Just wasting some time before heading out to Queens for the night. Valerie just got back from DC, and is currently being entertained/interrogated/fed by her parents. Hope she calls soon - it's a long ride out to Forest Hills, and I still have to be at work at 7:00 tomorrow. Well, 7:15. Maybe 7:30 if I push it. Boss is still on vacation.
We got our Voter Information Packets today in the mail - the primaries are coming up soon for NYC mayor, comptroller, city council, and various other elected positions that really don't matter in the grand scheme of things save for keeping the political machine's wheels well-greased. Unfortunately, the guide contained information on only the Democratic and Republican candidates. No Socialist Workers Party this time. However, Krikor and I were very entertained by mayoral candidate Christopher Xavier Brodeur, whose proposals include outlawing politicians who lie, eliminating fares for subways, (but, apparently, not buses,) mandatory organ donation, and outlawing umbrellas. He also seems to have some sort of Howard Hughes-esque fear of germs, since, if elected, Brodeur will both install foot-pedal controlled water faucets and make all bathroom doors in the city open outwards, such that nobody will have to touch dirty faucet handles or doorknobs again. Further, he demands that all tables in the city be forced to have 3 legs so they don't wobble. According to him, this is a major problem, and he accuses frontrunner Fernando Ferrer of "ignoring" this crisis. Riiiight.
This website is just too good. I'm going off to post it to MonkeyFilter straight away.
Thursday, August 25, 2005
Wednesday, August 24, 2005
Talking Trading: IDS
I've realized that I really haven't done any discussion of economics or finance here yet. Since one of the points of So Derivative is to be a forum for me to talk about trading, especially given that most of my friends' eyes glaze over when I start in on this topic, I suppose I should get down to business. So, I now present the first installment of Talking Trading.
So, I've come across an interesting hybrid security recently. It's called an Income Deposit Security, or IDS, although apparently there are other 3-letter acronyms for this same exact type of instrument. (One I've come across is EIS, or Enhanced Income Security.) The deal here is that an IDS is actually a packaged security - every IDS unit that a company issues is made up of one share of common stock and one bond. While they are publicly listed on an exchange, and trade together as a single unit, they are seperable into the two components under certain conditions. Further, there is (theoretically) an OTC market for the separate pieces. Naturally, this would lead to some obvious arbitrage potential, but my guess is that virtually nobody would bother to actually separate the two parts. Most likely, the units need to be separable for tax purposes, but nobody ever bothers to actually go through the process.
As far as I can tell, the IDS concept was pioneered in Canada, and really hasn't caught on very well in the US. I've only found a handful of these that trade, all on the AMEX. They don't seem to be very well publicized, as seems to be the case with most publicly traded structured products. What's intriguing to me, though, is that several of them seem to trade at a very high yield. What's more, I think there's a real opportunity for mispricing. Let's say, for example, company XYZ issues an IDS at $10 - $5 per share of common stock and $5 per bond. Further, let's assume that XYZ earned $1 per share for last year. A cursory glance at XYZ would lead one to believe that it was trading at 10x earnings - $10 per unit divided by $1 per share. But, half of that unit is a bond, which will be redeemed at a set date in the future. In reality, XYZ is trading at 5x earnings, since each share is worth only $5. If you actually went through the motions of separating out the two pieces of the unit, you could sell the bond, get your $5 back, and still have access to the same exact earnings stream. A few minutes online leafing through a prospectus, and you should have no problem figuring out what the par value of the bonds are on any IDS, thus giving you the true value of the stock portion of the unit. A few more minutes on Yahoo! finance can give you some back-of-the-envelope industry comps, which will give you a decent idea as to whether and IDS is grossly undervalued or not. Even after applying something like a 25% discount to peers due to the investing public's fear of the unknown, and I still suspect there's quite a bit of opportunity here.
