Potash Overpriced: Still Trading Above BHP Bid Price

Photo source: AP and the Wall Street Journal

When mega mining firm BHP Billiton dropped its hostile bid for Potash Corp. of Saskatchewan, most, including myself, expected the share price to fall back to $110 US. This was the value of the company pre-BHP bid. However, to my amazement, the shares are still trading above the $130-a-share bid, contradicting the efficient market theory.

If the theory were upheld, the shares would have dropped back to $110. The surge in the stock's value was primarily due to a rumour that BHP would increase its $130/share bid after its original bid was being rejected by shareholders. After BHP ran into political games against the Canadian federal government and provincial government of Saskatchewan, the Potash board, and Canadian citizens, it decided not to pursue the world's largest fertilizer company. Once it was dropped, this padded value should have been removed from the price, but this did not happen.

What fundamental or technical conditions have allowed the price of Potash to remain above the BHP bid?

One possible reason to justify the current 26 P/E ratio would have to be the positive earnings report on October 28. Potash reported earnings of $1.32 per share trumping estimates of $1.10 and increasing year-over-year net income 60 per cent. But initial reaction had the stock overpriced; traders sent the shares down below $135 on the news.

Another possibility would be the $2 billion buy-back program recently approved. The company, which only has $300 million in cash, will be selling bonds to finance the deal. But $2 billion represents less than 5 per cent of the company's outstanding float, which would only move the shares about 5 to 6 per cent up from normal valuations.

No positive changes have occurred on the fundamental front since August. Its timid dividend, paying out just 0.28 per cent yield, has been unchanged. The board and management team remains the same and even potash fertilizer prices estimates for 2011 have not seen drastic upward movement. Upgrades and downgrades by JPMorgan and Standards & Poors have done little to push the price up or down, and the S&P currently has a negative outlook on the company too.

Of course, an argument is not completely valid until we have a precedent. Fortunately, this is not the first time in recent history where a Canadian company was a target of a buyout which failed to transpire.

Back in 2007, BCE surged in the spring from $25 to $45 CDN on anticipation that the company would be bought out by the Ontario Teacher's Pension Plan. It easily passed legal concerns and received financial backing by a multitude of banks, even with stricter restrictions after the sub-prime crisis. It was one step away from privatization. But almost two years later in November 2008, a statement of solvency could not be produced by KPMG, a requirement of the deal, thus the deal was cancelled. As a result, the shares dropped back to $25 and would even trade below $20 for a few months.

The point is, even after two years including seven earnings reports, which would have showed changing profitability, changes in the Canadian telecommunications landscape, and changes in the global economy, the extra value in BCE shares directly due to the privatization were ultimately removed from the stock. Conversely, Potash Corp has yet to correct back to $110 to reflect this, even temporarily.

This Canadian Angry at Unemployed Americans

Billions of dollars have been leached from the American taxpayer over a short two-year period, but earlier today, the bleeding may have come to end, at least on this front. No, I'm not talking about the General Motors IPO, which pays back a large portion of TARP, nor am I referring to some big banks which are now making profits. I'm talking about the millions of unemployed Americans who have continued to live off the backs of their fellow working man.

Earlier today, the House blocked a jobless benefits bill that would have seen Unemployment Insurance (UI) benefits extend until the end of February. Instead, the House of Congress decided to put an end to fiscal recklessness, and said enough is enough. I was expecting an uproar from Americans, but I discovered the complete opposite.

As a Canadian living outside the border, I was shocked to see so much division and anger from Americans towards other Americans. Today, there is a very negative sentiment at those who are unemployed. It turns out that many, and I mean many, Americans are purposely unemployed because the UI benefits are more than many jobs are willing to pay. UI currently pays $300 a week for 99 weeks. That's almost $30,000 in just under two years. It might not be a lot to live off, but it's better than the alternative: working hard and getting the same amount of money.

Whatever happened to integrity and character? Hard work and ethics were once great characteristics in a human being, but I guess that's a fool's game now. The entire country is in debt and unemployment rates are sky high; fingers should be pointed at these lazy slobs for creating debt and not accepting jobs (to be clear, I'm referring to those who rejected job offers, not those who really are suffering). I've heard story after story of people writing about their friends who were offered two or three jobs, but declined because they wanted the easy way out.

I used to think that things were really that bad in the US, but it turns out that's not entirely true. Economic data shows nearly ten per cent unemployment and trillion-dollar deficits. Now I actually wonder what the figures would be if all these unemployed, at least the ones who are purposely unemployed, took a job.

