The “proper” amount of cash allocation

How much spare change should you keep behind the couch? You need a little bit in case if you want to head out to the grocery store to pick up some beer and popcorn, but too much of it and it will be wasting away earning a zero yield, which can be more efficiently thrown into the short term treasury bill market where you can skim off a rich 25 basis points. Depending on how much you actually have in the couch, that could translate into an extra beer!

Sarcasm aside, in the case of the US government, they raised a ton of money during the COVID-19 crisis as illustrated by the following chart:

In recent history, the US treasury normally keeps $200-$400 billion in cash available for day-to-day operations (noting that the annual US deficit in recent years typically hovers around the trillion dollar range), but they raised about 5 times this much during Covid-19.

However, now that the worst of things presumably are over, they have begun to bleed away this excess cash balance, approximately half of it. This can be attributed to some factors, but I would estimate the stimulus spending bill has accelerated the distribution of this cash, coupled with the necessity of keeping a high float due to the even further elevated deficit the government is incurring (estimated $3.3 trillion in 2020).

I don’t know what to make of the implication of the US government bleeding off the cash balances, but I will also note that the Government of Canada appears to have a similar trajectory:

Balances held by auction participants have presumably been zeroed because participants could get higher yields on their capital from other areas.

My understanding is that with the BoC still engaging in a very healthy amount of quantitative easing (‘at least’ $4 billion a week) interest rates will continue to be suppressed. I will note that the 10-year yield has almost reached to the range of the pre-Covid yields and the financial overlords are probably trying to manage some fine balance between the level of QE vs. what is truly going on in the economy. However, the current course of action (accumulation of massive amounts of debt and monetary suppression of interest rates) will come at a cost of economic growth being lower than what it could be – it is sort of like strapping additional weights on the ankles of a marathon runner.

Reasons to shut the radar off IPOs and SPACs entirely

Here is a prototypical example. MDA (TSX: MDA) has gone public yet again. Most people here probably know the financial history of the firm – purchased by Maxar (TSX: MAXR), and then taken private so that Maxar could de-leverage, and then now it is taken public again with a price of CAD$14/share.

The company had its founding in the Greater Vancouver area, and continues today to perform engineering services in the space satellite domain, among other things.

The offensive thing about the public offering is page 65 of the 275 page prospectus:

The overlords of MDA knew perfectly well that they were probably going to go public again, and in the process granted themselves a ton of cheaply issued stock (noting that the right-hand table contains the applicable prices because of the 6:1 reverse split they performed before the IPO). They were looking to raising more money (at a higher share price) but had to taper it back to CAD$14 due to the tepid reception – probably partly due to this table. The other is the financial status of the company (it isn’t making that much money).

At the very minimum, I’d wait until the 180 day lockup period is over before even considering it, but knowing that space is a hype sector, I’m sure it’ll take off soon before then. Comparisons to SpaceX, however, is incredibly misguided – SpaceX has the reusable rocket technology which contains a massive competitive advantage on launch costs, while satellite construction and manufacturing is a much more competitive (and hence lower margin) industry, albeit played by a much fewer number of participants.

Late Night Finance with Sacha – Episode 12

Date: Wednesday April 7, 2021
Time: 6:00pm, Pacific Time
Duration: Projected 60 minutes.
Where: Zoom (Registration)

Frequently Asked Questions:

Q: What are you doing?
A: I’ll give my Q1-2021 performance report and some forward-looking observations. Any time left will be for Q&A.

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 my web browser and PDFs from SEDAR 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, and you are more than welcome to be in your pajamas. No judgements!

Q: Can I be a silent participant?
A: Yes. I might pick on some of you though. Bonus points if you can get your cat on camera.

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.

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

The search for yield is yielding a wasteland

The title says it all, but the market is again at a point where if you want a double digit return on your money, it has to come from the equity side. With equity comes risk.

Over the past year there has not been a lot of TSX-traded debenture issuance (indeed, the list of traded debentures is down to 94 and there does not appear to be much compelling value in the list – anything trading below par is doing so for what I consider to be a valid reason).

On the preferred share space, while it is easy to make a relatively stable 5% return, the risk you have to take to move up the yield chain goes higher and higher – e.g. Aimia’s preferred shares give you an extra 250bps or so based off of the 5yr reset rate, but you’re more or less investing in a hedge fund with a current market cap of half a billion.

Want less risk? Canaccord’s preferreds reset at about 100bps less than Aimia’s, have much higher revenues, but when the investment banking gravy train stops (and indeed – it will) you can be sure that people like me will be buying these preferred shares for less than half of par value, like we did back in 2016.

The surest 500bps I can find at present appears to be Pembina Pipeline’s minimum rate preferred shares that they acquired from Kinder Morgan Canada (PPL.PF.A/C/E), and in the case of the C and E series, likely to get called out in less than 2 years. Aside from a mention of Birchcliff Energy’s preferred shares, Pembina’s is probably the closest instrument that you can treat as a term GIC instrument with a ‘probable’ fixed maturity. Between now and then, however, things can always change and there could be some credit crisis that’ll blow the capital value of the stock – as witnessed during the CoronaCrisis – what trades at par value today traded at 44 cents on the dollar on “Margin Call Day”, March 23, 2020. It does an effective job of wiping out people that take out excessive leverage to buy these types of issues.

All in all, if your target is to make a 5% income stream, there is still plenty of selection (with capital risk in the event of market stress), but this is a far cry from the days of last year or in early 2016 when finding low risk double digit yields in fixed income was like the proverbial shooting fish in a barrel.

This environment is making me suspicious and indeed elevates my sense of paranoia that we are ripe for something bad to happening.