A Canadian on Wall Street

I did a little reading yesterday after reading an analysis of Sprint that talked about the break up price of the stock and whether it was undervalued. It seems like Sprint is funnelling on the order of 3 billion USD into building out their WiMax network over the next few years, which got me looking into this big bet on the future. After doing some reading on the industry (1, 2), it’s apparent that there’s a host of competing standards under the banner WiMax, and it’s no guaranteed thing that Sprint’s buildout will be worthwhile. It smells a little like the way people rushed to optical networking during the dot-com age, building out huge networks that turned out to be completely underused at the time, but which are now seeing a lot more action.

Sprint’s WiMax network operates in the licensed 2.5 GHz spectrum, and this is by no means the definitive band that will be used worldwide, as there seem to be many countries (see the end of this Wikipedia entry) that are using 3.5 GHz and some mixed 2.3/2.5 GHz band. Although Inukshuk Wireless, a Bell/Rogers partnership, seems to be the main contender in the Canadian wireless internet space (or at least has the major backing), it appears that Look Communications has the 2.5 GHz band sewn up in Canada. That news pushed the stock out of its stagnancy in mid-December when takeover speculation, perhaps for the spectrum license and about 400 million CAD in tax losses, made news. At a current market cap of nearly 50 million CAD, the stock may be cheap by some measures, considering I’ve seen the license value estimated at 100-400 million CAD, depending on who an acquirer might be. That said, I know very little about spectrum licenses; how they work, how long they last for, how easily they can be expropriated. It’s something I may continue to research, but I’m lately pretty wary about investing in penny stocks that have nothing going for them except rumours and potentialities. It’s in this realm that casinoism is most prevalent and the gamblers come out to play.

Update, Jan 17 2007: Overview of WiMAX from an investor standpoint. Every time I read one of those articles, I imagine a crystal ball, one equally able to predict whether Apple’s iPhone and AppleTV will take off. Of course, if I had one I wouldn’t have sold my Apple stock at $22, months before the iPod announcements that would change the game. (I bought it based on an “I, Cringely” column that was a retort against those who called Apple out, during the period of the G3 Cube aka the Toaster.)

Funny, telling quote from Derman’s book My Life as a Quant:

Although options theory originated in the world of stocks, it is exploited more widely in the fixed-income universe. Stocks (at least at first glance) lack mathematical detail–if you own a share of stock you are guaranteed nothing; all you really know is that its price may go up or down. In contrast, fixed-income securities such as bonds are ornate mechanisms that promise to spin off future periodic payments of interest and a final return of principal. This specification of detail makes fixed income a much more numerate business than equities, and one much more amenable to mathematical analysis. Every fixed-income security–bonds, mortgages, convertible bonds, and swaps, to name only a few–has a value that it depends on, and is therefore conveniently viewed as a derivative of the market’s underlying interest rates. Interest-rate derivatives are naturally attractive products for corporations who, as part of their normal business, must borrow money by issuing bonds whose value changes when interest or exchange rates fluctuate. It is much more challenging to create realistic models of the movement of interest rates, which change in more complex ways than stock prices; interest-rate modeling has thus been the mother of invention in the theory of derivatives for the past twenty years. It is an area in which quants are ubiquitous.

In contrast, quants have been a rarer presence in the equity world. There, most investors are concerned with which stock to buy, a problem on which the advanced mathematics of derivatives can shed little light. Fixed income and equities have fundamentally different foci. When you walk around a frenetic fixed-income trading floor, you hear people shouting out numbers–yields and spreads–over the hoot-and-holler; on a busy equities floor, you mostly hear people shouting company names. Fixed-income trading requires a better grasp of technology and quantitative methods than equities trading. A trader friend of mine summed it up succinctly when, after I commented to him that the fixed-income traders I knew seemed smarter than the equity traders, he replied that “that’s because there’s no competitive edge to being smart in the equities business.” (ed: emphasis mine)

Or as Woody Allen recalled in his script for Match Point, “it’s better to be lucky than to be good.”