Category: Finance

The markets are continuing to get interesting. I’ve been slightly nibbling on some picks on the watchlist lately, but still am holding most of the portfolio (80%) in cash at the moment. The so-called “risk-off” trade is winning big-time: 10-year US treasury bond yields have cratered to a amazingly low 1.46%, 30-year bonds closed at 2.54%. These are really, really, really low yields. It is the bond market betting on seriously bad economic times ahead.

Commodities (except for gold) continue to plummet. Another notable is that spot crude (WTIC) at $83.23. This is still not near the lows seen in 2011. The S&P 500 and Nasdaq still are trading above the levels at the beginning of 2012.

I still don’t believe that we have seen “the bottom” of this recent market malaise yet. There is not yet enough volatility. There’s a bit more action on the downside yet to occur, but it would pay to hold onto that cash stack and be able to hit the “buy” button on some issues that have had panic liquidations.

It is when I start seeing price responses consistent with panic liquidations that I start to salivate. While I have seen some hints of this on the equity side of the market, I haven’t noticed this on the bond side yet.

Hold fast! Things will continue to get more interesting.

It are days like today that make me appreciate the beauty of holding 86% cash.

While some interesting targets of opportunities have traded down in the recent two weeks, I still believe that we have further to go. Sufficient amounts of volatility and fear just still aren’t there yet, which makes me think that we will continue to see more price depreciation.

I was able to spend a couple hours yesterday doing some genuine random research. This random research consisted of typing in random characters on the keyboard for ticker symbols and then doing cursory scans of the subsequent company. It usually takes a couple minutes to decide whether detailed research is required or whether I move onto the next symbol. The one company I did some extensive due diligence on unfortunately I had to reject at current valuations, but will keep it on the watchlist in case if there is subsequent depreciation. It was a Canadian firm based in Quebec that had roughly a $100 million market capitalization.

Normally I do some pre-screening with certain criteria (market cap, volume, etc.) but I just felt like doing random research. Sometimes I do pick up needles in the haystack doing this method. The expected return is proportional to the amount of quality time put into the process, but just like a lottery you never know when you will get a payoff.

Likely due to the Greece situation in Europe and anticipation of financial disruption, the markets are raising cash like no tomorrow by liquidating everything that can be liquified.

Naturally, this has gotten me somewhat interested in the markets again from a broad perspective.

Something fascinating is that anything relating to crude has been hammered for the past month. For example, Canadian Oil Sands (TSX: COS) has a relatively boring business that has been disproportionately traded down in relation to crude prices. An example is that a year ago you could have bought a share of COS for about 0.29 barrels of spot crude and today that ratio is 0.22.

This is generally the same effect that is seen with investors in gold – the underlying commodity is the volatile component while the stocks that produce the commodity are underperforming (Barrick, Kinross, etc.).

I don’t have much comment on COS other than that while it does seem like it is trading relatively cheap, my gut feel suggests that it can get even cheaper – especially if the unthinkable occurs. The unthinkable event in everybody’s mindset today is that the price of crude oil will make a significant fall. It’s similar to how nobody anticipated how low natural gas prices could go (and indeed, even lower than the economic crisis point), and how Canadian 10-year bond yields could not get lower than a very low 3% (they are now at 1.93%).

The other comment is that a good investor makes money by deploying it at the relative trough of a period of panic and crisis, and holding on for dear life until things feel rosy again, and then selling and going away until they see the panic and crisis again.

The problem is that it is very difficult to identify moments of panic and crisis, and even when you know you are in the middle of it, you still don’t know whether it can get worse than what you are seeing. It is expensive to be early to the party. One particular barometer that I use as a guideline (and many others do as well, so the information content of this proxy is somewhat diluted) is the VIX:

This would suggest we’ve got some way to go before deploying capital would be wise. I also still don’t see hints of any panic simply by looking at corporate bond yields – nothing is breaking in that department yet.

But assembling that watchlist would be a good idea. And this time, my instinct would be to go for non-commodity, non-yielding securities. And certainly not Facebook equity.

My writings have been relatively less frequent over the past month, but this is because I’m waiting for some opportunities to reveal themselves in the marketplace. There has been some renewed volatility over the past couple of weeks and some momentum-reversing trends (e.g. spot natural gas is finally showing an uptick), but other trends are back to their usual self (e.g. US 30-year treasury bonds at a very low 3% yield).

All I know is that reaching for yield becomes more and more risky. Avoid the yield since it is most likely an illusion that will give you a few pennies of income in exchange for a few dollars of capital.