Thursday, September 25, 2008

Max Pain Results For September

For the entire September-expiration month I tracked the options activity for some of the most traded symbols in the US market. These included SPY, IWM, XLF, QQQQ, and DIA.

For the most part of the month the price of these symbols was well below their max pain values (as computed by iqauto). However, on expiration day, the average difference between price and max pain value jumped quite significantly to very close to zero (+0.05%).

Last month, there were changes during the day that moved max pain values closer to the stock price and vice-versa. This month, the action was almost entirely on the stock prices, which is quite remarkable as the last day began with the average difference between price and max pain value down -4.47% (and it was -9.43% on Wednesday)

The average difference for all symbols tracked is show on the chart below:

This month was indeed remarkable. Max pain values looked completely off all month, yet in the end they somehow managed to be correct - on average.

Individual Symbols:

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Tuesday, September 23, 2008

Massive Volume of SPY Options Created Just Before Bailout Was Announced, Then Vanished

On Thursday September 18 there was a massive creation of SPY deep in the money calls very late in the day. The average daily amount traded on SPY is somewhere around $100M. On that day, when the massive $0.7T US bailout of wall street was about to be announced, $792M were traded. The majority of these trades were spread out through strike prices from 60 to 100, while SPY was trading much higher around 115.

Positions and Trading on Wednesday, Thursday, and Friday at the end of the day (data from Yahoo):

(Please click on image to enlarge)

Some samples from RBC for individual strikes, from both Thursday and Friday:

Note that on Thursday all these trades happened at or around 4PM, give or take a couple of minutes. Even more strangely, note how the options simply disappeared on Friday. They were not traded as there was no volume, yet they do not show up in the open interest. The options simply vanished.

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Thursday, September 18, 2008

A Potentially Rewarding Investment in Nortel, Deeply Troubled, Deeply Undervalued

Nortel yesterday announced a reduced sales forecast as well as the intended sale of a key Metro Ethernet division (a "premium asset"). The market responded by dropping its stock price by more than 50%. The day Nortel chose to make this announcement coincided with a global meltdown (what were they thinking?) certainly helped push the stock off a cliff. The company clearly has its share of troubles.

Notwithstanding these troubles, the company's valuation at the end of the day yesterday was USD$1.3B. With sales of $10B ($8.5B excluding Metro Ethernet), this means the company trades at 12% of annual sales, which is tremendously undervalued compared to its peers. Cisco trades at 3X annual revenues, that is 25X higher than Nortel's ratio. A common, reasonable high-tech company would trade at least at 1X annual sales. The Metro Ethernet division alone, with superb and unique optical products (for example allowing telcos to run 4x or 10x traffic on existing fiber lines) could fetch $500M to $1.5B alone.
Nortel also has a wireless division (particularly for LTE, Long Term Evolution) which is riskier but is worth something as well.

Moreover, the company's cumulative tax losses are roughly $6B. A profitable company which buys Nortel as a whole will inherit these tax losses, which can be worth approximately $1B in cash savings for the acquirer.

The company is selling its premium division because it is in trouble, its financial position is not strong, customers are buying less, competition is tough, and it does not enjoy the economies of scale of other players such as Cisco and Ericsson. However, I believe the company is deeply undervalued at the current prices, at least by a factor of 2 or more.

On the negative side, the company has $3.1B in cash, and $4.5B in debt.

Counting the Metro Ethernet sale as $1B, tax losses at $1B, and not counting any assets, technology, people, the company is worth a solid $0.6B in cash. Adding a paltry 50% annual revenues, the company is worth north of $4.5B, compared with the current market cap of $1.3B.

While you can be rewarded by buying the stock straight, a potentially rewarding strategy is to use leverage and buy the following call options.

September 2.50 traded at 0.30.
October 2.50 traded at $0.60
October 5.00 traded at $0.05
December 2.50 traded at $0.70
December 5.00 traded at $0.15

The September and October 2.50s and the December 5s can be extremely rewarding. Keep in mind that the current stock market steep decline is not over yet. Please do your own diligence.

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Wednesday, September 10, 2008

Solid High Yield Income Trusts Candidates to Park Your Money

If you are looking for places to safely park your money in the months ahead, while earning a good return in the meantime, you may be interested in some Canadian income trusts.

