Quick market commentary

The month of March (up until the 23rd) was like pushing on a spring, where people and funds were getting cashed out on margin.

We’re still on the spring back. How high this will go is anybody’s guess, but my trading instincts suggest it’s probably a good time to take a few chips off the table, at least temporarily. There will be some ‘rebound’ news that will get injected into the the world that things aren’t as optimistic as projected, that the lockdown will have to last for longer, that secondary infections will come back from people previously confirmed without the virus (when it probably turns out that they were false positive diagnosed to begin with and just caught Covid-19 from somewhere else), etc. There is also the element of sheer greed from participants that want to make the quickest buck.

The rebound down will take the market down 3 or 4%, the people that have loaded up will get frightened and dump, a bunch of people will panic over the revenge of the Coronavirus and that’ll likely be the best time to load up, just when it looks like things are getting awful. The speed that this is all happening, however, is quite remarkable. The market action is happening three times as fast as the 2008-2009 economic crisis.

You’re not going to get anywhere close to the bargain pricing you saw in March but there’s still considerable upside coming as long as you avoid the sectors that are sensitive to the “main street” economy (e.g. I wouldn’t want to be owning a sports franchise).

Continue to pay attention to debt covenants, but note that credit is going to become easier to get as the corporate debt market normalizes (this is what happens when the central banks are buying corporate debt – they’ll clear out the investment grade, which means banks can loan to the BBB, BB and Bs of the world). As long as there aren’t significant maturities coming up in the next 12 months or so, you’ll probably be fine if the debt loads are ‘reasonable’. This crisis will also scare a lot of corporations into de-leveraging or lightening up on leverage – the better capitalized companies will likely clean up better in this environment. Entities that should be trading at low yields (e.g. Rogers Sugar, RSI.DB.E/F) are already at a YTM of 600-650bps while just a few weeks ago they were well into the double digits. Of course, the trashy companies are trading in the teens and above still, but even then the ones that generate reliable cash flows will get back to normal (looking at Chemtrade).

The time to buy stocks…

… is not when the S&P 500 is up 6%. There will be down days of 2-3% when further news comes out of some catastrophe occurring, but the markets are now going to be in a “two days down, three days up” mode for the indefinite future as the waterfall of ZIRP money hits the market.

Now is the time to take a look at the individual components of your portfolio. Things that are trading at a P/E of 20 might not look cheap, but in a zero rate environment, it’s better than the alternative! If you have stocks that are up above the average, ask yourself why, and then consider adding when we get one of those down days.

Likewise, if your stock is down on a day when the main indicies are up heavy, ask why and guess whether there will be a ‘regression to the mean’. If your stock is fueled by index purchasing to begin with, then momentum trading is the way to go.

Companies using Covid-19 to cut dividends

Do not rely on the reported “current yield” statistic on nearly any stock out there. There will very likely be changes.

Companies that have regular dividend policies always find it difficult to reduce them or even scrap them entirely since there is an expectation of a return from their shareholder base. However, never letting a good crisis go to waste, you’re starting to see some action on this front.

If you think the banks are immune, HSBC Hong Kong scrapped their planned 4th quarter dividend (amusingly, there is a news article about shareholders planning a lawsuit – good luck suing yourselves!). You’re probably wondering about the Canadian banks, and they are too – calculating what their net exposures are. Securitized residential mortgages they can dump to the Bank of Canada, but on the commercial loan side of things, I’d expect their losses to rise significantly. The question is how much? For psychological reasons I do not think they will cut dividends, but Canadian banks are very opaque entities to analyze and you just never know when they will go on the brink. Entities like Deutsche Bank (DB) have always looked good on paper, but without having good granularity on their loan portfolio, who knows what the heck you’re investing in?

Food Service: On April 1st, A&W (TSX: AW.UN) suspended distributions. Their historical rate used to give out 15.9 cents per month, but clearly the take-out business is not nearly as strong when there is zero foot traffic. I wouldn’t be surprised if the Keg (TSX: KEG.UN) followed (they have yet to announce) but their units have already gotten hammered 50% from their ambient levels pre-Covid-19. MTY Group (TSX: MTY), owner/operator of a couple thousand restaurant franchises, announced they will scrap their next quarterly dividend.

Aviation, not surprisingly, is not doing well. Chrous Aviation (TSX: CHR) is suspending dividends. CAE, maker of very good flight training simulators, suspended dividends.

The list will continue. REITs, in particular, I think are prone to have distributions reduced as they need to build capital on their balance sheets to restore their debt to equity ratios to proper proportions. Since real estate is not the most liquid asset, it will take time for those fair market values to be reflected, but anybody relying on the price-to-book ratio should be cautioned that fair market value adjustments go down as well as up!

TSX Companies that bought back shares during the last week

Here’s a quick list of companies that reported purchasing their own stock on the open market last week:

TSX Company Buybacks - March 30, 2020 to April 3, 2020

NameTicker
5N PlusVNP
Aecon GroupARE
Alamos GoldAGI
Alimentation Couche-TardATD.A/B
Atlantic PowerATP
Badger DaylightingBAD
BMTC GroupGBT
Brookfield Asset ManagementBAM.A
BSR REITHOM.UN
CAECAE
Canacol EnergyCNE
Canada Pacific RailwayCP
Canadian Western BankCWB
Capital PowerCPX
CGIGIB.A
CIBT Education GroupMBA
ClarkeCKI
CRH Medical CorpCRH
Crown Capital PartnersCRWN
Dream Hard Asset AlternativesDRA.UN
Dream Office REITD.UN
Dream UnlimitedDRM
EcoSynthetixECO
Enterprise GroupE
Evertz TechnologiesET
Exco TechnologiesXTC
Finning InternationalFTT
GamehostGH
Gear EnergyGXE
Grainte REITGRT.UN
iA FinancialIAG
Input CapitalINP
InvesqueIVQ
LogistecLBT.A/B
Manulife FinancialMFC
Maxim PowerMXG
MBN CorpMBN
Melcor DevelopmentsMRD
MetroMRU
Middlefield Can-Global REITRCO.UN
Mullen GroupMTL
NorbordOSB
North American Construction GroupNOA
NorthWest Healthcare Properties REITNWH.UN
NutrienNTR
Pivot TechnologyPTG
Points InternationalPTS
PrairieSky RoyaltyPSK
QuebecorQBR.A/B
Real MattersREAL
Royal Bank of CanadaRY
StantecSTN
TFI InternationalTFII
Toromont IndustriesTIH
Tree Island SteelTSL
Vecima NetworksVCM
Western Energy ServicesWRG