Canadian Finance, Economics and Fiscal Analysis
I am back from my 6-week vacation outside the country (where the weather was much, much warmer) and will hopefully get back into mental shape to post about some projections for 2012, the performance in 2011 (not good!) and other such worldly things.
One thing I do know, however, is that unwinding from an extended stay out of the country takes a long time, and recovering from a 16 hour time change is not pleasant!
After this post, it is quite likely I will not be posting again on this site until 2012. The reason is simple: I am taking an extended vacation. I will generally not be in front of a computer during most of this time!
I won’t even have access to my portfolio, but at 72% cash, it is unlikely to cause any heartburn in the event that the European Union fiscally has a true blow-up and takes down the whole financial system in the process.
I do have some positions in companies that I have programmed a “trading autopilot”; these transactions will occur automatically given a set of conditions, both time and price. Interactive Brokers in this respect is quite friendly.
Have a Merry Christmas and Happy New Year!
Reviewing my predictions for 2011 (at the end of the 2010 annual report), I had the following predictions:
Predictions for 2011
Take these predictions with a grain of salt:
* The US Federal Reserve raises the short term rate by the end of the year. Thus, it follows that:
– The US Dollar will rise relative to the Canadian Dollar in 2011 (close of 2010: 0.9945 USD = 1 CAD).
– Spot Gold ends lower at the end of 2011 than the beginning of 2011 (close of 2010: US$1421/Oz).* An equal-weighted basket of the five big Canadian banks (BMO, BNS, CM, RY, TD), purchased at the December 31, 2010 closing price, will underperform a 1-year CAD treasury bill yielding 1.4% on December 31, 2010. (NOTE: dividends and interest are not reinvested in this prediction).
* My unconventional prediction for 2011 is that US cash will outperform the S&P/TSX Composite Index (link) starting February 28, 2011.
All-in-all, not bad. While the federal reserve did not raise short-term interest rates, they did conduct “operation twist” (selling short-term maturities and buying long term ones) which did raise short term rates (e.g. 3-month LIBOR went from 0.3% to 0.48% currently). The US dollar is about 2% stronger relative to the CAD currently; while spot gold is approximately 20% higher than at the beginning of the year.
Currently an equal-weighted basket of the five big Canadian banks will have lost you money – Year-to-date and adding in dividends, BMO is up 4%; BNS is down 11%; CM is down 6%; RY is down 12%; and TD is down 1%. Right now the banks will have earned you a 5% loss; a 6% spread over a T-Bill.
Finally, the S&P/TSX has performed at -15% since February 28, 2010. The US dollar has gained 6% since February 28, 2010 over the Canadian dollar.
There is about a month and a half left to the end of the year, so these results will likely change.
Rogers Sugar (TSX: RSI) announced at the end of trading they had a bought offering of debentures, and calling in their existing series of debentures (TSX: RSI.DB.B) effective around December 19, 2011.
Holders of RSI.DB.B will be receiving a nasty shock tomorrow because of this call announcement – they were trading around 104 before this happened, but now the debentures will only be redeemed for 100. Any recent buyers of the debentures will take a bit of a loss. The debentures were trading slightly above par because of the conversion feature embedded within them – they are convertible at $5.10 per share and with the market price recently at $5.14, it is possible there may be further conversions. The debentures will trade at 100 plus the embedded value of a call option that expires on December 19, 2011.
The deal itself is very good for Rogers Sugar – they have extended the term structure of their debentures to April 2017 and December 2018, done so at a slightly lower coupon rate, and an increased conversion price ($6.50 and $7.20 per share, respectively). Overall, Rogers Sugar has performed excellent in my portfolio and I continue to hold a position in the equity, albeit the equity is in my fair value range. Although the investment has been about as exciting as watching paint dry, they have performed solidly.
Oil has been rising steadily over the past month:
This is, in large part, due to the geopolitical premium that has built up in the commodity on fears of supply disruption from a potential strike on Iran from Israel. Other commodities have been roughly flat, with the notable exception of Natural Gas crashing through the floor:
Until we start seeing more consolidation and shutdowns of natural gas drillers and producers, this supply-demand picture is not going to be changing anytime soon. Big fish such as Encana (TSX: ECA) look cheap, but until we start seeing liquidations of smaller players or spontaneous construction of significant amounts of natural gas burning facilities, I would not be touching natural gas commodities. Notably in the peak of the last economic crisis, natural gas went down to US$2.5/mmBtu and at that level it would bankrupt most leveraged small producers. Larger companies like Encana just need to wait with a pile of cash and mop up when the time is right.
As for the oil markets, it will remain volatile as traders are seemingly using it as a proxy for geopolitical event risk.