume that between 'now' & the 'end state' there's a 1/2 to 2/3 dilution of the existing common share equity (prem's convertible being part of it), the average sale price of the production is roughly 2-3 higher than it is today, & that the existing pre-extraction 'proven' reserve is 25% higher than stated (higher prices make more of an existing field 'economic', which raises the pre-extraction 'proven' reserve). End state is about 10-15 years (until the principal eventually retires). The governing principal is that your smaller stake of the bigger (& hopefully more valuable) unknown company is worth a lot more than your bigger stake of the smaller (& known) existing company. Different kind of risk, but the longer you play the greater the likelihood of it occurring. SD

A time honored custom in the O/G patch is set up your own company, develop your production via either the drill-bit or acquisition, & then sell out to a major. The head-honcho is almost always very experienced, well connected, & just a ‘busting’ at the freedom & opportunity. It’s typically an invitation only network, & a small pool of partners bringing different things to the table. At times it is cheaper to buy someone else than drill. You got the assets because the other guy was over-extended, & he agreed to sell to you. But you’re relying on your solvency to get you through to the point where the production is worth much more than you capitalized at. At other times it is cheaper to drill, & your contacts/know-how will make/break you. They’ve spent some time under the tutorage of some very swift folks in Calgary, & have obviously decided to move forward. Good for them. SD

There's nothing wrong with the business model. The reality is that any kind of lease is only as good as the lessees credit, & a 1:100 year global credit event is bound to have an adverse impact. They've done well to date, & there's little reason to believe that it will not continue for the forseeable future. For ALL lessors (in this environment) the crux is what can you do with the returned assets. A material problem if its shipping or large passenger aircraft (one-off big ticket items), but much less so if its heavy construction (or tar sands) equipment where infrastructure spending is creating a demand for it (used vs new). For the next 12-18 months the European & Asian equivalents to NA's 'Caterpillar' make a lot more sense & at a relatively lower risk. SD

All banks will suffer a lower ROE as the capital requirement increases. While most of the securitization boosts (earned fees on zero 'net' assets) are out of earnings at this point; that wasn't the case 2-3 years ago. Pick your reference point carefully! WEB has pointed out that part of the bailout is effectively recapitalizing the banks via earnings on artifically high loan spreads (courtesy of ultra-low central bank rates). About 6-8 quarters (from memory), so it should stop by the end of 2010. Projecting off 2010 forward earnings could be a mistake. Banks probably are over-priced for the medium-term, but its unlikely to harm them at this point. SD

If the current market is 50 & the option writer writes a short-term call option with a strike at 70, the writer has written a deep out-of-the-money call. If the volatilty is fairly high there will probably be a modest premium. If the strike is far above the current market, & the remaining time is quickly eroding, the odds on the call writer actually getting called are fairly remote. If you are called you have the stock & will make a gain of 20. In the meantime you have the call premium, & that options strike, premium, & expiry date were set by you; as if you didn`t like the terms you wouldn`t write.

ValueCarl: Its too bad that you seem to have a problem with factual accuracy. The actual 'ask', only 2 1/2 hours earlier, was quite a bit different. "Please provide an illustrative example, in today's market where "premiums" received from selling deep "out-of-the-money" calls provide beneficial income at the same time subjecting its underlying owner to losing their stock if it is called away?"

As long as the shares are in a cash only account, & your 'margin' account is in some other institution - you can loan them as you wish. Most often you will not get enough to warrant the risk, & getting them back can be something else (ie: FFH share loans). Its more reliable to write deep out-of-the-money covered calls (long stock, short call). SD

So he's been sued lots of times unsuccessfully & a lot of other suits didn't see the light of day. Do you really want to do business with someone who gets sued this much? Then there's the honesty problem & the slimy business itself. If it really is as claimed he doesn't need my money, & a far better business will drive him out of the market. So why scratch fleas now, when I could invest via the much better business later? Don't need the smell thanks. SD

Nice sleuthing. That 500M+ is effectively the amount of 2009 easing - & it is the boost to the money supply that was needed to offset the velocity decline. If all the other participants simply cut back their purchases by a collective 10%, the ease would have to increase by at least 200M (40-50%), & the money supply would immediately inflate (all other factors equal) Not that long ago (15-20yrs) Canada 'hit the wall' & a Federal Cdn treasury auction essentially went 'no bid'. The BOC had to do a similar emergency type purchase, & within 12-18 months Cdn mortgage rates went to 20%+ (from memory) - & at a time when there was very little 'crowding out'. Today everybody needs money, & to get it they will have to competitively increase yield. Rapid rate hikes. The alternate is a synchronized global devaluation, via a global easing big enough to retire the total global easing to date. ie: The entire G8 prints 10% more currency to devalue 10%, & uses the new paper to retire the debt - but there's no internal trade impact on them as they've all devalued proportionately. If you're not G8 you either move with them & risk hyper inflation, or you revalue. We live in interesting times. SD

