CMHC announcement – February 28, 2014

CMHC is expected to make an announcement at 11:00am eastern time, on Friday, February 28, 2014.

The media (Globe and Mail) suspects it will be to announce that mortgage insurance premiums will be increasing.

This will have the effect giving people a disincentive to make low down payments (or use extended mortgage terms) and also conveniently allow CMHC to accrue even higher amounts of unearned premiums when they sell mortgage insurance policies.

Since the other two mortgage insurers in Canada (including Genworth MI (TSX: MIC)) mirror the CMHC rates, any increase in CMHC rates would have a proportionate impact on their top-line revenues going forward. CMHC is one of the Government of Canada’s best performing crown corporations, with a comprehensive income of $1.3 billion for the first 9 months in 2009.

The market anticipates a positive announcement, given that the pending news release was announced after the close of February 26, 2014 trading:

mic.to

Genworth MI continues to be a significant component of my portfolio so I am watching this like a hawk. I have no idea what the announcement is going to be.

My views on Genworth equity has been very well documented on this site since I took a position in them in July 2012.

Liquidating Bitcoins is not easy!

People should have seen this a mile away, but MtGox (the exchange that at one point facilitated the vast majority of Bitcoin transactions for real currency) finally packed it in and documents claimed that there was a gaping hole of about 744,408 Bitcoins due to some technical issues with the exchange software that accumulated over a couple years (not to mention a net of about US$33 million cash owed to customers!).

My hypothesis is more plausible: fraud. Anybody running an exchange operation like this would be looking at their account balances like a hawk, hourly, and have proper built-in mechanisms to ensure that there are no leaks in the system. Claiming a loss like this over a period of a couple years is simply incomprehensible.

One of the great things about how Bitcoin works is that the entire transaction ledger (the blockchain) is in public view, and some enterprising people will likely be able to reconcile what happened from publicly available data. 744,000 Bitcoins is about 6% of the entire amount in circulation.

Considering the underlying value of Bitcoin is zero, it is still amazing to see that one can still sell these things for US$500 a piece on other exchanges. This is assuming, of course, they won’t go under either.

I didn’t know how high the hype would go for Bitcoin. Guessing when the tops of markets occur is a tricky endeavour and is simply that, guesswork. My initial guess was “no higher than US$10,000 per bitcoin”, but I subsequently revised that to closer to US$900 than the $10,000 mark.

Now I’ll come with an even starker prediction: Bitcoins will never reach its all-time high (US$1,200) ever again. The hype is gone and the true weaknesses of Bitcoin have more or less been shown to make the entire system unusable except as a novelty.

Bitcoins to currency almost reminds me of what gift cards are to currency: like cash, except worse. If you truly want to invest in something that is relatively immune to the machinations of evil central bankers world-wide, this is the chart of the commodity that I think has profited the most from Bitcoin’s collapse:

gold

Right now a bitcoin is US$516 on Bitstamp (the now leading exchange for Bitcoin volume). You can get an ounce of gold for 2.6 bitcoins. An easy decision for those that still want to believe in hyper-inflationary theories.

Disclosure: No bitcoins, no gold!

More research, nothing found

Spent a bit of time today mining the equity haystack out there.

Nothing of note found at prices that would want to make me dive in. I did get the chance to educate myself on a couple obscure areas of the technology industry that would not make for very interesting cocktail conversation.

I have to keep telling myself that deploying cash for the sake of deploying cash is a good way to lose it.

And no, I’m not even interested in Bitcoins at US$160!

Bone-headed valuations marking the end of the cycle

The big headline is the deal Facebook made to acquire WhatsApp for an absurdly large piece of change – $4 billion cash and $12 billion in stock. There was also $3 billion in extra restricted stock that vests over four years, but really, $3 billion is a rounding error.

The owners of WhatsApp should be given a massively huge congratulations for extracting a huge pound of flesh and hopefully they will have the foresight to start hedging their stock so they’ll be able to live in luxury forever.

I highly suspect in five years or so that the guys at Snapchat and Instagram are going to be kicking themselves for not dumping their businesses at equally absurd valuations. They’ll probably end up being like Friendster when they are superseded by some other up-and-coming application service.

I am not a user of either technology, either Facebook or WhatsApp (or Snapchat and Instagram for that matter!). Today was the first time I ever heard of WhatsApp, and just looking at the Wikipedia summary, it looks like a well-used and functional version of BBM crossed with Skype.

This also explains why Blackberry is up today – if WhatsApp can fetch $16 billion, why can’t BBM?

Media is already panning the deal and I seriously have no idea whether this makes any sense for Facebook strategically – eventually they will want to fold the WhatsApp’s not insubstantial user base into Facebook in some seamless transition, but one can just ask Google how things went with Google+ and you’ll easily see it is a lot easier to do that on paper than it is in practice.

Financially, of course $16 billion is a huge price to pay. Even if you assume the stock component of the deal is worth zero, the $4 billion in cash is a huge investment. Putting that $16 billion in a 30-year treasury bond will reliably spin off $600 million a year in pre-tax income for 30 years and does anybody seriously think that WhatsApp will contribute that incremental income to Facebook’s bottom line?

This acquisition reminds me of what happened when Yahoo acquired Broadcast.com (from Mark Cuban), or the mergers that occurred in the optical networking space in the last couple years of the dot-com boom where you had massive equity-for-equity transactions (in particular, JDS, Uniphase, and SDLI come to mind).

Acquisitions like these highly suggest the 20-times-sales valuation hype is going to end sooner than later. I don’t know when, but I’m staying far, far away from this territory and letting the insiders and lucky day trader-types make their killing to the detriment of those that will be holding the bag when the party ends.

An actual purchase

Today one of my watchlist items fell well below what I considered to be a fair value range and I decided to nibble on a few shares. My first purchase of the year has the following metrics, without giving away what it is I’m investing in:

– Trading within 5% of its book value (about 10% if you exclude intangibles);
– No debt or abnormally large deferred revenues;
– Cash is just above 1/3rd of market cap;
– Enterprise value to sales of about a half;
– Profitable but not excessively so;
– Market took it down considerably due to the growth trajectory over the past couple years clearly abating and competitive margin pressures are rising somewhat. Clearly pessimism has set into the market – the chart has been trending down for the past half year. Most of the bad news is likely baked into the stock price;
– Short interest is relatively high.

So far this is just a tiny position, but if it continues to go down I will accumulate more shares.

(Update, February 14, 2014: I got about 1/7th of my desired position. It’s pretty clear short sellers are covering into this.)