If I were Shopify

Shopify (TSX: SHOP) is the new technological wunderkid of the TSX, following in the footsteps of Nortel, RIM, Valeant Pharmaceuticals and now SHOP. Good for them for achieving a market capitalization of $100 billion – a proud accomplishment to say the least. They deserve it.

The question is whether SHOP will retain its competitive advantage in the future. For now, things are great, but just like what happened to Nortel and Blackberry, you can lose your competitive advantages in technology more quickly than one anticipates, especially if you’re Canadian!

But what got my attention was their secondary offering where they raised US$1.3 billion (selling shares at US$700).

I should charge them for this advice, but I will offer it freely: If you can, raise more equity capital at this price. Like, try to raise $10 billion.

You’ll thank me in five years.

USA negative fed funds rates

I forgot to check my quotations but I see now the markets are predicting a negative short-term interest rate from the US Federal Reserve (a projected -0.06% fed funds rate for 2021):

I note that Interactive Brokers charges you -0.808% to hold CASH Euro balances over 100,000 Euro. Conversely they charge you 1.5% to borrow up to 100,000 Euro (and 1% for the next 900,000 Euro, and 0.5% for the next 149 million).

Notably, at this point, the Bank of Canada is still projected to be steady for the next two years.

However, as economic conditions deteriorate and monetary policy continues on quantitative easing forever, this might not be sustainable.

As we already have some history on European institutions (in addition to Japanese ones) in negative rate environments, there are some general guidelines as far as investment is concerned.

Although the government risk-free rate is going to be suppressed by central bank actions, the ripple effect in the non-government markets will be huge. This is playing out in asset prices right now. It’s not going to end up well for most other than the most financially nimble participants. I’d suggest throwing out the conventional playbook. While COVID-19 is not the cause of this, it definitely accelerated matters.

Retailers going belly-up

So far of note: J. Crew (clothing), Neiman Marcus (sort of like HBC – higher end generalized department store), Aldo (shoes).

Pier 1 (homewares) didn’t even need the Coronavirus to take it down.

These are all American, but in Canada some other notables (it’s actually odd how there aren’t a lot of retail companies publicly traded on the TSX – I’m excluding the food-related companies here):

Reitmans (TSX: RET.A) – stock trading at 12 cents – this one isn’t as clear-cut, mainly because at the end of January 2020 they had $89 million in cash in the bank, and the only liabilities were their massive lease payments outstanding. Their business (mid-stream business casual women’s fashions) is a terrible sector. They did caution “the Company estimates that it will need financing to meet its current and future financial obligations”, which is never something you want to be reading, but a bit paradoxical given their still relatively strong cash position. At a market cap of just under $6 million, the market is saying this one is worth way more dead than alive.

Roots (TSX: ROOT) – looks pretty ugly. Debt on the balance sheet combined with an operation that’s not making money, means they’ll have to get more credit in order to continue. Margins are decreasing, expenses are rising, it isn’t looking very pleasant.

Indigo (TSX: IDG) – The only big debt they have is their lease payments, while their retail operation isn’t bleeding THAT much. It’s kind of surprising to think on a normal full-year cycle they do make money. But from March 1, 2018, their stock graph has been a 30-degree ski slope downhill. It’s rare to see declines this smooth. Also, at the end of December 2019, they have $66 million in unredeemed gift card balances. Amazing.

ETF products that use short-term future contract maturities

If you hold the products mentioned in the title of this post, such ETF products are a legal license to have money stolen from you, specifically in the rollerover mechanism.

There are ways to mitigate this (i.e. involve the rollovers continuously over a longer period of time), but this mitigation removes linkage between true spot pricing and the underlying ETF value.

Also if the ETF is a small fraction of the underlying market, then it doesn’t matter. Life can go on as normal. However, in today’s modern era, there are huge amounts of money swimming around in ETFs, waiting to get picked away by professional traders.

USO was a great example last month. ETFs that blindly were forced to short the short-term month and long the second month – this came in all sorts of forms other than USO as well. Retail oil investors in China, for example, got duped into this. As a result of the widely known rip-off (culminating in the negative 40 dollar futures price), such ETFs were forced to reform their practices to make their trade rip-offs less obvious. Most of them do it much more slowly.

