Mad Retail Muppet – on Aimia debt

Daniel Austin has transitioned to a new site, the Mad Retail Muppet. On his first post in his forays with Aimia’s corporate debt, I am happy to bring his site to your attention.

I’m sure the 10 or 20 human visitors here will find excellent reading on his site.

I’ll add some value by saying:

* Aimia’s 2018 debt matures on January 22, 2018 and will likely mature. Their 2019 debt matures on May 17, 2019 and has a 5.6% coupon. They’re not actively traded via IB, but via Questrade they are currently being asked for at 84 cents (or YTM of 15.3% – noting these are the regular bonds and not the strip bonds). Retail bond pricing typically incorporates a VERY healthy price spread over what should be the existing market price (i.e. an institutional investor would likely get at least a couple cents better pricing, thus a higher YTM).

* The YTM of this debt issue should give you an idea of what I think about the preferred shares, which are trading at a yield of roughly 11% at present (AIM.PR.A/B).

* Taking a $456 capital loss (pre-tax!) on this debt transaction is a very low tuition cost. It’s even less than the cost of a typical 3-credit course at my old university!

* Daniel’s deferred revenue/cost analysis is spot-on: if Aeroplan members go on a Home Capital Group-style bank run on their Aeroplan accounts, Aimia is hard-pressed to pay – such is the perils of investing in a company with a negative tangible equity of some $3.1 billion! This alone is a major reason why I would not touch anything in this corporation’s capital structure.

* It’s obvious Aimia has another choice they will execute on in the future – watering down their rewards pricing. Legally speaking, if they were to double the price of all rewards, what recourse does the consumer have?

Let’s check the terms and conditions

In particular, you acknowledge and accept as a condition of continued membership that:

1. Aeroplan Miles have no monetary value whatsoever and cannot under any circumstances form the basis of a monetary claim against Aeroplan.

5. Aeroplan assumes no liability to members whatsoever by reason of the termination of, or amendment to, the Aeroplan Program, in whole or in part, the addition or deletion of reward partners (including Air Canada), limitations on the availability of flights or seats, changes made by Aeroplan Partners to their terms and conditions, or any change made in accordance with sections 6 to 8 below.

Looks like the program (similar to Air Miles) is an unregulated confidence game – the only recourse Aimia has to watering down their product (or Air Miles) is the loss of consumer confidence. Not much of a remedy.

As a side note, I’m anxiously awaiting my $100 gas gift card in the mail.

Exercise in marketing

Cam Hui‘s thoughts on re-branding the oil sands is brilliant, especially the following:

* The jungle (think hot, steamy and snake infested) has now become the rain forest.
* Swamps (aligators and mosquito infested, etc.) are now wetlands.

I will add another example: Global warming becoming Climate Change. This way you do not necessarily have to have the climate warming in order to score your political points.

More relevantly to the financial domain, perhaps “Financial Advisers” should be re-branded to “Financial Salespeople”.

Taking a small break

I will be taking a small break from posting for another week – posting will resume on or around mid-July.

It is vitally important for fresh perspectives to get away from the computer and once in awhile break the typical daily routines in life – ideally you will take note of random events that occur and this may strike the imagination in such a way that will make you become a better observer of your surroundings.

Canadian Finance Links

I have been very slowly adding in links to my sidebar in the “Canadian Finance” category. The criteria are as follows:

1. The site author posts with his real identity;
2. The site’s focus is of a Canadian investor’s perspective and has decent content;
3. Site is focused more on fundamentals rather than technical analysis;
4. The site is not too “spammy”.

There are amazingly few sites out there that fit these criteria.

Annual Energy Outlook 2010

Always good to know what the world’s largest consumer of energy is thinking. I have my grave doubts about biofuels – they do not scale at economical prices.

The development of economical shale gas is the probable cause of the divergence between crude and natural gas pricing, but this seems to be mostly baked into the marketplace now.

Fossil fuels, from a physics perspective, continue to be the only real portable energy option. They have the highest energy density and the technology is mature and developed. Every other alternative is poorer. There are advocates claiming that plug-in vehicles will solve car fuel issues, but they are sadly mistaken. The only real alternative at present seems to be natural gas driven vehicles, but natural gas engines are much more fickle and require more maintenance, in addition to requiring natural gas fuel stations. If the price between crude and natural gas continues to diverge even further, you may see a resurgence in technology in this general direction.

Countries like China and India, with developing economies and zero regard for greenhouse gas emissions, will continue to pick up much of the demand for fossil fuels.

