Week 131: Flat on my Back

by Lsigurd on January 5, 2014

Portfolio Performance

See the end of the post for the current make up of my portfolio and the last four weeks of trades.

Recent Developments

Its been a very quiet month and you can count the number of trades that I made on both hands. I was away for some time, there were holidays, and I was laid up with back problems for over a week.

Being laid up and not able to do much of anything reminded me of the importance of giving myself time to think. There are so many ideas to chase down, so many angles to look at, its easy to spend all one’s time doing and no time thinking about what else you might be doing.

It was that thinking that brought me to the idea about Pacific Ethanol, which I wrote about here. Pacific Ethanol was a story that I had been reading posts on the Investorshub message boards for a while, but because I hadn’t really stopped to think about the idea, it remained just a stock that I didn’t understand that kept going up.

After a bit of thinking, recognizing that the primary driver of the ethanol market was corn prices and that corn prices had basically collapsed over the past 6 months, the idea became more clear.

A bit of thinking also led me to wonder what drove the stock market rally over the last few weeks. I heard all of the stuff about the Santa rally, year end mark-ups, but because the move occurred coincident with the Federal Reserve decision to taper, I wondered whether there was something more. So I started to do some reading through various interpretations of what the Federal Reserve had done.

The conclusion that I came to was that there was something fundamentally more bullish about what the Fed said than what was bearish in what the Fed did by tapering. This blog post, from the Wall Street Journal, described it well, saying “As the fall in the unemployment rate continues to outpace improvement in the broader economy, the Fed decides to sever the link to short-term interest rates almost entirely.”

According to this interpretation, the Federal Reserve basically will only raise interest rates when inflation becomes a problem. Now I don’t think inflation is going to be a problem for some time, especially given the inflation metrics used by the Federal Reserve. I suspect the market thinks the same. So its off to the races with cheap rates as far as the eye can see.

Getting Speculative with the TSX Venture?

The other thought that I have begun to toy with is whether there is an opportunity in micro cap Canadian stocks. I track the TSX Venture exchange in relation to my portfolio. Its the green line in the chart at the top that has steadily gone down since I started to keep track.

Now certainly much of this is due to commodities and particularly to gold juniors that are floundering towards oblivion due to lack of financing. But there are also a number of micro-cap technology, industrial and commercial businesses that have been slaughtered along the way and that hold (I think) some potential for out-sized gains. If rates are going to remain low, can these little speculative vehicles remain depressed indefinitely?

I’m talking here about really, really, tiny stocks, almost all the one’s I’m looking at are less than $50 million market capitalization and sometimes less than $10 million. So that might exclude some readers right there. But being a small potato myself it doesn’t bother me as much, I just have to watch my size and liquidity in cases where getting out might be a problem. There are some very cheap stock around on the Venture index, trading at cash, trading at low EBITDA multiples, and its the sort of thing that with a bit of positive mojo we could see impressive gains. I’ll likely be talking about some of the ideas I’ve come across in the upcoming weeks.

Some Sells

I lightened up on a few positions in the last month. To recap briefly: I explained my position in New Residential in my last update and that my bullish outlook had made my position larger than my liking. I expected that if the thesis played out the way I anticipated that I would be reducing it to a more normal size in short order. I did just that in the last few days of the year, taking a ~15% gain in a little over a month as the stock rallied to over $6.90.

I also did a little tax loss selling, reducing my positions in Timmins Gold and Palliser Oil and Gas, taking off about 20% of each position. I’ve written about both stocks relatively recently, and I plan to tough it out with my remaining stakes in both. But it made sense to take advantage of some of the losses to reduce my tax burden in a few months.

I also added a couple of starter positions in the last month. In addition to Pacific Ethanol I added Supercom and PNI Digital Media, both of which I will give a brief run-through in another post that I am going to separate out from this one because its getting too long. I will post that later today.