Posts from the ‘Uncategorized’ Category

A Short Update

My portfolio did not trend up with the market last week because of hedges that went down on the rally and the Canadian dollar which corrected back up.  But whatever, I’m happy to sit this out.

Honestly, thinking too much about the market right now makes me a little ill.  It seems like a sideshow to the reality that is playing out.

But I said that I will write through thick and thin and so I will.   I’ve resigned myself to the fact that I’m not smart enough to figure out what the market does from here.  Its some combination of death tolls, hospitals being overwhelmed, drug and vaccine trials that I have no insights into, and how an economy comes back after being shut down.

And then there is the question of if you can go back to normal or if it just brings the virus back.  Not to mention how/if these huge government stimulus programs change the way things are when this is over.  Do restaurants open up again, do airlines fly, it just could be a totally different world.  Or maybe not.  I just don’t have a clue.

I have been surprised and not so surprised about the move back up in the market.  I mean the market was incredibly oversold.  So it was probably bound to happen.  But at the same time, I cannot share the optimism.  I think that the timelines for some degree of normalcy that being bandied about are optimistic.  Consider that here in Canada, the British Columbia health minister said yesterday that she thought any easing of restrictions before the summer was unlikely.  And that after British Columbia has said that there measures are starting to impact the curve.

It is the medical experts that have been most consistently right through this pandemic.

In Alberta, the testing has been excellent, social distancing has set in, and that (at least so far) has helped immensely.  Our cases have not gone crazy.

I did a few things with the portfolio in the last couple of weeks.  I made a couple of tiny trades on the tankers, buying DHT Holdings and Ardmore Shipping.  The oversupply of oil is going to be tremendous.

While the focus is on OPEC+ and the supply increase from Saudi Arabia, that pales in comparison to the demand destruction of the virus.  I don’t think anyone really knows how much demand is being lost but the numbers I’ve seen are anywhere between 15mmbbl/d to 30mmbbl/d.  In the Great Financial Crisis of 2008 it was 5mmbbl/d and that amount sent oil into free fall.

So quite honestly, I think that the Saudi’s are a bit of a sideshow here.  It is a nice story to talk about but would OPEC+ really cut 15mmbbl/d anyway?  Could they even cut that much without damaging the fields?

I also took a position in GoodFood. It has moved up a bit since I bought it (at a little under $3).  My thesis was basically how can this stock be worth less now than before the virus hit?  GoodFood provides meal ingredients and recipes, delivered to your home.  They operate in Canada.  Their counterpart in the United States, Blue Apron, is up six-fold since the virus hit.  GoodFood is flat.  Yet GoodFood is growing faster and has a better balance sheet.  Our family used GoodFood even before the virus so I am familiar with the product and its great.

As I have been scratching my head about why the market could be so strong, I also decided to add a little to my index hedges and shorts in the last few days.  All on the edges, but I just don’t see how we get out of this quickly.  There would also seem to be an outside chance that things really go sideways.  I do not see how the market is pricing that in at these levels.

What to do now?

Portfolio Performance

Thoughts and Review

“Everyone has a plan until they get punched in the face.”  – Mike Tyson

Leading up to this correction or panic or collapse or whatever this is becoming, my only plan was – ‘Do not get punched in the face.’

So far I haven’t gotten punched in the face.  I hope that I can continue to say this after today.

I’m purposely trying to write this before the open of the market because I suspect once the market opens I will have different thoughts.  Depending on when I publish, I might even write a second half post-mortem.  With the S&P poised to open -7% I suspect that market moves will be impacting my mindset today.

Going into the open, I think I’m okay.  I’ve tried to do everything to protect my portfolio – as I wrote at the beginning of February, I have reduced all but my most core positions, hedging with inverse ETFs, shorted oils and airlines (can’t do that in the practice portfolio but I’ve noted it on a bunch of past posts).  Keeping positions that have lots of cash (ie. my largest long has a market capitalization that is ~95% backed by cash on the balance sheet).  And maybe most importantly – being a Canadian invested in US dollar assets (the Canadian dollar is down 1.5% this morning).

If there was one smart thing I did last week, it was that I sold my FXC.  That is a USD/Loonie currency hedge.  I was about 50% hedged on my US dollars and now I’m not.  While I did not expect OPEC to crumble this weekend, it seemed like this market would likely not be friendly to the Canadian dollar.  This was really a bit of a lucky move but its going to pay off today.

If there is an Achilles heel to what I have left, it would be my gold stocks.  I own a few and they do not seem to care much what gold does right now.  I am reluctant to sell them because they remain very cheap, gold is holding up, and gold and gold stocks have proven in the past to be the first movers when the smoke starts to clear.

