What, markets don’t go up 30% a month forever?

I’m going to use Tesla as the standard, but you can pretty much use whatever high-flying technology sector stock as a substitute (e.g. Zoom):

Some basic math – from August 11 to August 31, Telsa went from $280/share to $500/share.

It is really a shame that Robinhood removed their customer stock holding information since it is very illustrative what the retail momentum crowd is chasing. Just imagine seeing this chart, and on August 26th or 27th you finally capitulate and say I’m going in. You buy shares at $420 level (remember that number? Pre-split!), and on August 28 and after the weekend you are looking like a genius, up about 20% on your investment in a week. Now this is how you become a millionaire!

Fast forward a week in the markets, and suddenly your $420/share purchase is now sitting at a 15% loss from the cost. How much further down does this go before you capitulate, dump your shares, and then swear off gambling on these popular technology stocks?

This sort of thing happened in 1999-2000 all the time.

One of the few differences is that treating the stock market as a casino is even easier than ever. The emotions associated with gains and losses are all the same.

Another difference is that after the Y2K scare passed without any consequences, Alan Greenspan applied the monetary brake pedals (do you remember the days when interest rates were above zero?) and it was one of the contributors to the crash in March of 2000. This crash was preceded by an incredible amount of volatility in February 2000. Right now, gasoline is still being poured onto the fire in the form of fiscal stimulus and interest rate curve control.

I’d be curious what the average retail holding period of Tesla stock was in the past month. I’d guess a week or two at most.

Since there was likely much more broad participation in this upswing since June (the realization that markets are effectively decoupled from the economy), in order to make a check on the upward momentum requires a much more violent downswing. As the chart of Tesla above can attest to, this was a pretty violent downturn, and will shake out people that think the stock market was a one-way street to riches.

In the short term, if a trade feels comfortable to make, it probably is a losing one.

TSX Debenture Sheet Update

A few days ago, TSX Money has changed their website interface (in my opinion the change is awful for desktop users compared to the previous version). Before it used to be my go-to to get a quick quotation or the most recent news, but now everything is so spaced out and shows a lot more irrelevant information that I’m looking for alternatives. Why do providers always mess up a good thing? You get what you pay for I guess!

The best example of non-changing interfaces with incremental improvement are sites like Craigslist or Secinfo. They know major interface changes turn off users.

In regards to the TSX Debenture sheet I maintained, it broke the quote retrieval system I was using. Previously, the code to recover near real-time quotes was kindly provided by a user of the sheet which I was more than happy to implement (it involved importing the data from the TMX website). My first attempt to this weekend to re-establish this (realize that my mad hacking skills are about 20 years out of date) consumed a couple hours of time with little headway. I’m guessing one of you out there is smart enough to give me a proper =importxml(…) routine that will magically work.

Thank you.

(Update: A very, very, very intelligent person from Japan (you know who you are…) was kind enough to render assistance on this. Things look to be operational again, but we’ll find out when the market opens again on Tuesday!)

Hiccups in the broader markets

The S&P has more or less been on an uphill trend for the past 3 months. The last major incursion to the prevailing market trend was in June, which shook out the people with low amounts of conviction. Since then, the people that have cashed up during Covid (“let’s wait for a vaccine”, “let’s wait for case rates to go to zero”, “let’s wait for the presidential election to conclude”), etc. have been staring at stock charts of companies like Tesla, Microsoft, Zoom, etc., all rising in price. During the three month process, the temptation to buy becomes too much (“let’s board the train”), and that also starts attracting unsophisticated retail investors (Robinhood traders) into the mix.

There is still a lot of cash on the sidelines, and there is still a lot of pessimism out there in regards to Covid and the general state of the economy, so this cash will be the ultimate backstop to the markets.

However, once in awhile, the markets need to exhibit a “shake-out”, where confidence is obviously lost, and the sentiment turns short-term negative, such as the moment we got yesterday and today – what’s happening is that equity holders with less conviction are taking gains and this creates its own stampede of people that have decided that taking gains on the past three months of performance is “good enough”.

Note I haven’t mentioned a thing about valuation in this post. Of course companies like Apple, Microsoft, etc., are trading at elevated ratios. Where else are you going to stick your capital, 30-year US treasury bonds yielding 1.4%? Of course companies like Zoom and Tesla are over-valued, but over-valuation alone is not a sufficient condition for going all negative on the S&P 500. Indeed, if the entire S&P 500 index were to collapse 25% in the next week (without a corresponding change in interest rates), you’d have the media shouting about how everything is going to hell, but privately within the halls of pension funds and institutions, would be a pretty good chance to deploy cash into equities.

