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(B)(N) CP Canadian Pacific Railway Limited

November 21, 2012

Drama. We’ve owned the stock of both CP Canadian Pacific Railway Limited and its much larger track-mate, CNR Canadian National Railway Company, for quite some time, years, in fact, in the Perpetual Bond™ (please see Exhibit 1 and 2 below) and the “noisy” complaints of the “born again” railway enthusiast, Pershing Square Capital Management, earlier this year had nothing to do with that investment decision other than to cause us to review our stop/loss and option positions in case they didn’t get what they wanted and the stock price went into a free fall while the tracks were being “fixed”.

No doubt change is afoot and some passengers and freight will be walking but one would hope that CP is benefiting in the long term as much as CN in the short term (Reuters, November 20, 2012, CN Rail picks up business abandoned by Canadian Pacific).

Pershing Square Capital Management spent $1 billion or so in order to accumulate a 15% shareholder interest in the $12 billion company at the time and then “noisily” sought proxies from other major shareholders in order to effect a management and Board change. It’s a risky investment strategy akin to  “greenmail” or a “threat” to acquire if they don’t get what they want (Financial Post, April 3, 2012, CP Rail investors concerned as railway drags customers into proxy fight) and they might end up “owning” all or a lot of what they say they don’t want.

In contrast, we only own the stock of a company if the Stock Price (SP) which is our buying, holding or selling price (please see Exhibit 1, Red Line, which is a step-function) is plausibly above the Risk Price (SF) (Black Line, also a step-function). Obviously, “above” and “below” is not rocket science but there is a substantial theory and practice in economics and mathematics that supports that view. Please our Post, The Price of Risk, August 2012, for more information.

One sees that, indeed, the Chart for CNR is much smoother and absent drama than the Chart for CP and that we “sold” our interest in CP at $62 in mid-year 2011 (up from $35 in 2009) and did not buy it again until $68 in early 2012 and are holding it now at $90. The current Risk Price (SF) is $70 and any “takeover” price above that must be counted as “good will” because stock prices above the price of risk are, provably, an economic “free g0od”. (Please see the aforementioned Post.)

Exhibit 1: (B)(N) CP Canadian Pacific Railway Limited – Risk Chart

(B)(N) CP Canadian Pacific Railway Limited

Canadian Pacific Railway Limited is a holding company whose direct and indirect subsidiaries operate railways in North America. The main operating subsidiary of the Company is Canadian Pacific Railway Company.

(Please Click of the Chart to make it larger if required.)

The stock price is up 30% this year and sometimes one simply has to accept the fact that in “fighting”, the enemy of our “enemy”, so to speak, could be our friend, at least for a while. Nevertheless, our stop/loss is set at minus ($9) and if we are intent on holding the stock pending further information (there is a scheduled Investor Conference in New York on December 4 and 5), we can buy the January put at $90 for $2.50 per share and sell an offsetting call at $95 for $2.00 so that for a net cost of $0.50 per share we can lock in the current price or better while we ponder. (Everything has a price, doesn’t it.)

Exhibit 2: (B)(N) CNR Canadian National Railway Company – Risk Chart

Canadian National Railway Company is engaged in the rail and related transportation business.

(Please Click of the Chart to make it larger if required.)

The Chart shows that we have held CNR continuously since $45 in 2009 and are holding it now at $85. We generally don’t care about the purchase price (subject to the rule that the stock price should be plausibly above the Risk Price (SF)) but “selling” is a discipline and can be done by actually selling all or part of the stock or by taking a long put position to protect the price that we have over market volatility. Please see our Post, The Wall Street Put, August 2012, for more information on the buying and selling discipline.

Postscript

We are The RiskWerk Company and care not a jot for mutual funds, hedge funds, “alternative investments”, the “risk/reward equation” and every other unprovable artifact of  investment lore. We have just one product

The Perpetual Bond™
“Alpha-smart with 100% Capital Safety and 100% Liquidity”
Guaranteed
With No Fees and No Loads on Capital

For more information on RiskWerk, please follow the Tags or Categories attached to this Letter or simply enter Search for additional references to any term that we have used. Related data may be obtained from us for free in a machine readable format by request to RiskWerk@gmail.com.

Disclaimer

Investing in the bond and stock markets has become a highly regulated and litigious industry but despite that, there remains only one effective rule and that is caveat emptor or “buyer beware”. Nothing that we say should be construed by any person as advice or a recommendation to buy, sell, hold or avoid the common stock or bonds of any public company at any time for any purpose. That is the law and we fully support and respect that law and regulation in every jurisdiction without exception and without qualification to the best of our knowledge and ability. We can only tell you what we do and why we do it or have done it and we know nothing at all about the future or the future of stock prices of any company nor why they are what they are, now. The author retains all copyrights to his works in this blog and on this website. The Perpetual Bond®™ is a registered trademark and patented technology of The RiskWerk Company and RiskWerk Limited (“Company”) . The Canada Pension Bond®™ and The Medina Bond®™ are registered trademarks or trademarks of the Company as are the words and phrases “Alpha-smart”, “100% Capital Safety”, “100% Liquidity”, ”price of risk”, “risk price”, and the symbols “(B)”, “(N)” and N*.

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