Divestor – Page 188 – Canadian Finance, Economics and Fiscal Analysis

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):

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.

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.

Market is beginning to panic?

The S&P 500 is down two days in a row, significantly, and everybody is panicking.

Volatility is up from 12% to 16% and the whole world is about to collapse.

The fact that we are 3% from the all-time highs has nothing to do with this sentiment. Stock markets are supposed to go up forever, all in a straight line, right?

Less sarcastically, my general feeling out there is that almost anybody investing from about August 2011 has not felt the experience of real loss. As a result, I think the market sentiment is going to be quite skittish – people with gains will want to lock them in quicker than normal, especially now that the 2013 tax year is over. Just a guess.

I continue to have 1/3rd cash and am being patient.

The decline of the Canadian dollar

There have been drawn out periods where I have done literally nothing and 2014 has had that kind of start for me. Writing about how I am twiddling my thumbs is very unexciting, so I will talk about something which has caught my radar: The Canadian dollar.

Just like any patriotic Canadian, cross-border shopping (and just generally enjoying recreation in fantastic and not-too-contaminated by mass population areas like the Oregon Coast) is something that is easily accessible due to the relative strength of the Canadian dollar.

As you can see from the chart above, our purchasing power has just eroded by about 10% over the past year, which is mildly disturbing and makes inexpensive vacation prospects slightly more expensive. When something makes my recreational agenda more expensive, I take notice.

Not helping was today’s announcement by the Bank of Canada, declaring that inflation is “further below” their 2% target, which creates more pressure that interest rates are not going to be rising anytime soon, ergo the currency drops to the USA, which is starting to see signs of their short term rate increasing:

The thoughts swimming in my head is whether the drop in the Canadian currency is a predictive indicator of what is going to happen to the Canadian economy and equities as a whole (adjusting for the impact that they are now cheaper to purchase with US funds!)?

We will see. My market exposure is relatively low and I have not been inspired by anything I have seen out of the marketplace. It might be some time before I write again given this “do nothing” stance.

When to give up investing in individual stocks and bonds

Michael James has a fairly good article on why he chose to stop investing in individual securities and instead just go with low-cost index funds (or ETFs).

Putting a long story short, he put in a lot of time into researching the stock market between 2000 and 2008 and failed to outperform his baseline index and then a couple years later made the decision to just give up and index.

Pretty smart, I would say.

When I look at my own performance where I have an 8-year baseline of data, 3 of those 8 years I have underperformed the major indicies. One of those years I definitely attributed to mental stupidity on my part and is a genuine outlier year of profound incompetence (2011). Overall, I am still performing about 12% over the S&P 500, but this could just entirely be luck. Very difficult to say as I do not believe 8 years is a sufficient baseline.

If I was performing at or close to the index average, I would easily say that giving up would be a good option.

The other component of individual equity and bond investing is that it requires a lot of time and mental concentration to be able to pluck value out of the marketplace (and more importantly, to know when to pluck it out!). An index investor just needs to decide what low-cost baskets to put his/her money into (e.g. an all-equity allocation would be 20% TSX, 20% S&P 500, 20% S&P 400, 20% S&P 600, 20% International) and just sit back. Of course, there is a science to this as well that requires a certain amount of research, but the idea is to just set the autopilot switch on and forget about it while focusing on other parts of life.