I remain hopeful that one of these days the gold stocks will start the day down and rise (they kind of did this on Friday) – which would finally demonstrate and end to the selling pressure which I believe is based mainly on fear.  I mean, the main reason I’ve heard to be worried about gold stocks is because they might have to shut down their mines if the virus gets really bad.  My response to this is that if its gotten that bad that remote mines are shutting down, then we are in big, big trouble.

I was going to write a what now part to this post, but to be honest, I’m still not sure.   I will cover some energy shorts soon, and maybe sell some inverse ETFs.  I’m still inclined to buy large caps like Facebook and Google but honestly, this is so far beyond my pay grade I’m tempted to just continue to sit it out.

One thing that surprises me is how stressful this is even though I’ve tried to do everything to limit exposure.  I’m still not sleeping great, still anxious.  Its crazy.  I remember in 2008 a friend of mine, who was smartly hedged (I was not), saying it was wearing him down.  I didn’t understand that and now I do.

Portfolio Composition

Click here and here for the last ten weeks of trades.

A Little Less Bearish

Following up on my intention from mid-week, I took off some of my index shorts on Friday.  I also covered my oil stock shorts and some of my tech one’s.  I’m keeping the airlines.  Because the market fell so far (I did not expect the S&P to get all the way back to the mid-2,800s!), I decided to cut my short exposure by more than I had anticipated.  I now hold less than half the index shorts that I did.  I took the first of some small longs – in very large cap names – Google, Abbott Labs and MasterCard.

Mostly, I’m less bearish because the market has come down a lot.  But a couple of other things are playing into my thinking as well.

For one, as the market continues to decline a coordinated effort from the central banks seems more likely.  While I’m not sure that a whole bunch of money is really going to solve anything, I’m inclined to think that the market will go up on such an intervention, at least for a while.

Second, there seems to be a path out of this mess and that is important.  The thing the market really hates is uncertainty.  And while uncertainty about the coronavirus still abounds, we aren’t flying completely blind here.

First, China appears to have provided everyone else with a template for how to get through this.  Cases in China seem to be declining (if you believe their statistics that is – in itself is a reason to be cautious).

Now, in North America we can’t be as draconian as the Chinese, but we can shut down schools, stop gatherings, and businesses can close for a period in areas where the virus takes hold.  The experience of China suggests that seems to work.

Additionally, there is a vaccine in development and maybe it isn’t as far away as it appeared a few weeks ago.  It might only be a few weeks from being developed, which could mean as little as 3-6 months until it is available.

You put these things together and you can see how globally, we could get through this in maybe 6 months. You can envision a path to the other side.

While that path is not good for the global economy, the stock market always looks past the immediate bad things and asks what happens next – and you can see how what happens next doesn’t necessarily have to be all dark and grim.

This may not be a path to immediate new highs for the market, but I also don’t know if it is a path to a full-on 1987 or 2008 style panic.   I wasn’t around for 1987 but I was for 2008 and the collapse didn’t happen until the credit markets actually seized up, at which point no one saw a path out of it.  There was a real fear that things just wouldn’t come back – that there was no path out.

Contrast that with the beginning of September 2008, which was like 3 weeks before the world went completely on tilt – the market was down less than 10% and holding up okay-ish.  Maybe if the Fed had bailed out Lehman (and everyone else subsequently), we wouldn’t have had 2008 at all?

My point is that the market doesn’t collapse on the possibility that something bad might happen.  It teeters on that.  It collapses once that possibility becomes inevitable and especially when it doesn’t see a way out of that bad event.

I just don’t know if that is what we have here.

So those are the positives that cause me to be a little more bullish, to take off some shorts, and to buy some Google (Google!  Me – buying Google – Hah!).

The negatives that keep me from really diving in here, apart from the obvious uncertainty about the virus itself, is that I’m a little wary about what happens to the global economy as parts of it potentially shut down for a period.

Once we are through to the other side of this, will it just bounce back?  I know that is the consensus.  I’ve read a ton of brokerage reports and they are all like – one quarter or two quarters of drop and then everything bounces back to normal.

The assumption implicit in that prediction is that the economy works like a machine.  You can turn it off and on and it effectively goes back to behaving the same as it was.

I’ve never been entirely convinced of that.  I’m more of the Jane Jacobs school of thought that the economy is like a complex ecosystem.  And ecosystems don’t behave mechanically.  They are less predictable.

I mean, again using 2008 as an analogy, we turned the economy off for a month (maybe two?) and it seems like it took years for it to completely bounce back.

This is different of course but I’m still a little concerned that while the virus will pass, the ripple effects on the economy won’t pass as quickly.  That after the initial exuberance of containment, the aftershock of having shut so much down for months will have a lasting impact on businesses.

But I don’t know, I’m really not sure about this.  It is different; it’s likely not going to shut things down in the same way that a credit crisis or even a business cycle shuts it down.  I’m just a little wary, and why I’m still positioning myself more out of the market than in.

