Q3-2015 Performance Report

Portfolio Performance

My very unaudited portfolio performance in the third quarter of 2015, the three months ended September 30, 2015 is approximately -0.9%. The performance for the nine months ended September 30, 2015 (year to date) is approximately +9%.

Portfolio Percentages

At September 30, 2015:

43% preferred share equities
17% common equities
11% corporate debt
29% cash

USD exposure: 23%

Portfolio is valued in CAD;
Equities are valued at closing price;
Equity options valued at closing bid;
Corporate debt valued at last trade price;
Portfolio does not include accrued interest.


I am still considering an e-mail subscription service for these updates. When I am in a position to do so, I may give an abbreviated summary of the report on the website, but send something more detailed through email.

Portfolio Commentary and Outlook

Relative performance is great if you are a fund manager, but it is not so good from the perspective of an individual investor. That said, I can take some minor satisfaction that I have been able to navigate the stormy seas of the markets over the past quarter. The S&P 500 is -6.9% over the quarter and the TSX is -8.6%. My performance, at -0.9%, is roughly flat.

Despite the markets dropping, I still have not been able to find many suitable candidates for investment. I published my purchase of Bombardier preferred shares (of which is the minority of my 43% preferred share position, there are other low volatility issues in the mix there) which was the only real purchase of risk taken in the portfolio. Currently it is roughly at my purchase price and I would expect it will continue to deliver both income and capital gains over the upcoming quarters. I will let my prior writings speak for themselves although the actual research has been done in much more depth than I presented.

The performance of Genworth MI (TSX: MIC) has been lacklustre despite having reasonably good fundamentals. It trades as a proxy for the fortunes of the Canadian real estate market. There is also the pressure that its parent, Genworth Financial (NYSE: GNW), is facing (one look at Genworth Financial’s stock chart should tell the entire story) and this may cause pressure on Genworth to dump its 57% majority share of Genworth MI to some other suitor. Genworth Financial’s issues are significantly different than Genworth MI (i.e. GNW’s issue deals with liabilities created from ill-thought out life insurance policies, something that Genworth MI does not have).

Companies that are connect to the Canadian real estate market, especially mortgage financing, include Home Equity (TSX: HCG) and Equitable (TSX: EQB). Other comparable entities include the staple REITs (e.g. Canadian Apartment Rentals, RioCan, H&R, etc.) that generally show little sign of slowing down – is this because they are trading on the basis of income or asset value? One would believe that if there is going to be some impairment of asset value that the market would have reflected this somewhere.

Pinetree Capital (TSX: PNP) announced at the end of September that they will be redeeming another $5 million in par value of their debentures. This will bring the total outstanding from $14.8 million to $9.8 million at the end of October. They had to do this because otherwise they would have most likely (once again) breached their debt covenant which states their debt-to-assets ratio can be no higher than 33%. Without the redemption they would have been sitting at around 36%, while with this redemption they are at around 27%. My position in their debt has been reduced by 4/5ths since they started their redemptions and with the residual position I can sleep tight knowing that I’m first in line to be paid out. The 10% interest payment is a reasonable incentive to keep my money there instead of dumping it out at 99% of par value.

They have a funny situation where they have few level 1 assets remaining and they will have to dredge up another $10 million to pay the maturing debtholders on May 31, 2016. They will be able to do this, but it has been a grave cost to the corporation and a lesson on how borrowing money to invest can be dangerous. There is likely some residual value beyond what the existing market cap implies ($13 million), but can you depend on management and insiders to actually monetize the tax losses, sell out, and move on? I doubt it.

In terms of studying for future investments, while I have been time limited over the past couple months, my focus has been on debt securities of energy companies. There is a lot of junk out there, and most energy firms are currently locked into a race to see who goes insolvent first. Simply put, companies with better balance sheets will survive longer. Those that have weaker balance sheets are going to get squeezed in this brutal war of attrition. The likely portion of the capital structure that will be profiting off the industry will not be the equity, but rather the people that hold the debt.

