Overall market thoughts – volatility – fossil fuels

This is another rambling post with no coherency. The quarterly reports from companies are flowing in and I am reading them – but there are few companies that are below my price range where I start to care about them in detail. As such, my research pipeline at this point is in the exploratory mode rather than doing detailed due diligence.

It is in the middle of summer and I am not expecting much in the way of volatility – it is truly a summer where major portfolio decision-makers have decided to take away from the trigger switches.

Accordingly I have been sitting and watching with respect to my own portfolio while I do my casual research. Probably my biggest error of omission was watching the solar market rise over the past six months – I’d written them off, along with almost everybody else, as languishing when the price of fossil fuel energy dropped. A lost opportunity there – there was one company in particular which I earmarked, financial metrics looked great, but didn’t even pull the trigger, primarily due to insider selling. If I executed correctly on it, I would have been looking at a double now. Oh well.

An equity chart that caught my attention was the high expectations of investors of Canaccord pulling a great quarter, which came nowhere to fruition:

This is very obviously the chart of expectations crushed after a quarterly report – a regression to the recent mean would suggest a $4.50-ish stock price. I also notice their domestic competitor, GMP, being crushed after their quarterly report.

I also notice most liquid fossil fuel companies are getting hit badly and are close to multi-year lows. In the USA, most of the companies receiving boosts are the ones that have had been relieved of their debt burdens through the Chapter 11 process (LNGG is a great example of this). I still don’t think equity holders of fossil fuel extraction companies are going to be too happy over the next 12 months.

I also took notice with Interactive Brokers, and Virtu’s commentaries with respect to Q2-2017 as being one of the lowest volatility environments possible – they are two types of businesses that generate revenues as a function of trading volumes. Volatility correlates negatively with an increase with the broad markets – I am looking for defensive-type companies that will do okay in an environment like present, but will really do well when volatility increases.

Interactive Brokers is a classic example of a great company (they are the best at what they do by a hundred miles over everybody else), but one who’s stock I am not interested in buying at current prices.

Mostly everything in the Canadian REIT sector seems to be over-valued. An interesting trend is that the downfall of retail is somewhat being projected by RioCAN’s chart – trading below book value, it might seem to be an interesting value, but are they able to keep up occupancy and lease rates to businesses that have to compete against Amazon? The residential darling of the market is Canadian Apartment Properties (CAR.UN) but they are most definitely not trading at a price that would suggest a future performance beyond a high single digit percentage point and this is under the assumption that their real estate portfolio asset value remains steady. Trading in the entire REIT sector seems to be entirely yield-focussed which is never a good basis to invest, but it is a good basis to evaluate other investors’ expectations on these entities.

Gold has also been up and down like a yo-yo and might be an interesting bet against dysfunctional monetary policy. Unfortunately my ability to analyze most gold mining firms is generally not that fine tuned.

The liquidity of my overall portfolio is very high (nearly a quarter of the portfolio is collecting dust at a short duration 1.5%), but right now I don’t see much investment opportunity that would suggest avenues for outperformance. I could shove the money into some sub-par debenture (e.g. TPH.DB.F which buys you a 7% coupon until March 31, 2018 maturity) but do I really want to lock my capital into something that is questionable? It is the literal metaphor of picking up pennies in front of a steamroller. My policy is that if I have to force my money to work, chances are the investment decision’s risk/reward is worse than if I just held it in cash and waited for some sort of crisis to hit. I generally define “crisis” as something that will take the VIX above 30%, but it has been awhile since we last saw it:

It is pretty ironic how the election of Donald Trump was foreseen by most pundits to be the end of the world and higher volatility times, but so far the opposite has turned out to fruition. Will it continue? Who knows.

I see a lot of people making the mistake of impatience, and also the mistake of assuming that the index ETFs that they are investing into (Canadian Couch Potato, etc.) will leave them safe through masked diversification – works great as long as there are net capital inflows, but what happens if there is a correlated bust among these products? Will retail continue their conviction when they see a 10% drop in prices, or will they grit their teeth and add to their positions?

I continue to wait. It might be a very boring rest of the year with very limited writing. If you think you’re in a similar predicament, I’d love to hear your comments below.