TAX LAW. The taxation for income trusts will change in 2011. At that point, income trusts will lose some of their tax advantages. It is expected that some income trusts will revert back to corporations. Others, have tax advantages that carry over for a few more years. In any case, until then there is plenty of time to invest in them.

YIELD: In choosing an income trusts you want a good dividend yield, but not exaggerated (which typically mean a return of your capital as opposed to a dividend payment). You capital may also decrease depending on the business the income trusts is involved in. For example, some income trusts invest in car dealerships. This is not likely to be a good investment when a recession is happening now, or is around the corner.

It used to bet that most Canadian income trusts were in the energy field (among other reasons, to attract foreign capital). These trusts have gone up in price when the price of oil went up, and have now come down. If oil continues to drop to around $80, they may still have some downside. It is also possible that some of the oil and gas trusts could cut their distributions if the price of the commodity drops. This was for example, discussed in the latest meeting of the Board of AN.UN (you can see it from their financial reports on their web site).


The income trusts listed below were filtered out of a list of a couple of hundred of them. They are either rated 4 or 5 stars by the Globe and Mail. They are:

(Please click on images to enlarge)

They are shown in detail below. Star rating is shown below each symbol.

A&W Revenue Royalties Income Fund is a Canada-based limited purpose trust. It is established to invest in A&W Trade Marks Inc. (Trade Marks), which owns the A&W trade-marks used in the A&W quick service restaurant business in Canada.

Canadian Oil Sands Trust is an open-ended investment trust. The Trust has a 36.74% working interest in the Syncrude Joint Venture (Syncrude). Syncrude is involved in the mining and upgrading of bitumen from oil sands in Northern Alberta, and is operated by Syncrude Canada Ltd. (Syncrude Canada). Syncrude Canada operates oil sands mines, utilities plants, bitumen extraction plants and an upgrading complex that processes bitumen into a sweet crude oil. Syncrude's production is sent by pipeline to Edmonton area refineries and to pipeline terminals, which ship it to refineries in Canada and the United States. The Syncrude Project is located 40 kilometers north of the town of Fort McMurray in Alberta, Canada. Syncrude's leases are in the sweet spot of the Athabasca Oil Sands deposit, spanning over 102,000 hectares and holding enough crude oil resource to produce 500,000 barrels per day for more than 50 years.

NAL Oil & Gas Trust is an open-end investment trust created to acquire a royalty from NAL Energy Inc. (NAL) and to issue trust units to the public. NAL acquires oil and natural gas properties and sells a royalty to the Trust entitling the Trust to 99% of the revenues from the properties held by NAL. The Trust also receives distributions, directly or indirectly, from NAL GP, Ventures Trust, Addison LP, NAL Energy GP, NAL Energy LP, NAL Partnership and 1331899. As of December 31, 2007, the Trust held assets in Southeast Saskatchewan, Central Alberta, Sylvan Lake, Alberta, Pine Creek, Alberta, and Monkman, British Columbia. During the year ended December 31, 2007, the production totaled 20,501 barrels of oil equivalent per day. The Trust is managed by NAL Resources Management Limited, which is a wholly owned subsidiary of Manulife Financial Corporation. On August 31, 2007, NAL closed the acquisition of Seneca Energy Canada Inc.

Noranda Income Fund is a Canada-based, open-ended trust. The Fund was created to acquire Xstrata Canada Corporation's (Xstrata Canada) CEZinc Processing Facility (the Processing Facility), located in Salaberry-de-Valleyfield, Quebec. Xstrata Canada is a wholly owned subsidiary of Xstrata plc. The Fund distributes the cash generated by the Processing Facility, to its unit holders. The primary objective of the Fund is to provide monthly cash distributions to its unit holders. During the year ended December 31, 2007, the Fund processed approximately 514,000 tons of zinc concentrate. Canadian Electrolytic Zinc Limited acts as the manager of the Fund.

