Canadian Finance, Economics and Fiscal Analysis
May 6, 2010 was the most volatile day in the marketplace in 2010. Here is a series of pictures:
Capital was rushing into the US dollar, US treasury securities and Gold – three major pillars of stability.
Neutral were energy commodities.
(Update: This post is already obsolete – this post was written before the 9% spike down in the major indexes!)
This week is the first week in a long, long time where my portfolio has taken a dive. I suspect it has been the same for others. If right now was the end of the week, it would be around -3%. This is not a reason to panic by any means, I think my financial strategy is appropriate for myself and I have enough cash (or cash-like instruments that can be liquidated) to take advantage of a “real” downturn, especially if this Greek crisis turns out to be something significant (which I do not believe).
However, what is interesting is to see what else has dropped:
– Canadian Dollar vs. USD: down about 5%
– Crude and Natural Gas (in USD): down about 8%
– Gold: Interestingly, not much change, if not a little higher.
– S&P 500, TSX 60: down about 5%
– 5-year government bond yields: down from about 3% to 2.8%
– Implied future 3-month interest rate changes: Lower; December 2010 to 1.70%; June 2011 to 2.37%
What’s odd is why Gold (which is a commodity that got hammered during the 2008 financial crisis) has not tanked with the rest of the market. Maybe there is a fundamental psychological shift in action.
The other comment is that the consumption of fossil fuel energy is not likely to abate with the Greek crisis, and most Canadian oil-related stocks have been hit. I’ve always thought that if you are a consumer of fossil fuels (which almost everybody in society is), it is wise to hedge this with ownership in some energy-producing assets, purchased at the right price.
This post is not to be taken seriously, but if you actually tried it, it would work.
Steps:
1. Have marginable assets (i.e. shares of widely held and liquid companies) in Interactive Brokers.
2. Withdraw cash from Interactive Brokers. For every $100 in shares you have, you will be able to borrow $70 in cash (using Canadian shares of widely held companies as an example, which allow for 30% margin). This obviously leaves zero room for a decline in equity price, so you would have to judge accordingly.
3. Observe margin rate. Currently 1.753% for the first $120,000 and 1.253% for the next $980,000.
4. Deposit cash proceeds into Ally, with a current interest rate of 2%. (Note: The risk here is that Ally would go belly-up, and CDIC only covers $100,000).
5. Whenever the margin spread goes to zero, close the transaction.
6. When it comes to tax time, remember to deduct the interest expense (margin) against the interest earned.
Assuming you had $142,857 in stocks in your account, you could conceivably pull out $100,000 cash and be able to earn an extra pre-tax $247/year, at current rates risk-free!
Obviously there is a limit to how this scales up, but you can easily see how the same procedure can apply to anything else with a higher yield. The risk you have to manage is the risk of losing principal on the investment (in this case you are investing in cash earning 2%, but in real-life scenarios people would typically invest in preferred shares or corporate debt or any other yield-bearing investment), liquidity risk (if another 9/11 happened and you were not able to sell your shares, you would be in trouble) and margin risk (making sure that you are not forced to liquidate the holdings).
Borrowing money at low rates and investing it in higher rate products is what banks and insurance companies typically do, but there is no reason why retail investors, assuming they know what they are doing, can’t get in the action as well.
The National Bank of Greece has an issue of preferred shares which trades on the NYSE that gives out $2.25/year in quarterly payments. Right now they are trading at an implied yield of 12.8%, assuming they actually pay. They are non-cumulative, and callable @ $25 in 2013, but this seems to be unlikely at the moment.
Yield chasers might note that if the crisis continues to worsen, 12.8% might go significantly higher, so market timing is a critical element in picking it off.
I won’t be touching these securities, I have a strict rule against investing outside my depth, and certainly the internal political situation and the dynamics of the Greek banking sector are far from my field of expertise.
A trading example (of which I did not participate at all) of the day – the company in question is Pacific & Western Credit Corporation:
We see the stream of trades:
| Time | Price | Shares | Change |
| 14:11 | 3.000 | 200 | -0.250 |
| 14:11 | 3.010 | 400 | -0.240 |
| 14:11 | 3.000 | 3,000 | -0.250 |
| 14:11 | 2.760 | 900 | -0.490 |
| 14:11 | 2.900 | 500 | -0.350 |
| 14:10 | 3.160 | 5,000 | -0.090 |
What happened?
Some guy put in an order to sell 5000 shares, and got filled in at 3.16. This might have triggered a stop order, which was sent to the market at the nearest available bids, in this case 2.90 and 2.76. The market maker likely stepped in at this point and picked up shares at 3 and above. Right now the bid-ask is 3.12-3.17.
The advice I have for absolutely everybody is you should never, EVER use market orders. If you must hit the market, enter in a limit order buy at the ask or above, or a limit order sell at the bid or below, but never use market – it is just giving a blank cheque to people that most certainly rip you off.
Whoever was on the selling end of those 900 shares at 2.76 paid about $360 for the privilege of getting rid of their shares at a low price.