(B)(N) TRP TransCanada Corporation

Drama. The TransCanada Corporation is a regulated utility that transports oil and gas products throughout Canada and into the U.S. It’s been in the Perpetual Bond™ continuously since 2009 at stock prices of about $30 (please see Exhibit 1 below, Red Line Stock Price (SP) above the Black Line Risk Price (SF)) and it’s in the Perpetual Bond™ now at prices above $45 to $50 and well-above the current Risk Price (SF) of $41. The company has a current market value of about $30 billion and pays a quarterly dividend of $0.46 or $1.3 billion per year to its shareholders for a still generous current yield of 3.8%.

However, we note that the Risk Price (SF) and the stock prices or Stock Price (SP) at which we buy, hold or sell the stock (subject to other considerations that we describe below) have been “tracking” each other for years and that it is only recently that the ambient stock prices are substantially above and holding above the Risk Price (SF).

Exhibit 1: (B)(N) TRP TransCanada Corporation – Risk Price Chart

TransCanada Corporation is an energy company which operates in three business segments, Natural Gas Pipelines, Oil Pipelines and Energy. The Pipelines segment develops and operates energy infrastructure, including natural gas pipelines.

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

The Risk Price (SF) is our best estimate (and both provably and testably so) of the “price of risk” which is the stock price at which a Nash Equilibrium is formed between the demonstrated investor preference for “cash” (“liquidity”, money or bonds) and the demonstrated investor preference for “risk” (please see below) although in both cases – cash and bonds or stocks – the investors are deemed to be “risk averse” – we want our money to be safe – 100% Capital Safety – and to obtain a hopeful but not necessarily guaranteed return above the rate of inflation.

All investment, of course, is just and only the “purchase of risk” but we don’t buy risk (at least most of us) in order to have a better chance of losing our money or to have it returned to us with less “worth” than what it has now.

Stock prices above the price of risk are, therefore, an “economic free good” because they are prices that are above the “risk-adjusted price” for which we have the reasonable expectation that $1-in will result in the same (or, hopefully, better, but it’s only a “wish”) $1-out in terms of its “worth” to us.

Investors who are willing to buy and hold the stock at prices above the price of risk are so committed and believe that those prices will be earned and that the price of risk will eventually equal the stock price. However, because we know that – that is, we know the price of risk and what it means – we can protect our prices against volatility by setting the stop/loss or, more broadly, by buying a “protective put”.

For example, our estimated downside due to volatility is minus ($2.50) (please see our Post, Popoviciu’s Volatility, September 2012) which would sell us out at $45.50 currently. Alternatively, the July put at $48 can be bought for $1.61 per share today and the sold (or short) call at $50 can be sold at $0.95 today, so that for a net cost of $0.66 per share ($1.61 less $0.95) today, we can hold our long position, collect our dividends and we are indifferent to stock prices between $48 and $50 for the next three months while the “pipe dreams” are being worked on or out (Reuters, March 4, 2013, TransCanada shares rise on Keystone environment report and Canadian Business, February 27, 2013, What happens when America doesn’t need Canada’s oil?).

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

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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*.