Canadian Interest Rate Projections

This is updated from December 7, 2009. The end of December rate (these rates are 90 day bank rates) has moved from 1.53% to 1.45%, while the end of December 2011 has gone from 2.86% to 2.77%. The market is signaling that rate increases will be less than anticipated from last month.

Month / Strike Bid Price Ask Price Settl. Price Net Change Vol.
+ 10 FE 0.000 0.000 99.530 0.000 0
+ 10 MR 99.540 99.545 99.535 0.005 3742
+ 10 AL 0.000 0.000 0.000 0.000 0
+ 10 JN 99.380 99.390 99.370 0.020 19921
+ 10 SE 98.970 98.980 98.960 0.020 13407
+ 10 DE 98.540 98.550 98.520 0.030 6731
+ 11 MR 98.130 98.140 98.130 0.000 3180
+ 11 JN 97.800 97.820 97.810 0.000 918
+ 11 SE 97.500 97.520 97.500 0.010 35
+ 11 DE 97.210 97.250 97.210 0.040 15
+ 12 MR 96.960 97.010 96.960 0.040 16
+ 12 JN 96.730 96.770 96.720 0.030 16
+ 12 SE 96.520 96.570 96.490 0.050 14

Trading against a computer

Most transactions on the stock market are done with computers and not with people behind the screens. A good example is when I did a minor order to do some tweaking of my portfolio, and got the following execution on something that only trades 1000 shares a day:

01/19/2010 14:28:28 Bought 100 of XXX @ $XX.XX
01/19/2010 14:27:23 Bought 100 of XXX @ $XX.XX
01/19/2010 14:26:16 Bought 100 of XXX @ $XX.XX
01/19/2010 14:25:10 Bought 100 of XXX @ $XX.XX

See the pattern? The computer probably had an algorithm that said “sell 100 shares, space each order at the bid 66 seconds apart until you’ve cleared your order”.

Algorithms that trade against each other fundamentally are playing rock-scissors-paper against each other in order to scalp profits against those who have the weakest or easiest to predict algorithms.

Enterra Energy Trust – Rising for no reason at all

Enterra Energy is a typical small-scale energy trust that has miscellaneous properties in Alberta and Oklahoma. They are not too remarkable other than the fact that they have been very diligent at reducing their balance sheet leverage over the past couple years – their unitholders received their last distribution in August 2007.

Today they announced that they will be converting to a corporation and changing their name. One would think this is typical considering that income trusts that do not give distributions to should change to corporations before the end of 2012 deadline. Income trusts that give out distributions in 2010 still have their tax shield for one more year – although the majority of them after 2010 should convert to corporations in either 2011 or 2012.

For whatever reason, the market decided that the announcement to convert to a corporation from a trust was worth a 25% mark-up in their unit price, as of the moment of this writing.

There is fundamentally no reason for this announcement to cause such a price spike. Either something else is going on, or the market is behaving very, very irrationally. Spikes like this make the market feel very bubbly.

Disclosure – I do own debentures in Enterra Energy Trust (the ones maturing in December 2011). They have been inching up closer to par over the past month and hopefully will continuing bubbling up above par, where I will proceed to dump them. If not, I keep collecting 8% coupons, which is a good reward to wait for a good price.

Don’t invest in corporate largesse

Putting a long story short, the board of directors of Cheasapeake Energy, in their infinite wisdom, decided that it was worth $12.1 million of its corporate assets to purchase antique maps from its CEO.

The only thing you can do when you see such a waste of corporate resources is selling your shares if you own them, and not buying them if you don’t.

I should take this opportunity to point out it was exactly the same company and its CEO that in November 2008 faced a margin call on his own stock, forcing him to liquidate 5.4% of the company in a very rapid transaction.

I said the following back in November 2008:

Some might think this would represent the best buying opportunity – cashing in on the misfortune of somebody’s financial errors. Unfortunately in the case of Chesapeake, the last company I would want to invest in would have a CEO that got caught by a massive forced liquidation like this one – first of all, his incentive to perform well has just disappeared (having no more equity stake in the company) and secondly, one would wonder whether he’d make a similar miscalculation with the company’s finances.

It appears that the CEO is just as reckless with the company’s finances as he is with his own – any prudent investor should blackball the entire Board of Directors of Chesapeake Energy – if any of them serve on a corporate board (or heaven forbid, management) of a company you are invested in, it would be a yellow flag.

This is why the iceberg theory of bad news is applicable – if there is a small piece of bad news, chances are there is a lot more to go with it. In the case of Chesapeake, this is the last energy company I would want my dollars invested in.

Taiga Building Products resumes interest payments

Taiga Building Products has resumed paying interest on their notes. I have written about the notes earlier and pointed out the risks associated with the notes. At that time the notes were trading between 45 and 50 cents on the dollar.

After the closing of trading on January 13, 2010, Taiga announced the following:

BURNABY, BC, Jan. 13 /CNW/ – Taiga Building Products Ltd. (“Taiga” or the “Company”) is pleased to announce that due to strengthening cash flows, it will be resuming interest payments on its 14% subordinated notes, including monthly interest on deferred interest, as per Section 2.04 of the Note Indenture dated as of September 1, 2005. Interest deferred from March 1, 2009 through November 30, 2009, including interest on deferred interest, will be paid by September 1, 2010 as per Section 2.04 of the Note Indenture. The Board of Directors may choose to pay interest prior to September 1, 2010 subject to cash flow considerations.

The first reinstated interest payment date will be January 15, 2010, with respect to interest, and interest on deferred interest, accruing for the month of December 2009.

… and on the following day, announced:

BURNABY, BC, Jan. 14 /CNW/ – Taiga Building Products Ltd. (TSX: TBL & TBL.NT) announces that it will be paying the monthly interest payment of $11.6667 per $1,000 principal value subordinated Notes. Taiga will also be paying the interest on deferred interest, accruing for the month of December 2009, in the amount of $1.1233 per $1,000 principal value subordinated Notes. The payments will be made to shareholders and noteholders of record at the close of business on December 31, 2009 and will be payable on January 15, 2010.

The question for the noteholders will continue to be how the company will pay the deferred interest in light of the fact that their credit facility, as of September 30, 2009 was around $53 million and without any cash on the asset side of their balance sheet. The equity in the company is negative $82 million at this date. At the September 2010 date is the expiration of the bank credit facility, which would be senior to the notes and secured by most of the company’s remaining assets.

The market, however, didn’t seem to care. Taiga equity went up 15 cents to 60 cents a share (so its market capitalization is roughly $19.5 million) and for noteholders, the market value went from 60 cents to a high of 92 cents, closing at 91 cents.

It appears that the market is applying a very rich valuation to the notes in response to this news. If I held notes, I would be dumping them if the market rate was 91 cents.

I suspect within a year there will be some sort of recapitalization of the company’s debt balance, and the issue for the noteholders will be one of recovery, rather than yield.

Just an item of disclosure; I have never had a position (equity or debt) in Taiga Building Products. They are interesting to track, considering that they are a (relatively) local company to where I live and wish their business the best of luck in slaughtering their debt issues with a minimum of pain for everybody involved.