Tuesday, May 23, 2017 0 comments ++[ CLICK TO COMMENT ]++

Sold: Syngenta (SYT) -- Tender Offer Accepted

The Syngenta (SYT) buyout successfully closed about a week ago and ChemChina cashed out all shareholders that tendered the shares near the end of last week. If you haven't tendered your shares, you should do so immediately in the next round where they are accepting the shares; who knows how the untendered shares will be treated once the offer ends and you don't want to be in that situation (this is a Swiss company and is an ADR so squeeze-out rules may not be what a typical American or Canadian investor encounters).

Overall, I'm very satisfied with this deal. The returns weren't that great--about 10% from the initial October 2016 position and about 3.6% from the April 2017 position--and the deal got delayed by about a quarter for regulatory reasons but it was a low-risk position and turned out as I was anticipating. This is the kind of risk arbitrage position I would like to take on.

You learn a lot from deals like these. You don't get to see it reading this blog but I was starting to question myself because the spread was so large for so long. For such a publicly visible deal, it is easy to doubt yourself when the spread stays somewhat wide. The question, 'what does the smart money know that you don't' runs through your head a lot. In fact, I still can't figure out why the spread remained at about 3% even after the European regulators, who were the main gatekeepers, approved the deal. That's when I decided to significantly increase my stake (it almost seemed like a risk-free arbitrage at that point). I would have put more money into this deal at that point but it was a bit risky in terms of currency fluctuations (I only have a small portion in US$ and I don't hedge so even though 3% seemed almost risk-free, it could be wiped out by currency changes). Also, it would be in a taxable account so the benefit is diminished.

You also learn something about position sizing in deals like this. I was always thinking about increasing the stake but was a bit too scared. Then after the regulator approved, my confidence increased and I put as much money as I can into this (keeping in mind what I mentioned above: currency risk and tax impact). My portfolio isn't large like some of you but I had around 56% of my portfolio in Syngenta by the end.

I can never be sure but I think the spread remained large because this deal is too big for risk arbitrageurs. Professional risk arbitrageurs tend to have 20+ deals at the same time and don't take big positions unlike amateurs like me (a key reason for this is that you want risk arbitrage to be uncorrelated to the market and not so dependent on company specific risk). This is a massive deal and arbitrageurs likely didn't have enough capital to commit. Furthermore, there were some big blow-ups, including John Paulson's risk arbitrage funds, in 2016 due to big merger failures (particularly several big deals being blocked by regulators in the healthcare sector). I think this limited the capital availability and probably made them limit their exposure to individual deals.


Price sold: US$92.95
Total Return: 6.4% (annualized (estimate): 11% -- not meaningful)


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Sunday Spectacle CCXXVII

Real Estate Contribution to Canadian Provincial GDP




(source: "In Home Capital’s Mortgage Mess, Blame the ‘Unlucky’ Brokers" by Katia Dmitrieva, Bloomberg, May 23 2017)

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Sunday Spectacle CCXXVI

Rise of Indexes vs Stocks

Not sure what is counted as stocks in this graphic by Bloomberg but it's amazing that indexes outnumber stocks. That's beyond crazy. The number one function of stock markets, according to some theorists, is price discovery and wonder how much of that is lost due to the rise of indexes.

Wonder how these indexes are going to behave during a market correction or a crash.


source: "There Are Now More Indexes Than Stocks," Bloomberg, May 12 2017

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Sunday Spectacle CCXXV

American Business Creation/Termination

I'm shocked to see such a low number of businesses (overall net) being created in the last decade. I don't know if the data is bad or something is being missed. This is probably good for existing companies but bad for society (since it implies less dynamic and less innovative economy).


(source: 1Q 2017 GMO Quarterly Letter, GMO. URL direct link; URL main website)

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Sunday, April 30, 2017 0 comments ++[ CLICK TO COMMENT ]++

Sunday Spectacle CCXXIV

American Diet from 1971-2014

Here are some interesting facts about food consumption in America. Several other Western countries probably have similar trends, although the actual foods may differ somewhat (I expect Canada to be at least 90% identical to USA). The following charts depict various types of food consumption from 1971 to 2014 (there is also some data for Britain here).

I'm sure there are investment implications but I'm not sure how easy it is to predict such trends. When reading these charts do keep in mind that comparisons are complicated given that there is quantity but there is also price (not shown) i.e. some item may cost 2x what something else does.

Some trends are driven by changing economics of the business. For instance, Americans used to consume less chicken (in terms of weight) in 1971 than beef but now they consume 2x as much chicken. Consumption of chicken has gone up around 2x while beef has declined and this is mostly due to cheaper cost of producing chickens. I'm guessing that the increase in consumption of strawberries, bananas and a few similar things are driven by cheaper production costs as well (including cheaper imports from Mexico and central America). A few trends are probably driven by changing demographics and introduction of new foods/diets (increase in avocado is probably driven by increased Hispanic population and food types).


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Saturday, April 29, 2017 0 comments ++[ CLICK TO COMMENT ]++

Howard Marks: Markets Richly Valued but You Don't Have a Choice

Howard Marks gave his opinion on the markets and I thought it succinctly captured the current state quite nicely. His area of expertise is the credit market but given how stocks and bonds are all at high valuations, the views are applicable across the whole investment universe in my opinion.

He basically says the market is richly valued but does not think it is overvalued or in a bubble. He thinks high-yield spreads--this is the spread between junk bonds and treasuries--needs to be smaller for it to be a bubble, at least in bonds.

I also like how he thinks about the market and talks about how it is what it is and you don't get to pick how you want it to be. He states the market can be highly valued, fairly valued, or undervalued and right now it is highly valued--but you don't really pick how it is.



If you are a professional investor or money manager, you kind of have to be invested in something so it comes down to earning the best out of the various possibilities. It will be difficult to earn high returns and investors will be reluctant to give money to managers (maybe that's one reason passive indexing is taking off?).

The current situation poses a bigger dilemma for small investors (who have more discretion on where and when to invest) and those nearing retirement (who can't afford to lose money; even if markdowns are temporary, they don't have enough time to "make it back"). It's kind of scary to be investing right now because you are basically locking in low future long-term returns. And if you tried going for higher returns, there is high likelihood you are reaching into lower quality securities and possibly increasing risk.

I see numerous amateur investors, including so-called value investors, who appear to be taking on much higher risk in order to aim for higher returns--the worst thing is that I don't think they realize they are doing that. Examples include some who are investing in preferred shares, which are generally poor investments (neither safe as bonds nor provide potentially high returns like stocks) and are better suited for corporations (depending on country, it can be tax-advantageous for corporations to own preferred shares of other companies) and certain special investing styles/strategies. I also see some investing in large-cap or mega-cap companies at P/Es over 20 even though those companies have low growth prospects (since they are so large) and questionable capital allocation (so many are buying back shares at seemingly high valuations).

It's really tough to invest right now. I have been researching a bunch of stocks and hardly anything seems cheap; and the ones that do appear cheap are cyclicals vulnerable to economic recession.

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