There is no shortage of energy debentures that trade on the TSX that warrant valuations far south of 100 cents on the dollar. Most of these debentures are going to be very dangerous to hold, especially considering that Alberta’s government is obviously doing what they can to make further oil sands development impossible.

Over the last quarter of the year, I do not anticipate any outsized gains. About 30% of my portfolio I could see trading 10-20% higher than present values, but the rest of it is mostly fixed income-type investments that is simply parked and waiting for better days. There is currently nothing in the pipeline that would constitute a good potential for a double or triple. Still looking.

Divestor Portfolio - 2015-Q3 - Historical Performance

YearPerformanceS&P 500TSX 60General Comments
9.75 Years:+14.4%+4.5%+1.7%Compounded annual growth rate.
2006+3.0%+13.6%+14.5%Performance marked by several "wins" and several "losses" which nearly offset each other.
2007+11.7%+3.5%+7.2%One holding was acquired at a moderate premium; nothing otherwise remarkable about this year.
2008-9.2%-38.5%-35.0%Avoided market meltdown by holding significant cash; bought heavily discounted corporate debt at and around year-end.
2009+104.2%+23.5%+30.7%Most gains this year were in the corporate debt market. Anybody holding anything from February onward would have made money, but I mostly selected securities that were more heavily depreciated. I completely realized the once-in-a-generation opportunity that occurred here and was able to take advantage of it.
2010+28.0%+12.8%+14.4%Continued to realize gains and lighten up on corporate debt holdings which were mostly trading at par at year's end.
2011-13.4%+0.0%-11.1%Very poor performance, most of which stemmed from poor decisions around the August timeframe, and also completely missing on two targeted trades which completely fizzled. Wounds in this year were completely self-inflicted.
2012+2.0%+13.4%+4.0%Spent most of the year in cash, which explains the relative underperformance. Did not feel confident about significantly getting into equity or debt, but did dive into "value" equities at the end of the year.
2013+52.9%+31.8%+10.6%Despite making several unforced errors in the year, not to mention having a generally bearish outlook on the marketplace, insurance industry holdings appreciation and one very timely trade contributed for the bulk of performance. Half the year had more than 20% cash in the portfolio.
2014-7.7%+11.8%+7.7%Spent the most of this year about 1/3rd in cash; given my performance, probably a good decision. Performance was negatively affected by a series of unforced errors, and having absolutely nothing work out this year.
2015 (Q1-Q3)+9.4%-6.7%-9.1%

A short squeeze on Bombardier

Back on July 29th, I posted I had purchased preferred shares in Bombardier. I wish I had started my averaging a couple weeks later (did pick up a few on the dip), but nonetheless what I expected to happen has happened over the past week, especially over the past couple days.

The catalyst (or rather the assumed story to cause all the excitement) was that a “crown corporation” in China was interested in purchasing lump-sum the rail division for a huge amount of money (enough to pay off nearly all the debt the company had).

While this may be the cited story, the reality is that sentiment was horribly depressed in the marketplace for a company, while clearly having operational issues, that was punched well below what should be a fair valuation range. It took a catalyst event for the mindsets of the traders, investors and institutions to re-value the company in-line to something that was more reasonable.

There will likely be a few slip-ups in the preferred share pricing between now and over the next year, but anybody picking up preferred equity is likely to receive their stated cash flows for quite some time to come.

While in general I think the market is still not showing many investment opportunities (at least from my eye), this was a rare opportunity in a very well-known Canadian TSX 60 issuer in the large-cap space (or at least they were large cap before this all began!). I very rarely dip my toes into the large cap sector.

The bond yield curve has also taken a similar descent.

If my nominal scenario comes through you’ll see the preferred shares at around a 7.5-8.0% yield range in a year. This will be about $20 for the BBD.PR.C and $9 for the BBD.PR.B series (interest rates are still projected to be very low going forward), which represents another 50% capital appreciation or so for much less risk (albeit slightly less reward) than the common shares.

