Risk on, risk off

Today was clearly a “risk off” day. After the EU had all the “good news” by extending another $100 billion to Spain which enabled them to kick the can down the road for another few months.

I will use spot WTIC crude as an example, but really, this could have been a chart for any of the major indicies and bond yields:

I always play this imaginary game with myself: looking at just one intraday chart and then extrapolating how the rest of the market fared in the day. Financial wizards call this “correlation”. Basically you can see how the entire commodity market (minus Gold and Silver) did by just looking at the Canadian to US dollar ratio. If the Canadian dollar strengthens, its a pretty good sign that commodity markets are up.

Today, with crude down, clearly the Canadian dollar will be losing purchasing power. The fun, however, is looking at individual issues and picking out the semi-liquid ones that have gotten taken down with margin calls. I still don’t see signs of too much distress in the non-AAA/AA/A Canadian corporate debt markets at the moment, unless if you’re an investor in Yellow Media.

I’m waiting to pounce for the day that I can deploy this cash, but it is still not here.

Chesapeake Energy – How long to clean up the mess?

I will not be taking any positions in Chesapeake Energy (NYSE: CHK), but the story behind it is fascinating. The latest revelations from Reuters not surprisingly shows that the corporation has significant structure built around the CEO’s lifestyle.

It makes you wonder how this will all go down when they finally get rid of the board of directors and the CEO is forced to depart. It will be a long and messy restructuring process, and most importantly for shareholders, costly. You can be sure that the lawyers that are working there are structuring the breakup of the CEO from the company to be as long and strung out as possible, baked with non-arms length relationships. This will all likely culminate in some sort of lawsuit whether such agreements were legal.

In other words, the company is going to be in a very messy state of affairs for a very long time. This is reflected in their relatively depressed share price, but the question for any prospective purchasers would be – is all of this bad news baked in, or is there still more bad news out there that needs to be reflected in the share price? One almost forgets that the company’s main business is the production and sale of natural gas.

Sometimes you hit, sometimes you miss – Miranda Technologies

I was relatively close on pulling the purchase trigger on Miranda Technologies (TSX: MT) – my initial accumulation price was set to be a shade under $10 per share, and they got down to $10.26 before they agreed to be purchased for a $17/share cash bid.

So in other words, I had no position when they were taken over for over a 60% premium from the previous day’s close. Yuck.

It’s painful to see a bunch of research get dumped down the drain in such stellar fashion. That said, one could have inferred something may have gone on with respect to a so-called “strategic review” of the company that has been going on for some time. Such reviews may or may not result in takeouts with premiums, so it is always wise to take such information in balance.

I’ve been nibbling on a slight bit of equity over the past week. I’ve added one new name, and added to an existing position, and added a position in a company that I have owned before. I still have 71% cash.

Canadan Short-term interest rate speculation

BAX Futures are pricing in a chance for a quarter-point rate cut by the Bank of Canada:

Month / Strike Bid Price Ask Price Settl. Price Net Change Vol.
+ 12 JN 98.740 98.745 98.740 0.005 17775
+ 12 JL 0.000 0.000 98.735 0.000 0
+ 12 AU 0.000 0.000 98.725 0.000 0
+ 12 SE 98.940 98.950 98.940 0.000 54050
+ 12 DE 98.980 98.990 98.980 0.000 49142
+ 13 MR 98.940 98.960 98.940 0.020 33314
+ 13 JN 98.920 98.930 98.910 0.020 23069
+ 13 SE 98.880 98.900 98.880 0.010 4780
+ 13 DE 98.860 98.870 98.850 0.020 1467
+ 14 MR 98.820 98.840 98.810 0.020 960
+ 14 JN 98.770 98.780 98.760 0.210 571
+ 14 SE 98.710 98.730 98.690 0.020 101
+ 14 DE 98.650 98.670 98.630 0.020 83
+ 15 MR 98.580 98.600 98.580 0.010 136

I personally don’t see it happening – Mark Carney is going to hold pat at 1%.

The following is a chart of 1-year Canadian treasury note yields:

What I find interesting is that just a month ago the market was pricing in a significant increase of interest rates – something flipped like a switch, and this is undoubtedly due to the theatrics going on in Europe at the moment. Big players are raising cash and this is depressing asset prices.

Still watching and waiting

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.