Evening Finance with Sacha, Episode 4

Late Night Finance with Sacha, Episode 4

Date: Wednesday, June 17
Time: 6:00pm, Pacific Time *** NOTE NEW TIME
Duration: Projected 1 hour.
Where: Zoom (Registration)

Frequently Asked Questions:

Q: What are you doing?
A: I’ll be talking about TSX-traded debentures and discussing some of the specific ones that are trading. Questions during this presentation, both on and off topic, are accepted. The entire universe is linked here.

Q: Why are you doing this?
A: Continuing my experimentation in video broadcasting. Who knows, I might learn something from you as well.

Q: How do I register?
A: Zoom link is here. I’ll need your city/province or state, and if you have any comments (or a debenture that you are interested in) just add it to the “Questions and Comments” part of the form. You’ll instantly receive the login to the Zoom channel.

Q: Are you trying to spam me, try to sell me garbage, etc. if I register?
A: I can hardly manage a mailing list without breaking my own website, what makes you think I will spam you? No, if you register for this, I will not harvest your email or send you any solicitations. Also I am not using this to pump and dump any securities to you, although I will certainly offer opinions on what I see.

Q: Why do I have to register? I just want to be anonymous.
A: I’m curious who you are as well.

Q: If I register and don’t show up, will you be mad at me?
A: No.

Q: Will you (Sacha) be on video (i.e. this isn’t just an audio-only stream)?
A: Yes. You’ll get to see me.

Q: Will I need to be on video?
A: I’d prefer it, and you are more than welcome to be in your pajamas. No judgements!

Q: Can I be a silent participant?
A: Yes.

Q: Is there an archive of the video I can watch later if I can’t make it?
A: No.

Q: Will there be a summary of the video?
A: A short summary will get added to the comments of this posting after the video.

Q: Is there a limit to the people that can participate?
A: Zoom limits me to 100. I really hope the number isn’t higher than 10.

Q: Will there be some other video presentation in the future?
A: Yes.

Back to normal – and re-indexing

Examining the price action of the past couple business days, I think there is a better chance than not that we have received the “flush-out” that I wrote about last week. The morning was packed with market selling before everything went up again. S&P 500 volatility spiked up to the 40% level. The trading was a bit panicky in two waves (how appropriate for COVID-19!). For the most part, I have been content to watch. There might be another ‘wave’ but I think the slow and gradual force exhibited by the central banks will force more capital into the markets.

I have been mildly tweaking my portfolio here and there, but in very minor ways. I’ve lightened up my USD portfolio concentration slightly.

Finally, I note that the TSX will be re-indexing their TSX 60 and Composite indexes next week. I always look at the entrails of index discards because typically if a company is getting trashed out of the index, the stock price tanks because of the automatic supply that gets sent to the market. However, if the underlying company has value, this is a better time than not to add. The only problem is a bunch of other institutional investors do exactly the same thing (reducing the effectiveness of this technique). Needless to say, there is a lot of money passively tracking the TSX 60 and TSX Composite, but most of it is concentrated in the top names.

How do you get into the TSX Composite? (I’ll just do a cut-and-paste job here):

To be eligible for inclusion in the S&P/TSX Composite, a security must meet the following two criteria:

1. Based on the volume weighted average price (VWAP) of the security on the Toronto Stock Exchange over the last 10 trading days of the month-end prior to the Quarterly Review, the security must represent a minimum weight of 0.04% of the index, after including the Quoted Market Value (QMV) of that security in the total float capitalization of the index. In the event that any Index Security has a weight of more than 10% at any month-end, the minimum weights for the purpose of inclusion are based on the S&P/TSX Capped Composite.

2. The security must have a minimum VWAP of C$1 over the past three months and over the last 10 trading days of the month-end prior to the Quarterly Review.

… and to get kicked out:

For Quarterly Review deletions the following buffer rules apply.

