Market thoughts – volatility is finally starting to wake up!

The last two days have been quite stirring. In particular, on Friday’s trading, the volatility index spiked up to 29, which is the highest it has been since the Silicon Valley Bank debacle:

Notably, the yield curve also dived down, with the GoC 5-year going south of 3% for the first time in awhile:

There are a few lead theories that I’m thinking. In no particular order:

The “day of reckoning” of tightening interest rates is finally hitting the markets in some sort of liquidity crunch. Somebody big needed liquidity and decided to hit all the bids.

Was there somebody big that was caught short the Japanese Yen and spontaneously triggered a liquidation?

The commodity complex has also gotten hammered. For example, CNQ and CVE reported quite decent quarterly results, but their stocks have been taken down 10% since then (and WTI has dropped from US$77 to US$73 in short order).

Finally something that might be concerning is the liquidity of cash ETFs – in particular, I note that HSUV.u (the US dollar corporate class fund) in intraday trading actually was trading 0.3% below NAV in very illiquid trading (note: NAV is 111.01):

Somebody holding this fund was demanding US dollars in the middle of the trading day and simply was not getting it. This is the hallmark of liquidity issues during a market volatility event.

My gut says there is more to come, so don’t buy too early. However, I’m well positioned for something catastrophic occurring.

Late Night Finance – Episode 28

Date: Monday July 15, 2024
Time: 7:30pm, Pacific Time
Duration: Projected 60 minutes.
Where: Zoom (Registration)

Frequently Asked Questions:

Q: What are you doing?
A: Quarterly review, crystal ball gazing, post-quarter dispositions, and finally time permitting, Q+A. Please feel free to ask them on the zoom registration if any questions. Honestly, other than jumping through some June 25 tax hoops, it has been a relatively inactive quarter so don’t expect any fireworks if you do attend.

Q: How do I register?
A: Zoom link is here. I’ll need your city/province or state and country, and if you have any questions in advance just add it to the “Questions and Comments” part of the form. You’ll instantly receive the login to the Zoom channel.

Q: Are you trying to spam me, try to sell me garbage, etc. if I register?
A: If you register for this, I will not harvest your email or send you any solicitations. Also I am not using this to pump and dump any securities to you, although I will certainly offer opinions on what I see.

Q: Why do I have to register? I just want to be anonymous.
A: I’m curious who you are as well.

Q: If I register and don’t show up, will you be mad at me?
A: No.

Q: Will you (Sacha) be on video (i.e. this isn’t just an audio-only stream)?
A: Yes. You’ll get to see me, but the majority will be on “screen share” mode with MS-Word / Browser / PDFs as I explain what’s going on in my mind as I present.

Q: Will I need to be on video?
A: I’d prefer it, dress code is pajamas and upwards.

Q: Can I be a silent participant?
A: Yes.

Q: Is there an archive of the video I can watch later if I can’t make it?
A: No.

Q: Will there be a summary of the video?
A: A short summary will get added to the comments of this posting after the video – assisted by Zoom AI because I can’t think for myself anymore and need to let the computer do it!

Q: Will there be some other video presentation in the future?
A: Most likely, yes.

The slate is being cleaned

Slate Office REIT (TSX: SOT.un) today announced an update on its “portfolio realignment plan”, also known as “We’re trying to dump this stuff as fast as we can but can’t find anybody willing to pay a price that will pay down the mortgages” plan:

Slate Office REIT (TSX: SOT.UN) (the “REIT”), an owner and operator of high-quality workplace real estate, announced today that it continues to make progress on its previously announced portfolio realignment plan, and in connection with the foregoing, continues to engage with its senior lenders to determine a mutually acceptable path forward in respect of its obligations to such senior lenders, including in respect of its revolving credit facility. The REIT also announced today that, notwithstanding those ongoing discussions, its senior lenders have provided notices of default, which currently restrict the REIT from making further payments of accrued interest in respect of its outstanding debentures (collectively, the “Debentures”), for so long as such defaults have not been cured or waived. The REIT has determined that based on the information currently available to it, there can be no assurance if or when a cure or waiver in respect of such defaults will be achieved, and as such, the REIT does not expect to make the cash interest payments due on June 30, 2024 in respect of its 7.50% convertible unsecured subordinated debentures and 5.50% convertible unsecured subordinated debentures, nor does it expect to make the cash interest payment due on August 31, 2024 in respect of its outstanding 9% convertible unsecured subordinated debentures. Pursuant to the trust indentures governing such Debentures, failure to pay interest on the Debentures for 15 days following such interest being due will give rise to an Event of Default under the terms of the Debentures.

Needless to say, it isn’t looking good for them. This could be inferred from previous public filings, in addition to them having to beg to shareholders to go above their prescribed asset to debt ratio.

My attempts at being a corporate raider (November 2022) was incredibly brief before I came to the conclusion that there’s no way to win.

My question is not necessarily for Slate (we will see how George Armoyan can try to salvage this situation) but rather whether there will be any ripple effects in the office REIT sector if Slate does decide to go into CCAA. In the sector include AP.un, D.un, SOT.un, TNT.un, and diversified REITs which contain significant office components including BPY/BPO (preferred shares), HR.un, AX.un, and to a lesser extent MRC/MRT.un.

One implication of the capital gains changes

Maximum price changes occur when there is demand or supply added to the market in a very short period of time.

The upcoming finalization of the June 25 “Delivering Tax Fairness for Canadians” capital gains tax inclusion rules has created an interesting ripple in the market.

Well-pocketed individuals or anybody managing a portfolio within a corporation that anticipated an upcoming liquidation of unrealized gains over the next three to five years are compelled to realize such gains in the next 5 trading days. The math is pretty straight-forward for somebody in the top Ontario marginal tax bracket – you sell your shares today and $10,000 of capital gains results in a $2,676 tax bill, or you sell your same shares at the end of this month and it will result in a $3,569 tax bill. The value of the tax deferral of the capital gain only reaches a break-even point in about 5 to 6 years assuming a 9% rate of return – quite a liquidity penalty if you decide to hold! (See: RBC report, page 8 and 9 for some reasonable analysis on the matter).

The people that have the capital to be concerned with these rules (over $250,000 in individual capital gains, or any capital gains in a trust or corporation) are more likely to have the economic substance to push the market in a short period of time with a significant amount of assets.

Hence I deeply suspect that there has been over the past week or so and will be, until June 21 (note – the change occurs on or after June 25 and now that stock trades settle T+1day, the last trade you can do is Friday June 21 to qualify for the 50% inclusion rate), a very unique form of “tax gain selling” on stocks that have reasonable potential for gains to be realized.

All things being equal, next week may prove to be a better than not opportunity to put capital to work.