I've already bought a few units in one company, and I'm planning on searching for some more. Due to the almost complete lack of publicity, they're not that easy to find. Also, many of the companies that issue structured products do so because they are on shakier ground - they need something to entice potential buyers because the common stock on it's own isn't particularly attractive. I wouldn't bet the farm on something like this, but it's probably a nice addition to the portfolio. Adding yet another wrinkle here is the fact that many of these IDSs are Canadian. On one hand, taking the Canadian units into account gives you many more choices. On the other hand, you'd be taking on currency risk as well as the ordinary risks in buying both the stock and bonds of the same company. It's in no way cost-efficient for an individual investor to hedge a small amount of currency risk, yet over an extended time-span the effect could be very significant.
Oh well, nobody said this game was easy. These IDSs could turn out to be giant flops. Then again, it wasn't that long ago that people were buying publicly traded warrants under parity, and convertible bonds could be bought for a credit. Never underestimate the stupidity of the market - the opportunities are still out there.
So, I've come across an interesting hybrid security recently. It's called an Income Deposit Security, or IDS, although apparently there are other 3-letter acronyms for this same exact type of instrument. (One I've come across is EIS, or Enhanced Income Security.) The deal here is that an IDS is actually a packaged security - every IDS unit that a company issues is made up of one share of common stock and one bond. While they are publicly listed on an exchange, and trade together as a single unit, they are seperable into the two components under certain conditions. Further, there is (theoretically) an OTC market for the separate pieces. Naturally, this would lead to some obvious arbitrage potential, but my guess is that virtually nobody would bother to actually separate the two parts. Most likely, the units need to be separable for tax purposes, but nobody ever bothers to actually go through the process.
As far as I can tell, the IDS concept was pioneered in Canada, and really hasn't caught on very well in the US. I've only found a handful of these that trade, all on the AMEX. They don't seem to be very well publicized, as seems to be the case with most publicly traded structured products. What's intriguing to me, though, is that several of them seem to trade at a very high yield. What's more, I think there's a real opportunity for mispricing. Let's say, for example, company XYZ issues an IDS at $10 - $5 per share of common stock and $5 per bond. Further, let's assume that XYZ earned $1 per share for last year. A cursory glance at XYZ would lead one to believe that it was trading at 10x earnings - $10 per unit divided by $1 per share. But, half of that unit is a bond, which will be redeemed at a set date in the future. In reality, XYZ is trading at 5x earnings, since each share is worth only $5. If you actually went through the motions of separating out the two pieces of the unit, you could sell the bond, get your $5 back, and still have access to the same exact earnings stream. A few minutes online leafing through a prospectus, and you should have no problem figuring out what the par value of the bonds are on any IDS, thus giving you the true value of the stock portion of the unit. A few more minutes on Yahoo! finance can give you some back-of-the-envelope industry comps, which will give you a decent idea as to whether and IDS is grossly undervalued or not. Even after applying something like a 25% discount to peers due to the investing public's fear of the unknown, and I still suspect there's quite a bit of opportunity here.
I've already bought a few units in one company, and I'm planning on searching for some more. Due to the almost complete lack of publicity, they're not that easy to find. Also, many of the companies that issue structured products do so because they are on shakier ground - they need something to entice potential buyers because the common stock on it's own isn't particularly attractive. I wouldn't bet the farm on something like this, but it's probably a nice addition to the portfolio. Adding yet another wrinkle here is the fact that many of these IDSs are Canadian. On one hand, taking the Canadian units into account gives you many more choices. On the other hand, you'd be taking on currency risk as well as the ordinary risks in buying both the stock and bonds of the same company. It's in no way cost-efficient for an individual investor to hedge a small amount of currency risk, yet over an extended time-span the effect could be very significant.
Oh well, nobody said this game was easy. These IDSs could turn out to be giant flops. Then again, it wasn't that long ago that people were buying publicly traded warrants under parity, and convertible bonds could be bought for a credit. Never underestimate the stupidity of the market - the opportunities are still out there.
Sunday, August 21, 2005
Weekend of Gluttony
Basically, this has been the weekend of overeating. I have consumed way more food than I ought to have, and we're not talking lo-cal vegetarian cuisine here either. Pure gluttony in all its forms. The highlight was the Pay-Your-Age special at the Park Avenue Cafe, which would have been a fantastic deal had we not overspent on the wine. Guess you can't help it at a place like that. The food there was very good, although not incredible. The highlight was clearly dessert- the choices were both unusual and artistic. I particularly liked the sweet basil ice cream. I was so thoroughly stuffed after dinner, (we'd had a pre-dinner round of appetizers at Copperfield's for Seidman's birthday,) that I could barely finish it. I'm amazed that Val and I didn't just pass out the second we got home.
