End of Canadian tax season

The last chance to dispose of stocks on the TSX will be at 12:59pm EST on December 24, 2015. These trades will settle in the 2015 calendar year. The exchange is closed on December 25, 2015 and also December 28, 2015 (in lieu of the December 26 Boxing Day holiday). Trades conducted on December 29, 2015 will settle in 2016.

Our American cousins journal their trades for taxation purposes on the transaction date and not settlement date, so they have up until December 31 to make their last-nanosecond trading decisions for tax purposes.

I have been insanely busy lately dredging the recent trainwrecks (mainly relating to oil and gas) and have been finding material of value, hence I haven’t been writing much here.

The biggest gainer on December 22 market trading

I will predict the company with a market capitalization of at least $1 billion that will exhibit the largest percentage increase in market valuation on December 22. I am pretty certain of my conviction.

Unfortunately, the company is not publicly traded. It is very likely to be publicly traded one day.

The company is called SpaceX, run by the same genius that runs Tesla Motors (Elon Musk).

Yesterday, they launched a rocket into space. They have done this before and being a private firm, this was no small feat as it was only done before by government-funded/operated space agencies.

The next step in their cost-optimization is being able to get the first stage rocket back to earth in one piece. Since the first stage probably costs around a low 3-digit million amount to construct, you would save a lot of money recovering this piece instead of having it dumped in the ocean.

They managed to do this less than 24 hours ago. Watching this video (the re-entry of the first stage rocket starts around 32 minutes in) is amazing. You can read about their initial attempts here.

My university degree was majoring in physics. I do not believe most people can appreciate how truly difficult this is to get correct.

They still have to figure out some other non-trivial matters, such as how much metal fatigue becomes a factor when reusing rockets, and how to deal with various atmospheric and variable factors that inevitably will come into play when it concerns rocketry, but for the most part, they are very well on their way to total domination of the low-cost space launch market.

After this successful re-entry, if SpaceX was publicly traded, I would guess their market capitalization would be up by 50% in a single day, which will likely top the charts on an ordinarily boring Christmas-time trading day.

Dream Unlimited Preferred Shares

With the calamity hitting the preferred shareholders of Dundee Corp (of which I narrowly escaped), I have long noticed that their spinoff corporation, DREAM Unlimited (TSX: DRM) has a similar situation going on with their own preferred shares.

You will have to dig through SEDAR and look for a May 31, 2013 document that is 8783kb in size and go to page 60 of 141 in the PDF document for a legal definition of what these preferred shares are. They made it so convenient as the documents are not even made searchable with the usual control-F function on Adobe Acrobat.

They trade as DRM.PR.A and they are retractable by the corporation at $7.16/share, and redeemable by the shareholder at $7.16/share, in both cases with accrued dividends (7% coupon on a $7.16 par value). Redemption and retraction are given with at least 30 calendar days of notice.

Unlike Dundee Corp, there is no ability for DREAM Unlimited to sneak a shareholder-hostile proposal to scrap the redemption feature without a significant sweetener – if they did so, you can “vote” by exercising your redemption rights and get your money 30 days later instead of voting your shares against such a hypothetical proposal.

The only risk is the underlying corporation, DREAM Unlimited, elects to pay the redemption with common shares. The provision is 95% of the typical 20 day volume weighted average price scheme that is common to a lot of other offerings out there, or $2/share if this is the higher price. DREAM Unlimited common shares are trading at $7/share and with a market capitalization of $526 million, so a dilution of $36.7 million is not going to hammer the common shares below $2 if they tried an equity redemption – you’d likely be able to get out above par value in such an instance. The underlying business is not prone to “gap risk” (i.e. this isn’t some biotechnology company that will drop 70% one day due to a failed clinical trial), but it is in real estate development – this means that any of their properties that are not in Alberta or Saskatchewan, should be relatively stable (at least until you can get your redemption money in 30 days time).

