Saturday, July 26, 2008

Case For Long USD/CAD, Canadian Energy Trust Massacre '06

I used to be bullish on the Canadian Dollar (CAD/USD exchange rate) back when it was around 0.82, when oil corrected to $49 and natural gas to $6 in January 2007. Canada is a huge commodity exporter and if these commodities increase in value CAD/USD should get a boost (if there isn't extreme monetary inflation for some reason, localized economic/employment issues, or other risks unrelated to free market forces) because these commodities are priced in US dollars (inverse relationship) around the world so Canada could buy more dollars with their commodities, hence CAD/USD would increase in value.

Canadian Income Trust Massacre of 2006

So I took the contrarian view along with other analysts that oil/natural gas was headed higher because of foreign demand, middle east tensions, deficits, US recessionary talk and the inflated US dollar. At about the same time the Canadian Government decided to tax income trusts at the corporate rate of 31.5% starting in 2011 instead of using the flow through entity trust tax structure which transfers all income to the unitholders, which the company can deduct for taxes. With this new tax rate as a corporate entity the company would have less cash on hand to distribute as dividends, plus they'd have less cash to purchase existing oil fields to stay alive. Anyway, as a result there was a "Canadian Income Trust Massacre" on the Canadian exchanges and some Canadian energy trusts lost almost 1/3 of their values and they looked very attractive because not only would these trust securities rebound if their oil/gas assets increased in value, interest income would increase to US holders as the CAD/USD conversion would boost the Canadian denominated interest income.

This in fact occurred, the sell off was overdone because the tax would not take effect until 2011 and the underlying commodities were bottoming out. Today the Canadian Dollar is at about parity with the US Dollar 0.98, and CAD/USD hit a high of 1.09 in late 2007. Oil recently hit a high of $147!

The tax decision was shocking because Canadian Prime Minister Steve Harper said they wouldn't tax these trusts and billions of retiree money was destroyed. Eventually these trusts were bought out or merged, and Canetic Resources got taken over by Penn West Energy Trust for $16.67. If you got in at the panic $12 lows you'd have a 41% gain in a year.


Canetic Resources 2006 Chart (Bigcharts.com)


Canadian Dollar/Oil Relationship 2005-2008 (Futuresource.com)

Monday, July 21, 2008

Yahoo! (YHOO): Buyout Valuation Still Pegged @ $33 (2008 Presentation)

I decided to look at Yahoo again. I was first interested in this company when it it broke the $20 level back in January of this year right before the Feb 1st $31 buyout offer by Microsoft. In late April when Microsoft said they were willing to increase the bid to $33, Yahoo wanted $37 and Microsoft walked away. Then Carl Icahn came in, scooped up a bunch of shares, wanted Microsoft to buy Yahoo at $34.375 or $49.5 billion, and threatened to seek control of Yahoo's board of directors. Also, remember that Microsoft bid $40 for Yahoo in January of 2007. In the past month it has hit around $20, and I think it's looking attractive again for a long term turn around or buyout.

Monday, July 14, 2008

GM: Analysis & Exchange Traded Notes (GMS, HGM)

First of all, how about this market? The Government comes in and saves Fannie Mae and Freddie Mac and also seizes IndyMac Bancorp Inc after a bank run (Fed offers to lend to mortgage companies, Treasury plans possible equity investment. IndyMac seized as financial troubles spread). I don't know if I should be surprised that the VIX ISN'T at all time highs and indices at all time lows. Actually right now, a little bit later in the day, the VIX is hitting highs on the day and the major averages and banks are dying again.. Listening to CNBC news alerts about possible bank runs is actually reminding me of books I read about the great depression, scary.

Now looking at General Motors. This chart basically explains everything! The Inverse correlation between GM and OIL (USO in this case).

Source: Yahoo Finance


It is no surprise right now that GM's gas guzzling vehicle sales are declining in the US due to rising gas prices and a struggling economy, however I should note that GM sales rose in Latin America, Africa, Mideast. But today is different than 2006 when GM's stock was under 20, bonds were at lows and people thought it was a buying opportunity. Well for a while it was until now, when it just hit it's 52 year low. It just broke $10 and is currently at $9.27. Bankruptcy talk is now hitting the headlines by big investment banks, and volatility is very high.

GM Falls to Lowest Since 1974 on Goldman Rating Cut (Update4) Bloomberg, GM Bankruptcy `Not Impossible,' Merrill Analyst Says (Update4) Bloomberg, Investors see higher risk of GM default Reuters.

If I were to take a contrarian view at this moment I think I'd stay away from the common and look more toward the debt. If GM has a stock offering to raise capital during their restructuring process there would be huge dilution. I believe this news is in process of being priced into the stock but there's too much of a risk that the price could go lower than higher before, I hope, an eventual rebound. However GM could also raise capital in other ways like selling off poor performing brands and getting into the more profitable smaller car/gas efficient space. Eventually oil will come down and housing will bottom in years to come so GM could be a great turn around story if they have liquidity to survive.

Saturday, July 12, 2008

Distressed Detroit.. (Analysis of Detroit Economy in 2008)

Distressed Detroit - July, 2008



As you've read in the news, Detroit's current mayor Kwame Kilpatrick is currently being investigated in a text message scandal and now I recently read this article by AP: FBI Probe Latest Setback for Beleaguered Detroit. FBI probe of sludge recycling contract is latest setback for beleaguered Detroit..

