Rogers Sugar – Freefall

I used to own shares in Rogers Sugar, back in the days when it was still trading as an income trust. I had a slab of units in the mid 3’s and sold them in the mid 5’s, citing that the upside was probably limited from that point. This was one of the companies that I loaded up on during the economic crisis and it paid off. My selling timing wasn’t ideal as they’ve managed to get up to about $6/share before moderating:

rsi

I’ve been asked whether this company is a buy or not. Normally I don’t entertain these requests, but since I don’t need to do any additional research on this company that I’ve already written about, I’ll comment.

The quick answer is that they are trading within my fair value range. They’ve been well over my fair value range for the bulk of the last couple years. My theory here is that they were perceived as a safe stock with a safe yield, and lumped into every income fund manager’s portfolio as something reliably yieldy but “without risk”. I would say the assessment of income is correct, but the assumption of risk is not, and the market clearly has shown that over the past two weeks of trading.

I’m not sure why they got killed as badly as they have. Their last quarterly report (the catalyst) was not good, but the stock didn’t deserve the 20% bludgeoning they took. There is clearly a lot of other technical factors going on here (stop losses, value investors dumping, margin players dumping, etc.).

Market-wise they are facing a few adverse factors (the crops down south have been better than usual, which will cause over-supply and hence no exports for this year), and also Redpath is seemingly getting good at marketing and beating Rogers – heck, I even notice their product in the local Costco. These margin pressures are not good for the company, but this is the nature of the industry and it has been this way for a long, long time.

They will have to go down further before I’ll consider buying shares.

Also for those wanting to do some fundamental research on the company, just note that reading the GAAP income statement is nearly useless due to the use of derivatives the company engages in to hedge natural gas pricing.

When interest rates rise

Constructively speaking, the federal reserve is engaging in raising interest rates, without actually raising the short term rate. The theory of what to invest in when rates rise is functionally the correct strategy here.

There is not a lot that is going to thrive except for US cash.

The federal reserve is likely to continue in the normalization direction for quite some time to come and as a result, volatility will be prevalent. Buying volatility is likely to be a winner.

Marginable vs. non-marginable equity

There is a lot of borrowed money out there. Even on the retail level, you can get Canadian currency for about 2.5% at Interactive Brokers, or if you’re going to borrow over a million dollars, you’re good at 1.5%. For US currency, it is currently 1.57% and 0.57%, respectively.

Borrowing money to invest makes you look like a genius when the markets are rising, but it adds a tremendous amount of pressure when things go south.

Interactive Brokers, in their most recent quarter, announced that year-to-year margin balances have increased 38%, while customer accounts grew 14%. This is not terribly dissimilar to the statistics reported by the NYSE – while they have yet to post December balances, looking at November-to-November they have a 29.6% increase in margin balances. It is significantly higher on a percentage basis if you net the margin debt with the credit balances available.

So let’s say you’ve borrowed to the hilt, and the markets experience a 4% decline and you start to feel uncomfortable about your 2:1 leveraged position. What do you trim first to avoid the dreaded margin call?

The answer is non-marginable equity. Each dollar you raise from a non-marginable stock contributes a full dollar that can go toward the minimum equity required to maintain the account. If you decided to dump one of those 30% margin stocks, you’d need to dump $3.33 of shares to get the equivalent of one dollar.

It is likely that there are a higher frequency of bargains in the non-marginable equity rather than the full margin equity (e.g. large-cap stocks) – forced liquidations have a tell-tale sign on charts which I am sure clever software programs are consistently looking for to ensure they extract the maximum amount of pain on those that are forced to sell.

Being human, however, restricts you to keeping a good quality watchlist, having done some fundamental analysis in advance to ensure you’re still not getting ripped off on valuation, and just paying attention.

Investing in political unrest – Thailand

Something that hit my political radar a few months ago was that Thailand is going through yet another political crisis. This has a material impact on their equity pricing, as witnessed by the only ETF available to invest in Thai stocks (and that is THD):

thd

There were two thoughts in my mind as this was going on: Will I be able to get an inexpensive Thailand vacation as tourists flee the country, or will I at least be able to earn one by investing in what will likely result in some sort of economic crisis?