But like all short-term, ill-conceived decisions, the consequences are often dire. UI benefits are coming to an end in December; millions of Americans will suddenly need to hit the job market and competition will be more fierce than ever. Call it poetic justice, or karma, or just the natural order, but we'll be seeing many Americans wishing they took that $100 a day job instead of having to fight for a $50 a day job.

I remember reading a story a few months back. A wife made his husband take on a job as a chicken delivery driver. The pay was much less than UI payments, but his wife, reluctant on taking money for free when he had a job offer, made him take the job. So for 9 months, he drove around his city delivering chicken. Then one day, things got better. He stumbled upon an opportunity that would never have existed if he did not take the chicken delivery job. I don't remember what it was, but it was along the lines of an IT job with the company or he met a customer who owned an IT company and needed a specialist. The man now makes significantly higher pay and has great benefits and job security.

It's a lesson that all Americans need to revisit. Opportunities only exist when your skills are being marketed through employment, education, or networking. By hiding your skills, you do yourself no favours.

The government took a big stance on fiscal responsibility today with a side effect of a lesson. The government will not take care of you forever. Good luck living on welfare and food stamps. If it makes you feel any better, you're still going to be living and eating better than half of the world's population.

Quotes from a MarketWatch forum attesting to the above

"I have a friend who turned down TWO jobs because he made more on unemployment. How many know someone like this?"

"Or everyone could finally grow up & learn how to take care of themselves, all by themselves. Like the other 90% of working people already do. "

"I've been trying to hire for months now. It's a high skilled, high paying job. Wish some of these people would've spent some time going back to school or acquiring some marketable skills in other ways."
"Re: I have the same problem. Going on 3 weeks. I think people are spending all their time whining on the net instead of training."

"There may be a role for government to play, albeit a limited one. There are other resources to tap - church, family, and other non-profits. I get tired of everyone looking first and last to government. The only money it has to give out either came from someone else so it is simply redistributing what it took, or it printed/borrowed it. This is the time for neighbors to be neighbors!"

"I believe that a honest man will do whatever he has to do legally to feed family. No matter if he has to work more than one job. I have family members that make $6 per day in the Philippines. Do the math, that is about $1200 a year. And while people are so quick to ignore this because I'm talking about the Philippines my family members have lived frugal lives in order to ensure their family is taken care of. None of the kids had Ipods or PSPs. They didn't have a TV. They ate rice and occassionally had a small amount of chicken on holidays."

Khabibulin to Blame for Poor PK

Watching the Oilers penalty kill is like watching a train wreck. It's just terrible! After opening the season with two wins and going a perfect 9 for 9 on the PK, they have now allowed 15 power play goals in 39 opportunities in 8 games, and this horrendous special team is costing the Oilers games.

They allowed 4 PP goals against Minnesota and lost that game 4-2. The Oilers could not hold the fort against the Flames, allowing a PP goal in the third period, which broke a 3-3 tie, resulting in a 5-3 loss including an empty netter. And last game, the Oilers allowed 2 PP goals and lost the game 4-3 to the Canucks.

The coaching staff implemented a new aggressive system that worked great in the first two games, but has been exploited. Some people are saying that teams have scouted this team's aggressive manner and have been able to score goals, but I don't think this is the case.

I know it's a little unfair, but I'm putting the blame on Khabibulin. In hockey, your best penalty killer is the goalie. Khabibulin has been in goal for all PP goals and has one of the worst GAA in the league (3.44) and a poor save percentage too (.897). Poor goaltending is destroying this offensively gifted team, ranked 7th in goals per game. And if you have seen any game, you may have noticed most of the PP goals scored occur very early and on the first shot too.

In the Minnesota game, M. Koivu scored two PP goals in less than a minute, on successive power plays, both goals occurring in the first minute of the power play. Against Calgary (Oct 26), the Oilers received a penalty in the second period with 32 seconds to go, and Calgary scored 12 seconds later before the period could end.

Dubnyk on the other hand, who has only started one game this year, faced 7 power plays and did not allow a single goal against Columbus. The team ended up earning a single point by forcing OT, but lost in the shoot out. They were key saves that kept the team in the game and the Oilers offensive talent allowed them to tie it up.