1. To be eligible for continued inclusion in the index, a security must meet the following two criteria:
a. Based on the volume weighted average price (VWAP) over the last 10 trading days of the month-end prior to the Quarterly Review, the security must represent a minimum weight of 0.025% of the index, after including the QMV for that security in the total float capitalization for the index. In the event that any Index Security has a weight of more than 10% at any month-end, the minimum weights for the purpose of inclusion are based on the S&P/TSX Capped Composite.
b. The security must have a minimum VWAP of C$1 over the previous three calendar months.

2. Liquidity is measured by float turnover (total number of shares traded in Canada and U.S. in the previous 12 months divided by float-adjusted shares outstanding at the end of the period). Liquidity must be at least 0.25. For dual-listed stocks, liquidity must also be at least 0.125 when using Canadian volume only.

In case if you were wondering, for the overall composite Index, Royal Bank is still 6% of the TSX and Shopify is currently around 5%, so no fears of over-concentration. I remember at one point Nortel was above 20% of the TSX.

Deleted out of the TSX Composite are:
AFN – Ag Growth International
AD – Alaris Royalty
BTE – Baytex Energy
BBD.B – Bombardier
CHE.UN – Chemtrade Logistics
CHR – Chorus Aviation
EFX – Enerflex
EXE – Extendicare
FRU – Freehold Royalties
FEC – Frontera Energy
HEXO – HEXO
MTY – MTY Food Group
SES – Secure Energy Services
SCL – Shawcor

I will offer some mild and not-so-useful commentary – some of these are compelling values. Some of them I’ve written about here before. I’ve looked at the inclusions and don’t like any of them.

What, markets can go down too?

Today is the start of these newly-found daytraders getting flushed out of the market.

What has happened is that apparently half of the cohort of unemployed people have entered into the casino known as the stock market with their unemployment/CERB cheques (this is a bit hyperbole – $2k isn’t going to move the market too much, but when you consider $43 billion in CERB has been handed out so far, not a trivial amount of money!), signed for accounts on RobinHood and WealthSimple, and suddenly turned into stock market geniuses buying shares of companies in Chapter 11. This is a by-proudct of many factors but very loose monetary policy is one of them. When you couple this with every institution on the planet trying to get into equities because they can’t make a return on their fixed income portfolios anymore, you will have days like today where the people with less conviction get flushed out.

Throw in a spooky headline like this:

Second wave! Second wave! Fear the second wave! Must sell because the news is bad!

Anyhow, this is why I suggested to lighten up last Friday and take some chips off the table.

This isn’t going to be a one day thing, the effect of flushing people out of the market involves having sharp down days (people getting caught long), and sharp up days (people getting caught in cash). This process rinses and repeats until monetary policy eventually kicks in, swamps the whole system with liquidity, and this gets pumped into the asset markets once again. Things are a lot faster than they were 22 years ago when this sort of thing happened in 1998 after the LTCM bust, but I’d guesstimate a week or two before the flush is completed.

I’m going to use Hertz as an example.

Visualize this. The equity of a company like Hertz (Chesapeake, Pier 1, etc., you name it) is fundamentally going to zero after it restructures out of Chapter 11. They have a fixed number of shares outstanding that are trading, and they have to be somewhere. Just because people sell it doesn’t mean the shares vanish – they are transferred to somebody else. The same goes for the cash. The only difference is that the asset value (the stock) changes.

Any sane institutional manager (I am not talking about the day traders, or high frequency traders that would have a rational reason to be purchasing the stock, but this would be for a very short term period) would have dumped out on Hertz equity if not on May 26th when Chapter 11 was announced, but they would have been guaranteed to bail out by June 8th, where there were 523 million shares traded and the stock topped out at over $5/share. Keep in mind that Hertz has 142 million shares outstanding!

