Firing on half cylinders

It has been an infinitely frustrating process when you place long orders and have them completely blown away (unfilled) by market action. Like we are not talking about missing by a dime or two, we are talking missing out by 5% gap up trades.

That said, the majority of the portfolio that has been invested in the market has caught a huge tailwind. I expect it to continue.

Remember during the 2008-2009 economic crisis where in retrospect you could just stick your fingers on a multi-year stock chart on those two years and pretty much where things ended in 2007 where were they were trading at 2011? That’s the sort of scenario I envision happening, except about as fast as it did coming down.

I always remember the cliche of that psychologically there is a feeling of regret when there is a winning trade that you always wish that more capital was deployed. Tempering that feeling is knowledge of hindsight bias – one usually never thinks about the scenario where the trade goes south.

I’m going to make an observation which may or may not come to fruition. During the CoronaCrisis, I noticed that Kitco and other physical gold vendors were having significant capacity issues which is a sign of very high retail activity. Most of the inventory was sold out or shipping delayed until well into June. My speculation is as the market and economy makes a recovery that gold will continue to lag again in favour of other commodities despite the extremely loose monetary policy. Once the S&P has peaked, it’ll probably be a better time to get into physical gold – chances are by then the Canadian dollar will also have appreciated.

Marijuana stocks

Why anybody continues to invest in this sector is beyond me. But for whatever reason, over the past 7 trading days, Canopy Growth has skyrocketed – yes, this is over a 50% surge up:

I’m not short the stock, but those that are are obviously hurting. It is a heavily shorted stock, with about 40 million shares short on the US side and 11 million on the Canadian side, with a cost of borrow of around 25% (assuming you can actually get shares to borrow).

While I’m not the type to gamble on these stocks, my gut instinct says that it might Tilray these short sellers before crashing again. In March 2019, they reported CAD$4.5 billion in cash and marketable securities on the balance sheet, and at the end of December 2019, it was about C$2.3 billion, an impressive cash burn trajectory. While Constellation Brands did exercise C$245 million in warrants on May 1st, I’m sure Canopy would love another opportunity to raise cash again!

I’m guessing all of these Robinhood and Wealthsimple investors have been happily buying shares. Who knows, they might have the last high!

Costs and inflation

The post-COVID-19 world is going to incur a material extra cost to doing street level business, at least if they want to do things “by the book”, which includes abiding by yet another layer of regulatory burden from health and worker’s compensation board agencies, lest the authorities pull your business license. Individuals can flaunt the unwritten laws of social distancing with little consequence, but businesses have much more to risk if they do not toe the line.

Getting plexiglass installed, and distributing masks and faceshields to employees, isn’t free. The labour to disinfect everything and to maintain it, isn’t free. Having your square footage utilization ratio decrease by a factor of 2 or 2.5, most definitely is not free, especially in urban centres where retail leasing prices are (or were) sky-high.

Good example of an article: Shops are reopening after COVID-19, and some are adding a new line to your bill to pay for it.

Psychologically speaking, a surcharge is ill-advised in competitive businesses. Customers will feel like they’re getting ripped off. Smarter businesses will embed it into the sticker price.

But the underlying point is that within businesses that have to deal with other human beings close and up-front, fixed and variable costs are going to increase. This is a cost burden that all such businesses will have to face, so it will give a natural competitive advantage to those that don’t have to put up with such costs, or those that can amortize fixed costs over a wider base.

These costs are not going to materially add value to the customer, but because they will be spread amongst all in-person business participants, the customer will have to pay for them.

If it isn’t obvious already, businesses that do not have much in the way of a physical presence will gain one more competitive advantage, relative to those businesses that serve customers in-person.

Minor site administration note – Comments

A few weeks ago, in response to a comment that the “email when there are new comments” function on my previous system was not working at all, I replaced the comments engine with this WP Discuz plugin, which appears to have better functionality in addition to actually supporting the feature.

I’m happy to report this system appears to be working well.

On a recent post, somebody had posted a couple links in the comments, and ordinarily posts with two or more links would go into the moderation queue (a ton of spam contains multiple links per comment). I’ve now raised this limit to 3 links or more before I have to manually moderate comments.

Cash parking – why bother?

A year ago, if you had spare cash in the brokerage account, it made sense to dump it into a cash-parking ETF such as (TSX: PSA) and get your 200 basis points of yield while you waited to make a decision on your capital.

You can see the effect of the decrease in interest rates from the Bank of Canada:

Now cash in this instrument yields 65 basis points, minus a 15 basis point MER, leaving a net of 0.50%. Might as well keep it in zero yielding cash instead of bothering with the hassle.

I found it amazing to know that despite the decrease in interest rates to nearly nothing, that PSA’s assets under management is still $2.2 billion! The managers are being paid $3.3 million to administer a savings account.

I note that one of their competitors, (TSX: HSAV) had to decrease its management expense ratio from 18bps to 8bps. Its gross yield pre-MER is 75bps on a $313 million net asset value.

Might as well keep it in liquid cash at this point. Who knows if the market maker will decide to have a heart attack and you can only liquidate with a 25 cent spread at the worst moment?