The underbelly of the high profile, high-PE, high capitalization stocks still shows a market that is relatively stable and doesn’t appear excessive.

I’m guessing this hiccup will be a two week ordeal, especially when combined with presidential election antics. Panicked hands will bail, and when they’re finished, we’ll begin the slow march up against the wall of worry.

Indeed, the implied volatility of the S&P 500 has spiked, where the short term contract (mid-September expiry) is hovering around the 35% mark, while the October contract is at 40%. This massive diversion is due to the anticipated effects of the US presidential election on equity markets.

In general, I would be a seller of volatility going into the election.

Finally, this is not to say there will be economic headwinds that will cause issues in the marketplace. But this is going to be a 2021 story, not 2020. All of this nearly free money provided through quantitative easing, central bank asset purchases, and the provision of massive government fiscal deficits will have consequences. The analogy is that the shot of meth has been given to the patient and the patient has been feeling really good. But this high only lasts for so long before you either have to pump up the patient again, or let the patient sober up.

Just Energy – the conclusion to the recapitalization

In regards to Just Energy (TSX: JE), after a suspenseful suspension of the recapitalization proposal meeting, a couple days later an agreement with substantially most of the shareholders and debtholders was struck.

On August 26, there was agreement to amend the following:

* pay accrued and unpaid interest in cash on the Subordinated Convertible Debentures until closing of the Recapitalization,
* issue C$15 million principal amount of new subordinated notes (the “New Subordinated Notes”) to holders of the Subordinated Convertible Debentures, which New Subordinated Notes will have a six-year maturity and will bear an annual interest rate of 7% (which shall only be payable in kind semi-annually),
* pay certain expenses of the ad hoc group of convertible debenture holders, and
* issue approximately C$3.67 million of common shares by way of an additional private placement to the Company’s term loan lenders at the same subscription price available to all securityholders pursuant to the New Equity Subscription Offering, proceeds of which will partially offset the incremental cash costs noted above.

All other terms of the Recapitalization remain unchanged.

The cash interest payment will save the debentureholders about (JE.DB.C) 1% and (JE.DB.D) 3% of par, and the $15 million debt issuance, assuming par, will be another 6 cents on the dollar. Debentures did jump up by a factor of 2 upon the recapitalization, and so did the preferred shares – clearly both classes were anticipating a CCAA proceeding.

The common shares also jumped upon the news, but traded lower from the morning spike throughout the day after approval.

Now, what is odd is that the news of the amended terms of recapitalization, coupled with the voting support agreements came by way of press release on August 26, at 8:27am, eastern time. The actual approval came on August 27, 5:32pm (after market close). On the morning of August 28, trading spiked up. There was a full two trading days where if one was alert, you could have sucked up a few bits of liquidity on the common shares and debentures:

Volume, August 26:
JE: 505,700 shares, VWAP 0.4315
JE.PR.U: 41,000 shares, VWAP 0.9997 (note: par value $25)
JE.DB.C: 113,000 par, VWAP 16.687
JE.DB.D: 139,000 par, VWAP 16.22

Volume, August 27:
JE: 349,850 shares, VWAP 0.4023
JE.PR.U: 100 shares @ 1.16
JE.DB.C: 93,000 par, VWAP 17.442
JE.DB.D: 18,000 par, VWAP 16.914

Dollar-wise, while we’re not talking about gigantic amounts of money, but for the small guppies out there, you could have made quite a few sushi dinners out of the gains from sucking up 5-10% of the average volume. Sadly I was asleep at the switch as well.

No positions, but this was rather fascinating to watch.

Apple – assimilating the S&P 500

Look at this chart since the COVID crisis period (March):

With a market capitalization of $2 trillion, they are now 6.75% of the S&P 500. You buy $100 of S&P 500, $6.75 goes into Apple automatically, without regard to its price.

Along with Microsoft, Google, Facebook and Amazon, that’s 23% of the index in 5 companies.

This is a well known fact. However, portfolio managers that are measured by performance relative to the S&P 500 will find it difficult to keep up if these five companies are the only ones appreciating while the rest are stagnating – so they’ll hedge by putting 23% of their assets in these five while playing the stock market with the other 77%.

Eventually this assimilation of the S&P 500 will get so large that the numbers become truly ridiculous – already rationalizing a $2 trillion market capitalization on an annualized net income of $60 billion – that’s a lot of growth expected from an already large baseline!

Canadian investors shouldn’t find much solace in the TSX either – the Composite’s top component right now is Shopify with 6.16% of the index. However, the rest of the companies aren’t the high-flying technology companies as seen in the S&P.