I had decided to be healthy after a day like that, so we went up to the Union Square farmers' market to buy vegetables. My ambitious plan was to make some sort of vegetarian pasta dish for dinner last night, sort of as a penance for all that food. I bought some tomatoes, squash, zucchini, onion, and green beans, and was on my way home, when Al called. He's in town from Chicago (and had met us for dinner at Park Ave) but wanted to show his brother the city. They were meeting up with Kahn at the 2nd Avenue Deli for some authentic NYC cuisine. How could I say no? It's right around the corner, and I haven't been there in ages. Their mushroom barley soup really is the best I've ever tasted. The corned beef isn't so bad either.
Now completely determined to be healthy, I returned home to relax, get some errands done, and make that healthy dinner. Right. After Al and Kahn left I fell asleep. I woke up at 7:00 when Seidman called - did I want to meet up with him for dinner for his birthday? At Outback Steakhouse? OK, plan B. Friends, let me tell you, just because a dish at Outback says it contains pasta, grilled chicken, and sundried tomatoes does NOT, under any circumstances, mean it's healthy. In fact, quite the opposite. I think they figure that the healthiness of the above ingredients allows them to put in more cheese and alfredo sauce in order to offset any nutritional value one might get from consuming said meal. Again, the night concluded with me rolling home.
Tonight would have been the ideal night to cook up something healthy, but naturally that's not going to happen either. Al just called - he wants to get dinner since he's leaving town tomorrow. Most likely, we're going to end up at Grimaldi's in Brooklyn. Somebody's got a date with the treadmill tomorrow.
I had decided to be healthy after a day like that, so we went up to the Union Square farmers' market to buy vegetables. My ambitious plan was to make some sort of vegetarian pasta dish for dinner last night, sort of as a penance for all that food. I bought some tomatoes, squash, zucchini, onion, and green beans, and was on my way home, when Al called. He's in town from Chicago (and had met us for dinner at Park Ave) but wanted to show his brother the city. They were meeting up with Kahn at the 2nd Avenue Deli for some authentic NYC cuisine. How could I say no? It's right around the corner, and I haven't been there in ages. Their mushroom barley soup really is the best I've ever tasted. The corned beef isn't so bad either.
Now completely determined to be healthy, I returned home to relax, get some errands done, and make that healthy dinner. Right. After Al and Kahn left I fell asleep. I woke up at 7:00 when Seidman called - did I want to meet up with him for dinner for his birthday? At Outback Steakhouse? OK, plan B. Friends, let me tell you, just because a dish at Outback says it contains pasta, grilled chicken, and sundried tomatoes does NOT, under any circumstances, mean it's healthy. In fact, quite the opposite. I think they figure that the healthiness of the above ingredients allows them to put in more cheese and alfredo sauce in order to offset any nutritional value one might get from consuming said meal. Again, the night concluded with me rolling home.
Tonight would have been the ideal night to cook up something healthy, but naturally that's not going to happen either. Al just called - he wants to get dinner since he's leaving town tomorrow. Most likely, we're going to end up at Grimaldi's in Brooklyn. Somebody's got a date with the treadmill tomorrow.
Sunday, August 14, 2005
Long Time No See
Right. So, I have no idea when I last wrote something here. Definitely a few months. A few things have happened since then, but I'll kind of work them in rather than just list them out.
Work's definitely improved a lot since I started. I know I'm not supposed to really discuss work here, as per my employee agreement, but I can probably say that, at first, I was a little nervous that my new boss and I weren't really working on the same wavelength. I'm still not totally satisfied with things, but at least I feel comfortable now working with him, as well as the rest of the staff. I'm also still learning a lot about balance sheet analysis and such, which is clearly going to be of help to me career-wise.
