Markets This was a holiday shortened week and one with a more negative tone as investor are coming to grips with the realization that the US Fed and the ECB will likely continue to keep a tighter monetary policy for the balance of the year. Stronger than expected employment data in both the US and Canada are keeping central bankers on their toes and investors wondering how much more the Fed needs to do to push inflation lower.
The DOW was lower by 2.0% this week while Nasdaq dropped 1.0% and the TSX was off by 1.6%. |
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The DOW has been a little better than flat since start of the year while Nasdaq has been the strong performer, outperforming the DOW by roughly 30%. |
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Hard to imagine this kind of outperformance to continue especially into the headwinds of tighter monetary policy.
Financials The US dollar index saw a sharp drop on Friday and is back testing the 102 level. |
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The Canadian dollar saw a sharp drop versus the US dollar after the release of US employment data however it recovered somewhat when Canada announced strong labour data of its own. |
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The stronger than expected US and Canadian labor data pushed treasury and bond yields higher and are testing 15 year highs. |
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We haven’t seen Canada 5 year bond yields at 4% since late 2008. |
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Last time we had a big move higher in interest rates we saw the US banking system start to crack. It will be interesting to see if we start to see some issues soon, it’s hard to imagine equity markets moving much higher, in the short term, while trying to digest these higher rates.
Commodities Oil bulls were a little happier by the end of the week as WTI oil closed just shy of $74 for the first time in over a month. The battle between a slowing global economy and stronger North American labor data continues and looks like this week investors think oil demand will be a bit stronger for a bit longer. |
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Oil stocks have been in a lazy downtrend since November but have failed to make a lower low since March. A break above $82 on the XLE gets interesting for the bulls while a break below $76 likely encourages the oil bears. Right now I’m sitting this one out. |
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There was much more bullish action in the energy service sector. We saw a strong move higher in the Energy Services ETF (XES) with this ETF jumping over 5% on Friday in one of the strongest daily moves in months. We did see one of the strongest increases in weekly active drill rigs according to Baker Hughes with US active rigs climbing by 6 rigs and by 8 rigs in Canada. |
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Gold had another dull week closing almost right where it closed last week. Precious metals likely stay challenged if we continue to see tighter global interest rate policy. |
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Stocks Markets look toppy to me. Nasdaq has been on a tear; the DOW and its basket of industrials have been somewhat flat. It seems like we are back to the old days of buying what’s hot and exciting. Greed or the risk trade seems to be back in full force and I’m taking the “be fearful when others are greedy” approach right now.
Yes, jobs are plentiful, and the consumer still seems to be spending like drunken sailors on weekend shore leave. I’m not liking the set up here. In my opinion, the big markets need a hefty breather. Thankfully I don’t trade the markets, but I do prefer to buy my individual names when they have good pullbacks and sometimes that comes due to market pullbacks/panics.
In the smallcap/nanocap space we are seeing a wider spread between the haves and the have-nots. Those that are generating cash and those that are burning cash. The companies from our portfolio/watchlist hitting 52 week highs this week are H2O Innovation (HEO.T), ADF Group (DRX.T), CanadaBis Capital (CANB.V), AirIQ (IQ.V), Total Telcom (TTZ.V) and one of our recent watch list additions Good Shroom (MUSH.V). All these companies are cash generators. |
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A few other notables this past week had some interesting moves or news. Grown Rogue (GRIN.C) announced a debenture financing. With a convertible price of $0.24 this financing likely puts a ceiling on the share price for a while as I can see where some existing investing might want to swap existing shares for a sweet convertible and warrant. |
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Char Technologies (YES.V) announced that the world’s largest steel maker will be making a strategic investment in the company along with an annual biocarbon purchasing agreement. Shares rallied 9% on the news. |
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Another name I want to bring to your attention is Decisive Dividend, (DE.T). This is a nicely growing entity that acquires boring businesses with a model that I’m a big fan of. They describe themselves like this: “Decisive Dividend is an acquisition-oriented company, focused on opportunities in manufacturing. The corporation's purpose is to be the sought-out choice for exiting legacy-minded business owners, while supporting the long-term success of the businesses acquired, and, through that, creating sustainable and growing shareholder returns. The corporation uses a disciplined acquisition strategy to identify already profitable, well-established, high-quality manufacturing companies that have a sustainable competitive advantage, a focus on non-discretionary products, steady cash flows, growth potential and established, strong leadership.”
The company pays a very juicy dividend and just announced an increase in their monthly dividend to $0.04 from $0.035 or roughly 6.7% at current prices. We have a SCD Zoom interview scheduled with management, so we’ll get a chance to dig deeper and see if this bigger than our typical company makes the grade. |
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This week we also had Immunoprecise Antibodies release year end financials and followed that with their quarterly conference call. The numbers were more or less as I expected, and I didn’t find too much new stuff in the conference call except for strong jump in order bookings for the CRO and some details around service revenue quotes for Biostrand. It appears that we should start to see a material increase in revenues in the coming quarters. They did state that they will be looking to raise money to bolster their cash position so any material increase in revenues should lighten the need for outside equity capital.
Other Stuff Having read all the books in the Market Wizard series by Jack Schwager and the recent book “How to Invest” it becomes pretty clear that most of the great investors in history have made the majority of their gains in a small handful of investments. I remember my days as a broker and for the life of me I can’t remember any of the active traders in my times ever gaining and/or keeping any amount of significant wealth. There were quite a few long term investors that did. The active traders put in just as much effort, maybe even more, than the less active, long term focused investors. But over time I did see a distinct difference between those active, almost compulsive traders and the almost sloth like successful investors when they looked at new investing opportunities. The traders said yes very often, the sloths said no almost all the time. However, when the sloths said yes, they bet big. When it comes to investing, especially in the microcap space, it’s not batting average that matters in slugging percentage. Warren Buffett likes to call it a “fat pitch”, that rare opportunity that presents itself where the odds of success are very high, and the chance of loss is very low. Some might call it an asymmetric opportunity where there is limited downside and much bigger upside. Seth Klarman calls it investing with a margin of safety. In any event this type of investing requires discipline and patience. It also requires the ability to determine whether it indeed is a fat pitch or a knuckle ball. And if it is a fat pitch you need to have the courage and conviction to bet big. As Mr Buffett also like to say “Opportunities come infrequently. When it rains gold, put out the bucket, not the thimble”. This week I’m reading: Unknown Market Wizards – Jack D. Schwager – The Best Traders You’ve Never Heard of – I’m actually re-reading this one. It’s latest in a series of great books interviewing some of the best investors of the past few decades. I highly recommend this series of books. It’s confirmed for me that there are many different investing strategies that work as long as you stay disciplined and work hard to find a system that works for you. Almost all of these different investors found an edge that they could exploit and focus on. To your wealth, Paul and Trevor |