But there are other examples.

Right now I have something on my quote screen that is so glaringly abberant that I had to wipe my glasses and double-check to confirm it was there. It’s something that institutional traders can take great advantage of (quantitative hedge funds must be making a fortune right now) but ol’ retail people such as myself can take some minor benefit to it, being restricted with the amount of margin to put up with such trades.

This chart is a relationship between two financial products. It should not be above zero (it can be at times, but right now is not a circumstance it should be above zero). But it is.

When checking some ETF databases, I can see why this is the case. There’s just too much money moving out of the front month to the second month, especially in relation to the ETF size versus the actual market size.

I’m purposefully vague here because this is clearly an actionable idea.

The lesson for people here is that investing in the wrong ETFs are financially hazardous. But this has always been the case. Just that the inherent structure of certain ETFs always lead to the same outcome – getting your pockets picked by traders.

Invest in a gold miner, get a solar project

Alternative title: Gran Colombia Gold’s confusing capital allocation strategy, part 4; (See also: Gran Colombia Gold’s confusing capital allocation strategy, part 1, part 2, and part 3)

(This was supposed to be published the evening of May 5th, but for some reason, I forgot to hit the button until May 11th)

One of the reasons why one of my policies are to be very, very careful before investing in any gold mining equities is that management in these industries is usually less than efficient with shareholder capital, especially when they have lots of it. Right now things are flying high in the gold mining industry because of the US$1,700/Oz commodity price and the general public fear and panic out there due to the aftermath of COVID-19, and looming large government deficits, and just general doom and gloom.

My personal take on the matter is if you believe gold is going to do well, just invest in long-dated commodity futures at a reasonable amount of leverage instead of playing around with companies that are most likely blow your capital away.

Or you can take a debt investment in such companies, where in that case you don’t really care how much management blows shareholder capital short of stunting their ability to pay you back, but a debt investment (in non-distressed situations) defeats the purpose of investing in such companies (i.e. you want double digit returns).

Imagine my thoughts when Gran Colombia Gold (TSX: GCM) announced the following:

Gran Colombia Gold Corp. (TSX: GCM; OTCQX: TPRFF) announced today that it has signed a Letter of Intent (“LOI”) with Renergetica Colombia S.A.S. (“Renergetica”), a subsidiary of Renergetica S.p.A., a developer in the field of renewable energy and of the smart grid worldwide and an independent power producer and asset manager for third party investors. The LOI encompasses Gran Colombia’s acquisition, through its Segovia Operations, of a solar project with a total installed capacity of 11.2 MW of power called “Suarez”, located in the Tolima Region, Colombia (the “Suarez Project”).

Lombardo Paredes, Chief Executive Officer of Gran Colombia, said, “As the leading gold and silver producer in Colombia, we focus our ESG programs on health, education, community and the environment in the areas in which we live and operate. We see the opportunity to invest in renewable energy initiatives, such as the Suarez Project, as the next step in doing our part to combat global warming. With the new Suarez plant, approximately 10,300 tons of CO2 per year will not be released into the environment. We look forward to partnering with Renergetica to make this solar project a reality.”

The Suarez Project is the first project of a pipeline under development by Renergetica in Colombia. Expected to have a 30-year life, the Suarez Project will connect to the Colombian National Electric System and will become operational later in 2020. The capital cost of the Suarez Project, expected to total approximately $8 million, may be financed by up to 70% through local banks involved in “green financing” and will benefit from special tax incentives in Colombia on investments in renewable energy.

Recall on March 1, 2019 the company attempted to raise financing, citing that they wanted to accelerate drilling in their Segovia mine, even though they had sufficient cash on hand and cash flows to do it internally. They have done a couple financings since, in addition to more financings on their separately publicly traded entities (other gold mining projects). You can at least make a justification for raising capital and spending it in majority-owned public entities in the name of gold mining.

But this press release to invest capital in a solar project in the name of ESG? If I owned shares in GCM (I do not), I’d be really wondering.

Hence the title of this post – I invested in a gold mine, but I got a solar project instead!