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(B)(N) O’Canada – The Perpetual Bond

December 20, 2017
Potentate

Great piles of money always disappear.

Drama. It’s unlikely that the people of India, Brazil, or Argentina, for example, are going to pay our pensions when the time is ripe but our vaunted pension plans are shopping there for unearned returns on “stressed assets” which are selling at bargain prices for a reason of which they are not fully privy and we might compare that to buying a used car that’s been in an accident which we don’t know about (Bloomberg, December 13, 2017, Canada’s $255 Billion Fund Says India Stressed Assets Are Costly).

And, like most of the public and government “pension plans” everywhere, the Canada Pension Plan (CPP) and the CPP Investment Board (CPPIB) which invests “surpluses” for a return, have never paid a penny earned to any pensioner other than a return of our taxes and they are deemed to be “good for that” for the next seventy-five years.

Are they expecting, then, that these countries will pay our US and Canadian dollar pensions when our time is ripe? Or only that we and the next generation of workers will pay them to service their debts to us and our fathers and grandfathers?

To turn all that around (should anyone want to because it’s a withering political mess with lots of well-entrenched empty pockets waiting for “fulfillment”, so to speak), there’s a reason that about 80% of Canadian assets are foreign-owned: (1) we’re known to be not excessively corrupt and (2) sometimes our assets are trading in the basement too.

And, therefore, if foreign investors are bringing their money to us by buying more of our stocks at any prices, low or high, we should take their money and keep it too so that we might eventually own more than 20% of what we have.

And it raises the question of what kind of an income can we reasonably expect from these sought-after investments in Canadian stocks year-after-year in perpetuity given the unreasonable (in our view) fear of the “volatility” menace to investment professionals who “fear” it as much as losing their jobs.

For example, we bought (hypothetically) 2% of the entire Canadian big-cap market for $20 billion in cash in January 2014 and invested it in the (B)-Class Portfolio and although there are lots of ways to balance capital gains, dividends, and the long and short portfolio, we decided that whenever the cash balance exceeded 10% of our capital ($20 billion), we would take it out and deposit in an “escrow account”, basically, our shareholders’ pockets.

As a consequence, we paid our shareholders $12 billion in the last four years and we still own 2% of the market but it’s worth $30 billion today and we currently have a net cash position of $4 billion.

And we call it “The Perpetual Bond” because that’s what it is – it is a transparent, steady and reliable source of income, year-after-year in perpetuity as long as there is a market somewhere, and it is much better than a government bond in Canada or the US (for reasons which we”ll explain below) and least of all in India, Brazil, or Argentina, for example, because of the leverage that investors give us in their pursuit of an income in our markets and our dollars.

Canadian Flag

The Perpetual Bond

The Perpetual Bond

To work this market (or any market), we don’t need to worry about buying at low or depressed prices but only that our capital is 100% safe at all times and that’s easy to do in dollars (or loonies) but not so much in rupees, reals, or pesos, for example, no matter how little we paid for them unless our own economy can’t keep up.

And although it’s very impressive to say that we have $20 billion or $30 billion in cash and investments, as above, it’s much more impressive to say that we’re earning at least 10% per year on our investments and we can afford to spend it now without compromising any of our prospects for the future.

For Sale

This is not a “stressed asset” sale, you say?

The reason for all of this “investor largesse” is that the investors are currently willing to pay $22 for $1 of such precious earnings (the aggregate [P/E]-multiple is 22×) and there is also an aggregate dividend yield of 2.5% which is more like “table scraps” than an income but they are only willing to pay $2 for the ownership ($1.6 trillion for the net worth of $800 billion) of these companies and only 25 cents ($0.25) for the assets ($7.3 trillion) which is what our friends above are trying to buy at “stressed prices” in lieu of an income for us which retails at $22 right now in Canada and even more, $29 in the US, for a pithy dividend of about 2.5% on all of that money in the everlasting float.

And they missed it and they lost it between here and India or Brazil; please see Exhibit 1 below for more details (and click on it and again to make it larger as required).

Exhibit 1 Canada - The Perpetual Bond

Exhibit 1: The Perpetual Bond in Perpetually Stressed Assets

For more information on real “risk management” in modern times and additional references to the theory and how to read the charts and tables, please see our Post, The RiskWerk Company Glossary and “(P&I) Dividend Risk and Dividend Yield“, and our recent Posts “(P&I) The Profit Box” and “(P&I) The Process – In The Beginning“; and we’ve also profiled hundreds of companies in these Posts and the Search Box (upper right) might help you to find what you’re looking for, such as “(B)(N) TLM Talisman Energy Incorporated” or “(B)(N) ATHN AthenaHealth Incorporated” or “(B)(N) PETM PetSmart Incorporated“, to name just a few.

And for more applications of these concepts please see our Posts which rely on the Theory of the Firm developed by the author (Goetze 2006) which calibrates The Process to the units of the balance sheet and demonstrates the price of risk as the solution to a Nash Equilibrium between “risk-seeking” and “risk-averse” investors within the demonstrated societal norms of risk aversion and bargaining practice. And for more on The Process, please see our Posts The Food Chain and The Process End-Of-Process.

And for more on what risk averse investing has done for us this year, please see our recent Posts on “(P&I) The Easy (EC) Theory of the Capital Markets” or “(B)(N) The Easy (EC) Theory of the S&P 500“, and the past, The S&P TSX “Hangdog” Market or The Wall Street Put or specialty markets such as The Dow Transports & Utilities or (B)(N) The Woods Are Burning, or for the real class actionLa Dolce Vita – Let’s Do Prada! and It’s For You, Dear on the smartphone business.

And for more stocks at high prices, The World’s Most Talked About Stocks or Earnings Don’t Matter – NASDAQ 100. And for more on what’s Working in AmericaBig OilShopping in America or Banking in America, to name just a few.

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®™, The Medina Bond®™, The Barometer®™, the Free Market Yield®™ and Extreme Economics®™ 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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