Markets After some R&R down in Mexico with the family it looks like I have a lot of catching up to do. Equity markets were already moving higher going into the week but better than expect US inflation data threw more gas on the fire. Investors seem to be thinking we may be closer to the end of the monetary tightening cycle and perhaps closer to an interest rate cut. The Dow finished the week higher by 1.9% while Nasdaq gained 2.6% and the TSX jumped by 2.7%. |
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It looks like this past week was a major turning point and the action in equity markets may be enough to change many opinions. We saw a number of well known and influential investors change their opinions and in the case of Michael Burry, of “Big Short” fame, closed his short bet against the S&P 500 and Nasdaq.
Financials We saw a big move in treasury yields over the past 2 weeks and last week’s release of the US consumer price index had treasury yields testing new multi month lows. Just a few weeks ago many investors were calling for “higher for longer” as it appeared that treasury yields were likely to move and stay at elevated levels last seen almost 2 decades ago. Now it seems the question has become when will the Fed start lowering interest rates.
The US 10-year bond yield has dropped by over 50 basis points within the last month and looks poised to move lower still. The combination of lower than expected US inflation data and ongoing weakening economic data in the US, Europe and China have many bond investors starting to change their expectations. |
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The US dollar is following treasury yields lower and we now have the US dollar index back below 104 for the first time in 2 months. |
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And of course, as go US treasury yields so goes Canadian yields. The much watched Canada 5-year bond yield is back down testing the 3.75% level. Several Canadian banks have already started lowering fixed mortgage rates on the back of these lower bond yields. A break below 3.75% could be a big break and signal that even lower yields are to be expected. |
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Commodities Oil prices have now dropped for 4 consecutive weeks and briefly traded below $72.50 (WTI) before bouncing back a bit on Friday. That’s a drop of almost 20% in 4 weeks. It looks like a lot of energy bulls have been caught offside and a lot of stop losses looked to have been triggered when oil drop quickly below the $80 level. Many were expecting the potential US strategic petroleum reserve buying to act as a floor as well as OPEC to put up stronger support and it will be interesting to see what their next moves may be. OPEC has already announced supply cuts in the recent past, will they enact more cuts? We’ll see. |
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Unleaded Gasoline hit new 10 month lows before bouncing on Friday. Ongoing weakness in gasoline prices continues to be welcomed by those concerned with higher inflationary inputs. |
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And natural gas, one of the strongest commodities of late also saw a pull back in pricing. After tapping the $3.80 level 3 weeks ago prices are off roughly 17% since the beginning of November. |
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This week’s Baker Hughes drill rig activity data shows that the US saw 2 more active rigs while in Canada there was a drop of 3 active rigs.
Gold - Lower treasury yields and drop in US dollar are putting a bid back under the gold price. Gold in US dollars is back to testing the $2000 per ounce level. Gold likes lower interest rates and a lower US dollar so expect the gold bulls to be back out and cheering for a break back above that psychological price point. |
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And a commodity I rarely talk about but one that many of the junior mining crowd is now starting to cheer about is uranium. Uranium is another one of those “widow maker” commodities. It tends to have a raging bull market about every 20 years and with prices breaking out to new 10 year highs every junior mining promoter is starting to dust off old uranium projects to see if they can shake loose some investors’ dollars to play with. Uranium stocks are starting to go nuclear… |
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Stocks It’s been an extremely busy reporting period. Lots of companies in our microcap/nanocap universe have reported quarterly financials over the past 2 weeks. It will take Trevor and I some time to finish going through them all, but until then, there were a few that stood out.
Let’s start with Cipher Pharmaceuticals (CPH.T). This has been one that we have been following for quite a while. Our first recorded management interview was from about 2 years ago and then again about 5 months ago. Cipher Pharmaceuticals is a specialty pharmaceutical company with a robust and diversified portfolio of commercial and early to late-stage products. The company announced a 27% increase in Q3 revenues and a 165% increase in net income. Net income was boosted by a income tax recovery so looking at pre-tax income better represents the income growth. Pre-tax income was higher by 36%. This cash-rich company has been voraciously buying back its own shares and even after the recent pop in share price trades at a relatively low EV/ebitda of 6.42. |
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The other notable surprise was Cematrix Corporation (CVX.V). The manufacturer and supplier of technologically advanced cellular concrete products, reported a nicely profitable Q3 with revenues higher by 76% and operating income of $2.5 million vs $300,000 in the year ago period. The company has had its fair share of challenges, and has chronically under-delivered over the past few years, but seems to have finally hit its stride and with a very large backlog of projects should see continued growth. Shares closed at its 52 week high of $0.24 on Friday. |
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Two other companies that reported that I want to mention were AirIQ (IQ.V) and Zedcor (ZDC.V). Both reported higher quarterly revenues with AirIQ seeing revenues higher by 15% in Q3 but net income was lower by 35% due to a slight increase in marketing expense and a roughly $130,000 difference in foreign exchange gain. The stock saw a significant drop of over 28%, a significant over-reaction in my opinion, and puts the stock at an attractive valuation. |
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Zedcor (ZDC.V) announced an 11% increase in Q3 revenues. Net income dropped from $966,000 to $288,000. The company is seeing some volatility in monthly revenues and utilization rates as the Trans Mountain Expansion pipeline project comes to an end and equipment is redeployed to other customers throughout the company's operating regions. The drop in earnings has been expected as the company had pre-warned of this as the company relocates equipment. Many investors likely have been waiting for a drop in share price on this weakness, but as so often happens, it’s possible that this weakness in earnings has already been priced into the stock. The stock was basically unchanged on the news. |
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Other companies of note reporting this past 2 weeks included Payfare (PAY.T) revenues up 35%, Kits Eyecare (KITS.T) revenues up 32%, Enterprise Group (E.T) revenues up 61%, McCoy Global (MCB.T) revenues up 36%, VitalHub (VHI.T) revenues up 35%, and Knight Therapeutics (GUD.T) revenues up 13%. |
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There have been no shortage of strong earnings reports this past quarter and we are rapidly reviewing them all with the idea of highlighting some of the better opportunities that are starting to present themselves. We’ve reached out to a number of the strong performers with the hopes of getting them to update us through our zoom interviews.
Stay tuned. To your wealth, Paul and Trevor |
