Cheque Writing Continues Unabated
Massive Relief Buoys Economy
The last 6 months has been very difficult. While the markets enjoyed a nice rally from the lows in March, the relief rally appears to be losing momentum. Optimism has begun to wane with the ongoing COVID case load rising almost every day. For example, most of Edmonton now is on “Watch Advisory” where the number of active cases per 100,000 below 50. Economies have become dependent upon Government assistance and the stock and bond market is optimistically hoping for more and more.
Industrial production has been decimated as evidenced by the price of copper which is a relatively obscure but helpful indicator of world economic health. The futures price for copper can be followed quite easily and the news today was not good as the copper price rally came to an abrupt halt with the bellwether metal experiencing one of the worst one-day price drops on record. On the Comex market, copper futures for the month of December fell 5.9% to a low of $2.8540 a pound amid heavy selling, with more than 2.6 billion pounds traded in a single day. It was the biggest decline since mid-March at the height of the covid-19 induced sell-off, which sent the copper price crashing to below $2.00 a pound – levels last seen during the global financial crisis.
Alberta Hit by Low Oil Prices
Oil prices attempted to recover this quarter, but the month of September was not pleasant for oil stocks. Prices for Suncor, Imperial Oil and Husky Energy had fallen between 26% and 32%, respectively in just 30 days. Over the past 5 years the companies are down between 56% and 85% from their peaks. Now, depending upon how you look at it, these stocks are either screaming bargains or relics of a dead and dying industry. Edgepoint, whose funds have some of the best 10-year track records of performance in Canada, believe they are incredible bargains and have just opened up a mutual fund targeted specifically to the oil and gas area of securities.
As Charlie Munger from Berkshire Hathaway has stated the best place to fish is where the fish are. So I went hunting for bargains in the oil and gas area and came up with Transglobe Energy. They have roughly $35 million in cash on their books and their whole company is valued at just over $35 million which means you can buy the shares for their cash and get the business for free. Values like these do not show up unless oil and gas shares are overly depressed so I am holding out hope for Edgepoint funds and Fidelity Large Cap fund that have high exposure to cheap industrial stocks.
Big Growth Gets Bigger
Momentum stocks of well-known companies like Amazon and Google continue to advance as they appear safe and solid even through these difficult times. The “problem” is not with the companies themselves because they will likely continue to do fine but the with the high price investors are willing to pay for the shares. If you look at the price/earnings ratios of these “big growers” versus the p/e ratio of the market as a whole they trade at roughly 6 times what the market trades for which shows them as more expensive relative to the market as at any point in recent history. Clients are understand-ably gravitating towards what is well known and what is safe but using the fishing analogy these spots have already been fished out. The chance of making future gains in this area is remote.
Advice From the Shuttle Driver
My auditor recently took her car in and was pleasantly provided with free investment advice. The shuttle driver gave her three “hot” stock picks, two of which were Esty and Shopify which were sure to do well. Now I don’t know about you but this reminds me of the stories of shoe shine boys giving investment advice in the last 1920s. Let’s just say it did not end well in the 1920s. Investing is not a sport. While it does have some entertainment value, you had better do some research on what the underlying shares are worth before you dabble in this area. It also reminds me of a gold miner, St. Elias mines that was heavily promoted in Edmonton some 10 – 15 years ago. I shorted the shares at $2.40 and was happy to see them fall to under $2.00. I think I covered at $1.75. When last I looked they were 1 penny each.
Advice From D.W. Good
Investing is never easy. It is best left to the professionals like Edgepoint, Mackenzie and Fidelity. Even the top performing funds with the best 10 year track records can find themselves “at the bottom of the charts” with short term performance. You literally have to have faith that the manager knows what he or she is doing as performance numbers can be fickle. As Carey Price, the number one goalie for Montreal Canadiens has stated you are never as good or as bad as the public makes you out to be. Patience in investing is a virtue.