I remain long Bombardier preferred shares.

A nice time to be holding cash

This is a rambling post.

Downward volatility is the best friend of an investor that has plenty of cash.

You will also see these punctuated by magnificent rallies upwards which will get everybody that wanted to get in thinking they should have gotten in, until the floor drops from them again which explains today.

By virtue of having well over half cash and watching the carnage, I’m still not finding anything in fire-sale range except for items in the oil and gas industry which are having their own issues for rather obvious reasons. Examples: Penn West (TSX: PWT) and Pengrowth (TSX: PGF) simultaneously made announcements scrapping and cutting the dividends, respectively, and announcing capital expenditure reductions and their equity both tanked over 10% today. Crescent Point (TSX: CPG) had a fairly good “V” bounce on their chart, but until oil companies as an aggregate start going into bankruptcy and disappearing, it is still going to be a brutal sector to extract investor value from.

I just imagine if I was one of the big 5 banks in Canada and having a half billion line of credit that is fully drawn out in one of these companies. Although you’re secured, you don’t envy the train wreck you have to inherit if your creditors pull the plug.

The REIT sector appears to be relatively stable. Looking at charts of the top 10 majors by market capitalization, you don’t see a recession in those charts. If there was a true downturn you’d expect to see depreciation in the major income trusts. I don’t see it, at least not yet.

Even when I exhaustively explore all the Canadian debentures that are publicly traded, I do not see anything that is compelling. The last debt investment which was glaringly undervalued was Pinetree Capital (TSX: PNP.DB) – but this was in February. They recently executed on another debt redemption which puts them on course to (barely) fulfilling their debt covenants provided they can squeeze more blood from their rock of a portfolio. I wouldn’t invest any further in them since most of what they have left is junk assets (Level 3 assets which will be very difficult to liquidate). One of those investments is a senior secured $3 million investment (12% coupon!) in notes of Keek (TSXV: KEK) which somehow managed to raise equity financing very recently.

The preferred share market has interesting elements to them as well. Although I’m looking for capital appreciation and not yield, it is odd how there are some issuers that are trading at compellingly low valuations – even when factoring in significant dividend cuts due to rate resets (linked to 5-year Government of Canada treasury bonds yielding 0.77%!). I wonder if Canada’s bond market will go negative yield like some countries in Europe have – if so, it means those rate reset preferred shares will have even further to decline!

Inattention to the site caused errors

A very rare administrative post.

For some reason, the links on the specific articles were breaking. I’ve now fixed them. I have no idea why this happened and do not care to investigate further in case if something else breaks. It had to do something with the permalink structure of the site.

This affected commenting and thank you to Safety once again for sending me an email informing me of the problem on this site.

Plunge in the markets

It is very obvious that there was a forced liquidation at the beginning of today’s market session and also parts of the morning. There are some securities out there that were clearly force-sold at the bid. Unfortunately when I am scouring the entrails of this market vomiting, I still don’t see anything terribly compelling that is at insanely clearance prices. There are discounts, but nothing on wholesale liquidation at present. While my expectations might be too high, I remember when Sprint corporate debt was trading at 30 cents on the dollar during the 2008-2009 economic crisis. I don’t expect these types of discounts on large cap corporations, but something close would be nice.

That said, I believe this episode of market panic will end shortly and we’ll probably get some form of a “dead cat bounce”. I find it interesting that despite the fact that Japan went through exactly the same thing that China is going through presently that North American equity markets continued to rocket upwards.

China’s Shanghai index also, despite everything happening recently, is still up year-to-date.


Days like today are a good reminder why one holds cash – even if you were invested in “safe” securities, liquidating safe securities in market panic situations is not easy – you will still receive adverse pricing due to the bid-ask spread.