"Auto industry cutbacks, double-digit unemployment and one of the nation's highest home foreclosure rates have left Detroit with a dreary economic future. Now, a mayoral text-messaging sex scandal, federal investigation into a City Council-approved $47 million sludge recycling deal, and poorly run and deficit-plagued public school system have dashed inroads toward respect and reopened Detroit to outside ridicule. "When we're out doing business and trying to get customers we sometimes get asked 'You're from Detroit? What's going on there?'" Compuware Corp. senior vice president Jason Vines said. "As taxpayers and residents, it has to be disheartening. When your city is used as a public joke, it's not good." Like most major cities, Detroit is no stranger to scandal. Former City Council members, and even a police chief, have been indicted, arrested or imprisoned. But the current political crisis threatens to bury the city deeper in an economic grave. While the mayoral text-messaging scandal has been going on since the end of January, the past week alone has brought a new round of bad news for the city."

And then I read this a few days later!



Dave Bing: I may run for mayor of Detroit. Scandal drags city down, he says.

"Detroit businessman and former NBA star Dave Bing is considering a run for the Detroit mayor's office because the city needs to "regain credibility" after the scandals that have infected all levels of government, and before the city loses the middle- and working-class population so necessary for its renaissance. "I don't think most of us that live in Detroit or call Detroit home feel real good about it right now and that's so unfortunate because there are so many good things happening right now," said Bing, the 64-year-old founder and president of the Bing Group, an automotive supply company and a real estate developer whose latest project is a condo development on the city's waterfront. "All of this overshadows that. We've got to get back on track to turn this ship around, and I think it will be with new leadership."

Friday, July 11, 2008

Oil touches $147: USO/XLE Charts/Options Analysis

Oil set a new record above $147 a barrel (Crude jumps above $147 as concerns persist about Middle East conflict; heating oil hits record - Link).

I found an argument between traders on CNBC this morning that caught my eye. Rick Santelli knows whats going on.. Economic Panel: Oil soars to a record near $147, with Jack Bouroudjian, Brewer Investment Group; Mad Money host Jim Cramer and CNBC's Rick Santelli. CNBC Video Link. I'm going to look at Light Sweet Crude Contract, USO, XLE and Option Activity.


Light Sweet Crude Chart Analysis (Stockcharts.com)



USO Chart Analysis (Stockcharts.com)



XLE Chart Analysis (Stockcharts.com)


Freddie Mac, Lehman, Fannie Mae, Dow Keep Getting Killed (July 2008)

Wow, the market just KEEPS getting killed. Credit crisis is alive and well! Freddie and Fannie are hitting new all time lows. Lehman was down 20% today hitting an intraday low of $13.29 (Shares Of Lehman Brothers Sink Amid Financial Sector Concerns).

Also there are Bloomberg headlines that the gov will NOT bail out Fannie and Freddie! “Our primary focus is supporting Fannie Mae and Freddie Mac in their current form,” Mr. Paulson said in a statement. “We are maintaining a dialogue with regulators and with the companies.” Fannie and Freddie Shares Fall by as Much as 50 Percent. Look at these 5 day Fannie Mae and Freddie Mac charts from Yahoo Finance, it looks like there has been some big volume blocks, is this overdone? Well there's still a lot of put volume at the Fannie Mae July 7.50 puts (Volume 14,313 w/3,317 OI) and 5.00 puts (Volume 18,440 w/3,632 OI). Is volatility at its peak here?? UHHHH.. WE'LL SEE!



As of now the Dow is at 11,029!!! It pierced through 11,000 and hit 10,980. I think we're going back to the 10Ks folks! The Dow is at lows not seen since 2006! I'd say we're in a bear market, but from the look at the long term chart on the dow we could see support at the July 2006 lows of around 10,700. There are some big bargains, well hopefully soon bargains, of some BIG AMERICAN COMPANIES right now folks!


Dow 2 year chart

Thursday, July 10, 2008

Orient Express Hotels Put Activity ($OEH)

Orient Express Hotels is interesting and I've been watching this for about six months now. Here we have an amazing company, seriously look at the assets at their website.  In late 2007 a bunch of institutions (including DESHAW,SAC) were scooping up >5% positions in this company, and also Indian Hotels bought about 11.5% of the company in a December 2007 filing and Indian Hotels wanted to do a partnership with Orient Express but Orient refused.  This seekingalpha post I read a while back got it spot on. It was overvalued relative to earnings and book and the current economic crisis is not helping. I read recently they were planning on doing joint ventures with this real estate developer called The Related Group "a premier real estate developer in the United States, initially to develop hotels and residences in South Beach Miami; Cartagena, Colombia; and Panama City, Panama".  As I'm reading all of this I see thousands of Sep $35 put contracts trade which was way over the open interest and average option volume. The stock was around $38 at that time, and the stock tanked today (a few days later) to an intraday low of $29.89 on 4x average volume. Eventually this stock will be a value play.


Source: Yahoo Finance

Welcome To DistressedVolatility.com

Welcome to Distressed Volatility, a financial blog written by @dvolatility. Why did I choose this name? Well, large-cap America is both "distressed" and "volatile" at the moment. GM is at a 52 year low and Bear Stearns was just bailed out by the Federal Reserve and sold in a distressed sale to JP Morgan for $2/share $10/share. So there you have it, Distressed Volatility. This name can also work in good times when volatility is distressed, but there are always distressed and volatile securities somewhere.

DistressedVolatility.com will cover technical analysis (equities, ETFs, indexes, currencies, and futures), financial news, market calls by analysts and hedge fund managers, financial statement and valuation analysis at times (price valuation ratios, historical trends and comparables), economic data trends, geopolitics, and political volatility that effects markets. Follow me on Twitter (@dvolatility) and Google+ (+Matt Dvolatility).