National Pest not reading da blogs

July 3rd, 2009

As the Globe and Mail runs through the final days of its “Top Money” blogs poll (vote for us here), it is telling to read a piece in the National Post Pest that confirms that whatever the Pest may be as a newspaper, it doesn’t stay on top of the blogs.

How do I know this? Earlier this week, the Pest ran a story about compensation at the CPP Investment Board. One of the journos angles is that CPPIB managers need to be paid large bonuses, for if they weren’t, the CPP would have to spend even more outsourcing the role to external managers:

Going “cheap” on talent would save a few million in bonuses, but it would also add 10s of millions of costs to the running of the [CPP] plan because the fund would be forced to rely more on outside fund managers and consultants who charge high fees to handle alternative assets such as private equity and infrastructure funds.

I don’t think the authour of the article is aware that the CPPIB has already committed over $30 billion to external private equity fund managers (see prior posts “Supersized private equity allocations at CDP and CPPIB?” February 10-09 and “PE consumed 61% of CPPIB quarterly payroll contributions in Q4” May 24-09). A full 32% of their (our) assets under management are in the one category. How could you “rely” more on external PE managers than that?

Changes the argument somewhat, doesn’t it?

MRM

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First year isn’t kind to O’Leary’s investors

July 2nd, 2009

Decade of Daddy Mirror Fund™ One Year Report

For those who are new to the space, Dragon Kevin O’Leary launched an equity fund a year ago with the promise of unique stock market riches and index-beating private company deal flow (see prior post “O’Leary Fund promises to share the wealth and wisdom” May 8-08). At the time, I thought the concept was unlikely to be a winner for retail investors, and (to put some ego on the line) threw together our own “global equity fund” to see if I could replicate his promised outperformance. Since Mr. O’Leary was living his so-called “Decade of Daddy“, I thought I’d call our notional $40 million fund the “Decade of Daddy Mirror Fund”.

And so it began. His real $40MM fund versus our fake one. We launched on Canada Day 2008, and it is time to take stock at the one year mark. The day of our public embarrasment? Did he blow the doors off our meagre effort? That’ll have to wait, it appears.

Our Decade of Daddy Mirror Fund™ continues to outperform the major indicies. The US$ is down from the March 1.29 exchange rate to 1.16, which cramps performance over the period. But things are still going in the right direction.

All told, our Mirror Fund is up 6.8% to $42.7 million over the past 12 months. Staying above par is important now that we are at our one year anniversary of the $40 million fund’s launch (see launch in post “Decade of Daddy Mirror Fund” July 2-08).

In the Mirror Fund, we’re making money in Bank of Montreal (+63%), Goldman Sachs 2037 Subdebt (+43.6%), JP Morgan (+6.0%), MKS (+11.3%) and Royal Bank (+18.8%) {gain/loss percentages in home currency}.

Since the fund began we’ve locked in our gains on BMO ($775k; but we are back in again), CIBC ($242k), Merrill Lynch ($799k) and Teranet ($307k plus distributions) as you’ve read in prior reports.

In the red column (again in home currency):

BCE (-31%), BNS (-3.4%), Berkshire Hathaway (-34.7%), Bristol Myers (-4.6%), CDN Oil Sands Trust (-46.9%), Duke Energy (-14.7%), Eli Lilly (-19.5%), Merck (-20%), Spectra Energy (-20.7%) and Thomson Reuters (-7.6%).

Over at the O’Leary Global Equity Income Fund (OGE.UN:TSX), Mr. O’Leary has had little success getting the fund’s performance out of the ditch and into first gear. Since the market began its recovery in early March, the S&P 500 is up 35%, the Dow Jones is up 29%, yet the net asset value for OGE is up just 12%.

Fortunately for prospective OGE investors, the trading premium to NAV has been “fixed” and the fund no longer trades on the TSX at a massive premium to the underlying value of the fund’s actual stocks. That never really made sense, but it took a few months for that bubble to burst following Mr. O’Leary stellar fund unit price-boosting performance on his BNN TV show last summer (see prior post “O’Leary talks up his own book” July 31-08).

Since we launched the mirror fund on Canada Day 2008, the Dow Jones Index is down 2,878 points from the level of 11,382 — or 25.3%. The S&P 500 is down 26.8%. Our Decade of Daddy Mirror Fund is up 6.8% during the same timeframe (including dividends and currency moves). With more than half of the portfolio trading in US$, the currency matters.

The unit price of the O’Leary Global Equity Income Fund is down 36% since it was launched, and now sits around $7.50 as compared to the June $12 IPO price. One can’t forget that it has paid out 40 cents in cumulative distributions since launch; bake that into your return and you’re “only” down 32% (unless you reinvested the distribution in more OGE units, since they’ve gone down just about each and every month since the IPO).

With a $8.25 NAV, the decline since the launch date has improved from 37% to 31%. As has been mentioned in the past, OGE’s NAV decline has almost perfectly tracked the S&P 500 (-27%) and the Dow Jones 30 over the same time period (-25%). The correlation between the NAV and the Dow between August 29, 2008 and Tuesday’s close remains high — at 88%. Despite the sale of 17 of the top 25 stocks during the last couple of quarters, the fund’s NAV continues to track one of the world’s best known benchmarks with almost a “mirror-like” perfection.