Genworth MI Q2-2015 review

This is part of my continued coverage of Genworth MI (TSX: MIC). There wasn’t anything too remarkable about Q2-2015’s report other than that delinquencies in Alberta have not been materially increasing. Combined ratio is at 37% for the quarter, which is in-line, and the company wrote $205 million in premiums, which is significantly higher than the $160 million from the previous year’s quarter. As the premiums recognized is significantly less than this number ($144 million) as policies amortize, the revenues to be recognized will be increasing over time.

The conference call transcript would suggest that management is quite aware of the economic fallout with regards to oil prices and Alberta’s economy and also the mortgage fraud issues that Home Capital Group (TSX: HCG) disclosed.

Portfolio management moved out of common shares and into preferred shares – from the beginning of the year they moved about $190 million of capital into preferred shares in the financial and energy sectors. Considering all the carnage going on in that sector (please read James Hymas for his most brilliant descriptions of the Canadian preferred share market) this is probably a reasonable decision on valuation.

The company repurchased 1.54 million shares at $34.38/share during the quarter. Considering this is below their book value, share buybacks are an accretive transaction. The company’s ability to conduct share buybacks relies upon them being “modestly” above a 220% minimum capital test ratio (which was at 231% at the end of Q2).

With MIC.TO shares trading at $29 as of last Friday, any further share repurchases at this price range (in my humblest of opinions) would be a highly beneficial transaction for remaining shareholders and the company should be exercising another share buyback this quarter – basically at current prices every dollar they spend on a buyback is minting about 25 cents of value from thin air.

The market price is clearly trading on fears of some sort of downturn in the Canadian real estate market. With the carnage going on in China there may be some foreign liquidation of domestic land, but how much collateral damage this may cause in the broader market remains to be seen. Employment rates are the primary determinant of the ability for people to be servicing their mortgages and right now this is appearing to hold steady at 6.8%. Although the horizon appears to be stormy, there seems to be a reasonable economic buffer between the fundamental valuation of Genworth MI and the risks ahead concerning the mortgage insurance market. Cash generation is still immensely huge and combined ratios are incredibly low.

I have always likened Genworth MI to be a glorified bond fund with a housing-linked component that will boost returns providing the Canadian economy doesn’t implode (i.e. default rates will rise) beyond the 2008-2009 economic crisis levels. The current trading price is on the lower depths of my fair value range and I am eyeing it closely.

Search for yield – Dundee Corp

Dundee (TSX: DC.A) is an investment corporation. They are family-controlled (by the Goodman family) who control approximately 87% of the voting interest and 18% of the economic interest of the firm through a typical dual class share structure.

By virtue of owning Dundee Financial and other majority and minority-held investments, their consolidated financial statements are a mess to read. When pulling apart the components, they are diversified among real estate, energy, financial, mining and agriculture, in that order.

At the end of the day their stated book value is about $1.45 billion dollars, trading at a market capitalization of about $540 million. There are good reasons to believe the book value will be impaired simply due to their slowness in writing down some investments that clearly will not perform, but even assuming a 50% write-down (which seems appropriate) this brings the entity down to a liquidation value that is still well above its market capitalization.

On the liability side, the holding company has $92 million in term facility debt and subsidiaries make up approximately $100 million more in non-recourse debt. The leverage is not huge. The term facility is good for $250 million total and expires in November 2016 which is salient to the discussion below.

I generally have an aversion to controlled corporate structures as a minority holder unless if there are significant reasons why one would believe there is an alignment of interests. There also needs to be some reasonable assurances there isn’t a cesspool of conflict of interests in the other subsidiaries / operating companies that would cause shareholders to believe they are being taken to the cleaners with. I don’t get this element of confidence with Dundee, so I would steer away from the common shares. This is also found in companies with similar capital holding companies, including firms that have been on and off my radar (let’s be specific: Pinetree Capital is one of them – trading at around 50% of reported net asset value!).

On a more humorous note, Dundee’s logo also looks like the Blackberry logo, which is kind of disturbing considering how Blackberry has fared:

At least their logo is pointing upwards instead of flat.