The ETF itself is not of a trivial size – it has $500 million in assets under management, trades about $15 million in volume a day, and has about half of its holdings in the top ten consisting of large cap Thai companies such as financials, telecoms, industrials, and so forth. They represent roughly an equity proxy for the country similar to the Dow Jones Industrial Average. The size of the country’s equity market is large and liquid enough that my comments here will not materially contribute to any price movement, so I can write a little more freely on this topic.

It does not require an experienced lens to figure out that there will be continued unrest in the country going into early 2014. There is a highly polarized political situation with the two factions holding considerable public support – in a constitutional monarchy environment where the monarch does exercise power (a subtle version of power, but to a much greater extent than monarchies such as Canada or the United Kingdom), coupled with democratic culture being a means to an end rather than a process of acceptance for defeated rivals, this will create excessive tension. In addition, the Thai military is a significant third “political party” that any governing party needs the implicit consent in order to govern in the country.

The democratic culture in countries that have not evolved with the British parliamentary system is significantly different in execution than in countries that have been influenced by it. In the Western democracy sense, voting (whether in general elections or within legislative chambers) is the final arbitration of public decision-making. In a good number of developing countries, it is akin to how lines painted on the road: for advisory purposes.

Thailand will survive this political crisis as it has done for the past century. It will do so in typical Thai fashion, and there is no shortage of historical articles one can dredge up to get a fairly good idea how this one is going to turn out. Despite the public mess that is occurring, they will solve their own problems. The only question is when and how much collateral damage is done in the process.

I will be keeping THD on the watch list. There are no exchange-traded ADRs of Thai companies that one can directly trade with any liquidity of significance that I can find.

Genworth MI Q4-2013 preview

Genworth MI (TSX: MIC) will report its quarterly and year-end results on February 4th. I am not expecting too much deviation from the previous year’s quarter. From the CREA, sales activity nationally are slightly higher than the levels they were in the previous year. The previous year had seasonal-related issues and this year (either Q4-2013 or Q1-2014) will likely have some seasonal-related issues due to the deep freeze that affected the eastern half of North America.  These weather related events will only shift demand around periods rather than reducing it.

natl_chartA01_hi-res_en

Due to the latest federal regulatory changes (tightening) in mortgage financing kicking in on July 2012 (but constructively pulling some demand from Q4-2012 onwards into Q3-2012), year-to-year underwriting will likely be flattish from Q4-2012 because this will be the first full year-to-year comparison with the new regulations kicking in.

We can see the predominant trends for the company – premiums earned (the revenues earned from the actuarial performance of the mortgages that are being insured) continues to degrade slightly because of the run-down of past premiums written:

The only other item that I will mention is that claims and delinquent mortgages appear to be at an all-time low in Canada, despite all the talk about high consumer debt-to-income ratios.  This will eventually blow up in the faces of those that have accumulated the debt in the first place, but not today.  The lack of mortgage delinquencies will continue to mean that Genworth MI will be a cash generation machine.

There are a few negatives coming along the horizon.  One is that profitability of this magnitude tends to involve competitors, and I see Canada Guaranty is trying to cash in on this market – however, the barriers to entry with respect to regulatory compliance is not trivial and establishing sales networks and funnels will take quite a bit of time.

Another is that the OSFI is continuing to look at the capital framework on the property and casualty insurance industry in Canada.  In 2012, there was a significant change in the government guarantee fund which resulted in surplus funds being released to the company.  This risk is offset somewhat due to some guidelines already being released: for those that have the stomach to read this stuff, you can review the draft guidelines here, effective January 1, 2015.

Another negative are the usual concerns over the Canadian housing market that I won’t bother repeating here.

I do not foresee MIC continuing the share buyback at this price level, nor have I seen any insider purchases from SEDI lately.  The last slab of shares were repurchased in September at $29.23. They increased the dividend in the last quarter (they have been doing it on a yearly basis) and while I do not see them raising it again, depending on the results of the regulatory review, they do have room to declare a special dividend in the future.

Solvency-wise, the only maturity on the horizon they have is $150 million face value at December 15, 2015.  This debt issue has a coupon of 4.59% and in 22 months they can decide whether to refinance or just pay it off.  Management is also in a position to pay off about a $3/share special dividend and likely be within their own internal targets for minimum capital.

To summarize, I am not expecting fireworks out of this quarter, but I do expect consistent performance in line with previous quarters.  The company is far from the bargain basement price it was a year and a half ago, but I do believe it is continuing to trade within what I would consider my fair value range.  In the meantime, they continue to spit out cash.