Beginning the volatile ascent upwards

There is always something to remember regarding the tops and bottoms of markets – they are the most gut-wrenching volatile periods where there are fortunes to be made buying and selling.

The markets over the past three months have mostly been a slow ascent upwards, but lately the sentiment has changed where “cash is trash” and you are starting to get retail into the woodwork – typically a huge yellow flag.

What the natural progression in these market cycles are is that retail will get involved to the point where every Joe and his/her neighbour will have to get into the equity side of the market because so many people around them are making too much money in the stock market. This is like shades of what happened in 1999 and early 2000 before the whole market collapsed during the Internet bubble collapse.

I’m not saying the market is bubbly – in fact, valuations are relatively reasonable (e.g. the two largest components, Apple and Exxon are trading at surprisingly reasonable valuations) but in order for there to be a top, expectations need to be at a maximum. I simply do not see the expectations to be at a maximum quite yet, and thus we will likely have more volatile trading that has an upward ascent.

Things are likely to get a little more exciting in the next few months.

Chesapeake Energy CEO quits

The CEO of Chesapeake Energy (NYSE: CHK) announced his resignation today, pending the confirmation of a successor being hired.

Because the CEO was a very flamboyant abuser of his position in the company (and for most intents and purposes is a poster child for anti-business political movements everywhere) the stock price will shoot up tomorrow – the market essentially communicating that the CEO was a liability to the company.

Although getting rid of him was a first step in many that has to be implemented to truly heal the company, I would anticipate once the primary shareholders get somebody in to thoroughly analyze the situation that they will find more bugs hiding underneath the rocks once they turn them over. It will probably take them a year and a bit to clean up and subsequently I would not want to be owning any stock while they clear out this baggage. Sentiment needs to get worse.

Cautious on rising indexes

The S&P 500 is up about 5% year-to-date, even including Apple’s fall from the stratosphere (which was its largest weighted component).

spx-annotation

Although I don’t see signs presently of a speculative euphoria on equities quite yet, the moment that I start seeing publications like the Drudge Report or equivalent reporting on the rise of the stock markets will probably be the best signal to start scaling exit positions and building cash reserves.

Interest rates not going up anytime soon

The Bank of Canada announced they were leaving interest rates unchanged. The salient paragraph was the last one:

Reflecting all of these factors, the Bank has decided to maintain the target for the overnight rate at 1 per cent. While some modest withdrawal of monetary policy stimulus will likely be required over time, consistent with achieving the 2 per cent inflation target, the more muted inflation outlook and the beginnings of a more constructive evolution of imbalances in the household sector suggest that the timing of any such withdrawal is less imminent than previously anticipated.

This basically means that short term rates are not going to increase for at least half a year, but likely for the rest of 2013. BAX quotes reflect a slight expectation of higher rates approaching the end of 2013:

Month / Strike Bid price Ask price Settl. price Net change Open int. Vol.
Open interest: 543,666 Volume: 171,501
13 FEB 0 0 98.745 0 0 0
13 MAR 98.710 98.715 98.710 0 101,834 14,761
13 APR 0 0 98.695 0 0 0
13 JUN 98.710 98.720 98.720 -0.010 119,478 45,715
13 SEP 98.680 98.690 98.690 -0.010 113,065 42,119
13 DEC 98.640 98.650 98.660 -0.010 90,020 34,371
14 MAR 98.590 98.600 98.610 -0.010 56,655 19,399
14 JUN 98.540 98.550 98.550 -0.010 31,336 9,242
14 SEP 98.480 98.490 98.490 0 14,456 3,892
14 DEC 98.410 98.430 98.430 -0.010 9,608 1,602
15 MAR 98.350 98.370 98.370 0.070 4,925 94
15 JUN 98.280 98.300 98.300 0.080 1,185 17
15 SEP 98.220 98.240 98.240 0.070 754 182
15 DEC 98.150 98.170 98.170 0.060 350 107

The important figure is the 10-year government bond and its yield has not gone anywhere over the past year:

bond-yields_STATIC_V39055_en

The implications here is that if there are going to be disruptive changes in asset prices, it is unlikely to result from interest rate changes. This would suggest that the REIT market and other yield-driven markets will continue to receive demand as investors clamour for yield. I also suspect that real estate asset prices will continue to exhibit a slow deflation rather than a bubble popping.

Genworth Financial restructures US mortgage insurance assets

Genworth Financial (NYSE: GNW) is up about 9% today on news that it will be implementing a plan to re-arrange the capital structure behind its US mortgage insurance units in such a manner that will basically leave the parent company with less “blow-up” risk concerning that business. This is assuming they receive regulatory approval, but this announcement surely would not have been announced had it not been floated by regulators first.

The implication for its majority-owned Canadian mortgage insurance subsidiary (TSX: MIC) is that there will be no requirement for a fire-sale of the MIC asset to raise capital for GNW.

MIC is up approximately 35% from its lows in July and August when I started to accumulate shares and GNW is up about 80% from the $5 baseline it was sitting at for the past year before this recent run-up. I guess I should have put money into GNW in addition to MIC, but I couldn’t make heads or tails out of GNW’s statements to a firm enough clarity for my own satisfaction.

At this point I am awfully curious whether GNW is still shopping around their Canadian mortgage insurance subsidiary or whether they’re just going to keep their ownership stake and collect dividend cheques. Genworth owns 57% of MIC and this represents $65.3 million in dividend income for them – 13 cents a share.