I am writing not about the common shares, but rather the preferred share securities of Dundee. They have a series of preferred shares (Series 4) which has a par value of $17.84/share. The reason for the unusual par value was because Dundee split off DREAM Unlimited (TSX: DRM) which partitioned the original preferred share series issue (into DC.PR.C and DRM.PR.A). The shares have a coupon of 5%, paid out quarterly.

The preferred share series has an interesting feature: they are redeemable by the holder for $17.84/share after June 30, 2016. They are also retractable by the company indefinitely (at $17.84/share cash) and convertible into common shares at 95% of TSX market pricing or $2/share, whichever is more until June 30, 2016. The aggregate value of the preferred shares at par is $107 million.

This creates a rather interesting situation where an investor can purchase shares today (trading at roughly 97 cents on the dollar) and force a redemption in about 10.5 months’ time, skimming a 5.15% preferred yield and a 3% capital gain. One clear risk is whether the common shares will be trading above $2/share by June 30, 2016, which would seem to be a likely bet even if the underlying asset value of Dundee’s oil and gas companies are seriously impaired. It also does not help that most of their operating entities and equity-accounted entities are losing money, but the question is how much money will they actually end up losing between now and June 30?

There is also sufficient management interest in ensuring that their (not trivial) 18% economic stake in the firm is not diluted with a share conversion, coupled the with the fact that their operating credit line appears sufficient to pick up the bill (in addition to the $87 million cash they already have on hand in the holding corporation).

The preferred shares are extremely illiquid and trade in a narrow range that is presumably due to the redemption/retraction feature.

It is an interesting gamble that seems like it is reaching out for yield, but with an element of security given the pre-existing credit facility and 80% distance between the existing common share price and the $2 floor for preferred conversion.

In relation to the tax-preferred status of an eligible dividend coupled with a (presumed) capital gain at the end, one is looking at a functional tax-preferred 8% with a reasonable amount of asset security (although the security is implied by redeem-ability, definitely not direct security!), contrasted with a fully-taxable 1-year GIC at 1.2% (without liquidity) or 0.85% with liquidity. The spread seems to be a reasonable compensation for risk.

I would like to thank a comment poster by the name of Safety, who on May 25, 2015 posted about this in one of my prior rantings. I was indeed quite surprised at the quality of this person’s comments and hope he can chime in here again.

Anyhow, I finally picked up a few shares.

Purchased Bombardier Preferred Shares – Investment Analysis

Bombardier (TSX: BBD.B) has been on my radar screen since the beginning of the year when the pulled off a secondary offering that was force-fed to the public.

Over the past week I have bought Bombardier’s preferred shares. Specifically I have bought the preferred shares BBD.PR.B and BBD.PR.C, which have somewhat different characteristics.

BBD.PR.B gives out a dividend that is adjusted according to the prime rate given by the various big banks. Right now prime is 2.7% on a $25 par value, so that works out to 67.5 cents per share, paid out in monthly installments. At today’s market value it is trading at a yield of 11.1%. The shares can be converted to BBD.PR.D in August 2017 at a rate that is to be previously declared by management that is a function of the 5-year Government of Canada bond yield. In August 2012 it was 220% of the 5-year bond yield. Generally speaking with bond yields as they are at present I would not expect too much of a fixed premium to be assigned to the conversion.

BBD.PR.C gives out a 6.25% dividend on a par value of $25, so $1.5625/share paid in quarterly installments. At today’s closing price that works out to a 13.1% yield. This series of preferred share can be converted by the company into BBD.B equity at 95% of the closing price of the shares over a pre-determined time span or $2/share, whichever is more.

Both series of preferred shares are cumulative.

So why buy into something so obviously risky? The short story is that this appears to be a high risk / very high reward situation. There are a few reasons to believe that the risk is higher than what the market is perceiving.