Mr. O’Leary’s actual OGE investing performance has had no impact on his rock star reputation. Money continues to flow in across his four funds. My math suggests that over the past 12 months, Mr. O’Leary has generated about $19.6 million of IPO commission for Bay Street investment bankers and stock brokers.

Tidy pass that is.

Investing performance? Now that’s not quite as eye-popping. But, hey, at least Bay Street and KO are making money.

So that’s something, right?

MRM
(disclosure - this post, like all blogs, is an Opinion Piece; we own BCE, BMO, BNS, COS, MKX and GS sub debt in our household)

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Bank business lending down for 5th consecutive month

June 30th, 2009

This isn’t the first time that we’ve dug into the numbers, only to find that Canada’s banks really have pulled back on the throttle of commercial lending (see prior post “Bank lending drops again in February” March 20-09). With May’s figures out, following a revised number for April, the stats aren’t pretty.

The category is “Business loans to Canadian residents for business purposes”, and the data is from the Bank of Canada:

December: $191.967 billion
January: $186.086 billion
February: $184.168 billion
March: $184.5 billion
April: $182.228 billion
May: $180.619 billion

May 2009’s figure is now approaching the number not seen since November 2007. And these numbers include the massive loans that went out the door to Teck for the Fording purchase last Fall (see prior post “Could it be that the Banks and Flaherty are both right? part 2” January 9-09); the ones that have juiced these business loan figures higher then they really are.

A 5% drop in drawn business credit in the space of 5 months.

Do you think that’s at all connected to the fact that some Canadian bank stocks are up almost 60% over the past six months? Or is it the other way around?

Better still, what’s a $100 million line of credit program from the Business Development Bank of Canada (only for “strong balance sheets”) going to do in the face of a 5 month, $12 billion withdrawal from the system? By the time the program is up-and-running, loans will have been reduced by another few billion dollars.

The free market is doin’ its thing, and there is nothing anyone can do to stop it.

MRM

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Iran, Intrade and the Revolution that wasn’t

June 29th, 2009

Millions protested the results of Iran’s election. People died. Westerners hoped this 30th anniversay of the Iranian’s revolution would mark the end of a bellicose theocracy. We learned that Twitter can be used for something useful.

But there might have been a clue all along that no change was coming to Iran. Not yet, anyway.

Regular readers of this blog may recall our discussions of Intrade, the prediction market. Last September we found that Intrade signaled the failure of the first TARP bill. And that McCain’s popularity resembled a drop similar in profile to Mt. McKinley when he chose Palin as his running mate.

For those not familiar, a refresher: Intrade lets you bet real money on binary outcomes, such as whether Steve Jobs will depart as Apple CEO before Dec 31, 2009 (currently trading at a 20% chance, down from 75% in January). The idea is that when people put real money on the line the market will give a more accurate prediction than polling.

The graph below shows Intrade results for the outcome that Ahmadinehad will win the Iranian election. Anything above 50% means the market says “yes he will” and below 50% means “nope”.  Until the beginning of June, Intrade favoured Ahmadinejad to win, albeit on very little trading volume.

And then - the opposition (presumably Mousavi) started to gain traction, and trading volume picked up. Ahmadinejad’s Intrade-odds dropped from about 60% to a low of 20% on the day of the election.

As soon as the election results were announced - boom, the odds of Ahmadinejad winning jumped to 90%. And stayed there through all of the protests. Hardly budged. Despite all of the Western press coverage and the hoping and the changing of avatars to green.

Turns out Iran isn’t having the Colour Revolution its ruling clerics may have feared. Iran is not the Ukraine which could look to nearby Poland or the Czech Republic for examples of how political and economic change can work. Neither is Iran the former USSR which had a few years of Gorbachev loosening the Politburo’s grip before Yeltsin could tear down the wall as it were.

After his stance against the clerics, it is unlikely that Mousavi will be given a chance to be a Gorbachev-like reformer on the inside. For now, Iranians will have to wait for any change they want.

CWN

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Blackmont Capital sees good things for TMX Group

June 29th, 2009

I think the message can be this: whether it be good times or bad times, stocks still have to trade. Which seems to bode good things for the TMX Group (TMX:TSX) according to a research report from the Equity Analysts at Blackmont Capital:

“Analysis & Forecasts: So far June has been a strong month almost across the board for TMX. Based on our analysis, using the growth rates seen in TMX’s revenue drivers thus far in Q2/09 (ending June 30th), cash EPS could wind up in the $0.72 range, which is at least 16% above current $0.62 consensus expectations as well as Q1/09 results. We expect significant revisions (including our own) in the coming weeks when the full data is released. Specifically, quarterly cash equity trading volumes are up 17% sequentially despite losing 1.9% in market share to Alpha in June. IPOs are set to rise over 250%, while secondary/supplementary equity financings are up more than 15% from Q1/09. Montreal Exchange’s 3 key
derivatives products are set to see quarterly growth of 10% (30% Q/Q for its most important derivative product, BAX).

Valuation & Recommendation: We view this strong quarter as illustrating the earnings potential of TMX under a market recovery and its ability to grow even in the face of increased competition. TMX shares have significant upside in our view, trading on a consensus forward earnings basis at a 3% discount to the banks and a 26% discount to the asset managers; thus, we maintain our Outperform rating and $41.00 target price.

Not matter what the price of gas, the folks who own the pipeline always seem to make a profit.

MRM

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