General Comments – Canadian Debenture Market

I’ve finished my comprehensive sweep of the Canadian debenture market. Nothing much has changed except a bit of price weakness which can likely be attributed to the volatility seen this week. Very broadly, I’m not finding anything overly attractive in this marketplace.

On the TSX side, the exceptional items on the radar include the question of when Lanesborough (TSX: LRT.DB.G) will be formally going belly-up – you can buy their zero-yielding debt for under 10 cents on the dollar. Another luminary is Discovery Air (TSX: DA.DB.A), where you can gamble that the controlling entity (who controls most of the senior secured debt outstanding) will be generous enough to let the unsecured debentureholders get away with some cash.

There are quite a few of the smaller oil and gas issuers that are showing signs of financial stress. This is likely due to the fact that Alberta and Saskatchewan oil producers are facing a CAD$22/barrel selling price deficit with no signs of this going away. It turns out that it’s really difficult to sell crude oil when you can’t transport it anywhere! I’m guessing the majors (Suncor, etc.) are just licking their lips and are preparing for an acquisition spree once the less solvent juniors are forced into CCAA submission. I still maintain, for now, that fixed income investors in fossil fuel producers will be likely to make more money (or perhaps lose less of it) than the equity side.

It is also interesting to see how Kinder Morgan Canada Limited (TSX: KML) has not traded down much given the news from British Columbia’s government that will be implementing further regulations on the transport of diluted bitumen. The payload is in the last line of the backgrounder of the release:

In order to protect B.C.’s environmental and economic interests while the advisory panel is proceeding, the Province is proposing regulatory restrictions to be placed on the increase of diluted bitumen (“dilbit”) transportation.

KML does continue to operate the existing Trans Mountain pipeline (map), and since there is effectively a moratorium on long-distance fossil fuel pipeline building in the country, it does make existing pipeline infrastructure more valuable.

This hostility to fossil fuels is one reason (high taxation is another) why retail gasoline prices in Vancouver are the highest in Canada, short of remote northern areas. This will continue to go higher as the provincial government will be raising carbon taxes over (at least) the next four years.

As an interesting side note, retail gasoline in Vancouver, BC is currently at $1.43 per litre, while a little down the border in Washington State, it is US$2.68 per gallon, which works out to about 87 cents per litre.

General comments – market weakness

Another ranting post with little direction.

With marijuana-related equities and cryptocurrencies plummeting, the market for speculative investments appears to be topping. Probably the next short squeeze that occurs will be the best time to be shorting these instruments. Implied volatility on the options sadly are high, and the borrow rate on WEED, APH, ACB, etc., are astronomical.

I also note Aimia (TSX: AIM) has sold off one of their divisions today and most of the negative news is buried in a later paragraph concerning the tightening of their senior credit facility – this is basically part of the slow march to zero. The company is happy to cite the amount of cash on their balance sheet, but not so happy to cite the balance of their deferred revenues, which represents future commitments that will be offset by cost of goods sold – hence the cash reserve. Using an insurance analogy, they are running off their insurance book with little capacity to collect premiums written after Aeroplan expires in 2020.

There’s a lot of young people out there that have witnessed nothing but rising markets and low interest rates and the financial mindset is fixated on these two conditions. There is going to be a lot of financial roadkill along the way, similar to what happened in 2000-2002 where a lot of people got wiped out for believing the dot-com bubble.

Incidentially, 2002-2003 was the perfect time to invest in the inevitable winners of that technology boom (Amazon and Priceline being two great examples). There will have to be winners out of blockchain software, but it could just as equally come from a major player. Very difficult to say at this point in time as I still have not seen any functional system operating with blockchain that doesn’t have a parallel system that is better – unless if you believe that cryptocurrency’s best application is evading monetary authorities.

As I suggested in my previous post, the roller-coaster is just starting. No point in jumping in too early.

S&P 500 year to date

Caution investors – if your portfolio hasn’t risen +7.4% since the beginning of this year, you are underperforming! (Just for disclosure, I am underperforming the S&P 500 year to date!).

I’ve attached the above chart to show how parabolic things are going to get over the next little while.

I can just imagine clients telling their value managers about how much their friends are making on cryptocurrencies, marijuana, and also by people just dumping money in the top 10 large-cap companies, irrespective of any fundamental underpinnings of these corporations.

There are times in financial history where this has occurred before. I’m thinking 1999 or early 2000. It doesn’t end very well.

Raise cash. It is the most difficult trade to hold cash right now – precisely why it is correct.

Bombardier vs. Boeing

Just like most (but not all) of the financial community, I was not expecting the USA trade panel to vote 4-0 in favour of Bombardier.

The immediate implication here is that Boeing, by its actions, has pushed Bombardier into Airbus’ arms, and Airbus is obviously more capitalized and equipped to handle Boeing. By forcing the trade issue, they’ve allowed Airbus to take control of a superior product, which Airbus has a strategic interest in proliferating.

Suffice to say, Bombardier’s stock price is up today, but more relevant for myself, I will be holding onto their preferred shares.

Keg Royalties Income Fund – Impact of the Keg franchise buyout by Cara Group

The Keg chain of restaurants were acquired today by the owner of Harvey’s and Swiss Chalet (both of these names are much more prominent in Ontario than they are in British Columbia). In general, this does not bode well for food quality, but it does bode well for the continued corporatization of the brand name.

More specific to Canadian investors, the Keg Royalties Income Fund (TSX: KEG.UN) is one of those few royalty funds remaining. It’s sole purpose in life is to distribute cash obtained by its 4% revenue share in anything that the Keg sells. It was interesting to see its reaction to the news today:

The market believes the buyout is a revenue-negative event for the Keg.

Financially, KEG.UN is easy to analyze. The trick for an investor is determining the proper fraction to pay for the royalty income (currently investors are purchasing a KEG.UN unit in exchange for $1.13 of distributions, which at a $19/unit price means a 5.95% ratio), plus factoring in the future trajectory of the Keg franchise’s gross sales.

Personally the last time I ate at the Keg was 2009.