Correlations between rates and equities is reversing

One of the “elephants hiding in plain sight” in 2018 was how the market reacted in February 2018 during the volatility crash:

This chart takes a few seconds to mentally digest, but the key point is that during the beginning of February, the correlation between the 30-year treasury bond yield and the S&P 500 decoupled. Normally market crashes have the tendency of having investors flow capital into long-term treasuries as a safety valve but this did not occur.

What’s happened over the past week is that the 30-year treasury yield has spiked 20bps from roughly 3.2% to 3.4% and the S&P 500 has edged down during that time period. While the equity moves were relatively low (within the bounds of regular volatility), it is increasingly evident that long-term government treasury bonds are no longer being regarded by the market as a haven of safety.

If/when the markets decide to crash, it is quite likely that long-dated treasury bonds will be crashing at the same time and cash/short duration will be the only safe haven when this occurs.

Canadian interest rates are also creeping up as well.

There are going to be bargains here and there, but in general, most investors are going to face some serious headwinds going forward. Cash is king in these situations.

Element Fleet Management

This is a short note – when Element Fleet Management (TSX: EFN) blew its February quarterly report and the stock crashed (and continuing a downtrend that has went on for years), it got my interest. I even put the stock on my quote monitor and watched it. I never pulled the trigger on it, but I do remember staring at the bid-ask when it was hovering around $4 and thinking to myself “this would be a pretty good time to buy”.

Specifically I remember the day in March where they spiked down on a panic dump and thought to myself that the stock would trace down to roughly those lows and I’d be able to get some shares at $3.25-ish. Of course the downward momentum will continue indefinitely! They haven’t even appointed a new CEO yet!

As you can see from the 1-year chart, oops! My fault for being such a cheapskate.

Anyway, this one is now in my “missed opportunities” folder. Won’t be the last.

Today’s financial insanity – Tilray

I’m not sure what to say about this chart other than “holy crap”:

With a market capitalization now of $21 billion, Tilray is worth more than (insert the names of any companies that actually have real businesses with real profits here).

Short borrow rates are 500%:

Put options at a strike of $100/share, expiring in November, trade for around $25/share.

The only reason why anybody with two brain cells left with a bid on this one are the auto-indexers and the people that are receiving a margin call of the century going short against this one.

Readers should not be surprised to know the purported business of this company is cannabis production. Their only quarterly report to date (as you can see by the stock chart above, they have not been public for very long) is here (Link to 10-Q).

I have not seen this insanity since the dot-com era of 2000. Be careful. It ends badly.

Somewhat disappointed by Enbridge buyout offer

I’ve been writing about Enbridge (NYSE: ENB) and their process of re-acquiring their daughter entities, including EEP, EEQ and ENF. They already formalized the arrangement with Spectra Energy Partners (NYSE: SEP), which I wrote about earlier.

For EEP, I was anticipating a slightly higher exchange ratio (0.35 vs. the 0.335 offered).

I own call options in EEP. Valuation-wise they should trade like call options in Enbridge, with a minor dividend differential (EEP will declare one more $0.35 distribution for the quarter which option holders will effectively receive by virtue of the exchange arrangement, which will be offset by Enbridge’s quarterly dividend).

Enbridge is getting a steal of a deal on EEP – once the Line 3 expansion project becomes operational (scheduled for 2019 and unlike Trans-Mountain, the regulatory way has already been cleared for construction), the amount of cash flows available will be even more immense than the existing $6.6 billion/year they are currently doing (just eyeballing their June 30, 2018 financial statements). Once stripped of all the politics and drama of pipeline construction, it is a pretty boring company to analyze, but one that is a reasonably valued blue chip component in anybody’s portfolio. The fact that there is so much protection in the industry will assist, in addition to them being able to raise rates at the rate of inflation, while paying down their debt in nominal dollars.

Enbridge is also the type of company that would be able to survive an economic recession – as long as the oil flows. And oil will be flowing for a very long time.

I’m holding onto my call options in EEP. They expire in 2019 so I am in no rush to liquidate the position – as ENB appreciates (and it will), the call option position will also reflect this. I can see ENB heading to around CAD$48-50/share by the end of the year which would put EEP at around $12.60 with a 0.77 CAD/USD. Once I’ve squeezed another dollar out of the position I’ll probably sell the options.