Category: Finance

If not, you are lagging behind the S&P 500 and are UNDERPERFORMING. So those sitting in a paltry 20% year-to-date return may think they are sitting pretty, but hedge fund managers out there know they are lagging and their customers are demanding heads to roll. Looking at my year-to-date performance, I’m barely ahead, but this is because I’m Canadian and can cheat a little via the amazing accounting practice of mark-to-market for currency translation, (i.e. my returns are always denominated in Canadian dollars, and the Canadian dollar has gone lower this year hence I get a little boost up in performance for having the audacity of holding US-denominated stocks and cash during the year). In my defence, however, is the fact that I’ve had a relatively large quantity of zero-yielding cash in the portfolio for financial Armageddon’s sake.

In the last phase of a bull market (which we are indeed going to be entering, if not there already), all of the naysayers (such as myself and “professional market analysts”) warning of a market crash and chronic over-valuation will suddenly start shutting up and believing there is some sort of new economic paradigm that has caused the markets to go wildly up. I’m pretty close to reaching that point myself, which probably suggests that the end is near. I had these visions of the world entering into a 2009-like economic crisis again when the Greek Debt thing hit in August 2011, which was probably one of the worst calls I made over the past decade, and it indeed cost me.

Of course, the whole world knows the asset inflation is primarily due to the federal reserve pumping trillions of dollars of liquidity into the system, only to end up as bank reserves for JP Morgan and Bank of America, but who cares at this point? Politicians know the general public does not know the true implications of free liquidity, and here in Canada, the government knows that if the central bank raises interest rates, they will end up crashing the entire economy because our debt-to-income ratios are sky high.

There’s clearly no vulnerability or risk here.

For memory’s sake, here is a chart of the Nasdaq from the beginning of 1999 to the end of 2000:

I remember these days as being wildly irrational. I got my start in the public markets a year or two before this and even when I was beginning my journey to compounding assets on my balance sheet, I realized that things were frothy and I had better stick my capital in anywhere but dot-com technology, and that I did. Even when I ventured into technology it was relatively “value-based” – the first company I owned that got bought out was Sterling Commerce, and they were trading at a relatively modest P/E of around 20 at the time. I didn’t keep proper records during the 2000-2002 timeframe, but I do distinctly recall that the overall hit to my portfolio was quite modest compared to the market averages, similar to my performance in 2008.

Let’s pretend we’re sitting at the year 2000 and the Nasdaq is sitting around 4000 (where it is presently). The world discovered the computer systems did not melt down and bidded up the markets another 20% before finally collapsing down to earth again.

A repeat of that scenario would mean the S&P 500 would go to 2160.

So just before somebody thinks “things can’t go higher”, in bubble-type situations, they usually do, a lot longer and a lot farther then most people rationally expect, especially with the winds of the federal reserve still clearly behind the market’s back.

Does it feel like 1999 to anybody out there? Basically if you invested in high beta, momentum type stocks (especially those .com companies with as little revenues and high negative incomes) you would have made like gangbusters. If you actually invested in anything that made financial sense, you would have seriously underperformed, if not seen depreciation in your asset values.

People investing in Apple currently must feel like that. There is a lot of stuff out there that has seen substantial price appreciation and very little change in the fundamental thesis in the first place – e.g. has the story with Netflix (a triple since the beginning of the year) changed any over the past 10 months? Priceline (nearly doubled)? Even old technology, like Hewlett Packard, has seen appreciation that doesn’t seem to correspond with any real change in their underlying structure.

Just because markets are trading wildly higher doesn’t mean that they won’t stop doing so – momentum in the marketplace has amazing power that will confound even the most seasoned of investors. Its already happened elsewhere, such as the Nikkei 225:

Investors in the month of May saw appreciation and depreciation of nearly 20%.

We are in strange, strange times. The trick is to not lose money on the way down.

The current game of chicken going on in the US Congress is good for media and may be financially profitable. I think most participants going into this negotiation concerning the debt ceiling thought that it would be a foregone conclusion that there would be some sort of settlement on the matter, but both parties seem to be sufficiently entrenched in their positions.

There is about a weeks’ worth of time before the US Treasury runs out of room to borrow money (via extraordinary measures), and then another couple weeks before they run out of cash entirely. This undoubtedly would create a market crash if this occurred and would result in a very large buying opportunity.

In other words, now is a good time to pick candidates for purchase in the event they are wholesale-dumped into the marketplace when other institutions realize that their T-Bills aren’t going to actually mature at par value.

It will likely not happen, but one can always hope – it is only at times when institutions and funds are forced to liquidate holdings that you can make the greatest gains from the market.

The whole investment world knows about what is going on with Blackberry. They reported their quarterly result today and it indeed was the disaster the company signalled last week, which wasn’t a surprise to the marketplace. Indeed, optimists that were wearing glasses with a very deep hue of rose could pick out some elements that did not lead to total despair, but the pickings are slim.

My post is a very simple one – Prem Watsa’s very conditional US$9/share offer is genuine. There is a whole bunch of speculation why it will fall through, and these are legitimate (mainly there needs to be other CANADIAN backers in this offer other than Fairfax, who have already been badly singed with the acquisition of their 10% stake in the firm). However, one risk that media brings up which I do not believe to be a risk is the genuineness of Watsa’s intentions. I have been following Fairfax for over a decade, and it simply does not pay from a reputational standpoint for Watsa to be playing “games” on this one. It would harm his company’s future ability to pull off similar acquisitions.

With Blackberry trading at about $8/share, this would leave about 12-13% upside over a two month time frame. There is an outside chance (I’d weight this as roughly 25% at present) of other bidders coming into the foray, which would likely not be in the form of a clean takeout offer.

Watsa also has to consider if this deal falls through what he will do with his 52 million share stake in Blackberry, still worth around $420 million at current market value. He has about as much of an incentive to see something happen with his stake as the rest of the shareholders do.

Still waiting and seeing. I haven’t had many market inspirations lately. One of my positions has been significantly underperforming over the past month and this has contributed to some significant portfolio drag, which I am not entirely happy with since I was considering to jettison the thing before they got significantly hit on their last quarterly report. The underlying company’s liquidity has been less than ideal, but one would think they would have an incentive to find some sort of financing considering that its founder still has a double-digit percentage stake in the company.

My macroeconomic focus is less on geopolitical considerations (e.g. Syria) and more on what the impact of the anticipated reduction in US Federal Reserve policy accommodation will have on the economy. Clearly nothing good. Ironically I am thinking that longer term treasury bonds are looking attractive, but if those 10-year yields inch up above 3% then I think there would be a speculative position worth taking.

I also observe the REIT sector has taken a bit of a breather lately, but valuations are still nowhere close to where I would consider them attractive.

Over a quarter of my portfolio is in cash, and the majority of what I have invested in would be considered in the deep value category.