Game of Chicken – US Debt Ceiling

The current game of chicken going on in the US Congress is good for media and may be financially profitable. I think most participants going into this negotiation concerning the debt ceiling thought that it would be a foregone conclusion that there would be some sort of settlement on the matter, but both parties seem to be sufficiently entrenched in their positions.

There is about a weeks’ worth of time before the US Treasury runs out of room to borrow money (via extraordinary measures), and then another couple weeks before they run out of cash entirely. This undoubtedly would create a market crash if this occurred and would result in a very large buying opportunity.

In other words, now is a good time to pick candidates for purchase in the event they are wholesale-dumped into the marketplace when other institutions realize that their T-Bills aren’t going to actually mature at par value.

It will likely not happen, but one can always hope – it is only at times when institutions and funds are forced to liquidate holdings that you can make the greatest gains from the market.

Short term investments

A friend of mine asked me one day… I’ve got $X to invest, over the next two years, and I was wondering what is out there where I can get a better than 3% return with liquidity and relatively little risk.

I asked them if they were interested in investing in 30-year government bonds, which yield a tad over 3%, and certainly fits the liquidity criterion. They were strict on the 2 year limit.

So I pulled up a list of Canadian debentures that were maturing over the next couple years. I couldn’t find anything acceptable. I did do some research on Ag Growth International (TSX: AFN.DB) which would give roughly 5.6% or so, but was strongly conditional upon them obtaining refinancing. With their equity prices as high as they were, this should not pose much challenge at present, but who knows what it will be like in half a year?

Every institutional manager on this planet is trying to squeeze a few more basis points out of their short term portfolios and this competition is quite evident in the public marketplaces.

I also looked at split share preferred shares, but those equally have risks that I won’t bother getting to in this post.

I face the same dilemma myself – there is relatively little that is striking my attention in the marketplace at present. The only purchases I have made are really special situations that would otherwise be very difficult to pick up on a typical screen.

Blackberry / Prem Watsa

The whole investment world knows about what is going on with Blackberry. They reported their quarterly result today and it indeed was the disaster the company signalled last week, which wasn’t a surprise to the marketplace. Indeed, optimists that were wearing glasses with a very deep hue of rose could pick out some elements that did not lead to total despair, but the pickings are slim.

My post is a very simple one – Prem Watsa’s very conditional US$9/share offer is genuine. There is a whole bunch of speculation why it will fall through, and these are legitimate (mainly there needs to be other CANADIAN backers in this offer other than Fairfax, who have already been badly singed with the acquisition of their 10% stake in the firm). However, one risk that media brings up which I do not believe to be a risk is the genuineness of Watsa’s intentions. I have been following Fairfax for over a decade, and it simply does not pay from a reputational standpoint for Watsa to be playing “games” on this one. It would harm his company’s future ability to pull off similar acquisitions.

With Blackberry trading at about $8/share, this would leave about 12-13% upside over a two month time frame. There is an outside chance (I’d weight this as roughly 25% at present) of other bidders coming into the foray, which would likely not be in the form of a clean takeout offer.

Watsa also has to consider if this deal falls through what he will do with his 52 million share stake in Blackberry, still worth around $420 million at current market value. He has about as much of an incentive to see something happen with his stake as the rest of the shareholders do.

Blackberry – Mother of all revenue misses

Blackberry pre-announced their quarter today, announcing that their revenue estimates are going to be about half of what analysts were expecting.

Their stock, surprisingly, was only down about 17% in the half hour that traders had to disseminate the information before the market closed. Quite frankly, given that their mass-market handset sales have plummeted to very little, I am surprised that they aren’t trading down further. Part of the reason why they haven’t dropped further is that there is implied value the company can fetch in some sort of liquidation.

Balance sheet-wise, they are still in a relative position of strength – with a couple billion in cash in the bank and no long-term debt. They’re probably going to have to utilize this for severance packages as they are laying off half their workforce.

Strategically speaking, Blackberry is now shifting to its roots in the business end – presumably getting out of the consumer market. It will be interesting to see whether there will be much of a market left for the technology side within organizations.

That said, if the stock gets hammered further, I will be eyeing some for a purchase. It is still slightly away from a point where I will consider a purchase and I would also need to see the actual quarterly results themselves (which will paint a bunch of doom and gloom). There will also be the component of people that will be dumping their stock by the end of the year to book a tax loss, and who wants to have the embarrassment of actually owning Blackberry any time this year? Anybody entering into the stock in 2013 will likely be guaranteed to be sitting on a loss.

On a total side note, if they are writing off their existing inventories of Z10s and other mobile units, I am actually in the market to just do a straight purchase without committing to any length of period for a mobile service contract. Maybe if they are going to do a fire-sale of inventory that I’ll finally pick up a new phone compared to the nearly-broken dinosaur I currently have for a mobile phone. Right now I clearly am not interested in paying $625 for one of them, but if they slash prices by half, I can easily upgrade. I did have a chance to try out the product and they are well designed, despite all of the negative mind-share that Blackberry has today.

Disclosure: No positions.