Pizza Pizza Royalty Income Fund is a limited purpose, open-ended trust established to indirectly, through the Partnership, acquire the trademarks and trade names used by Pizza Pizza Limited (Pizza Pizza) in its Pizza Pizza and Pizza 73 restaurants. On July 24, 2007, the Partnership acquired the trademarks and other intellectual property of Pizza 73 (the Pizza 73 Rights) from Pizza 73, Inc.

Penn West Energy Trust is an open-ended investment trust. The Trust's principal undertaking is to issue Trust Units, and to acquire and hold securities of subsidiaries, net profits interests (NPI), royalties, notes and other interests. Its direct and indirect subsidiaries and partnerships carry on the business of acquiring, developing, exploiting and holding interests in petroleum and natural gas properties, and assets related thereto. Penn West Petroleum Ltd. (PWPL) is actively engaged in the business of oil and natural gas exploitation, development, acquisition and production in Canada. The Trust is the sole shareholder of PWPL. The Trust is a party to NPI Agreements with PWPL and certain other operating entities pursuant to which the Company has the right to receive the NPIs on petroleum and natural gas rights held by PWPL and the other operating entities from time to time. The Trust's production and reserves are attributed to more than 200 producing properties.

SIR Royalty Income Fund is an investment trust. The trademarks related to the SIR Corp. (SIR) concept restaurant brands, including Jack Astor's Bar and Grill, Alice Fazooli's! and Canyon Creek Chop House, and SIR's signature restaurant brands, including reds, Far Niente/Soul of the Vine, Petit Four, and the Loose Moose Tap & Grill, is used by SIR under a license agreement with SIR Royalty Limited Partnership (the Partnership) in consideration for a Royalty, payable by SIR to the Partnership. As of December 31, 2007, SIR operated more than 40 Concept Restaurants and Signature Restaurants in Canada. The Fund receives distribution income from its investment in the Partnership and interest income from the SIR Loan. On January 1, 2007, three new SIR Restaurants were added to the Royalty pool in accordance with the License and Royalty Agreement. SIR owns 100% of all its Canadian restaurants, except for Jack Astor's Don Mills Limited (50%).

K-Bro Linen Income Fund
is an open-ended, limited-purpose trust based in Canada. The Fund was created for the purpose of acquiring, directly or indirectly, all of the issued and outstanding securities of K-Bro Linen Systems Inc. (K-Bro). K-Bro owns and operates laundry and linen processing facilities in Canada. It provides a range of services to healthcare institutions, hotels and other commercial accounts. These services include the processing, management and distribution of linen, including sheets, blankets, towels, operating room linen and a variety of other types of linen. Its healthcare customers include hospitals and long-term care facilities. As of December 31, 2006, K-Bro owned and operated processing facilities from leased premises in six Canadian cities, including Toronto, Edmonton, Calgary, Vancouver, Victoria and Quebec City. K-Bro owns 100% of the shares of K-Bro Linen Inc. and is a 99% limited partner in KBL limited Partnership.

Disclaimer: I currently have no position in any of these but I am looking for an entry.

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Sunday, September 7, 2008

Investments in Brazil Since 2007

In recent weeks the USD has risen significantly after a lengthy decline. This, coupled with the withdrawal of funds from emerging markets by distressed financial institutions, among other issues, has cause the Brazilian stock market to drop recently. However, anyone who invested in Brazil since 2007 would still be far better off when compared with investing in the US markets:

Bovespa index on Jan 1 2007: 45,383 (US$21,221)
Bovespa index on Jan 1 2008: 62,815 (US$34,704)
Bovespa index on Sep 6 2008: 51,940 (US$30,096)

Bovespa performance in USD:

Since Jan 2007: +41.8%
Since Jan 2008: -13.2%

SPX performance:

Since Jan 2007: -14.1%
Since Jan 2008: -12.3%

While in 2008 the performances are comparable measured in USD, anyone who had invested in Brazil would far, far better off since 2007: +41% in Brazil vs -14% for the SPX.

In Jan 2007, in USD bought 2.13 R$. Today one USD buys only R$1.72. As a side note, US investors should note that the US market is a bit of an illusion. This is particularly true for those who thought that the US market went up in 2007. The gains were greatly due to the falling USD, which means, the USD buys less.

Those who own real estate properties (or even stocks) which have on top of it lost face value, have had even larger losses in real terms.

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