Headlines that get your attention

Being an investor requires you to be part rational analyst, part number cruncher, and part armchair psychologist (and a lot of other parts as well). On the armchair psychologist side, you have to determine what other investors are thinking and determine whether this sentiment has reached a local maximum or minimum with respect to the expectations that are implied in market pricing.

So when I see a headline like “Equities are dead, long live bonds” it gets my attention. Not because there is any information in the headline, but rather that it is an indicator of sentiment. Although a single news article is never enough to give a definitive indication of sentiment, multiple articles over a short period of time spread across all sorts of non-specialized ‘conventional’ media tend to send signals.

While mining for this information is difficult without realizing that retrospective analysis is 20/20, recent memories such as the tech/internet mania in the late 90’s and early 00’s come to mind. Also, in the early 80’s when gold was bidded up to the moon, and the US currency was widely known as future toilet paper (along with those 15% 30-year government bond yields) made a sell gold / buy bonds trade to be the trade of that particular decade.

Trying to mine this information for future use, rather than historical use, might be impossible task. Who knows. Sometimes the masses are right.

Week ends with some bond selling

The 30-year US treasury bond had a significant sell-off over the past few days.  It will be interesting to see whether this is a start of a larger sell-off in the autumn, or whether this is just a simple profit-taking exercise:

I had another trade execution in an issue, but probably the most frustrating thing on the planet is when you have your order in, the price gets touched, and you get a fill in for 100 shares and then the market backs away from your price. It is more annoying that this happens than if the order was never touched at all. Hopefully the market will be a little more generous next week.

Top Canadian Oil and Gas Producers

The following chart is a brief list of the top-10 sized oil and gas companies in Canada, and their year-to-date performance ended September 1, 2010, not including the impact of dividends (which would be significant in the cases of COS and PWT which distribute most of their income through their trust structure):

Name Ticker %-YTD
Suncor Energy Inc. SU -9.35%
Canadian Natural Resources Limited CNQ -7.63%
Imperial Oil Limited IMO -2.73%
Husky Energy Inc. HSE -16.42%
EnCana Corporation ECA -13.19%
Cenovus Energy Inc CVE 11.66%
Talisman Energy Inc. TLM -13.00%
Canadian Oil Sands Trust COS -14.04%
Nexen Inc. NXY -19.27%
Penn West Energy Trust PWT 6.09%

Cenovus is clearly the winner here – investors are quite happy with parking capital into non-conventional Canadian oil.    It is surprising that Suncor has not fared better, probably due to integration concerns with Petro Canada.  Husky Energy and Nexen have been the worst performers.  Husky has had a significant management change and appears to be in petrochemical limbo with no obvious growth.  Nexen has Gulf of Mexico exposure and this can explain its performance.

It should be important to distinguish the difference between oil and gas – gas commodities have been priced significantly less than oil over the past couple of years, so EnCana and other gas-concentrated producers should lag the oil companies at present.

Finally, there are likely many more analysts out there that follow these ten companies that are much more knowledgeable about the individual companies and their exploration properties, so it is unlikely that by mining the relative price data that there can be any value extracted from this very simple analysis.  It does tell you which companies have had lowered and raised expectations since the beginning of the year, however.

Market psychology in the last week before labour day

Everybody is on holiday this week.

Thus, yesterday, when the markets went down, it was because of “traders betting on a double dip recession”. Today, the markets are up, so therefore it is because “they are betting on an economic recovery”.

It’s advisable to just not pay attention to the headlines and instead just pay attention to individual issues that might be wildly taken up or down in low volume conditions.

Uranium One now majority controlled

Uranium One’s shareholders voted convincingly in favour of the takeover of a majority stake in the corporation by a Russian “crown” corporation SC Atomredmetzolo (“ARMZ”) with approximately 91.99% of non-ARMZ shareholders in favour of the transaction.

The salient terms of the agreement is that ARMZ will take a 51% majority stake, and pay the rest of the shareholders $1.06/share in a cash dividend. Shareholders, assuming they haven’t already sold at market value, will be in for the ride and will have to make sure that their interests are in alignment with the majority ownership.

This is almost the reverse case of Magna International, where the Stronach family is being paid a considerable sum by the corporation to relinquish its controlling stake.

Investors should always be very cautious in making sure whenever they invest in companies that have majority or near-controlling ownership stakes that their interests are in alignment with the large shareholders. While a majority stake is not necessarily an exclusion criterion to considering a potential investment, it does raise the bar considerably higher. I tend to have a high aversion to majority or near-majority controlled domestic corporations as they can abuse minority shareholders.

The debenture holders, however, should be looking good – Uranium One has a December 31, 2011 issue that has a 4.25% coupon that is a very probability candidate for maturity at par; between the bid and ask, it is trading at 98.5 cents. Once you factor in capital gains, it is a relatively low risk 5% return on investment. Uranium One has another outstanding debenture issue that matures in March 2015 and this one is muddied by the fact that the conversion privilege (at $4/share) is close to the common stock price – this issue is trading at around 105 cents.

It is not likely that the 1.3 years between now and December 31, 2011 will pose much of a credit risk for the initial debenture issue – the corporation is likely to refinance this debt. However, the 2015 debenture has more embedded risk simply due to the time between now and the March 2015 maturity – you never know how much of the company assets will get stripped out. The worst case scenario is that ARMZ will try to to repatriate the assets (mainly agreements to mine and sell Uranium, mostly from Kazakhstan) of Uranium One into some other corporation controlled by ARMZ. You then don’t have to worry about the bankruptcy of a Canadian corporation once the assets have been stripped out of it, and debenture holders and shareholders alike would be left with nothing. It is unlikely this scenario will happen by 2011, but by 2015 it becomes somewhat more likely.

Suffice to say, I won’t be touching the equity or debt of this corporation.