In typical Dundee fashion, however, while the corporation is reporting considerable GAAP profits, their cash flow statements leave much to be desired. They do have ample liquidity in the meantime, having negotiated a $175 million million first-line facility with the banks expiring June 2018 and also $200 million of spare capacity on their operating line of credit which expires on June 2017. There is easily enough room to pay for a redemption of preferred shares – indeed, the fact that the preferred shares occupy a $36.7 million hole on their balance sheet probably forces them to be more conscious about this liability. I wonder why they haven’t even just bitten the bullet and redeemed this expensive capital.

In other words, the market value of this preferred share issue is going to be anchored around the $7.16/share mark as investors are able to skim off a 7% eligible dividend until such time the corporation bites the bullet and finally redeems the shares. If it goes too below $7.16, it is an easy arbitrage to buy below $7.16 and instantly redeem if you believe there is any sense of credit risk. It is as close to a risk-free 7% as it gets.

I note that the preferred shares were trading as low as $7.00 today and this was likely fueled by some investor out there getting his RBC Margin account spontaneously liquidated – it wasn’t a trivial amount either, around 40k shares worth. About 30,000 of them traded at $7.00 and somebody redeeming them back to the corporation at $7.16 made the easiest CAD$5000 on the planet. Ordinarily DRM.PR.A is not an actively traded stock and with all of the stress occurring in the marketplace, what may be “risk-free” isn’t as liquid as cold hard cash!

Anyway, I bought some shares at $7.00 today.

Revisit of Bombardier

There was an article on the Globe and Mail regarding my declaration that I had invested in Bombardier preferred shares (TSX: BBD.PR.B / BBD.PR.C).

I’m going to look very smart or very stupid at the end of this ordeal.

I will emphasize this is a high risk, very high reward-type opportunity. With high risk goes the chance for permanent capital loss, so the position size is appropriately small.

At current market prices, BBD.PR.B trades at a 12.6% yield, while BBD.PR.C trades at a 16.5% yield.

Other than the obvious business execution risk entailed within their aircraft division (specifically the execution of the C-Series project), there is another huge risk for investors: they will suspend preferred share dividends.

If this happens, BBD.PR.C will trade significantly lower (percentage-wise) than BBD.PR.B. The conversion risk is another component of the yield differential.

The comment about bond yields was accurate as of the middle of November, where after the government equity injections the short-term maturity bonds traded at reasonable yields. Today, however, yields have significantly widened, which also accounts for why the preferred shares are trading at such blowout yields.

Below is a graph of various yield to maturity curves of Bombardier debt (note these are NOT “yield to maturity” curves, I use a current yield + capital gain calculation which is non-standard but a more intuitive measurement for high yield debt I prefer using):

2015-12-14-BBDBondYields

The near-term maturities have risen to the 10% yield levels, which puts the corporate entity in the refinancing danger zone.

Considering how much equity was injected into the company (US$2.5 billion) over the past few months, this is not exactly an enthusiastic market for debt, especially their March 2018 issue which matures in just 2.25 short years from now (albeit this specific issue’s last trade was 98 cents on the dollar – but go back another 6 months and that one traded at 90 cents!).

Part of this is likely because of year-end dumping for tax reasons, and the embarrassment factor of any fund managers that are holding onto this – they don’t want those shares to appear on their year-end financial statements to clients!

However, there is also a very deeply political component to my investment thesis. The Quebec investments are part 1 of the story. I’m waiting for part 2 to resolve itself (and this does not involve a federal government investment – if it happens, it will be icing on the cake).

The point of maximum fear

Very interesting things happens to markets at bottoms and tops – there are typically panic spikes down and up.

My market instincts suggest that we’re approaching some sort of local maximum for fear in terms of the energy markets. All doom and gloom, and usually you hear about the opposite arguments (demand is rising, geopolitical risk, etc, etc.) but none of this is present.

Probably a reasonable time to shop for assets in entities that will be able to survive the trough.