Canadian short-term interest rate projections

BAX Futures are as follows:

Month / Strike Bid Price Ask Price Settl. Price Net Change Vol.
+ 12 OC 0.000 0.000 98.820 0.000 0
+ 12 NO 0.000 0.000 98.780 0.000 0
+ 12 DE 98.730 98.735 98.745 -0.015 10452
+ 13 MR 98.710 98.720 98.750 -0.030 27000
+ 13 JN 98.680 98.690 98.730 -0.050 32803
+ 13 SE 98.650 98.660 98.690 -0.040 19232
+ 13 DE 98.610 98.620 98.660 -0.040 11758
+ 14 MR 98.570 98.580 98.610 -0.030 1998
+ 14 JN 98.520 98.540 98.560 -0.020 1257
+ 14 SE 98.470 98.480 98.500 -0.020 613
+ 14 DE 98.410 98.430 98.430 -0.010 525
+ 15 MR 98.340 98.360 98.370 -0.010 123
+ 15 JN 98.280 98.300 98.310 -0.010 50
+ 15 SE 98.210 98.230 98.240 -0.020 50

The market is pricing in the anticipation that rates may increase a quarter point in 2013 but nothing yet substantive.  In particular, the September 2015 projection of a 1.5% target rate is an interesting bet from a risk/reward perspective.  Three-month corporate paper is at 1.16% and has been this for quite some time.

The Dell and PC hardware value trap

I noticed recently that Dell (Nasdaq: DELL) slipped below $10/share. They’re now at $9.5/share or roughly a market capitalization of 16 billion (if you net out the cash and debt, the enterprise value is about $12 billion). This is on $3 billion income for the trailing 12 months, so something is completely out of whack – the market is either nuts, or they’re betting that Dell’s net income is going to drop significantly in the future. The latter is more likely to be the case.

I still don’t see anything worth investing in unless if you have a good sense of salvage or residual cash flow analysis. Dell is facing a compounding problem of being in a low margin industry that is not only shrinking, but is facing longer lifespan cycles and technological shifting.

In other words, they don’t have a proprietary tablet to be selling for ultra-large margins like some other fruity-named company.

Intel (Nasdaq: INTC) has an escape route – their processors can be used elsewhere and can command market pricing. They’ll take collateral damage, but will do relatively better. However, since the consumer end is still a significant portion of their market, I will also continue to lump them in the value trap category. Their anti-trust shield, AMD (NYSE: AMD), should also struggle. Considering that embedded chip makers such as ARM (Nasdaq: ARMH) are stronger competition to Intel, it makes you wonder if AMD is at all relevant any more and will get taken out by Intel finally.

This is similar to the fate that graphic chip designers were all finally consolidated into Nvidia (Nasdaq: NVDA) – which in itself might get munched by Intel. Its as good a time as any for consolidation in this entire PC sector.

Finally, it is always easy to point out share buybacks are a mistake when your stock is richly priced, but in Dell’s case, they have cumulatively spent $32.1 billion of cash on repurchasing 1.2 billion shares of stock – an average price of $26.79 per share. If from day zero they banked this cash and simply traded at a market cap of their net cash value (not even the higher book value), they would be trading at $11.93/share today. If they traded at the premium above book value as they are trading today, they would be at $15.26/share. Quite a bit of value destruction went on with those share buybacks.

RIMM upcoming quarterly report

RIMM’s (Nasdaq: RIMM) expectations have finally been driven deeply into the red – an expected loss of 46 cents for this upcoming quarter, 1.49 loss for the current fiscal year and 71 cents for the next fiscal year (year ended February 2014).

I earlier suggested that potential investors in RIMM should wait until these estimates go deeply negative. They are now currently negative and I would suspect after this quarterly report, the company is going to get expectations to the point where the risk has been correctly priced in if not already there.

While I am not buying RIMM shares, people that believe in Blackberry 10 and its potential probably have a correctly timed entry point in the remainder of this year – especially as most institutional investors will be sitting on tax losses and would likely want to clear it out of their portfolio or risk embarrassing themselves.

There is still obvious technology adoption risk for the company – if they execute well then you might be sitting on a double or even more if they are able to regain market share (and perhaps the more important mind-share of the developers). If they don’t, well, then you get a Nokia (NYSE: NOK) where you start pricing the company based off of salvage value.

Does High Frequency Trading add value to the market?

Reading Mark Cuban’s post about High Frequency Trading (HFT), indeed, I agree with him that it provides little value to the marketplace.

The incentives are completely geared toward having it, however – the stock exchanges make money on volume and have no incentive to stop it. The traders themselves are able to do it profitably and have no incentive to stop.

The easy solution to fix this problem is to simply transform the stock market into one second auction windows – i.e. every second that the stock market is open (6.5 hours, which translates into 23,400 seconds) bids and asks are aggregated and transactions are appropriately processed.

This would also undermine the value of sub-penny quotations and seriously reduce the value of phantom quotations that try to “probe” what hidden support there is in the order book.

There would be a decrease in volume, but most of the volume you see today is “phantom liquidity” – it is liquidity that would never be truly accessible for somebody wanting to accumulate or distribute shares at a certain price level.

This change is unlikely to be enacted, however, since it does nothing politically for those that control the securities commissions – the regulators’ incentive structure is favoured toward higher complexity, and thus more requirements for regulation.

More specifically, securities regulations has little to do with “investor protection” – rather, it is about entrenchment of established interests.