On a technical basis, it is clearly obvious that investors have given up on the company. Anybody sitting on the preferred shares since the beginning of the year has lost about half their equity and the same can be said for the common shares. While this is a relatively unscientific comment, sentiment as seen through the stock graph is horrible. The sentiment could get even worse (i.e. go to zero) but despite what most retail financial literature specifies, portfolio returns are highly magnified if you can avoid catastrophic time periods and likely most of Bombardier’s catastrophic period is in the past. Price and volume suggest panic and it is best to invest in a panic situation.

I can’t see people within various pension funds and institutional investors credibly recommending to their investment committees the purchase of Bombardier at this time. The risk has simply gone too high. As a result, the shares (both common and preferred) have cratered. The question at this point is assessing whether sentiment can get worse (resulting in lower prices) or has bottomed.

Operationally and in terms of sentiment, the mass media has focused on the consistent delays on the C-series airplane that is designed to compete against others in the 100-149 person segment. The development of this aircraft continues to cost the company considerable amounts of cash – debt has risen to $9 billion at the end of March 2015 compared to $5.4 billion at the beginning of 2013.

In fairness, the cash balance between those two time periods has also gone up, from $2.6 billion in January 2013 to $4.7 billion in March 2015. The net debt position would be $4.3 billion which is not terrible.

In the last raising of capital, the company forced through a bond offering that functionally extended their nearest term maturity out to 2018. They managed to get a 5.5% coupon on 3.5 year money and 7.5% on 10 year money.

Investors that bought into the 10 year bond would doubtlessly be pleased to know that what they had bought at par is now 83 cents on the dollar (or approximately 11% yield to maturity). The 3.5 year maturity issue last traded at 94.7 cents (or 7.6% YTM).

Their yield curve would still suggest they are not going to be shut out of debt financing.


So they have a couple years to figure things out. Considering they have seemingly gone through a whole host of management changes in the first half of the year, presumably there will be a renewed focus to solve the issues the company is facing. I also do not know of any aircraft projects that were ever delivered on time and budget.

The company has a profitable transportation division which they are planning on bringing public. This would also give the underlying entity a bit more market value than what is being prescribed (a 3.8 billion market cap plus $4.3 billion net debt position gives an enterprise value of approximately $8.1 billion). For a company doing $20 billion a year in revenues, one would pause to think if a more rational valuation were prescribed to the firm on the basis of revenues.

It is likely any recovery in the company would clearly result in equity appreciation for the company, but also as the credit profile improves, preferred shareholders (especially the BBD.PR.B series) would see considerable capital appreciation, nearly in line with the common shares, with the added bonus of the income payments on the side.

If interest rates rise, BBD.PR.B investors would receive a small bonus. I’m not holding on my breath for an increase in interest rates, however. However, I do believe that 0.5% is the lowest the Bank of Canada will go.

There are obvious risks. The chief risk is the company will suspend dividends and the shares would most likely drop to half of what they are trading at presently. The company suspended dividends on common shares earlier this year and may decide to drop preferred share dividends as they constitute a cash drain of CAD$23 million/year that they would want to otherwise save. They can also save half of this by converting the BBD.PR.C series into equity, a decision that I doubt they would make (they would rather suspend the dividend instead).

There are two good reasons why they won’t: they would likely compromise their ability to access the bond market, and the controlling family (that owns a majority of the votes in the corporation) would lose one more element of the privilege of controlling who is on the board of directors: declaring common share dividends. It does not seem likely at this time that they will suspend dividends unless if things get worse than present. There are other issues concerning the control issue that I will not write about in this post.

There are other positive and negative catalysts, most of which are not being priced into the market. I won’t go into those.

I have omitted a lot of the analysis (including the relationship between the various world governments and Bombardier), but I have written several elements to consider. While I am not too interested in the common shares, the preferred shares do give me interest, thus my purchase. This is not for the faint of heart – this is a high risk investment. If a stabilization comes to fruition and Bombardier manages to plod along, the preferred shareholders are good and will be earning significant income for the indefinite future.