So this leaves the question of – who the hell would want to own the stock after this? The institutional demand for Hertz equity will be zero – they are all cashed out and not interested in getting in. The answer has to be retail investors, where currently (at a share price of $2.10 as I write this) US$300 million of client capital is locked up. There will be some other retail investors that look at the chart, not even realizing what Chapter 11 means, and purchase the stock, and some of these retail investors will be able to get out, but you can be sure that the only bids you will be receiving will be of other retail investors, or short sellers covering the trade. (Edit: Or perhaps the RobinHood/WealthSimple brokerages simply are making a mint speculating off of their clients by selling any Hertz their customers buy and then they have a very cheap borrow!)

In these ‘flushing’ processes is that after it is done, the garbage of the market will lose asset value, while the entities that have value will later receive a wave of demand – aided in part with the cash from their sales of Hertz at US$5! The people remaining will be true bagholders, and will eventually flip the stock around to a diminishing pool of demand until it gets cashed out at zero once the Chapter 11 process is completed. The inevitable result – wealth gets transferred – from the buyers of worthless Hertz to the sellers, who will move the asset value into something (presumably) more productive.

Torstar insider trading before NordStar acquisition announcement

The Globe and Mail is reporting potential insider trading that went on before the acquisition announcement of Torstar (TSX: TS.B).

I posted above this possibility the day after the announcement.

It is pretty obvious from my eyes that there is something worth investigating, albeit the dollar values involved were relatively tiny. The transactions are so obvious that anybody conducting trades like they did were not sophisticated enough to know the liquidity of the stock was like trying to squeeze water out of lava rocks – you can look at the trade history to see it did not take a huge amount of volume to move the price up.

My guess, if there was some insider trading going on, was that some receptionist or office worker saw some prominent individuals (e.g. Rivett and/or Bitove) walk out of an office and then he/she tipped off a friend, who then pumped a bunch of market orders into the TSX, in a very unsophisticated manner.

Tailored Brands – not looking too good

The next clothing retailer that stands a good chance of going to Chapter 11 (to restructure what are fairly onerous amounts of outstanding store leases) is Tailored Brands (NYSE: TLRD).

They filed Form 8-K today and the salient highlights are this:

Cash and cash equivalents at the end of the first quarter of 2020 (this would be May 2, 2020) were $244.2 million;

…

As of June 5, 2020, cash and cash equivalents were $201.3 million, excluding $93.5 million of restricted cash.

That’s a burn rate of about $43 million per month, which should be disturbing to most investors, especially since they have a minimum cash maintenance requirement with their lender.

In order to reduce the cash burn, they need to sell inventory and get their stores up and sell product. However, initial data does not look good:

The Company noted that it is too early to determine steady-state comparable store sales for the second quarter but wanted to provide an update on recent performance. For the week ended June 5th, for stores open at least one week, the average comparable sales performance was:

o Men’s Wearhouse down about 65%,
o Jos. A. Bank down about 78%, and
o K&G down about 40%.

Clearly buying suits hasn’t been a priority of the consumer public post-Covid-19.

Ignoring the common stock, which has been exceptionally volatile over the past week (it spiked up to US$2.40 two days ago, and is now closed at $1.24), the corporate debt tells the real story:

This is the July 1, 2022 unsecured debt, with US$173.4 million outstanding. It is structurally behind the majority of the company’s asset-backed loan facility which does not bode well for recovery for the unsecured debt. If you have any inkling that the company will make some sort of financial recovery, however, these bonds are trading at roughly a 100% YTM at present.

A sure sign of Chapter 11 will be if the company decides to withhold interest payments on this debt (we will find out by the end of June), or they could be pulling the plug earlier than that. Who knows, with how Hertz (NYSE: HTZ) has traded after its Chapter 11 filing, it might result in an improvement in the stock price!

A side note – famed “big short” investor Michael Burry took his lumps on the stock last month. At one point he had a 4 million share position (8.3% of the company), with his last shares purchased in March 24, 2020.

I have no positions in TLRD or its debt, and not intending on taking one – they need to chop off half their debt, shed half their leases and this can only come in the form of a restructure within Chapter 11. I made my trade for a few cheap suits after they cut their dividend to zero, and closed it out late last year for a mild gain.