Earlier today I went to Rich Bruckner's engagement party, which was held at some Italian restaurant uptown. Kind of like Carmine's, except slightly better. A lot of the old AEPi guys showed up who I've really lost touch with. It seems there's a whole group of them who hang out all the time in NY, and I basically have no connection to any of it. Well, a little reminiscing and a recitation of The Funniest Story Ever and now I'm in. Guess I'll be spending a little more time with the likes of Demby and Waldo and Goody.
The Funniest Story Ever:
Kahn's girlfriend Dani told me this about a friend of hers. It seems this girl was hired to dog-sit for a week while the owners were on vacation. The first day she went to the apartment the dog was fine, but the second day she arrives the dog was dead. After the requisite panic, she calls animal control to figure out what to do with the dead dog. Animal control tells her that she has two choices - either she can pay $150 to have them come take away the dog, or she can bring it to a certain location in the city and they'll dipose of it for free. Not wanting to pay the money, she puts the dog in a large duffel bag and heads off for the subway. Now, apparently, this girl is kind of small, and the dog, well, it was pretty big. So, she's having some trouble carrying the bag to the subway. (Don't ask me why she was taking the subway. If there's ever a time to hail a cab, this sounds like one.) While she's struggling down the street, a man walks up to her and asks her if she needs any help.
"Yes, thank you," she says.
"Wow," he says, while lifting the bag. "This is really heavy. What's in here?"
Not wanting to explain what is really in the bag, she quickly invents a story.
"Well, I'm moving to a new apartment," she says, " and I hired some movers to take care of everything. But, I didn't want them to steal any of my valuables. So, I put them all in this bag, and figured I'd bring them myself."
"Oh, really?"
"Yes. It's all my jewelry, and some other expensive stuff that I wouldn't want stolen or damaged."
At this point, the man promptly runs off, stealing the duffel bag.
I wonder when he realized what he actually stole.
Work's definitely improved a lot since I started. I know I'm not supposed to really discuss work here, as per my employee agreement, but I can probably say that, at first, I was a little nervous that my new boss and I weren't really working on the same wavelength. I'm still not totally satisfied with things, but at least I feel comfortable now working with him, as well as the rest of the staff. I'm also still learning a lot about balance sheet analysis and such, which is clearly going to be of help to me career-wise.
Earlier today I went to Rich Bruckner's engagement party, which was held at some Italian restaurant uptown. Kind of like Carmine's, except slightly better. A lot of the old AEPi guys showed up who I've really lost touch with. It seems there's a whole group of them who hang out all the time in NY, and I basically have no connection to any of it. Well, a little reminiscing and a recitation of The Funniest Story Ever and now I'm in. Guess I'll be spending a little more time with the likes of Demby and Waldo and Goody.
The Funniest Story Ever:
Kahn's girlfriend Dani told me this about a friend of hers. It seems this girl was hired to dog-sit for a week while the owners were on vacation. The first day she went to the apartment the dog was fine, but the second day she arrives the dog was dead. After the requisite panic, she calls animal control to figure out what to do with the dead dog. Animal control tells her that she has two choices - either she can pay $150 to have them come take away the dog, or she can bring it to a certain location in the city and they'll dipose of it for free. Not wanting to pay the money, she puts the dog in a large duffel bag and heads off for the subway. Now, apparently, this girl is kind of small, and the dog, well, it was pretty big. So, she's having some trouble carrying the bag to the subway. (Don't ask me why she was taking the subway. If there's ever a time to hail a cab, this sounds like one.) While she's struggling down the street, a man walks up to her and asks her if she needs any help.
"Yes, thank you," she says.
"Wow," he says, while lifting the bag. "This is really heavy. What's in here?"
Not wanting to explain what is really in the bag, she quickly invents a story.
"Well, I'm moving to a new apartment," she says, " and I hired some movers to take care of everything. But, I didn't want them to steal any of my valuables. So, I put them all in this bag, and figured I'd bring them myself."
"Oh, really?"
"Yes. It's all my jewelry, and some other expensive stuff that I wouldn't want stolen or damaged."
At this point, the man promptly runs off, stealing the duffel bag.
I wonder when he realized what he actually stole.
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