Divestor

The past two weeks in the markets have seen the S&P 500 go down a whopping 3% from its rough highs of 2120.

While I do see some signs of margin selling, it is still quite light and I am still not interested in dipping my toes further in the market.

I would love to see evidence of large-scale margin liquidations in illiquid securities. That makes me salivate financially, but we are another 100 points away from the S&P descending further before this may happen.

A few other points:

* 30-year US treasuries seem to have peaked at 3.2% and are now trading at 3%. The 3% gain you would have lost in the S&P 500 you would have gained by investing in long-term treasuries.

* The Canadian currency has also been hacked to death and BAX futures are hinting, but not fully pricing in, the notion of another interest rate cut to 0.5%. If the Canadian currency slips further I will likely convert some USD to CAD, likely around the 76 cent level. This seems to be directly correlated to the drop in oil prices.

* If the technical glitch on the NYSE was determined to be caused by hackers, I am curious how this would be priced into the markets.

Positions:

Happily majority cash.

I have substantially liquidated a large position in my portfolio today and am sitting on an approximate 50% cash position yielding precisely 0.00%. The majority of this is denominated in US currency. I have no interest in swapping it for Canadian currency at this time.

For various reasons, while I have thought about investing cash temporarily in 30-year treasury bonds, at this time I prefer the comfort of plain cash. There are quite apparent liquidity issues concerning US treasuries (on an institutional level) that alerts my brain to a form of tail risk that I can’t quite express in words.

I have substantially completed nibbling on a small equity position in a company that I have not disclosed but since I am aiming for a 2% position and have obtained 1.3% to date, you can guess what kind of conviction I have for the underlying company. Looking for a double in a year for the reasons that the market is pricing in worse profitability than what will actually occur, and the industry the company is in can be described as fairly un-sexy at present.

Pinetree Capital (TSX: PNP.DB) will be redeeming more debentures at the end of this week and this will also result in a further injection of cash. There will likely be another redemption notice coming between now and the end of August which will clear out half of the remaining position, and the last half will occur between October and maturity (May 2016).

My largest equity holding is now Genworth MI (TSX: MIC) that I have held on since 2012. At its current price I am not interested in liquidating or purchasing more shares.

I am completely out of ideas and thus the next seven months may be a very boring period of time for portfolio management. I have a bunch of interesting companies that I have researched, but valuations are nowhere close to the point where I would pull the trigger. Examples include cash generators like Rogers Sugar (TSX: RSI) where I would ideally purchase under $4 a share. Companies like this I have on my watchlist, but are nowhere close to where I would want to purchase them with an acceptable margin of error.

I would not want to be a portfolio manager for a firm that required 100% deployment of capital. The decisions at this point would not be pleasant and I would take an extreme perspective of putting capital in the most defensive equities as possible. Most (if not all) of these have been bidded up due to the low interest rate environment.

For now, I wait and twiddle my thumbs.

Here’s an article on the CBC about the state of high beef prices (and how they are here to stay for years to come).

There are a few lessons here.

One is that these market-affecting events typically have causes that span a timeframe greater than a calendar year. For instance, this spike in pricing can likely be traced back to 2011 when there was a significant drought that affected most of the corn and grain-producing regions in the USA. The drought was a multi-year event.

When cattlemen cannot obtain enough feedstock for their livestock, they switch to liquidation mode. Beef prices paradoxically went to relative lows at the beginning of the drought but have skyrocketed (as far as food inflation prices go) ever since.

It will take some time for the supply-demand balance to restore itself. However, the other lesson here may be one of demand destruction – have steak prices gone high enough that people will permanently reduce their demand for the product, resulting in a reduction of overall volumes?

The analogy to the crude oil market is also fairly straight-forward in terms of things not coming to any equilibrium over the span of a calendar year.

Retail prices of beef (and other food products) over the past few years are available from Statistics Canada. Onions, carrots and white sugar are the only three things that have dropped in price from April 2011 to April 2015. (As a side note, celery is roughly equal in price, and onions, carrots and celery make the staple Mirepoix that is a classic mix for sauteing, so at least I won’t be giving that up in my diet).

A couple ways of playing the beef situation financially that come immediately to mind (although both do not make any sense under the circumstances). One are through food processors, e.g. Tyson Foods, (NYSE: TSN). There are few “pure beef” processors out there, but one that does come to mind, indirectly, is Leucadia’s (NYSE: LUK) very ill-timed purchase of National Beef Packing Company. I have no interest in either company (either short or long).

For those brave souls, however, cattle futures on the CME are the purest play on beef prices. They are not the purest play on beef volumes, however, which would be easier to play than the price of beef.

Anecdotally, I have noticed my own consumption of beef (especially my favourite cut of steak, rib-eye) decline as I generally look at the opportunity cost of the CAD$27/kg price vs. other meats that I am equally competent at cooking. Also there is the other option of buying tougher cuts of beef and a competent cook can prepare these in a manner that are palatable (e.g. thin-cut stir-fry), but it just isn’t the same!