Category: Canada

No April Fools jokes on this site.

1. I’ll post a more comprehensive report later, but Q1-2020 is shaping up to be around -13% -11% performance for me, while:

Index / Total Return
S&P 500: -20.0% / -19.6%
TSX: -21.6% / -20.9%

I was caught badly out of position going into this CoronaCrisis and I do not consider my relative performance to be any sort of victory at all. You can’t eat on relative performance is a good cliche to describe this. I hate losing money.

2. CannTrust (TSX: TRST), after getting busted by Health Canada in July 2019 for not being able to run a legal marijuana operation, finally bit the bullet and did CCAA yesterday. The fact that they haven’t been able to publish any financial statements since Q1-2019 should have been enough of a hint to anybody that something really bad was going on. The marijuana sector is regarded as one positive recipient of everybody that is forced to go on lockdown (and anecdotally when biking around Vancouver I get the impression a lot more people are smoking it!), but my views on the economics of the entire sector is the same – I wouldn’t be a buyer unless if you get the impression that branding will result in premium pricing power. Although I do not smoke marijuana at all, from those that do, apparently the legal stuff isn’t nearly as good. The majors (Canopy Growth, Tilray, etc.) will stay alive but that’s about it.

Speaking of Tilray, remember when they were trading at US$150/share back in October 2018? They’re now a shade under $7. Canopy’s down to about CAD$20/share and still has a $7 billion market cap. I’d expect this to depreciate. Still too expensive to short (borrow is still at 22% cost although this has gone down significantly), so sad.

3. What happens when a province goes bankrupt? Newfoundland is on the brink and only got bailed out by the rest of Canada…

4. Dividends will be cut. Do not depend on the historical dividends of any corporations. Another example is Corus (TSX: CJR.B) reported this morning and they will “review” their next quarterly dividend in June as they, along with the rest of the universe, has no idea what will happen to business going forward. Although quite cash flow positive, they are also heavily leveraged and this leverage is forcing them to be more conservative than what their P/E of 3 would otherwise indicate. Good luck raising debt financing in this environment unless if your investor is the Government of Canada!

If Canadian real estate valuations continue to drop and banks start taking baths on bad debt, I also wonder if they will be forced to cut dividends in an attempt to shore up their Tier 1 ratios. Remember how I described Genworth MI as picking up twenty dollar bills in front of a steamroller? With unemployment spiking up to double digits, we’re going to find out what happens when we get a whole bunch of credit defaults. The question is whether the market is pricing this in or not.

It’s starting…

https://www.theglobeandmail.com/business/article-caisse-sets-aside-4-billion-to-finance-quebec-businesses-affected-by/: The Caisse de dépôt et placement du Québec says it’s ready to pump up to $4-billion into Quebec businesses affected by the COVID-19 pandemic.

https://pm.gc.ca/en/news/news-releases/2020/03/31/prime-minister-announces-new-partnerships-canadian-industries-fight: The Government of Canada is investing $2 billion to support diagnostic testing and to purchase ventilators and protective personal equipment, including for bulk purchases with provinces and territories. Personal protective equipment includes things like more masks and face shields, gowns, and hand sanitizer.

The Government of Canada has signed new procurement agreements with Canadian companies Thornhill Medical, Medicom, and Spartan Bioscience to purchase and boost capacity to manufacture equipment and supplies including portable ventilators, surgical masks, and rapid testing kits. The government has ordered millions of supplies to ease the pressure on health care facilities. It has also signed letters of intent with five companies – Precision Biomonitoring, Fluid Energy Group Ltd., Irving Oil, Calko Group, and Stanfield’s – to produce additional test kits, hand sanitizer, and protective apparel including masks and gowns.

(Who wants to make a bet the government is not going to be too price sensitive?)

Anybody standing in the way (by being short) on these “protected” industries had better cover.

A story of some collateral damage of the Coronavirus: A public example of a margin call – Royal Bank taking one of its clients to the cleaners.

The juicy details are here: 1257000-1257010-https-ecf-nysd-uscourts-gov-doc1-127126628149

3. Specifically, on March 23, 2020, Defendants issued margin calls to Plaintiffs on
the purported basis that the “Market Values” of Plaintiffs’ commercial mortgage-backed
securities (“CMBS”) that are financed through the parties’ Master Repurchase Agreements
(“MRAs”) have drastically declined in value as a result of the current market crisis. According
to Defendants, their calculations of these “Market Values” reveal a purported “Margin Deficit”
that permits them to require Plaintiffs to post large sums of additional cash or securities to meet
margin requirements. Defendants’ margin calls, however, are based on their entirely subjective
and self-serving calculation of “Market Value,” and do not come close to reflecting the
fundamental value of the securities or following the contractually-mandated means of assessing
those values. Indeed, because the “Market” is temporarily frozen, there currently is no objective
means of calculating “Market Value.” Moreover, the MRAs provide that “Market Value” shall
be based on a “price … obtained from a generally recognized source agreed to by the parties or
the most recent closing bid quotation from such a source.” MRA ¶ 2(j). It is entirely unclear
what “source” Defendants have been using to calculate “Market Value” in this illiquid market,
but it is crystal clear that Plaintiffs have not agreed to use it.