Sleep Country Canada goes public – brief analysis of IPO

Sleep Country Canada (with the cutest ticker symbol on the TSX, ZZZ) goes public after they were taken private half a decade ago. The hedge fund that took them over is still up on a market capitalization basis, but they still have to liquidate approximately 47% of their holdings in the post-IPO organization. The hedge fund also lent the operating entity money which they received a slick 12% for (this is being converted into equity again and replaced with a more conventional credit facility post-IPO).

ZZZ raised a ton of money in the equity offering but it went to facilitate the internal takeover of the operating subsidiary and a partial buy-out of the hedge fund. There is also some equity remaining to pay off some debt of the operating entity so the business in general doesn’t look like a leveraged train wreck.

The underlying business within the holding company is of average financial profitability considering its retail business – very roughly speaking over 2012 to 2014 it has cleared a 9% profit margin before interest and taxes.

When doing the analysis, however, my question was not whether this company should be going public or whether it should be purchased, but rather: how the heck did they manage to get people to pay $17/share for this? On almost every valuation metric I can think of, I would not be interested in looking at this company until it reaches about $10/share (this is roughly 20% under a fair value estimate of $12.50/share). There are a lot of strikes against ZZZ at $17/share:

1. Its retail niche is not a growth market (despite what is claimed in the prospectus), especially considering its top-dog status in the Canadian market – thus not warranting any sort of real “growth valuation”.
2. The profitability of the market is not extreme (although one can make an argument that it will be more difficult to erode from the Amazons and big-box retailers compared to the retailing of trinkets) and one is very hard-pressed to find why existing margins will rise beyond economies of scale;
3. Investors should continue to pay a discount, not a premium, due to the fact that they are (nearly) minority investors in relation to the 46% owner (Birch Hill) sitting in the room looking for an exit;
4. Tangible book value after offering is going to be negative ~$142 million – this is purely a cash-flow entity one is investing in. If they were a growth company, why would they give out a planned 11 cents/share/quarter dividend?
5. I don’t ever invest in companies that have their ticker symbols not represent an abbreviation of their company name. Seriously.

At $17/share ($640 million market cap), I don’t have a clue why people would want to invest in this. Who should be congratulated are the insiders and the financial institutions that actually managed to find purchasers of this stock – well done!

Canadian interest rates

The Bank of Canada dropped their target interest rate from 0.75% to 0.5% today.

Canadian currency has taken a plunge in response. In addition the Federal Reserve Chair has pledged to start “normalizing” US interest rates by the end of this year which also puts downward pressure on all non-US currencies.


While I rarely have strong feelings on currencies, the “perfect storm” for the Canadian dollar is brewing (lowering interest rates, lowering GDP, lowering commodity prices, lowering external trade with China/USA, political uncertainty over the October 19 election) and it appears more likely than not that we’ll start approaching the point where we’ll see some sort of floor on Canadian currency (simply because the news could not get worse). I’m going to guess it will be around 72-74 cents, but we will see. I’d also expect this low to be reached around October and I may make a significant policy change on my CAD-USD holdings at this time given valuation levels.

My working theory is that the US economy is going to have extreme difficulties adjusting outside of a zero-rate environment and the process of deleveraging will be a painful business when hedge funds can no longer obtain money for free (Interactive Brokers, for example, will happily lend you USD at 0.63% for more than a million and 0.5% for more than $3 million). Paradoxically if the 30-year treasury bond decides to spike up from 3.2% to around 3.5% yield levels, I would suspect that purchasing long-term treasuries are going to be the winning play over the next period of time – not any equity fund. Debt levels incurred by the US government are hideously high and with every quarter point increase that they face will be a disproportionate amount of interest expense going out the door.

This also does not factor in other entitlement spending (e.g. social security, medicare, etc.) that serves to effectively ramp up the net expenditures for public debt purposes.

Right now I am mostly cash (or near-cash). Some of my efforts to find a place to park cash have mysteriously yielded results that are relatively low risk and I’ll be able to realize a modest single digit percentage at the cost of a little bit of liquidity, but in the event there are better investment opportunities on the horizon I will be in a very good position to pounce.