Canadian Finance and Economics
I am simply not intelligent enough to know how to trade Tesla (Nasdaq: TSLA) properly, nor have I traded Tesla in my life, but man, my eyeballs have really been glued to the quote monitor and also their option chains today and yesterday.
Some interesting charts with captions:
I’m not sure what medication you need to trade this, but my doctor hasn’t prescribed it.
It takes a certain level of boldness to predict a major market index going down roughly 60%, but John Hussman makes a pretty good case for it.
He also gives considerable input on answering a reader’s potential question of “If the market is over-valued, why hasn’t it been sold off already?” or the correlated question of “What prevents an already over-valued market from becoming even more over-valued?”.
Either way, it looks pretty miserable for large index investors – an investor that is forced to be fully invested in the marketplace would likely be well-advised to hold fixed income securities.
(Update, August 5, 2018: It has been brought to my attention that his flagship fund’s average performance hasn’t exactly been stellar – as of June 30, 2018 his 10-year average return is a negative 6.65%, during one the largest bull markets in history after the economic crisis! Ouch!)
An amusing story about a Bitcoin Exchange auto-liquidating a futures trader that took a bet that was too big – not only did they wipe out their own account, but they managed to take out a bunch of others as well.
Reading the exchange’s press release on the matter, it looks like that they are discovering that allowing clients to take large concentrated positions in single securities may not be the best idea to ensure the stability of the brokerage.
It reminds me when the Swiss national bank decided to no longer support the Swiss Franc at the 1.2 Euro level peg, and then one nanosecond later it crashed through a glass ceiling with such force that it took out FXCM. Bitcoin exchanges are learning the lessons that others have learned – be very careful when allowing your clients to trade on margin as your ability to liquidate their holdings when they hit “the wall” may be imperiled by external market conditions.
Interactive Brokers (Nasdaq: IBKR), by far and away, has the best track record concerning customer usage of margin, but even they took a $120 million haircut during the Swiss Franc re-valuation. Their most recent action was raising margin rates on Tesla, which is somewhat telling.
Imagine being a client of IBKR and seeing an email that because of another customer’s highly leverage bets going bad, that they’re going to be taking away 18% of your accumulated profits to compensate for the exchange’s loss on extending the external customer credit!
Both entities listed (NYSE: TCP, parent TSX:TRP, NYSE: EEP, parent TSX:ENB) got hit badly with the March 2018 FERC ruling. TCP got hit the worst (as measured by the percentage decline in market value) out of all of the MLP pipeline companies affected by the FERC ruling.
Initially in their Q1 release, they stated that the FERC ruling could have an adverse revenue impact of up to US$100 million. In light of their US$546 million in revenues in fiscal 2017, this was not a trivial impact. As a result, they dropped distributions from $4/unit/year (about US$292 million) to $2.60/unit/year (about US$190 million). This was a reduction of 35% in distributions.
The interesting element is that because it is structured as an MLP, the company can retain the cash and use it to pay off debt while the unitholders face the income taxes payable even though they never see the cash-in-hand (directly). Reducing distributions is a very effective strategy to paying down debt.
TCP’s MLP units were trading at about $48 before the FERC announcement. After the 35% distribution drop, the MLP units dropped more than half over the subsequent two months.
While there was an economic substance to the reduction in unit price (the FERC announcement did have a genuine impact on future distributable cash flows), the impact to the unit price was overblown (perhaps due to inflammatory language by the parent saying that TCP was “non-viable” and a sudden fear that they would not be able to obtain credit, etc.).
On July 19, 2018 the FERC provided some clarifications with respect to the future billing rates of natural gas pipeline MLPs and the taxation basis that they can charge customers. The stock market initially launched the unit price from $26 to $35, but that has tapered down as there is a realization that the new pronouncements are a partial backpedaling of the original March announcement.
Today, TCP announced their Q2 results and quantified the results of the revised FERC ruling to $40-$60 million. I’ve read management’s presentation and listened to the conference call for some additional colour. $40-60 million is still a significant amount of revenue to be lost, but not as bad as previously thought. There was still considerable uncertainty as to the exact number and also the future state of governance – the initial obvious route was conversion of the MLP to a C-Corporation, but now that does not appear to be attractive. The other obvious decision is a re-acquisition of TCP within TRP, similar to how Enbridge Energy Partners (NYSE: EEP) has a proposed re-acquisition by Enbridge back on the table.
Right now, pre-FERC, looking at 2017, TCP has revenues of $546 million (transmission revenues plus equity earnings), and about $445 million in operating cash flows (approx. $6.20/unit). Distributable cash is $310 million ($4.35/unit).
The impact of the FERC decision will start to hit the financial statements at the end of 2018, so 2018 will still be a relatively “clean” year. The excess of cash generated over distributions will be used to pay down debt – At the beginning of the year, the balance on their credit facility was $185 million, and on August 2, was paid down to $90 million. By the end of the year, it should be around $40 million or so. The coupon rate of this debt is very low (linked to the short-term US rate – about 3% at the end of June 2018) so there won’t be much of an interest expense savings.
The remainder of the debt profile of the company is at a low interest rate and can be extended without pressure given the investment grade credit rating (in 2019, $55 million, in 2020, $270 million, in 2021, $375 million, in 2022, $500 million).
Operationally, there are the usual concerns about smaller pipelines that have customer concentration risk (Bison expires in 2021, consisting of 17% of cash flows), but I do not see fundamental threats to USA domestic natural gas transportation.
Taking $50 million off of distributable cash results in $3.65/unit. At the market price of $30/unit, that’s a 12.2% total return on something that is in a very stable and predictable business. The $30 unit price appears to be a bit low and I suspect that TRP will attempt to re-incorporate TCP into it while the price is still relatively low.
Prior to all of this FERC business, six months ago (February 2018), TCP was trading at $50/unit and giving $4/unit distributions (8%) at roughly a 90% payout ratio. Now that the FERC matter has been settled somewhat, the market is currently pricing TCP at an 8.7% distribution level, at roughly a 70% payout ratio post-FERC (2019 steady-state amounts). The core business (natural gas transportation) hasn’t changed, so why the sudden doom and gloom? This MLP should creep up higher as regulatory matters get clarified. You’re not going to see TCP double to its previous US$50 glory, but I believe US$30/unit appears to be low.
(Note: TCP goes ex-dividend tomorrow, so you will see an immediate 65 cent drop in price from the currently mentioned $30 current market price when trading opens Friday).
Bombardier reported their quarterly results today. They’re slowly digging themselves from the financial gravesite a couple years ago – reporting $70 million in accounting profits, and that makes $114 million for the half. This doesn’t quite translate into cash positive results, but they should achieve cash flow positivity in 2019 and beyond, once all of the C-series related expenditures are consumed and happily handed to Airbus. This will not include the half billion injection they will receive whenever the outstanding warrants are exercised (not likely until closer to expiration – but they’re deeply in the money at present).
Management will probably use some of that capital to slightly de-leverage but after that they have options, including the re-initiation of a very small common stock dividend (they have diluted their common equity considerably over the past couple years).
Their preferred shares trade at a yield between 670 and 730 basis points and are likely to continue paying off into the indefinite future. I will be holding onto mine.