The other thing I did, and I’m not really sure this was a good idea, is I bought back a portion of the gold stocks I had sold.  I bought some Gran Colombia and some Wesdome.

I don’t know if I should have done this.  Gold is so bizarre.  You just never know.  Also, consider the following:

1. India and China make up the bulk of jewelry demand and the virus may make that take a hit – it already has to be hitting China and it seems inevitable that India gets hit with this virus at some point and I don’t see the same sort of containment strategies working there – it could be a real disaster in a place like India
2. Gold stops doing well if things really deteriorate.  Everything is rosy in gold as long as everyone still believes that its all going to be ok when central banks step in.  We saw a bit of this on Friday.  I learned in 2008 that if the shit really hits the fan gold is going to tank with everything else for a while.  It will be the first thing to come back, but you’d be better off out until that liquidity crunch ends.  I don’t know if this virus panic gets to that point, maybe not, but it gives me pause.

On the other hand, I mean holy crap – Gran Colombia and Wesdome were down ~15% on the day when I bought them (!!) and gold is still well above where it was at even the beginning the year.  They are making a lot of money – Gran Colombia is trading at like less than 2x EBITDA and probably less than 4x free cash flow at these gold prices (I haven’t worked through the free cash flow numbers at $1,600 gold so don’t quote me on that, but its in that ballpark).

But it is gold, so expect the unexpected.  I might be backtracking on those purchases.  I’m staying nimble.  My underlying framework is that I don’t know much at all.

Continuing to Wait

I wrote a few weeks ago that I was sitting on the sidelines.  That continues to be (mostly) the case today.  It has not been without some pain however – the market went up for the first two weeks of February and I’ll be honest, it was getting very frustrating as it just didn’t make sense to me.  Fortunately I stuck to my resolve and stood mostly pat, watching stocks go up while my portfolio did a whole lot of nothing.

Now though, the tides have turned.  The market seems to be waking up to what this virus will mean for economic activity.  My portfolio has done well and is at a new high, up about 2% for the month, while the S&P has fallen 7-8%.

Though the market has fallen pretty far pretty fast, I’m still reluctant to do much other than make small trades here and there for a bounce.  I did take off some of my short positions – 20% of the index shorts (I think I will take off another 20% today or tomorrow as we can’t just keep going straight down) and roughly 1/2 of my airline and oil shorts.  I may regret reducing the oil and airline shorts if the market continues to fall given that they are obvious collateral damage of the virus spread.  I did take on a few small, big-cap tech shorts, like Apple and Skyworks when things seemed to be getting particularly silly.  But I’m wary of how oversold we are and wary of some sort of stimulus package that seems inevitable (there was a call for it in the WSJ this morning).

I did sell some stocks that had what I would call unappealing news.  When Smith-Micro came out and said that they had acquired a competing company that was a provider to T-Mobile I sold the stock, thinking that this probably meant that there would be no T-Mobile deal coming in the short run.  When Big Five Sports announced bad guidance for the first quarter (due to weather) I sold out of that stock as well, thinking that being a retail chain with poor guidance in the midst of this virus was probably not a good combination.

I also sold some stocks on good news – in this case mostly the gold ones.  It felt to me like gold was getting a little frothy earlier this week and so I have lightened up significantly on almost all of my gold positions – Gran Colombia, Wesdome and the like.  I’m also wary that there are headwinds here for gold – first that India and China make up the bulk of jewelry demand, which is going to get hit by the virus and B. that if the shit really hits the fan gold doesn’t tend to do that well.  The only gold stock I didn’t sell was Roxgold, which is simply because the damn stock won’t go up!  I also added a small position in a new miner – Teranga Gold.

The other thing that I have done is take positions in some bond indexes.  This seems like another way to play the virus and what is likely to be the inevitable slowdown that will materialize.  Unlike shorts, I’m not sure that bonds will drop as the central banks inevitably respond, so it might be a bit safer avenue.  I bought TLT, ZAG and XSB.

Two stocks that I have decided to keep positions in are Evolent Health and Digital Turbine.  Both had good quarters in my opinion.  With Digital Turbine I really like the acquisition of Mobile Posse and insiders have been buying stock since the release of the quarters results.  Evolent’s revenue guidance for 2020 was very good, and while their EBITDA guidance was light, that would seem to be because of the ramp in costs from the growth.  The stock is still held hostage to Passport though, which should resolve in the new couple of months.

Finally, Schmitt Industries had some (maybe?) good news when they announced the delay of their de-listing transaction as the evaluated a new opportunity.  I’m hopeful but guarded about what the opportunity might be.

Looking ahead, I’m of the mind that when I do get back into the market I will look for larger companies to buy.  It just seems like every time there is a big sell-off, its always the big companies hat recover fastest.  There are a lot of big-cap names that are beginning to get whacked but good.  So I’m trying to figure out some simple ideas here that will work once the turn begins.