Category: Finance

This week is the US Thanksgiving, where non-discriminating consumers go crazy purchasing tangible objects under the perception that they are discounted.

It is quite apparent, however, that floor retail is getting smashed by online retailing. This has been my underlying theory for quite some time and leads me to the theory that avoiding retail-heavy REITs such as Riocan will be a money-saving procedure. If you can’t compete with Amazon, then the entire structure of your business should be examined.

What’s going to be interesting is if this Amazon-ification of retail will impact corporations like Walmart – certainly their equity is being eroded by Amazon, but I think there is a limit to the erosion where people will simply want to look at tangible stuff in a consolidated warehouse environment. The success of Costco is an example of this – eroding Costco would be the holy grail for Amazon and Walmart, but even Walmart couldn’t pull it off with Sam’s Club.

I have been looking for distressed entities and right now anything resource-based (especially energy) is clearly stressed. I still do not find a lot of value in this sector, but there are ancillary businesses that seem to be a case of throwing the baby out with the bathwater. Anything related to bulk dry shipping is also getting killed, but most corporate entities that are publicly traded come from Greece, and this is a country I do not want my money invested in for a lot of reasons.

I still remain relatively defensively positioned. It is odd how my normal investment patterns is to go for capital gains and growth, but every component in my portfolio right now is giving off a substantial amount of income. There will probably be a time to shift to growth but it doesn’t appear that now is that time.

It is very obvious that there was a forced liquidation at the beginning of today’s market session and also parts of the morning. There are some securities out there that were clearly force-sold at the bid. Unfortunately when I am scouring the entrails of this market vomiting, I still don’t see anything terribly compelling that is at insanely clearance prices. There are discounts, but nothing on wholesale liquidation at present. While my expectations might be too high, I remember when Sprint corporate debt was trading at 30 cents on the dollar during the 2008-2009 economic crisis. I don’t expect these types of discounts on large cap corporations, but something close would be nice.

That said, I believe this episode of market panic will end shortly and we’ll probably get some form of a “dead cat bounce”. I find it interesting that despite the fact that Japan went through exactly the same thing that China is going through presently that North American equity markets continued to rocket upwards.

China’s Shanghai index also, despite everything happening recently, is still up year-to-date.

Days like today are a good reminder why one holds cash – even if you were invested in “safe” securities, liquidating safe securities in market panic situations is not easy – you will still receive adverse pricing due to the bid-ask spread.

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.