Keep in mind that if you're going to roll it's highly unlikely that you'll go with anything longer than 180 days; simply because global future rates are expected to be higher than they are today. The bubble gets bigger, the duration shortens, & volatility rises; hence a market distortion is largely enevitable. That 2.5T is also understated. An individual US state that can't roll its debt can effectively refinance with short-term debt backed with a federal guarantee - & some big states are in deep sh1t. We've allready seen sovereigns increase rates (Australia) to dampen inflation, & its highly likely that others will follow within 6-9 months (Canada). Hence the US either raises real rates to mantain the roll-overs, or it prints $ to immediately inflate & devalue the USD (& promote trade). Each has ugly consequences. The cheap money is coming to an end. SD

LNR-T You wouldn't want to touch it untill after their Q4 results have been published (write-downs), but after that you may want to hold it for 3-5 years or so. They are better known as a Cdn auto sector supplier, that is closing plants & getting hammered by the high $C. Lots of resultant negativity. But they also make the very large 2nd generation windpower generators, they have material technological advantages over their competitors, they are the 1st name in this market, & the size of these generators makes it uneconomic to ship from Germany or Asia. Green energy sells at a premium & these things are substantially cheaper on a delivered MW basis, as they can continue to operate in a wider variety of conditions. Eventually the auto-sector side of LNR's business will return, & you'll essentially have this windpower business for free; ideally as a spun-off company. Merry Xmas SD

In the spirit of the Xmas season. Keep in mind that options, futures, index instruments were invented for use by portfolio managers because they typically cannot hold any significant cash (I dont pay a PM to hold cash), and cannot buy/sell the underlying instrument without moving the market. As a retail client you do not have these restrictions. Because you could be wrong, the 'true' hedge is to sell 1/2 the existing position. If you're wrong the additional cost to repurchase is your hedge cost, & you largely control it as its your decision as to when to repurchase. If you're right you'll have a cash gain & a lower cost base. The optimal hedge against loss is to sell the entire existing position & write out of the money puts that you want to get exercized. If successfull you'll have a short gain AND get paid for your liquidity, but its a directional hedge - so if you're wrong you'll have a loss. Know why & what you're really hedging. As options, futures, etc. have embedded leverage (ie: risk), why is that important to you for hedging purposes ? There is nothing wrong with options or futures use as 'entertainment', but know it before you try it. Merry Xmas SD

Keep in mind that this is not a traditional buy & hold business case. SFK must exit their trust structure prior to 2011, the interest rate on their debt significantly increases on July 01, 2010, & they have 30MM+ (from memory) of debt maturing in 2010. They are well run, in a rising commodity cycle, have at most a one-year time horizon under the existing structure, & their investment case has always contemplated an eventual consolidation with some other entity. As soon as they can show a positive quarterly earning, & a fat EBITDA; the current price discount will effectively disappear. A wise man would also expect a merger premium in anticipation of a trust sector consolidation. As soon as they evidence a debt roll-over and/or repayment, pricing should essentially change to some % of BV. As if the bank was not confident that it would be fully repaid under the new structure, it would not roll; therefore SFK must have a solvent future. While SFK has many re-engineering options, whatever is chosen has to be in the interests of their (knowledgeable) investors, it will require at least a 2/3 majority, & it must be completed by Dec-31-2010; nobody is going to be stealing it. Possible extension (REIT), or further FX erosion aside; a fairly straightforward case. SD

Nice touch. There is a variant of this for use on concentrated holdings, where the coy's themselves have significant FX exposure that you don't want. ie: For SFK.UN you'd work out the end-of-quarter nominal USD BS exposure, & the next quarters estimated USD sales; put it into exposure/share terms, & multiply by the size of your holding to get to your share of their USD exposure for the next quarter. Then hedge it as you've described. Although typically restricted to just the corporate playbook (need a big holding) it does have application at times. SD

Keep in mind that when its O/G you really need to know your partners, & that the real money is in the future deals that you do together (their expertise & your $). This is a relatively low risk way by which to get their feet wet. SD

Very counter-intuitive, but simply take $ off the table. Buy some other kind of income generating asset in a risk-sharing partnership, or pay off the margin/mortgage. Money should be the servant, not the master. SD