…

5. Yesterday (Sacha’s note: this was filed March 25, 2020), Plaintiffs learned that Defendants intend to conduct an auction that
includes nearly $11 million of Plaintiffs’ CMBS—at 11:00 a.m., EDT, this morning.

…

33. Notwithstanding the various government actions designed to return liquidity to
the markets and stave off mass foreclosures, on March 23, 2020, Defendants made multiple
margin calls on Plaintiffs in the total amount of $10,794,000.

Ouch. When playing with debt and leverage, playing with fire. Effectively, this mREIT got cleaned because they believed their definition of “Market Value” was what they believed they will get the assets for, while RBC’s definition appears to be “whatever you can auction the thing for”. Also I truly wonder what’s going to happen with all of this private equity and infrastructure investments going on that don’t have any active market – you can be sure that the level 3 value on balance sheets for the funds and such that own these assets are likely going to get downgraded pretty soon!

And for a final note, take a look at your Canada Pension Plan and ask yourself whether you can trust the stated value on 44% of the portfolio or so (I’m being generous and considering the “Other Real Assets” to be things like gold bars in a vault somewhere)…

When you have $400 billion in assets under management, you’re probably allowed to use your own definition of “Market Value” and not RBC’s.

Accounting-wise, I think the largest scandal-in-waiting is the proper valuation of private and infrastructure assets, or basically anything that doesn’t have an actively trading market. It would not shock me at all to discover there are plenty of assets out there being held on books of funds that are overstated by a significant magnitude.

Random observations:

Barring any more catastrophic news (e.g. China launching a military invasion), Vix has likely peaked:

There might be another spike up but I’d suspect that this will subside over the coming months as the fallout is now being quantified and known.

I have done some radical portfolio re-alignment over the past couple weeks. I’ve not been thrilled about my performance, which I’d consider to be mediocre at best. The choice to diversify was correct. An acknowledgement of my own stupidity is in the form of index longs on the S&P 500, which is just trying to get a broad-brushed swash of what is going to be a gigantic capital influx because the “borrow at 1%, long at 10%” trade is going to turn that 10% into 8%, 6%, and 4% before we experience the next leveraged crash.

Speaking of what’s above 10% yield, have you looked at anything relating to the debt markets lately? Print up a list, get a dartboard, and throw darts at it, and you’re likely to do good.

Same thing goes for most of the preferred share market, although you have to wonder about the state of those 5-year resets. Still, even if you assume the 5-year GOC bond yield stabilizes at around 50bps, you can buy some reasonably safe income streams. The only problem is when the market rockets up, you’re not going to be able to benefit as much.

Q1 and Q2 results are going to be horribly impacted, and this is going to make the P/E and PEG metric useless as an investment tool going forward for the next 18 months.

There is still going to be a whole bunch of ups and downs at wild magnitude. Resist the urge to buy on a +8/10% up day like today, and resist the urge to sell when we inevitably get a -5% day and you should do well.

Envision what’s going to still sell a year out. Businesses that were looking shaky before this crisis are likely to go belly-up, and even in a recovery will not recover to the extent that others will.

The math of portfolio management is that if you take a bunch of positions at 5% (or any arbitrary number), some will gravitate up, and some will gravitate down. The ones gravitating up are ones that you happened to pick at a reasonable time (or hopefully the choices themselves were skillful) and thus they will have a larger weighting. Thus future changes in these larger weighted items will have a more disproportionate impact on the overall portfolio, while those that slide down will have less of an impact. It’s exactly how capitalization-weighted investing works with indicies – the strong get stronger, while the weak get less capital. And if you pick something that goes up by a factor of 10, you can still have 9 total wipeouts and break even.

Finally, there is going to be an element of luck and iron steel nerves to pick at the entrails of those that get totally crushed by this – cruise lines, airlines, oil production, and anything very retail-driven. If you pick equity survivors out of those (especially those that are regarded as already written off to go into CCAA/Chapter 11), you will receive huge multiples on your investment – but these come at extreme risk of a permanent loss of capital. Ultra-high risk, ultra-high reward.

So far this week, the following TSX companies have reported buybacks (at prices where companies actually add value by doing this!):

5N Plus (TSX: VNP)
Cascades Inc (TSX: CAS) – Note: they sell TISSUES and TOILET PAPER and you’d never guess we are in the apocalypse by looking at their chart
CIBT Education Group (TSX: MBA)
First Majestic Silver (TSX: FR)
Goeasy (TSX: GSY) – wow, they’ve gone off a cliff
Granite REIT (TSX: GRT.UN)
High Liner Foods (TSX: HLF)
Melcor Developments (TSX: MRD)
Melcor REIT (TSX: MR.UN)
Mullen Group (TSX: MTL)
Osisko Mining (TSX: OSK)
Rogers Sugar (TSX: RSI) – trading at a 5-year low. Company is still slightly debt-heavy IMO, but buybacks at this price does make sense

I also have read Atlantic Power’s (TSX: ATP) press release where it is pretty obvious they have been purchasing common shares and preferred shares in March, quite above their normal rate.