I know it's not scientific or even fair to compare Dubnyk's one game to Khabibulin's nine games played, but the facts are there. If the team's poor penalty killing was because of an aggressive system exploited by scouting, then how can a game in which the Oilers took 7 penalties, the most in one game this season so far, be perfect when Dubnyk started? I won't bet on it yet, but the next time Dubnyk starts, he will be able to stand tall and keep the Oilers in the game, unlike Khabibulin, who has been riddled with personal issues, injury, and aging muscles.

Now, I'm definitely not saying this team would be an elite PK team if Dubnyk started. Heck they'd probably be in the bottom 10 still, because there are still many things that need to be worked on, like net presence and shot-blocking, but without a goalie being able to make the big save, especially on a man advantage, how can this Oiler team expect to beat the pundit's and make a playoff run?

Fed Buying Bonds Again...

Before I start this post, I just wanted to write a big thank you to HongT, a recent follower who wrote a wonderful compliment about my blog. If you ever have personal requests or even questions I don't normally discuss on this blog, please comment or find me on Facebook (please include a message who you are so I don't ignore your request) and I'd be glad to talk to you.

The Federal Reserve will be meeting Tuesday and Wednesday this month and economists expect the Fed to announce another round of bond purchases as a way to stimulate economic activity by keeping borrowing costs low. A majority of economists polled predict purchases will exceed $500 billion, adding to their never-ending debt. But continued reckless spending by the government will be in focus today, as millions of unemployed, angry, and hopeless Americans cast their votes for or against change in levels of federal government.

Bond purchases by the Fed is nothing new and it's recently been occurring at an outrageous pace. The plan, more famously termed as Quantitative Easing (QE), is to ignite the economy through lowered borrowing costs. Sound familiar? That's because it's the same description used to explain low interest rates. But because rates are so low, QE has been a strategy continued to be played out by this administration that continues to fail 300 million people.

Very little positives have resulted through QE measures, but the Fed insists on maintaining their course of action. Meanwhile, 17 million Americans are still out of work and jobs are being shipped out of the country because major corporations are hesitant on hiring with no clear signs that economic growth is sustainable. Don't be surprised if drastic changes occur in Congress, the House, and the Senate later today.

Many investors and even non-investors ignore these headlines, thinking that it does not affect them, but this is simply not the case. So why does the Fed keep trying it if so many believe it's not working? Their decision is based on the fundamental theory of a loose monetary policy.

It all starts with the Federal Reserve. The Fed, which by the way is a not a government agency, but a private cartel of its member banks overseen by the US government, buys bonds in the Federal Reserve Market, not the bond market. This is done by printing money, which creates inflation. The purchases of the bonds are done to work with the member banks in keeping rates low. This allows consumers the ability to borrow from banks at low rates or increase investment spending by businesses, also known as capital goods. If the business is successful, it expands and hires more workers, expanding spending, and expanding the overall economy... well that's the theory.

QE has done none of the sorts, at least not yet, and probably won't do anything in the near future. All it has done is decrease the US currency, in turn, increasing the value of nearly every asset in the financial market, except housing.

Low interest rates and an appetite for risk has pushed the stock market higher over the last six months because the yields in the bond market have been just plain ugly. Even corporate bonds are trading extremely high because their prices are in direct correlation with government bond prices.

You may have noticed that many companies, like Microsoft and IBM, recently announced major bond offerings. With rates in the bond market so low, they are selling debt and using that cash to buy back shares or pay for dividends. When a company buys back shares, it reduces the outstanding shares or the supply of shares, which results in a small increase in its price. This is important because public companies are valued by the EPS, not always the actual net income. Instead of trying to create more profit during poor economic times, they can sell debt for cheap and maintain their dividend payments, pleasing shareholders.

Hewlett-Packard mentioned that it plans to buy back up to 25 per cent of their shares. That's a significant amount! HP's market capitalization is roughly 97 billion (at the time of this posting). If 25 per cent of their shares are bought back, and the value of the company does not change for the worse, then the shares, which are $43 right now, would be valued at $57 in the future, an increase of 33 per cent. I bring this point up because more and more companies are issuing bonds, and it is very important that you review your investments and see how this will impact your portfolio.

A devalued US currency has also sent gold and many commodities to record prices. It has been a joyride for those enjoying the second gold rush, without having to set foot in California or the Yukon, but the rally in gold is a sign of inflation. Gold is often used as a hedge against currency devaluation and inflation. And with America printing more and more money to buy bonds, it is only a matter of time before the inflation bomb really affects America and the rest of the world. 17 million Americans are still out of work and another estimated 18 million are not making enough today... how in the world are they going to be able to afford food after inflation ripples through the economy?