Divestor

The month came and went, and despite all of the theater of Gamestop and the rest of the overall market, there weren’t any portfolio actions of note (some minor tweaking here and there, but it was some minor trimming and minor purchasing of existing positions, less than 1% of the portfolio).

In general, since the November “Biden jump”, many targets of opportunity out there have jumped up in price and presented themselves of being far less compelling than in 2020.

As a consequence of the two takeover offers that occurred in January (FLIR Systems (Nasdaq: FLIR) and Atlantic Power (TSX: ATP)), coupled with an imminent call of Gran Colombia Gold Notes (TSX: GCM.NT.U) and Bombardier’s inevitable debt repurchase offer, my effective cash position is in the teens at present. I’m still being paid to wait with these positions (merger arbitrage and collecting bond coupons is great, but oh-so-less exciting than watching Gamestop get volatility halted 8 times a day) so I’m in no rush to clear them out due to the lack of compelling alternatives.

There was one TSX stock that I performed an intensive research deep dive on, at a valuation that was compelling enough to put in an order to take a small starter position if the market allows for it. Price-wise, it did crash about 50% peak-to-trough during the Covid crunch (March 2020) but its recovery has been tepid, in a manner that I believe is relatively unwarranted. It is most definitely not a household name. It is also unlikely to triple overnight, but it should continue to retain value. Consider this a low risk, medium-reward type opportunity – a base hit single type investment.

Other than this, I’m happy to accumulate cash.

With vaccinations on the way, we will start to focus on the real economy again, the economy that has not been artificially inflated by fiscal spending in the name of COVID-19 mitigation. This is going to present itself as a very ugly picture.

For instance, when we look at the November 2020 snapshot of Canada’s Fiscal Monitor, we see the following:

Note the GST collections: In April to November 2019 (8 months), the government collected $27.2 billion. In April to November 2020, the government collected $18.8 billion, a 31% decrease.

GST collections form the purest indication of end-consumer activity of GST-able products – i.e. non-food, non-export, non-residential rent consumption. This part of the real economy has exhibited a gigantic depression in activity. It is inescapable that this will take a very long time to recover to pre-COVID levels.

For historical context, during the same time periods, here were the GST collections for 2016 to 2020, April to November:
2020: $18.8 billion
2019: $27.2 billion
2018: $27.8 billion
2017: $25.8 billion
2016: $23.5 billion

What’s interesting is that the real economy was already going south before COVID-19 occurred.

Finally, in the belief that lightning can strike twice, the retail crowd that took Gamestop up to the roof is trying the same with the silver commodity. I couldn’t have picked a worse commodity to try to engage in market manipulation with. It all makes me wonder if this is part of some massively elaborate joke. That said, you might wish to be rounding up the cutlery in your grandmother’s kitchen – if silver heads up to $420 an ounce (funding secured), I’ll definitely be selling it.

A bunch of scattered thoughts in this post.

In more traditional times, you gave some company money, and they would issue you shares which represents a claim on their residual earnings. These companies would take your money, and invest it in machines, infrastructure or people that would produce goods and/or services that were in demand and would make money from it, taking in more cash than they spent. With the help of your investment money, they would build up surplus cash which they’d either dump back into the business (if they could generate more of a return on it) or if the market has been saturated, issue the capital back to you in the form of a dividend. While there was no set rate of return (it was highly variable, depending on cost of capital, risk of the business, etc.), generally speaking if you made a 15%/year return on investment it was considered greatly successful since the alternate, risk-free government bonds, would give you about 5%/year. The spread between the yield on debt vs. equity was a premium that an investor would demand in exchange for the increased risk of holding the equity instead of the debt.

Later, you had people buying stock from other people instead of from the companies directly. Their shares would trade on an implied return on investment, which would be comparable to the above.

Fast forward to 2020. Risk-free rates have gone to near-zero – you can’t put money into government debt and make any sort of return anymore. Asset prices have risen, so companies that have gotten a 15% return on their investments are now trading at 5% (indeed, looking at Microsoft/Apple today, that is closer to 3% on their equity at present). From an aggregate perspective, you can’t get rich quickly anymore. While 15%/year might be acceptable in older times, now, not only can you not make that with conventional investment (in the aggregate market) but at the current rates of return, it’ll take forever to double your money. What’s the point?

So hence we have money being thrown into all sorts of speculative vehicles. Just a couple months ago, Bitcoin was the big thing, where people were clearly talking about the “next currency” being a “store of value” and “they don’t print any more bitcoins”, yada yada yada. Because the organic return on Bitcoin is zero (indeed, you can make a claim that the aggregate return on Bitcoin is negative because of the electricity consumption required to maintain the network), there are no valuation metrics to constrain what is essentially narrative thinking. When you see media pick up on the notion that central banks are “printing money” (not strictly true, although their actions are completely involved in the low rates of return we see), people buy into the narrative that fuels this rampant speculation. Instead of making 15% a year, you can make that in a day!

Then we fast forward to Gamespot, AMC, and the like. Rationally, Gamespot is running a dead business, like Radioshack or Blockbuster of the past. But sensing a quick opportunity, hedge funds bidded the crap out of it and forced a presumptive wealth transfer.

The thing to always remember is that Bitcoin, Gamespot, and the like, all represents a zero sum game in the short term. There are no returns to be made other than off the capital of other market participants. GME, AMC, etc., are trading off of their value to be short squeezed, coupled with a bunch of retail sentiment that wants to gamble to get a quick return on their investment. After all, when Gamespot goes up 150% in a day, that’s a heck of a better reward than doing it the old fashioned way and spending a year to get your 5%!

For these hedge funds that were heavily short, however, it will be a catastrophic event. This will have ripple effects on the market, including prime brokers likely raising margin requirements for heavily shorted stocks, in addition to the long sides of their portfolios being culled down. This will be a forced sale process, which means it will come with volatility. This will most certainly be the first blowup after the COVID crisis, although this one will be short lived.

There will be a ton of money made by some people, and a ton of money lost. It will be irresistible to most retail participants that see this and feel like they want a slice of the action. Some indeed will do very well. While entertaining to watch, my focus is kept elsewhere.

In the US stock markets, the following is the top ten short as a percentage of float:

GME Gamestop (retail)
DDS Dillard’s (retail)
BIGC BigCommerce
BBBY Bed Bath & Beyond (retail)
LGND Ligand Pharma
FIZZ National Beverage
FUBO fuboTV
AMCX AMC Networks
MAC Macerich (malls, REIT)
ASO Academy Sports (retail)

They are ALL up, significantly. GME, in particular, has gone nuts.

It is pretty obvious that short books are getting slaughtered and are being forced to cover and/or reduce exposure.

The fear of missing out on these large price swings that occur on market tops is going to be extreme. Many people, especially inexperienced market participants, will go nuts. Most of them will not be able to time the exit, while a small minority (~20%?) will make out like gangbusters.

I have no edge in these situations and am not playing this (nor do I have stocks that are heavily shorted) but this is very fascinating to watch.