10 thoughts on “Overall market thoughts – volatility – fossil fuels”

  1. “Interactive Brokers is a classic example of a great company (they are the best at what they do by a hundred miles over everybody else)”

    Sacha…that got my attention, not as an investment, but as a tool. I use TD webbroker (now 20yrs) and its time to move on. I tried Questrade a year ago and didn’t much care for it. Do you have any experience with other brokers?
    Can you give some reasons why you find IB better than everybody else. I think in the past you mentioned they are good at fixed income, which is something TD is poor at.

  2. @Marc: My 2010 review here stands: http://divestor.com/?p=3592

    Differences over the 7 years: They now offer RRSPs and TFSAs. I have not migrated due to them not offering TSX debentures (although the way things are going in that market, that’s not much of a disadvantage). Otherwise the review is pretty much the same. It’s been awhile since I’ve looked at other brokerages – I haven’t found the need to.

    Other brokerages might offer cheaper commissions but most people don’t know that they’re likely being ripped off on trade execution.

  3. I think many people are feeling stuck in the doldrums. The insanity surrounding SNAP is probably an indication of that, still can’t wrap my head around the interest in it, especially from institutions.

    I’ve purchased a few REITs as recently as last fall when I felt they were actually somewhat undervalued. Namely D.UN and NVU.UN which have both appreciated over 20%, I continue to hold those. Wouldn’t purchase them now but I think there is considerable strength in some of the residential REITs with detached house prices so high.

    Have you ever held Fairfax? Their latest quarter looks like they’ve righted the ship on some level and the price is much more attractive than it has been. I keep reminding myself they have some solid insurance operations underneath it all.

    Some days it’s hard to fight the “fear of missing out.” Bitcoin, Amazon…has the shipped sailed or will there be some flaming wreckage out there soon?

    Always enjoy reading your thoughts, best of luck!

  4. TD Webbroker is the best of the banks and makes sense for your RRSP and TFSA where margin is not permitted. IB is in a league of their own if you’re using margin. Currently 1.75% to borrow CAD, and 1.25% for CAD over 1.4M. I believe 3.1% is the best I could find elsewhere. For me, the interest savings far exceed the extra commissions. As Sacha mentioned, IB does not offer access to debentures, or offerings, so keeping an account at TD makes sense.

  5. I’m not seeing much out there, but I have a few things in the hopper maybe. I like the holdings I have but won’t be adding to many (possibly MIC if it gets down to ~$35).

    In the mean time, I’m working on deleveraging while I look for value.

  6. @Vince: I studied Fairfax, respect Prem, but find their valuation to be high at present. And right now the flaming wreckage appears to be on fossil fuels (which, considering it is combustible, has an element of irony). Retail is another category – especially if you’ve got good intuition whether Coach or Kate Spade will be hot in 2018 and whether any department store (ranging from HBC to JCP, etc.) will survive.

    @Chris: Yes, IB’s margin rates are absolutely top-notch, borrow at 2%, invest at 6% and pray the collateral doesn’t crash (along with the other trillion dollars of capital that have done the same thing)…

    @Tyler: I personally was going to add if they got into the upper 20’s. They got close during the HCG fiasco period.

  7. Thanks Sacha for the link…..I do not use margin, not sure if IB is a good fit for me.
    Chris, why do you say TD is the best of the banks, imo it’s taken over a year for there “new” look website to function properly….and it still has constant problems (for me anyways) Are the other banks the same?

    I just read this….interesting that there 2 top pics are the ones I dislike……..well then, maybe its just me…perhaps I should try using questrade, again…. as I have an account there already.
    Does any one use 2 brokerages?

  8. Marc, I should have noted that I haven’t had recent first hand experience with all of the bank’s discount brokerages. My experience has been with RBC and TD (also Qtrade, HSBC and IB) and I find TD to be far better than RBC. Besides a much better website, they have 24/7 customer service, and better access to offerings. My customer service experiences (and their competency) has been better at TD than RBC. I only use the banks for accounts that are not traded frequently, as they fill holes in what IB offers. If someone has had a great experience with the other banks, I’m all ears.

  9. Thanks for your thoughts guys……I was OK with TD for almost 20 yrs until they launched the new website….which took over a year of adjusting and tweaking to work properly. I spoke with some of there tech people a few times and it was apparent that many didn’t really trade stocks so had no real point of reference, per say. I read on some forum that the new “Webbroker was launched prematurely due to competition and loss of market share…..not sure if its true or not, but makes sense IMO.
    Anyways I will move some money over to Questrade and try using 2 brokerages.

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