There is also significant geopolitical risk with respect to Israel and Iran that would have a disproportionate effect in the event of a war developing in the region. I do not believe markets currently are pricing in this to its proper degree.

It is a virtual guarantee that the combination of US dollar devaluation plus the increased demand and decreased supply of fossil fuels will result in a long-term price increase of fossil fuels. The question is how to time it and how to ensure that even if you are correct that your fossil fuel assets are not going to get expropriated by a national government – at this point I would only count on Canadian assets. Even our country faces geopolitical risk due to our lack of military infrastructure, but fortunately the country is so big that it would be nearly impossible to invade by force. A political invasion, however, is completely plausible.

Stocks and Politics – TennIndependent

I am linking to some fellow named TennIndependent, who resides in Brentwood, Tennessee, USA.

He seemingly has a portfolio that has a billion stocks in it, but his writings are strangely both coherent and incoherent at the same time, but I like his scatter-brained logic and how he knows he writes as such (which he equates to his “left brain” and “right brain”).

Most notably is that he is probably one of the few amateurs on the internet that I know of that invests in Trust Preferreds.

Physics always trumps marketing

One reason why Robert Rapier is such a powerful writer (and a wonderful one to read) is that he rarely strays into dogma and talking points (and the times he does so, he usually signals it); his articles are quite analytical and verifiable. In his latest post, he rips into Range Fuels and Cello Energy, and also states that venture capitalist Vinod Khosla had no idea what he was investing in.

In summary, I will point out that the two primary sources of cellulosic production being counted on by the EPA for 2010 were Range Fuels and Cello Energy. Both are Vinod Khosla ventures, and neither has come remotely close to delivering despite lots of funding and taxpayer assistance. I don’t think these are isolated cases. I think they are a symptom of things to come. We have gotten a lot of overpromises, because face it, that has worked to secure funding. But what this leads to are completely unrealistic expectations regarding our energy policy, and numerous bad decisions regarding where tax dollars should be spent.

Finally, I want to make one thing crystal clear. I am not criticizing failure here. That is normal and expected. Failure is a part of what it takes to learn and move forward. What I am criticizing is the nature of the failure; that it was primarily because inexperienced people were making claims they shouldn’t have made, and taxpayers are going to get stuck with the bills. Personally, I have a problem with my tax dollars being squandered away by smooth-talking salesmen.

The underlying science (mainly the first law of thermodynamics – not even process engineering is required to understand the issue) will show that it is very difficult, if not impossible, to get a net energy return on the production of alcohol-based (methanol/ethanol) fuel. Essentially, such fuels require energy inputs far greater than their desired output, so why not just use the input directly in whatever application you require the energy for?

There are some applications where energy conversion will be desirable anyway, despite a net energy loss – for example, the conversion of a diffuse source of energy (corn) into a concentrated source (ethanol), but if you are using a source of energy with even higher energy concentration and equal portability (natural gas), what is the point?

The government and a lot of people in the US Environmental Protection Agency (EPA) got sold a bill of goods, and they took the bait, hook, line and sinker.

Here in Canada, provincial governments are enacting legislation to blend in ethanol into fuels, which is a grave mistake. Also, the emphasis of hydrogen as a fuel to eventually replace gasoline is misguided; my thoughts are that hydrogen’s potential lies with energy storage rather than replacing conventional fuels.

Politicians get sold a bunch of fancy marketing and great promises in the hope that taxpayers’ dollars will get allocated toward whatever special interest of the day is being pitched at them (in this case, “less reliance on oil” is the message, although in the case of ethanol-blended gasoline “clean fuels to prevent global warming” is the message). The politicians and staff do not have the scientific capability of properly analyzing the proposals, and they get slick marketing pitches to sell them. Next thing you know, millions of dollars of taxpayers money are wasted with inefficient proposals and the end-consumer will pay for it when governments inevitably have to raise taxes to recover their losses on the project.

In the end, physics trumps marketing, but not after a lot of money is wasted once people scale up operations are realize they have no chance of delivering what they promised.

John Jansen a true financial journalist

Across the Curve was written by John Jansen, and it was something that I thoroughly enjoyed reading. He was quantitative, and factual and to the point. It was very good writing.

Probably a recent highlight for the author was when he got invited to a meeting with a few other bloggers to a meeting with some senior US Treasury officials, and ended up on television for an interview shortly after on Canadian business television.

Anyhow, he got a job with TD Securities and will presumably not be allowed to write about his views on the market, which is tragic, but I wish him the best of luck in his job.