Waiting for the last dance

This article by now 82-year old investing giant Jeremy Grantham nails it. Well worth the read.

As for the canaries in the coal mine, a good one to follow would be in my back yard – Ballard Power (TSX: BLDP), a perennial cash burner that is currently cashing in on the Hydrogen rush. Notably since 2004 they have not made any cash through operations, and have not made any net income aside from 2008 when they had a one-time gain (my memory faintly recalls a one-time sale of tax loss credits!). Doesn’t mean they won’t be making money in the future, especially from federal government subsidies for our bold hydrogen energy economy!

A hint for Ballard executives (after you’ve cashed in stock options): Do a secondary offering.

Rising long-term interest rates

From the Bank of Canada (the 10-year and 5-year government bond yield):

From the end of 2020 (0.67%) to yesterday (0.84%) the 10-year bond yield has risen.

This could just be from the “white noise” of trading. A fixed equity/debt split would surely have resulted in equity selling and fixed income purchasing which to date has not occurred, prices would appear to have done the opposite. US 10-year treasuries are also up about 15bps or so from the beginning of the year.

The impact of rising long-term interest rates have a ripple effect through the market. If the trend continues, you’ll see a dampening effect across the investment spectrum. Right now it is not a lot, but if yields continue to rise another 20bps or so (totally arbitrary guess), more people will start noticing and you’ll start to see momentum effects occur, which would likely be concentrated with price contractions of yield-based instruments (which would have the immediate impact of increasing their yields, but interest rate increases would result in the expense of their ability to borrow money at low rates). Soros’ theory on reflectivity reflexivity really applies here!

The zero rate bound

What is the difference between 0.25% and 0.1%? A 60% drop in the short term interest rates!

Apparently that is the logic of the Bank of Canada mulling a decrease in the target rate, which is currently at 0.25%.

In November, the Reserve Bank of Australia cut its policy rate by 15 basis points to 0.1%, while the Bank of England did the same last March.

While this may not seem like a lot, the mathematics of division when you get close to zero gets really fun. If your limitation is interest expense, then reducing the interest rate by 60% means you can borrow 2.5x more money!

This is a luxury that nations with their own sovereign currencies can perform. In Canada, despite the federal debt ballooning over $1 trillion this fiscal year, public debt charges peaked in 1995-1996 at nearly $50 billion. For the 2020-2021 COVID-19 fiscal year, that interest bite is expected to be about $19.5 billion (table A2.4)!

The low interest rate environment ends when the demand for currency starts to abate and one trigger to this is the onset of inflation.

Dear Questrade, fix your system

What does it say about a brokerage platform when they cannot enter the proper multiplier for securities in their system?

Chemtrade example:

CHE.DB.E.TO:

This is correct – a sample order of 1000 par value at 80 cents = $800 plus commission. Hurray!

Chemtrade example:

CHE.DB.F.TO:

This is incorrect – a sample order of 1000 par value at 100 cents = $100,000 plus commission.

Needless to say CHE.DB.F.TO can’t be traded on their system because for whatever reason they put a 100x margin multiplier on the new issue. Putting in a “10” quantity at a price between the bid-ask spread did not register on the quotation, so this is clearly a margin clearing check failure.

I’ve chatted with their support and also sent a couple emails, but have not received any satisfactory reply. They don’t seem to have any idea what is wrong.

It makes you wonder if they can’t get this right, what else will go wrong? What if this was an actual time-critical situation and saw that I could get in at a cheap price?

Risks of investing in foreign jurisdictions – Turquoise Hill

There are a couple hot assets that are down in the upper-teens percentages today. One is Bitcoin, but I’ll let other financial scholars write about it.

The other is equity in Turquoise Hill (TSX: TRQ), which is an entity that is 50.8% majority owned by Rio Tinto. The TRQ entity owns 65.9% of Oyu Tolgoi LLC, a Mongolian corporation that operates the Oyu Tolgoi mine, which currently is mining gold and copper. Copper represents the vast majority of revenues (roughly 75% in the 9 months ended 2020). While nominally Canadian, the primary operating entity is Mongolian and their operations are consolidated into TRQ’s financials. They report in US currency.

The company is facing significant issues concerning an ongoing dispute with the Mongolian Tax Authority, and also operational concerns regarding the expansion of their copper mine. While the GAAP financials are showing profitability, one quick look at the cash flow statement shows that the entity is (not using formal finance terms here) bleeding cash like crazy.

The first nine months of 2020, they spent $817 million on property, plant and equipment, and their net operating cash flow was negative $29 million.

At the end of September 2020, they reported $1.4 billion cash on the balance sheet, but this is offset with $4.2 billion in long-term debt, primarily consisting of a project finance facility:

They have another US$1.6 billion to draw out, but there are conditions regarding this which I won’t bother posting about here.

Last month there were news pieces about a tax dispute brewing, and today TRQ announced they are taking it to an international tax tribunal. It looks incredibly messy.

This post is not about a rigorous financial analysis about the viability of the copper mine expansion, but rather about the risk of investing in foreign jurisdictions – I know very little about Mongolia and it is very difficult to sort out how much of this is political, or false positive promises, or whatever. All I know is that an investment on the simple narrative of “Copper and Gold will go up, therefore I should invest in this” has been shown to have embedded risk that is very difficult to quantify, and quite likely the stock price was not pricing in correctly.

Also, in such majority-controlled situations, it is unlikely that the parent (Rio Tinto) will take actions that will give minority shareholders a fair shake. If there is a bailout in the works from the parent, it will be very extractive to the minority.

In my books, this is easily a stock that goes into the “too difficult” pile. But fascinating to study nonetheless.