Very good abstract financial advice

David Merkel writes an article he titled “The Future Belongs to Those with Patience“, but the summary explanation is about how peoples’ expectations drive asset values. Waiting for when expectations are low and investing will generate superior returns. Easier said than done.

The article he wrote contains very powerful information and is well worth reading in entirety (along with most of what else Merkel writes), but is probably too abstract for those that are not in tune with the marketplace to understand. I believe it was a Warren Buffet quote that said “There are no called strikes in investing”, and using this analogy, it is if you are playing a game of baseball and every (investment) “pitch” equates to every security you end up researching. The only difference is that in a real game of baseball you’re out if you receive three good pitches and don’t swing, while in the investment world you can still wait for that perfect pitch.

Since the third quarter of 2011 I have been averaging at about a 70-90% cash balance. I started deploying this late in the second quarter of 2012, and am currently sitting on around 30% cash. I don’t know of many people that can keep large cash balances for a significant length of time – it is easy to get “itchy” and take a swing at some marginal bets. This is how you lose capital.

Genworth MI Canada update

I am generally skeptical of stocks when they do parabolic-type increases that we have seen over the past two weeks of trading, but the obvious conclusion is that somebody presumably wanted to get their hands on some shares of Genworth MI Canada (TSX: MIC) quickly.

My theory is that whoever decided to do the “dump the shares slowly starting April until they’re gone” sale was gone after the couple high volume days in late July and then it was off to the races once that supply dump was concluded. This is one of those rare moments where I have some technical analysis insight (but alas it is still backward-looking).

What I find rather funny is that I (hopefully) timed the bottom relatively well (my average price is around $18/share) but I still feel quite bad that my entry wasn’t perfect. That is the emotional feel. The cold, hard rational world of mathematics, however, says that it is impossible to pick that exact bottom – you will not be that person picking up shares at $16.72 unless if you are very lucky and getting 100% of what you wanted in your portfolio at that bottom price.

With any luck the stock will get around to book value, which is around $26.30/share when you strip out intangibles. It won’t be a straight line otherwise I will start to really get worried. The dream scenario is if they’ve found somebody to buy out the subsidiary business of Genworth (NYSE: GNW). Heaven forbid if they fetch a premium to book value.

I will warn readers that now that I have a tendency of picking tops and bottoms when writing about upward and downward price spikes, respectively!

Raising cheap debt capital

Cenovus Energy (TSX: CVE) raised $1.25 billion in debt financing today. Here were the relevant terms:

TRANCHE 1
AMT $500 MLN    COUPON 3 PCT       MATURITY     8/15/2022
TYPE NTS        ISS PRICE 99.129   FIRST PAY    2/15/2013
MOODY'S Baa2    YIELD 3.102 PCT    SETTLEMENT   8/17/2012   
S&P BBB-PLUS    SPREAD 137.5 BPS   PAY FREQ    SEMI-ANNUAL
FITCH N/A       MORE THAN TREAS    MAKE-WHOLE CALL 20 BPS
    
TRANCHE 2
AMT $750 MLN    COUPON 4.45 PCT    MATURITY     9/15/2042
TYPE NTS        ISS PRICE 99.782   FIRST PAY    3/15/2013
MOODY'S Baa2    YIELD 4.463 PCT    SETTLEMENT   8/17/2012   
S&P BBB-PLUS    SPREAD 165 BPS     PAY FREQ    SEMI-ANNUAL
FITCH N/A       MORE THAN TREAS    MAKE-WHOLE CALL 25 BPS

So they can raise 10-year money at 3.1% and 30-year money at 4.46%. After taxes (assume 26%) this is about 2.3% and 3.3%, respectively. At these rates, I’d be raising as much 30-year capital as I can and figure out what to do with it later – there has to be a way to deploy it at a better pre-tax return rate of 4.46%.

Long term bond yields – creeping up

The following is a chart of the US Government 10-year and 30-year bond yield to maturity:

Up about 0.3% from their yield lows, which is fairly significant. Now the $64,000 question is: Is this just a short squeeze, or do yields shoot higher from present?